Ensign Group Inc (ENSG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Ensign Group Fourth Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

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

Thank you, Ashley. Welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday. This announcement is 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 p.m. on Friday, March 2, 2018. We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, February 9, 2018, and these statements have not been nor will be updated subsequent to today's call.

Also, 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's 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, The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to other operating subsidiaries through contractual relationships with such subsidiaries.

In addition, our wholly owned captive insurance subsidiary, which we refer to as the captive, provides certain claims made coverage to our operating subsidiaries for general and professional liability as well as for workers' compensation insurance.

The words, Ensign, company, we, our and us, refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center and our captive, are operated by separate, wholly owned independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of terms, we, us, our and similar terms, used today are not meant to imply nor should it be construed as meaning that The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign Group.

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 is available in our Form 10-K.

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

Thanks, Chad. Good morning, everyone. We're proud to report that we achieved the highest adjusted earnings per share in our history. The momentum we experienced in the third quarter continued into the fourth quarter, and we've just started scratching the surface of the significant organic growth potential within our portfolio.

As those who have been following us know, we're coming off some of our largest acquisition years. Over the last several quarters, our talented local leaders have been tirelessly integrating 116 skilled nursing and assisted living operations into the organization. In our 17-year history, we've established a track record of both top and bottom line organic growth. It often takes several years to truly transition a health care operation as the clinical, reputational, cultural transitions take time to transform. We still have pockets of weakness in some of these transitioning operations, but we've made great progress in the vast majority of them, including in Texas. Of course, some transitions are quicker than others, but over the period of 18 years and 232 acquisitions, this pathway to progress has been proven over and over again. We're very excited to see this multiyear process beginning to bear fruit in spite of some challenging circumstances. Over the next several years, as the wave of baby boomers arrive and networks continue to narrow, we're positioned to capitalize on the enormous organic growth potential.

During the quarter, we experienced a dramatic improvement in our transitional and skilled services segment income of 40.2% over the prior year quarter. We also experienced positive trends in occupancy, with an increase of 289 basis points in our transitioning operations and 109 basis points in our same-store operations, both over the prior year quarter. Our GAAP earnings per share for the quarter was $0.21 per diluted share, and adjusted earnings per share was up 33.3% to a record $0.40.

With a focus on strengthening outcomes, lowering readmission rates and extending our capabilities to care for more complex patients across the post-acute continuum, we continue to invest in the best leaders and clinical programs in post-acute care. As a result, we're seeing significant improvements in all the key indicators related to outcomes and patient satisfaction, both of which will drive occupancy and skilled mix. During the year, 14 more of our skilled nursing operations achieved 4- and 5-star ratings. And with those additions, 100 of our skilled nursing operations carry that designation at quarter end. The other operations, most of which were 1- or 2-star operations at the time of acquisition, continue to make the improvements necessary to gradually increase their star ratings.

We're also pleased to report that we continue to quietly build significant value in our other lines of business, including assisted living, home health and hospice, nonemergency medical transportation and other post-acute care services. Under the direction of key leaders and the dedicated Service Center resources, these operations have achieved consistent clinical and financial results while simultaneously bolstering our core skilled nursing operations. Our assisted living and independent living portfolio company, which consists of 51 stand-alone operations and 21 campuses in 12 states, grew its segment revenue and income by 13.7% and 66.3% over the prior year quarter respectively. Similarly, Cornerstone Healthcare, our home health and hospice portfolio subsidiary, grew its segment revenue and income by 27.5% and 27.7% over the prior year quarter respectively.

Collectively, these 2 business segments, along with other new health care ventures within the portfolio, are quickly approaching the size of Ensign when it completed its initial public offering in 2007, and each and every one of these ventures are independently profitable and self-sustaining. The income growth each of these business ventures has achieved is further evidence of our ability to apply its operating principles in several health care services. We expect to see each of these segments grow by acquiring underperforming operations and driving organic growth. As they apply proven Ensign principles, we believe the sometimes forgotten underlying value will become increasingly more difficult to ignore.

We continue to methodically add value to our real estate portfolio by improving the operating results in our owned operations and by acquiring additional real estate assets. Since we spun out all but one of our real estate assets to CareTrust REIT in 2014, we've added 145 operations and acquired 64 real estate assets. Historically, our shareholders have received little to no credit for an incredible amount of underlying value in our real estate, and that value is again being overlooked. As an operationally driven organization, we'll continue to focus on creating value through solid operational performance, but we also believe it's important to recognize the growing underlying value in our own real estate and that there are many options available to us to unlock this value for the benefit of our shareholders.

We announced yesterday that we're increasing our 2018 annual earnings per share guidance to between $1.80 and $1.87 per diluted share. This increase is due to the recent tax reform that reduced the company's effective income tax rate from 35.5% to an estimated 25% for 2018.

We intend to invest these tax savings to strengthen the balance sheet, to fund growth and to share a portion of the savings with employees. Overall, this adjustment represents a 31.1% increase from the midpoint over our annual earnings for 2017. Even without the tax savings, the midpoint of our guidance represents a 15.7% increase over 2017 results. We're very excited about the coming year and look forward to continuing to drive quality health care outcomes and corresponding financial results.

And with that, I'll ask Chad to give us an update on our recent investment activity and growth. Chad?

Thank you, Christopher. During the quarter, we paid a quarterly cash dividend of $0.045 per share, representing an increase of 5.9% over the prior year. This is the 15th consecutive year we have increased our dividend, which we hope shows our continued confidence in our operating model and our ability to return long-term value to shareholders. We have been a dividend-paying company since 2002 and have increased our dividend every year since.

Also, during the quarter and since, the company's subsidiaries made the following acquisitions. On October 19, 2017, we opened Pointe Meadows Health and Rehabilitation, a newly constructed 99-bed skilled nursing facility located in Lehi, Utah. This one also happens to be the last outstanding newbuild commitment for the time being.

On November 1, 2017, Cornerstone acquired the assets of Excell Home Care and Hospice and Excell Private Care Services in Oklahoma City, Oklahoma. And on February 1, 2018, Bridgestone acquired the real estate and operations of Cedar Hills Senior Living, a 37-unit assisted living facility in Cedar Hill, Texas; and Deer Creek Senior Living, a 37-unit assisted living facility in DeSoto, Texas. These additions bring our growing portfolio to 181 skilled nursing operations, 21 of which also include assisted living operations, 51 assisted and independent living operations, 22 hospice agencies, 20 home health agencies and 4 home care businesses across 15 states.

On December 27, 2017, we completed a $112 million portfolio financing, with low fixed-rate loans, amortized over 30- to 35-year terms and secured by mortgages on 17 of our 65 owned properties. These new long-term, fixed-rate borrowings represent an important piece of our capital structure, providing us liquidity on a portion of our owned real estate during a period of historically low interest rates. In addition to paying down previously drawn amounts on our revolving line of credit, the proceeds of our HUD-insured debt will be used to fund acquisitions to renovate and upgrade existing and future facilities and to cover working capital needs. This is just one of the many levers real estate ownership provides us, and as we've said many times before, this is one of the reasons we continue to purchase underperforming real estate.

We continue to see a steady flow of acquisition opportunities across all our business segments. These potential transactions come from a variety of sources and different types of sellers, ranging from smaller operators and nonprofits that are exiting the business, to large or regional operators that are selling noncore or turnaround assets. Almost all of the transactions we completed in 2017 fit one of these 2 categories and were completed 1, 2 and 3 at a time. We have also seen an increase in the number of larger, well-known portfolios of skilled nursing assets. As we've said before, these types of opportunities generally attract interest from financial or real estate buyers. As a result, these deals generally trade at a premium and too often lead to purchase prices and lease coverages that leave the operations very vulnerable to rent escalators. In our view, several of the recently announced transactions have traded at overly aggressive cap rates and lease coverages, all of this in the face of news reports indicating that large, historically strong operators are defaulting on rents as a result of poorly structured capital market transactions, owner's leases and unhealthy leverage. We continue to believe that the dynamics in our industry, while sometimes challenging, are not nearly as difficult as many are led to believe as a result of these self-imposed challenges that follow creative financial engineering.

When we evaluate each opportunity, there are many factors we use to evaluate our level of interest, including the availability of locally driven clinical and operational leaders, the building's reputation and the estimated return on our investment. All of this is with the long-term health of the operation as a top priority. We take our commitment to each health care community and the team of caregivers very personally, and will only do a deal if we can see a pathway to continued and sustained health over the long run.

One of the keys to our success has been, with very few exceptions, to structure our transactions in such a way to ensure the long-term health of the operation. We constantly remind each other to remain disciplined and true to our operation-driven acquisition strategy. More often than not, that means that we pass on transactions that push the envelope in terms of valuations and lease coverages.

With all that said, the pipeline for our typical turnaround opportunities remains strong, and we remain confident that there are, and will be, many, many opportunities to be had at the right prices. We expect to continue to find and acquire more and more of these types of operations in 2018 and are already working on a handful of transactions that we expect to close in the first and second quarters of this year.

And with that, I will turn the call back over to Christopher.

Thanks, Chad. Before Suzanne runs through the numbers, we'd like to share a few examples that represent some of the vast improvements that have been made over the quarter. Osborn Health And Rehab, located in Scottsdale, Arizona, is seeing remarkable growth under the leadership of CEO, Karl Cooper; and Director of Nursing, Mary Huerta. Osborn is in a great location across the street from a major hospital, but they literally share a property line with 2 direct competitors, making it a hotly contested market. Even in this highly competitive environment, Osborn has proven to be the facility of choice, growing census and boosting Medicare days by over 24% for the quarter. In coordination with their local hospitals and physician partners, they've developed specialized services to meet targeted patient needs. They also boast lower length of stay and very low hospital readmission rate, which is remarkable given the uniquely complex patients they serve. As a result, they have leveraged these outcomes to become the trusted partner to their ACO partners and physician groups, all while achieving outstanding survey outcomes. Because of the demand for their services, Osborn has boosted their EBIT performance by more than 100% over the prior year.

Bridgestone Healthcare, our assisted and independent living company, has been a critical part of our success in the quarter. Over the past 3 years, Bridgestone has grown from 24 operations to 75 as of today. As an example of their operational success on the assisted living front, we've seen some impressive performance from the team at Desert Springs Senior Living in Las Vegas, Nevada. CEO, Simona; and Wellness Director, Erika Tindel, have taken on an already high-performing operation and made it even better during the year. Desert Springs has a long-tenured staff, some of the most consistent regulatory outcomes and very high resident and employee satisfaction scores. Because of the longevity and consistency, Desert Springs continues to get better every year. There's such a demand for their community that they are now consistently bumping up against 100% occupancy due to their stellar reputation in the very competitive Las Vegas market. Accordingly, occupancy improved by nearly 500 basis points to an average of 99% for the quarter. Net income also improved dramatically for the quarter by an incredible 42.4% on a revenue improvement of 9%, all compared to the same quarter last year.

Namaste Home Health and Hospice, which serves the Denver, Colorado market, was a key driver of our home health and hospice success in the fourth quarter and throughout 2017. CEO, Richard Lewis; and Director of Nursing, Allison Collins, have led their team to become a provider of choice in the Denver market. For the fourth quarter, Namaste saw revenue increase by 27% over the same period in 2016, and EBIT increased by 98%. Their growing reputation in the community was reflected in a 60% increase in days of hospice service provided during that time, and their home health operation earned a 4-star rating during the quarter. For the year, revenues were up 27.1% and EBIT improved by 99.7% as the agency's hospice days grew by 49.8%.

These are both more seasoned operations in our portfolio and both come from the same-store bucket. There are many more such examples across the organization, and we 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 that the opportunities for organic growth in all parts of the company's expanding portfolio remain more compelling than ever.

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'll open it up for questions. Suzanne?

Thank you, Christopher, and good morning, everyone. Detailed financials for the year are contained in our 10-K and press release filed yesterday. Highlights for the quarter included: GAAP earnings was $0.21 per diluted share; adjusted earnings per share was up 33% over the prior year quarter to a record $0.40; GAAP net income was $11.2 million; and adjusted net income was $21.1 million, an increase of 35% over the prior year quarter. Transitioning skilled occupancy was 74.7%, an increase of 289 basis points over the prior quarter. And same-store occupancy was 78.7%, an increase of 109 basis points over the prior year quarter.

Skilled segment income was $39.9 million, an increase of 40% over the prior year quarter and an increase of 8% sequentially over the third quarter. Assisted and independent living segment income was up 66% to $4.3 million, and home health and hospice segment income was up 27.7% to $5.8 million.

Other key metrics include cash and cash equivalents of $42.3 million at December 31 and $100 million of availability on our revolving line of credit. We expect our lease adjusted net-debt-to-EBITDA ratio, which was 4.2x at quarter end, to decrease in 2018, as the EBITDAR from transitioning and newly acquired operations continue to grow.

We also wanted to address some of the unique items that impacted our 2017 GAAP results, including class action settlement, the impact of the natural disasters and the adoption of the new tax law. Each of these events are unusual and are not expected to occur in the near future. We also anticipate the results related to some of our constructed and startup operations will no longer be included in our adjustments. As a result, we expect that the elimination of these items will significantly reduce the number and amount of non-GAAP adjustments in 2018.

As Christopher mentioned, we are updating our guidance for '18. We are projecting revenues of $2 billion to $2.06 billion and adjusted earnings of $1.80 to $1.87 per diluted share. The 2018 guidance is based on: diluted weighted average common shares outstanding of approximately 54.3 million; the exclusion of transaction-related costs and amortization costs related to patient-based intangibles; the exclusion of losses associated with startup operations, which are yet -- not yet stabilized; the inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax; a tax rate of approximately 25%; the exclusion of stock-based compensation; and the inclusion of acquisitions closed or anticipated to be closed in the first half of 2018. Additionally, other factors contributing to our asymmetrical quarters include: variation in reimbursement systems; delays and changes in state budgets; seasonality in occupancy and skilled mix; the influence of the general economy on our census and staffing; the short-term impact of our acquisition activity; variation in insurance accruals and other factors.

And with that, I'll turn the call back over to Christopher. Christopher?

Thanks, Suzanne. Just to clarify something, I think I said we had $100 million of availability in our revolving line of credit. We have $170 million of availability in our revolving line of credit. I just wanted to clarify that from my part.

We want again to thank you for joining us today and express our appreciation to our shareholders for their confidence and support. We're very appreciative to our colleagues in the field and the Service Center for making us better everyday and for the improvement that we are making currently in our current organization. I guess I'll turn the time over to Ashley to conduct the Q&A portion of our call. And Ashley, if you would instruct, I guess, everyone on the call how to proceed.

(Operator Instructions) And our first question comes from Chad Vanacore of Stifel.

So just thinking about occupancy in the quarter, it was relatively strong while the industry has been struggling. So what drove that occupancy improvement at Ensign versus the rest of the industry?

I think part of it -- because you saw, it was in same-store and in the other buckets. But part of it was because we saw great strength in some of the transitioning facilities. They were starting to get healthy. But on the same-store front, I think it's kind of what we've been talking about for a while, that sort of was more delayed, that I sort of sheepishly kept referring to, Chad. We finally saw the strength in Texas. We finally saw some strengthening in Utah. We finally saw some strengthening in some of those markets where there had been some delay in some of the narrowing of networks. They probably had the biggest influence on that and that -- we feel like that's going to continue into the distant future.

Great. So Christopher, you've mentioned a couple of times the strengthening in the Texas portfolio. What's really driving that improvement there? Is it operating expense improvement, payer mix, better occupancy, some combination of them?

Yes. I mean, I think it's all of it. I -- you're probably tired of hearing this too, Chad, but I -- we really took a little bit of a step backwards when we took that acquisition on, and we weren't strong enough in Texas to be taking on an acquisition like that. Slowly, last year, our same-store stuff got much, much healthier. And as they got much healthier, they were able to help in a much bigger way with the transition -- the healthier transition of the Legend portfolio. And so all of that -- I mean, to be candid, we did take a step backwards first in Texas before we started taking leaps forward. And those leaps are more pronounced now partly because we took the step backwards.

So fair to say that situation looks like it's stabilized now?

It's much, much better. Look, there's always room for improvement. We -- there's plenty of opportunity for growth still in Texas. And we expect -- we actually expect the growth in '18 in Texas to be much bigger than it was from '16 to '17. But -- because most of the impact happened late third quarter and early fourth quarter, so we're really excited about the track that Texas is on. It's a good question though. I'm glad you noticed that.

All right. And well, then just thinking about revenues were stronger, and then that looks to be occupancy and mix. But that margin profile, still a little weaker than historical average. So what's driving that? And what kind of assumptions are you making into 2018?

You're talking about EBIT margins?

EBIT, EBITDA, all the way down, excluding taxes.

Chad, I mean, if you're looking for the year, I mean, as you heard us talk about, the health care, I mean, obviously plugged us the entire year. So if you're looking at the overall year amount, I would say that that's an accurate statement. We continue to be having that higher amount coming into -- through Q4 and like we projected and why we brought down guidance. But as we continue to look at what '18 is going to be, we think that we'll be in good shape on the margin. And overall, it's kind of at exactly where we thought it would be and very consistent and a little bit down from where -- or a little bit up from where 2000 -- Q3 was.

Yes. So the margin is actually strengthening. But Chad, you are right. If you compare all of '16 to all of '17, it did decline a little bit. But if you look at the momentum and what we see in the fourth quarter as compared to prior quarters, we feel like those margins are getting stronger. But yes, it was -- I don't think we hit it at all. We did have some struggles in early '17.

So when you think about 2018, do we get back to those 2016 margins? Do you want to hazard a guess on there?

I hate hazarding a guess. But I do feel like the momentum's there, and whether it happens, I think we should run past '16's margins. I just don't know -- I don't know if it will happen in '18 or '19, but the momentum is there, and I'd be surprised if our margins didn't strengthen throughout the year.

All right. And then just one last one for me. I noticed average Medicaid rate per day was elevated in the quarter. Is there some year-end bonuses in there? And where do you think the average of Medicaid rates for 2018 shake out?

Yes. I mean, I think what we -- we continue to see us participate in those supplemental programs. So we had our first full quarter of the Texas QIPP program. So I think that, that elevated the rate. It's a consistent rate that we expect to continue in 2018.

So just to clarify that, that fourth quarter Medicaid average rate, you think, would be average for 2018, something there or better?

Yes.

And our next question comes from Frank Morgan of RBC Capital Markets.

Could you talk a little bit -- you made some comments in your prepared remarks about the likelihood of some M&A activity in the first part of the year. Could you share with us maybe your thoughts on sort of the level that you're thinking about for the year? And what you're talking about here today, is that representing a larger part of what you may be thinking about for the year? That would be my first question.

It's a good question. And I think you know better than anybody does, that it depends on a lot of things. We -- probably not going to see us participating in a lot of those big deals. Chad mentioned in his remarks that we just don't think the pricing is right, right now. But we do have some -- we see some off-market stuff that looks very intriguing to us. And yes, it's hard for us to tell you exactly what that volume will be, but we do expect some volume, but not crazy volume. Chad, what...

Yes. I would agree with that. I mean, I think the onesie, twosies and the smaller deals are definitely there. And like I said, we have a handful of those that we can see in the short run that we're going to do. We expect that to kind of continue on a steady basis throughout the year. As far as more than that, I think we're just -- we don't have artificial growth goals and we don't set targets that we're trying to achieve at the outset. We're just very opportunistic about it. And when we think the opportunity is right and we have the leadership in place, we'll be ready. And I think that's our focus, Frank, is we're just wanting to be prepared for what we think will be an attractive acquisition market in the near future.

Got you. And I suppose -- I think Suzanne referenced leverage coming down in your press release, it came down. Do you have any kind of targets of where you want to see that optimal leverage, particularly in a year where it sounds like you're not going to be doing anything big?

Well, again, Frank, as the deals come forward and they come out of nowhere often, we don't want to say we won't. We will do that. But you're right, if none of the right deals come forward, we expect that number to go down in the 3 to 3.5x. And that's where we ought to be. But if some additional deals that make sense to us are attractive, then that number might stay above that for a little while. But that's kind of where -- I mean, our ideal number is probably between 3 and 3.5x.

Got you. And then maybe one more kind of high level. You referenced the value and the size of some of your other assets and your other ancillary assets. I guess, what would it take for you to seriously consider doing something, one of those, maybe as a spinoff, or -- I mean, obviously, there's a lot of interest by payers, with Humana buying Kindred's at Home in a JV. So given the -- kind of the appetite and the acknowledgment by payers in the value of some of those other businesses, I guess what are you looking for?

Well, I'm not ever allowed to say that we'd never do something. But I think that there is ample reason. If the market doesn't give us credit for what's happening there in a growing part of our portfolio, then it may make sense for us, both functionally and in behalf of our shareholders, to do something else. Selling them off is not anything that we would be interested in, but creating a separate entity that functions alongside us, but where people can see in detail what's happening with our home health and hospice and assisted living that are both functioning very, very well. That's something that we're -- we certainly have the obligation to look at and constantly consider.

Yes, Frank. I'd just add, we have added more disclosure as well with our different business segments. And so we're hoping to kind of shine more of a light on those businesses as well through that disclosure.

Got you. Maybe one more technical question, and I'll get back in the queue. But just looking at the transitioning portfolio, the -- certainly, the occupancies you pointed out has improved nicely. But the -- it looks like the skill days, the percentage of skill days and the skill revenue has kind of gone down, kind of trended down, really since, I guess, you had that big pop going from the fourth quarter of '16 to the first quarter of '17, where the size of that transitioning portfolio went up to, I guess, 40 buildings. So can you remind me what happened with those 40, and why that seems to be kind of trending where skill mix is lower?

Yes. So one of things there is you're looking at a percentage, Frank. And so what it does is it skews. When we have a significantly higher growth in our Medicaid days or non-skilled days, you actually have that percentage look a little skewed. So we did have just a really significant growth in our Medicaid days, making the percentage go down.

So in other words, the days still went up. But because the Medicaid days went up alongside it because remember how many empty beds we have in our total portfolio of 116 that we've taken just in the last couple of years that are -- that have a lower occupancy than our standard occupancy. So as those fill up, even if we increase our skilled days, you're still diluting them in that part of the portfolio.

Our next question comes from Dana Hambly of Stephens.

To follow up on Frank's question on the ancillary services, how integral is home health and assisted living to your core skilled nursing operations? And if you did something, would you be able to do that without a lot of disruption to existing operations?

Yes. I think there -- just because of the way we function as an organization, there probably wouldn't be a whole lot of functional change. They help us a lot, we help them a lot. But they are very independent. They have their own Service Center. They provide almost all of their own resources, except for some legal and accounting stuff. But other than that, they are very independent. But I should state, in their behalf and in behalf of the whole organization, there's an interdependency. I mean, we -- on the skilled side, there are a lot of pushing and pulling of home health and hospice and vice versa. So -- but I don't think that if we did something like that, that, that would change at all, Dana. I think we would -- it wouldn't be like the other transaction we did where we were mandated to be very, very separate and to not sit on each other's boards or things like that. It would be -- it would still be -- there'd still be a lot of interdependence.

Okay. All right. Helpful. And then on the Medicaid pricing environment, states are going through their budgeting processes right now. Are there any states that particularly concern you on the Medicaid pricing right now? Future Medicaid?

In skilled nursing, you're talking about?

Correct. Yes.

Yes. No. Nothing that is concerning.

Okay. And then on Medicare, I guess, were the potential big changes to the reimbursement in Medicare. I don't think it's probably this year, but maybe next year. Anything that particularly concerns you there with potential changes?

No, not -- really, the things that we've seen proposed are not things that we aren't already addressing or can't address quickly and even for next year. So we did see the increase reduce slightly in the latest proposal, but it's still a healthy 2.4%, 2.5%. So that's what we've been accustomed to. In fact, we've been accustomed to less than that a few years. So it's -- I don't think any of it is concerning.

Okay. And then lastly, Suzanne, do you have a targeted CapEx number for the year? And within that, are there any special projects that need to be done and system overhauls or implementations that could cause disruption?

No. Our target is about $60 million. We don't have any system overhauls or other things that could cause disruption planned for the current year.

And I'm showing no further questions in queue at this time. I would now like to turn the call back to Christopher Christensen for closing remarks.

Thanks, Ashley. And thanks for everyone for giving us your time this morning. We'll look forward to talking to you again next quarter.

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