LHC Group Inc (LHCG) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2005 LHC Group Incorporated Earnings Conference Call. (Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to the host, Mr. Michael Porter president for Porter LeVay and Rose, please proceed sir.

Thank you very much operator. Good morning every one, thank you for joining us this morning. As the moderator said this is our third quarter, nine months 2005 conference call. On the call today are Keith G. Myers, President and CEO of LHC Group, Barr Brown the company CFO and Chief Operating Officer John Indest.

Before I turn the call over to them I must remind everyone on the call that statements included in this conference call, may constitute forward looking statements in the meaning of the Private Securities Litigation Reformed Act of 1995. Such statements involve a number of risks and uncertainties such as changes in the reimbursement, changes in government regulation, changes in our relationship with referral sources, increased competition for our services, increased competition for joint ventures and acquisition candidates and changes in interpretation of government regulations. Therefore actual results may differ materially from any financial outlook stated herein. Further information on potential factors that could affect the company's financial results can be found in the company's S-1 registration statements as amended filed with the Securities and Exchange Commission, and its form 10-Q for the quarter ended June 30, 2005. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Just so everyone is informed, management is in New York attending the CIBC Health Conference, and if anyone has any questions after the call, please refer to them to home office and management will catch up to you sometime during the day or tomorrow. With that out of the way it's my pleasure to introduce you to President and CEO of LHC Group, Keith Myers. Good morning Keith.

Good morning, thank you Michael, and thank you everyone for joining us this morning. Our financial results for the third quarter and nine months ended September 30th, met our expectation with about 41.3 million in revenue and non-GAAP EPS of $0.17 per diluted share. Meeting these financial expectations in the wake of hurricane Katrina and Rita proved more challenging than we all would have liked. That being said I'm extremely proud of the outstanding efforts of our staff during this time.

During the quarter, we made a pair of acquisitions as part of a growth strategy we are continuing to pursue. We acquired the home care assets of Good Shepherd Health System in Longview, Texas as well as assets of A1 Nursing Registry in Lafayette, Louisiana. The acquired companies had combined revenues in 2004 of approximately 7.5 million, and we paid a combined 1.5 million in cash for the assets of these two.

As I've said before, if one only considers the financial compatibility of the target company, there are a lot of possible acquisitions to be made of it. However it has always been our philosophy to base our growth and acquisition strategy solely on the numbers (inaudible)

In the long run it is integral to maintaining our profit focus that the management of our targeted acquisitions share in our philosophy; it's all about helping people. Our business model places paramount importance on personal contact between patients and care givers. Any acquired company that becomes part of the LHC Group family, has to fit within that model. Both Good Shepherd and A1 measure up in this way, we're very glad to have them as part of the LHC family. I would like to turn things over to Barr Brown our CFO who will go through the financial results of the third quarter. Barr?

Thanks Keith. Here are LHC Groups financial results for 2005's third quarter. Beginning with the top line, net service revenues for the three months ended September 30, 2005 rose 27.5% to 41.3 million from 32.4 million in 2004. For the three months ended September 30, 2005, 2004 85.1% and 82.9% respectively, of our net service revenue was derived from Medicare.

Our cost of service revenue for the three months ended September 30, 2005 was 22.6 million, an increase of 5.9 million or 35.3% from 16.7 million for the three months ended September 30, 2004. Also service revenue represented approximately 54.7% and 51.4% of our net service revenue for the three months ended September 30, 2005 and 2004 respectively.

Our general and administrative expenses for the three months ended September 30, 2005 was 13 million, an increase of 3.4 million or 35.4% on 9.6 million for the three months ended September 30, 2004.

(audio gap)

Pardon the interruption this is the operator, can I get your name of your company please? Hello is anyone on the line? Hello is anyone on this line?

Earnings per diluted share excludes a mark to market non cash charge relating to the minority interest in one of the company's long term acute care hospital joint ventures, which becomes -- which became redeemable upon completion of the initial public offering.

With regard to the direct effects of hurricane Katrina -- hurricanes Katrina and Rita, we lost approximately 500,000 in net service revenue, tax affected that's 300,000 or about $0.02 per diluted share for the quarter.

As most of you know we have two business segments; home based services segment and a facility based services segment. The following summarizes the financial results for each of these segments. Starting with our home based services segment, the net service revenue for the three months ended September 30, 2005 was 26.9 million, an increase of 4.6 million or 20.6% from 22.3 million for the three months ended September 30, 2004. Approximately 3.7 million of this increase was attributable to the net service revenues generated from acquisitions or internal development duty during 2004 and 2005.

Of the 3.7 million increase in net service revenue due to acquisition or internal development activity, approximately 1.6 million related to revenue from acquisitions that did not increase total admissions, such as management services revenue and revenue generated from acquisitions in which the patients were admitted before acquiring the company. The remaining increase in net service revenue of approximately 900,000 reflects the company's internal growth. Operating income for the three months ended September 30, 2005 was 5 million, an increase of 100,000 or 2% from 4.9 million for the three months ended September 30, 2004.

Our total active home nursing census as of September 30, 2005 was 8,387, an increase of 32.6% over our census of 6,324 the year before. Completed episodes in our home nursing division for the three month ended September 30, 2005 were 9,614, an increase of 2,285 or 31.2% from 7,329 for the three months ended September 30, 2004. Total admissions to the home nursing division were 4,716 to 4,445 (interruption)

Pardon the interruption Mr. June (ph) Hello is anyone on the line?

...495 and 3,232 for the three months ended September 30, 2005 and 2004 respectively. Hurricanes Katrina and Rita negatively impacted our admissions by approximately 150 patients for the quarter ended September 30, 2005. Some other noteworthy stats for our home nursing services include, our average business for completed episodes were 18, our revenue per completed episode was 2,481. With regard to therapy utilization within our home nursing services, 25% of all episodes received at least one therapy visit and 17% of all episodes received ten or more therapy visits.

For our facility based services segment, net service revenue for the three months ended September 30, 2005 was 14.3 million, an increase of 4.2 million or 41.6% from 10.1 million for the three months ended September 30, 2004. The 4.2 million increase was attributable to net service revenue generated from acquisition and development activity during 2004. Total patient days in the long term acute care hospitals were 11,437 and 8,383 for the three months ended September 30, 2005 and 2004 respectively.

Full up total outpatient visits to our clinics were at 9,768 and 5,980 for the three months ended September 30, 2005 and 2004 respectively. However if we compare the numbers at the end of the third quarter and second quarter of 2005, we see that the results as of September 30, 2005 were a drop of 1,871 from the 11,639 total we had as of June 30, 2005. The drop in total outpatient patients visits to the clinics was directly attributed to Hurricane Rita.

Operating income for the three months ended September 30, 2005 was 669,000, a decrease of 331,000 from operating income of 1 million for the three months ended September 30, 2004. In addition to the weather related issues, start-up costs associated with the conversion of our last long term acute care hospital in Morgan City, accounted for the drop in operating income. Sales -- day sales outstanding, DSO, improved to 79 days for the three months ended September 30, 2005, a decrease of 16.0% from the DSO of 94 days for the three months ended June 30, 2005, despite billing and payment delays caused by Hurricanes Katrina and Rita. Home-Based Services DSO improved 35.0% for the same three month period, decreasing from 103 days to 67 days. This decrease represents efficiencies gained due to the implementation of our new revenue, billing and receivable management application in our home nursing agencies. DSO was 83 days for the nine months ended September 30, 2005 as compared to 72 days for the nine months ended September 30, 2004. The DSO increase, when compared to the nine months ended September 30, 2004 was due to Medicare system delays, billing and payment delays caused by Hurricanes Katrina and Rita and acquired accounts receivable from businesses purchased during the third quarter. Our balance sheet remains quite healthy as of September 30, 2005, with cash and cash equivalents of approximately 22.8 million, largely reflecting our initial public offering completed during June 2005 However, I would like to also point out that our total cash and cash equivalents is up about 2.5 million over the June 2005 level as a result of our improving cash flow. Our working capital stands at 54.8 million, our total long term debt, capital lease obligations including current securities is 6.1 million. As of September 30, 2005 we have no borrowings on our 25 million revolving lines of credit and our stockholders equity was 75.6 million up from 73.2 million at June 30, 2005. That covers the main points to our financial results. To give you some details on our operations underlying them, I'll turn it over to Johnny Indest our COO.

Thanks Barr and good morning. As you saw on the news, our part of the country took a couple of hits with Hurricanes Katrina and Rita. Like most corporations we had contingency plans in place to deal with this kind of event. These hurricanes were not the first for most of us. With regard to our patients, this included assistance with evacuation plans as needed and making sure those who weren't evacuated had what they needed to ride out the storm.

We had 80 Home Health Agencies in LHC Groups family of care, and 24 of them were affected by the weather. As of right now we are back to pre-storm census and staffing, and many of our peripheral agencies have made up for the shortfalls in places where we suffered most. For example in Lafayette Louisiana, where we had 175 patients before the hurricanes, today we are at about the 250 level. But these contingency plans don't mean very much, if your people aren't dedicated to executing them. Our staff proved their commitment to our patients during the storm and their aftermath.

I know for a fact that two of our home office employees were flooded out of their homes, and another half dozen were completely wiped out by Rita. Everyone was affected, but everybody moved past their own troubles to help our patients. Within hours of Katrina passing we had members of our staff out with flashlights making contact with patients who stayed in their homes, and for those who left, we went by their homes to put flyers on their front doors that had our company contact information.

We had other LHC Group employees visit local hospitals, doctor offices and shelters to provide immediate care and to make long term arrangements for patients' needs. After Katrina hit, we knew what we were faced with as Rita approached, so we made up travel kits for every patient which included contact information like the 800 number we set up. Our staff visited each and every patient home in the storm's path to make sure they were given their travel packet, and to make sure that they had what they need. You can't get work like that out of people who aren't 100% committed to what they are doing, and remember some of these people were affected as bad as anybody else.

Events like this bring out the best in some people and the staff and caregivers of LHC Group proved how very good their best was. We are extremely proud of their efforts and without them this company would still have a long way to go toward recovery, as it is we're back. Keith I'll let you finish up.

Thanks Johnny, I think the entire world was surprised by the effects of the two hurricanes on our area of business. But we are pleased with our financial results and our operations and truthfully we feel blessed that things weren't worse for our employees and the many patients, families and communities we are fortunate to serve. Because of the timing of the storms, especially Hurricane Rita, we do expect some downward pressure in our fourth quarter results while as Johnny said our patient census is already recovering to pre-storm levels.

All of these back to back (audio gap) presented us with operational challenges, and certainly had a short term impact on our organic growth, our business development effort has continued without interruption. As a result, we see more activity in our business development pipeline today than at any point in the history of our company, and we look forward (audio gap) future as we remain fully committed to our balanced strategy of pursuing strategic acquisitions that are properly valued and more importantly fit our company's culture while remaining focused on market penetration and organic growth with our partners.

This brings us to the Q and A portion of the call, operator?

(Operator Instructions)

And your first question comes from Eric Gommel from Legg Mason, please proceed sir.

Good morning.

Good morning Eric.

Good morning Eric.

The question about the cost of living update that was just recently announced, what -- is there any different impact with relation to the metro area of re-weighttings on your operations and on revenues that compared maybe some of the other Homecare companies?

Eric this is Barr. Certainly with the market basket proposed as it is now and we are very hopeful that that's going to be pushed through with, we are very confident that it will be. The weighting as we've calculated the impact of the 2.8% composite increase in the market basket, the impact as we stand today with our existing makeup within the MSA and rural settings would approximately account for a 2.3% increase in our Medicare home nursing revenues for 2006.

Great, and then on the LTAC side of the business, what -- do you - first of all do you have like a case mix, what is your case mix for the LTAC business and do you expect any impact from the re-weighting either positive or negative on that business and could you maybe expand on that?

Eric, I'm going to let Johnny Indest answer with regards to the case mix, but as it relates to the cost of the market basket increase on the LTAC side, I would tell you that that increase, approximately I think it's 3%, the weighting the DRG relative weighting as it relates to the impact on us again as we currently stand, unfortunately is about a 6% decrease in our revenues beginning in October when it was effective, October 1. But I will let Johnny refer to the patient mix, if Johnny has any additional on the market basket impact he can add it there.

No, Barr you are right on with the market basket and our case mix is approximately 1.2 in our LTACs.

Okay great and then just a couple of little housekeeping questions. What was your deprecation and amortization for the quarter and then I don't know if you said this, CapEx and maybe the ending share count, actual ending share count for the quarter.

Okay Eric let's go over those one at a time. CapEx for the quarter was 3 million right at 3.7 million. Three million of that was related to the acquisition of a plane, so really CapEx exclusive of the plane for the quarter was right at 700,000. Your other question with regards to depreciation for the quarter was 700,000, and your other question was what Eric?

Ending share count.

Ending share count was real quick here, hold on a second, ending share count for fully diluted 16,594,774.

And then my last question, and then I will get out of -- and back in the queue, is really, when we are looking at the impact of Rita on your operations in 4Q '05, we -- is there any color at all that you can put on that or any kind of bracket you can put onto the impact of the hurricanes at this point, related to the impact in this quarter, if you could any additional color would be great, thanks.

Okay Eric. I would tell you, to kind of allude to Johnny's, we have returned to, in almost all agencies, pre storm census levels. Were are not quite halfway through the quarter as of this point, so we are optimistic that the impact would be somewhat offset by the pickup in some of the other agencies that Johnny alluded to, but I will tell you, that at this point it is a little bit too early just too fully quantify it.

Okay thanks.

Thank you.

Your next question comes from the line Art Henderson from Jefferies & Company, please proceed sir.

Hi, good morning. Just to follow what Eric was asking just a couple of housekeeping issues. Cash flow from operations for the quarter do you have that handy?

Let's see. For the quarter...

Yes.

Next question, I will pull that up right here.

Okay. And then the DSOs obviously significant improvement in that. How much further down do you expect that to go?

Significantly we -- I would tell you that, just in through one month, since we've completed one month of the third quarter, Art, in October, we've already lowered it some additional four or five days.

Okay.

So we continue to push that down, I think we've gone on record, I've gone on record in saying that in 2006 by the end of 2006, we are hopefully to have our DSO in the 50s.

Okay, alright. And, thinking about the Home Health Business, or if I do the calculation basically what you guys were saying, you have about 500,000 in the quarter that was organic growth and granted that that was probably impacted to some extent by the amount that you indicated, the 500,000 from the hurricane, how should we think about organic growth for this business going forward, excluding what the impact of the hurricane's going to be? Is it -- I would have expected it to be a little bit more robust than 4% but can you put some parameters around that? Maybe that's a question for Johnny I don't know.

I'll -- let me -- Art this is Keith. Let me jump in here and I'll let Johnny add some comments if he chooses. Typically we have a fully matured agency that -- and for us it's an agency that has been in existence at least three years, maybe up to five years, but we have certain market penetration levels that we target on it. But from that point on, we see a 10% growth mark as something that's both achievable and something that we are happy with.

The blend (ph) for us comes in agencies that we acquire. But we generally focus on agencies that have a lot of upside potential (audio interruption) have them for one year. We are still able to pickup 25% to 35% per year in those agencies year one through three and that gives us a -- that's what gives us our plan. Did that help any?

Yes, now that does, so, in understanding what happened during the quarter because if I do the math it looks like 4% off the 500 now, how much do you think the hurricanes impacted that. Was it -- would that have changed it meaningfully?

We would have actually been -- if we add back the impact of the hurricane we would have been at 11%.

Okay.

And that's just taking the 150 admissions.

Okay, alright, that's helpful. On the facility based side, the margins were down obviously weather related and then of course the Morgan City, where should we see those margins going sort of pre-hurricane related thing this next quarter?

We talked about from a gross margin as it relates all our LTACs, Arthur, being in the low 40s, low to mid 40s, and I think that going forward with the last Morgan City LTAC converted and operating we look for those mid 40 and then hopefully a little bit of creep there in our gross margin on the Alzheimer's (ph).

And as I look at it right now you are kind of in the low 30s this quarter, is that -- am I doing my math right on that?

Yes, that's correct.

So, kind of fourth quarter we should see a jump up in that.

Yes, we should have marked improvement in that, gross margins on the LTACs.

Okay, and then one last question and I will get back in the queue, guidance for '05 did you -- is it just too early to know kind of where you think you'll fall?

It's a - we've got the impact, we are working through the fourth quarter with regard to the hurricane Rita. But we said before and we're holding to that, Arthur, that the fourth quarter earnings call will provide guidance for 2006...

Okay.

...and one other follow-up cash flow for the quarter 6.6 mill

6.6 million.

And one correction, I think I said 662 for depreciation for the quarter if Eric's still on, it's actually I read a digit, it's 462 for the quarter on depreciation.

462 on depreciation, okay. So, basically you expect - - you indicated you expected to see downward pressure in Q4. Is that to assume that Q4 EPS is going to look something below sort of $0.17, is that how to think about it? Or am I misinterpreting that.

I'd say you're misinterpreting that with regard to below third quarter.

Okay, so we'll see a sequential improvement Q3 to Q4?

Yes.

Okay, great thank you.

(Operator Instructions)

We have a follow-up question from Eric Gommel from Legg Mason, please proceed sir.

Yes thanks, I just have one follow-up, another publicly traded home nursing company had talked about -- a little bit about issues with capacity, labor and hiring therapists, also some wage rate pressures. I am interested to get your thoughts on what you're seeing in the labor market, are you having any issue with recruiting or retaining either nurses or therapists at this point? And how about maybe just a little color on labor rate increases or wage rate pressures if any that you're seeing out there.

Eric this is Keith, I'll start off here. Overall as we said before we haven't had a problem accessing the necessary staff in all of our locations to implement our strategy and stay within our growth target. While that's true, it hasn't been easy in every market. But we are certainly seeing some upward pressure in salary, specifically with regard to therapists. We reported that our therapy utilization of 25% all episodes, receiving one or more therapy visits and 17% 10 or more therapy visits. That's actually a little lower than we'd like to see, as the national average at somewhere in the mid 20s. Part of that is due to the difficulty in hiring therapists, especially in some of the rural areas that we serve.

To combat that, we're being more aggressive in the recruiting side of our business through our HR department, trying to recruit salary therapists to send out to those rural areas. But again we are seeing salaries become very competitive. Johnny would you like to add a little color to that?

Sure I mean what Keith said is absolutely correct, in certain pockets we seem to be challenged a little bit more in -- with some of our staffing needs. I think one thing that's very important to point out however is that we have never been in a position, even in those agencies like Lafayette and Baton Rouge that saw a pretty significant increase in census post storms. We never went on what we call diversion, and that meaning that; I'm sorry we don't have enough staff to take care of the referrals that are coming in. Our staff buckled down, they had taken care of the patients, so there is definitely an effort on our part to continue to attract staff, we have been very fortunate in that the reputation of our company and the areas we serve, serves as a recruiting instrument for us and -- but it continues to be a focus for us.

Great, thank you.

(Operator Instructions) Your next question is a follow-up from Art Henderson from Jeffrey's & Company, please proceed sir.

Eric and I can just keep doing this all day long. Minority interest in the fourth quarter, is it safe to just take that number and annualize it out and sort of that would be your run rate going forward?

It's very accurate to do that.

Okay, that's all I had.

Because the only thing, Art, just a follow-on Arthur is as you well know, for the year but naturally that number as we bring on to these acquisition joint ventures, that number would have to be a little creep in it 2006.

A little creep in 2006, okay, and then it reminded me of one other question. On your pipeline Keith you did a good job at characterizing and that looks really healthy, is there -- can you kind of give us a sense as what stage some of those prospects are in, are they kind of towards the end, or they're balanced, how is it looking?

I'm going to be honest there, they're all over the board, you know these -- not all of them mature at the same rate and some have been active since early in '05 so naturally they are getting closer to closing, but in the deals we pursue, no two deals are alike.

Right and -- how is -- what's your policy on this, you don't announce them until the contract's actually signed, is that right?

That's correct; we don't like to announce anything until we have a tentative agreement first.

Okay and have you seen any increase in competition or any creep in multiples that you're seeing out in your -- the areas that you are looking in?

I don't think we are seeing a lot of creep in multiples in the smaller deals we pursue, but as the deals get larger we see more competition and the multiples seem to be higher, but we look at a lot of deals, sometimes the ones that we do acquire do (inaudible) (ph) and we are okay with going through a lot of them to get to the ones that are the right value that fit our model.

Okay, great, thank you.

(Operator Instructions) Ladies and gentlemen this does conclude your question and answer portion of today's call, we turn the presentation back to Keith Myers for closing remarks.

Okay, once again I'd like to thank all of you for joining us this morning. As Michael said we are here in New York, CIBC conference on Wednesday and if you need to contact Barr or myself through the home office and we'll get back to you. During the day we have meetings today and tomorrow but we will find the time to get back to you. Thank you again and we look forward to speaking with you again in the near future.

Ladies and gentlemen thank you for your participation in today's conference this does conclude your presentation, you may now disconnect, good day.