LHC Group Inc (LHCG) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Preliminary Fourth Quarter and Year-end 2005 LHC Group Earnings Conference Call. My name is Michelle, and I will be your audio coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call Ms. Cheryl Schneider. Please proceed, Ma'am.

Thank you, operator. And thank you everyone for joining us this morning to review the preliminary fourth quarter and year-end 2005 financial results for LHC Group. Before we get started, I wanted to remind you that certain statements included in this conference call may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to a number of risks and uncertainties such as changes in reimbursement, changes in government regulations, changes in the company's relationship with referral sources, increased competition for its services, increased competition for joint venture and acquisition candidates, and changes in the interpretation of government regulations.

Therefore actual results may differ materially from any financial outlook presented in the call. Further information on potential factors that could affect the company's financial results, can be found in the company's S1 registration statement, as amended and filed with the SEC on June 14th, 2005 and its Form 10-Q for the quarter ended September 30th, 2005. And please note that LHC shall have no obligation to update the information provided on this call to reflect any subsequent events.

Just as an explanation, the reason that we are hosting today's call with unaudited results is because management will be meeting with members of the investment community next Monday, February 27, 2006 at the Citigroup Healthcare Conference in Washington DC. Management is expecting to discuss its expectations at this conference. And therefore in order to comply with all the legal requirements and to be as transparent as possible, we are hosting this call in addition to the issuance of today's press release. And that conference on Monday will be webcast for anybody who would like to listen to it. The company intends to release its audited fourth quarter and year-end financial results by the end of March.

With that aside, I would like to introduce management. On the call today are Keith Myers, President and CEO of LHC Group, Barr Brown the company's CFO and John Indest, the company's COO. At this point, I would like to turn the call over to Keith Myers. Keith, please go ahead.

Thank you, Cheryl, and good morning everyone. Before we get started, I would just like to reiterate what Cheryl said, that our decision to provide preliminary unaudited results for the fourth quarter was made after careful deliberation and proper assessment of the risks associated with the release of this [nature]. Because these results are not yet audited, we will be providing ranges rather than specific numbers, which Barr will cover with you shortly. On the completion of our audit towards the end of March, we will release our final audited results.

Let me begin my CEO report by saying we were very pleased with our unaudited results for this quarter. Our revenues for the fourth quarter ended December 31st 2005 are in the range of 43 to 45 million with non-GAAP EPS of between $0.18 and $0.19 per diluted share. Thanks to the total team effort from the members of a dedicated LHC Group family, we were able to more quickly recover from the effects of two devastating hurricanes than originally expected.

As Johnny will cover in more detail, we were able to return to pre-hurricane census levels in almost all of our locations by fiscal year-end. Additionally, with increased volume in some of our locations not impacted by the hurricanes, we were able to successfully minimize any negative financial impact of the storm. Since out initial public offering, we have announced seven acquisitions. During the fourth quarter, we announced the planned acquisition of a 67% ownership of Infirmary Home Health Agency located in Mobile, Alabama and Levi Home Health, located in Hot Springs, Arkansas. These majority interest additions represent great opportunities for growth and contribution in 2006.

Also in the fourth quarter, our two wholly owned acquisitions of Home Care Plus in West Virginia and Able Home Health in Mississippi and Alabama, were successfully transitioned by our operations team. We believe these additions will represent us -- will present us with significant de novo opportunities over the course of the next 12 to 18 months.

Finally, we are extremely excited about our most recent acquisition, the assets of longstanding Stanocola Home Health in Baton Rouge, Louisiana. This acquisition involves the formation of a joint venture between LHC Group, General Health Systems and Stanocola with LHC maintaining majority ownership. Stanocola began in 1924 as a subsidiary of Standard Oil and already has significant market share in the Baton Rouge area.

I would now like to turn it over to Barr, to walk you through our preliminary unaudited results for the quarter. Barr?

Thank you, Keith. Good morning, everyone. Here are LHC Group's preliminary unaudited financial results for the fourth quarter of 2005. As Keith stated, our net service revenue is expected to be between 43 and 45 million in the forth quarter of 2005 as compared to 35 million in the fourth quarter of 2004. For the quarter ended December 31, 2005, the company expects non-GAAP earnings per diluted share of $0.18 to $0.19 and GAAP earnings per diluted share of $0.20 to $0.21.

The company's non-GAAP earnings percentage diluted share excludes a mark to market non-cash charge related to the minority interest in one of the company's long-term acute care hospital joint ventures which became redeemable upon completion of our initial public offering. For the year ended December 31, 2005, our net service revenue range is expected to be between 160.5 million and 162.5 million, compared to the 123 million we reported in fiscal, for fiscal 2004. For the full year ended December 31 2005, the company expects to report non-GAAP earnings per diluted share of $0.82 to $0.83 and GAAP earnings per diluted share of $0.58 to $0.59.

The company's non-GAAP earnings per diluted share for the year ended December 31, 2005, excluded equity based compensation charges primarily related to the conversion of the company's Key Employee Equity Participation Units to common stock in connection with the company's initial public offering, which closed on June 14, 2005. It also includes 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 became redeemable upon completion of the initial public offering as well as a one time tax benefit resulting from an equity-based compensation charge incurred by the company prior to the completion of the initial public offering.

Days sales outstanding, DSO is expected to range between 71 to 76 days for the three months ended December 31, 2005, an improvement from the DSO of 79 days for the three months ended September 30, 2005, due to efficiencies gained in the implementation of our new revenue, billing and receivable management application at our home nursing agencies. DSO has continued to return to 2004 levels as of the end of the year. DSO is expected to range between 76 and 81 days for the 12 months ended December 31, 2005 as compared to 74 days for the year ended December 31, 2004. This increase in the DSO is due to the residual effects of the implementation of our new billing system, management application system at our home nursing agencies implemented earlier in 2005.

I'd like to now provide you some operational statistics. Total admissions to the home nursing division increased to approximately 4,500 for the fourth quarter of 2005, from 4,176 for the three months ended December 31, 2004. Total Medicare admissions to the company's home nursing division rose approximately 3,200 in the fourth quarter of 2005, from 3,071 for the three months ended December 31, 2004. Total patient days in our long-term acute care hospitals climbed to 12,300 in the last three months of 2005, from 8,865 for the same period in 2004. Total outpatient visits to our clinics were approximately 8,900 in the fourth quarter of 2005 compared to 10,809 for the same period in the prior year. As our audit is still underway we do not plan to discuss our balance sheet results in today's call.

Now I'd like to address some recent Medicare reimbursement activity and the potential impact on LHC Group. As it relates to our home health revenues on January 1, 2006, a 2.8% market basket increase went into effect along with the new Core Based Statistical Area, CBSA designations and wage indices. As you are all aware, the one-year Deficit Reduction Act has provided for a one year Medicare home health market basket reimbursement freeze in 2006, in essence, taking away the original 2.8% market basket adjustment. This Act also provides a 5% rural add on.

Under the new CBSA, we expect to be classified as approximately 60% rural where we were previously classified as approximately 40% rural. Using the Transition Wage Index, this is expected to result in a 2.5% increase in revenue in 2006. The effect of this legislation has been included in our 2006 earnings projections that Keith will share with you shortly.

On the LTAC front, the DRG reweighting which occurred back in October of 2005 is expected to result in an approximate 6.2% decrease in our LTAC revenues for 2006. More recently CMS issued its proposed prospective payment rule for the 2007 rate year. This proposed rule includes changes to the market basket, short stay outliers and high cost outliers. Based on our current patient mix, the adoption of this proposed rule is expected to result in a decrease in our third and fourth quarter 2006 LTAC revenues of approximately 4.3%. Again, both of these decreases have been included in our 2006 earnings projections.

That covers the main points of our preliminary unaudited financial results. and now I would like to turn it over to Johnny Indest, COO.

Thank you, Barr, and good morning, everyone. I'm pleased to report that all of our agencies affected by hurricanes Katrina and Rita are back up and running. A total of 27 of our home care locations were affected in some way by the two storms. The good news is that all of our home care locations hit by the storms with the exception of our New Orleans location are at or near pre-storm census with some even exceeding pre-storm levels.

As Keith indicated, we are very proud of our challenges and dedicated employees. From our critical caregivers out in the field to our home office support personnel, it was a complete team effort that allowed us to successfully bounce back so quickly. When something like this happens, you find out a lot about the kind of people, you are working with, and our team truly proved that they really are the best. To our team, I would like to say that I'm not at all surprised, and on behalf of management and our investors I thank each and every one of you.

Aside from the hurricanes, the chief challenge for operations is the successful integration of our acquisitions into the LHC Group family. Our strategy of acquiring only those operations that fit our corporate culture goes a long way towards avoiding and easing transition problems related to our acquisitions. Our plan was to have our third quarter acquisitions integrated by the end of the year, and I'm very pleased to report that we have done so.

In addition, since our last call we have added four de novo locations to our growing list of home health agencies including Mississippi Homecare, Madison, Mississippi Homecare, Philadelphia, Louisiana Homecare of Alexandria and Knoxville Homecare. Our most recent announced acquisitions, which Keith referred to earlier, Infirmary and Stanocola are on track and should be integrated in the early second quarter.

I will now turn it back over to Keith for his closing remarks.

Thank you, Johnny. Once again we are, we reiterate how pleased we are with our preliminary unaudited results fourth quarter of 2005 and trust that our investors are also. We plan to continue our concentrated focus on the growth of our core business of home health through acquisitions and the addition of de novo locations, as well as continued organic growth.

In response to the many inquiries for guidance and in the light of the fact that many of the uncertainties on Capitol Hill have now been resolved, via the Deficit Reduction Act, we're pleased to provide you with our 2006 guidance. We expect revenue for fiscal 2006 to be in the range of 200 to 215 million, and non-GAAP diluted earnings per share of approximately $0.95 to $1, all numbers exclusive of any future acquisitions.

In closing, I would like to once again remind participants that we are presenting at the Citigroup Healthcare Conference next week. Accordingly our release of preliminary unaudited results for the fourth quarter via this call and the issuance of this morning's press release, seem to be the most transparent way to deal with the situation.

We appreciate you all joining us today, and I would now like to open the lines for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Arthur Henderson of Jefferies & Company. Please proceed.

Hi, good morning. And just wanted to complement you on a very, very nice quarter. I know you guys had a lot to deal with this quarter and you did a fantastic job executing. It's refreshing today for sure. I guess, the first question that I have for you is, it's clear that investment community really sort of views you as a home nursing provider. And less so, as an LTAC provider. And with some of the changes that seem to be taking LTAC from a reimbursement perspective, are you kind of at a point now where you would consider possibly trying to sell those assets or move those assets into say, discontinued operations, so that it kind of takes the focus -- it doesn't necessarily distract people from what you're really trying to go after?

Arthur, this is Keith. I'll take that one. We hear you. And I think you know that we're constantly evaluating our business and we do that more, more frequently than quarter-to-quarter. But, when we look into 2006, we've been able to gain operating efficiencies. And the contribution margin that we anticipate from our existing LTAC locations is such that it would not, it would not point -- lead us to divest them given market conditions today. We will continue to investigate that quarter-to-quarter. One thing's for certain though, we will not be opening any new LTAC locations.

Okay, okay that's a fair comment. I would say with, to the extent that this is something that at some point you would consider possibly selling, we have seen circumstances where other companies would move a business like this into the discontinued ops, even though they haven't been able to sell it or do something with it. At least it sort of takes the investor mindset off of that, and really kind of look at what you're really going after, just as a suggestion.

Yes.

Second question I had for you is your guidance for '06, 0.95 to a dollar doesn't include acquisitions. Is that a net of stock options expensing or is that even an issue, which is going to impact you to any meaningful degree this year?

Arthur, this is Barr. I don't think that in any way that'll be a meaningful takeaway for going into 2006. So I wouldn't factor that in.

Okay, so we can use the 0.95 to $1 as kind of a net number?

Yes.

Okay. And then thinking about sort of your acquisition pipeline, I know that in the past you guys have talked about the strength of it. And Keith, I know you're pretty, pretty conscious about what you want to pay for things. First thing I -- first question I have on that is with the change to Medicare reimbursement, or with the Deficit Reduction Act being passed, taken away the market basket update, are you seeing some sellers maybe coming to terms -- coming to the idea that valuation, their expectations were maybe a bit too high or they're being more, a little bit more realistic in their discussions with you?

We do, Arthur. We're seeing, we're seeing more activity on the seller side. And certainly their expectations are coming down. But on the other hand, I think, I'm going to meet them in the middle somewhere. We're going to kind of come up a little bit. I think we were a little low. Seriously, we've had some very good conversations with industry leaders in the M&A area over the past 30 days or so. And we think [technical difficulty] [story] in '06.

Okay. And then, are there some, sort of looking at your pipeline for the year, I mean are there some things that are close at hand or can you give us some sense of when if we were to think about acquisition timing, when would we kind of keep our eyes open? I know it's difficult to predict, but to the extent that you can.

It is on the heels of the -- of the Infirmary acquisition and acquisitions of, in that size range, we would hope to, to see activity in the second quarter of maybe significant volume. But I'd also like Johnny maybe to -- Johnny if you could, maybe share some of the de novos that we have on the slate for opening in '06?

Correct, Keith. As Keith stated in his comments, particularly with the Alexandria [Able] group of acquisitions, it's created some opportunities for de novo locations for us. And I alluded to a couple of them. In 2006, we have 11 additional de novo locations targeted. And that would include Alabama, Arkansas and Mississippi. And we have -- I stated that we have already initiated some de novo locations, and I'm very pleased by the progress I've seen with them. By the very indication, de novo means we're starting from ground zero. But they are starting to perform quite well for us.

And are those de novos typically in areas where I guess in a county, sort of, next to where you already are, that you can minimize the startup costs associated with it?

That's exactly correct. De novos usually are branches [of] provider numbers that are already existing. We're able to use mentors that are already acclimated to our operations model and go into those de novos. It does not cause any increased activity or increased staffing from the home office. It happens totally within that provider number. And therefore is extremely low startup cost.

Okay. And in your guidance are you factoring any contribution from those or, is that kind of, incremental as well?

We have not factored those in. We have those slated, but it's not factored in. And I would tell you that, as you would imagine Arthur, the de novos and bringing those on, it would be even an incremental contribution throughout 2006.

Okay, okay. And then the last question, and I'll turn back in the queue. Any thoughts on sort of home nursing reimbursement, going forward, as far as it's CMS, are you hearing anything about case mix adjustment, anything that we need to be aware of?

Nothing, nothing that's -- nothing that's imminent. Nothing that -- other than the chatter we've all heard already. I mean we think that there will be some adjustment or reweighting, if you will, at some point in the future. But that'll be in '07 at the earliest, in our opinion.

Okay great. Keep up the good work. This is great, thank you.

Arthur?

Yes?

[Technical difficulty] on the comment, we did have a, and we've had them periodically, we had a call with some legal counsel that's very tied in with things going on in Washington. And one of the things that I think you're probably aware of that the Deficit Reduction Act has commissioned a study that's going to exam and persecute over the next three years, but that's not beginning from January '07. So as Keith said, I think from everything we're seeing, there's nothing that's imminent. But it's certainly as we all know, they continue to look at ways to reduce.

And I think the best news, Arthur, is that none of the chatter we're hearing includes any copay in it.

Okay, okay. That's good, all right. Well, thank you very much.

And our next question comes from the line of [Eric Gomall] of Steifel Nicholas. Please proceed.

Good morning.

Good morning, Eric.

You guys have been very successful in bringing the LTAC business from, I guess what was an unprofitable business, to one that is profitable through what I'd call basic blocking and tackling. When you look at some of the changes that are happening with reimbursement in this space, how do you guys, kind of look at adjusting to those, to those challenges? Is it -- are you going to take a -- is [it] basic things you can do to make yourself more profitable or is it going to be more difficult to adjust to that? And the other thing that I'd be interested in, relative that maybe your peers, why are you not as impacted by some of these changes as maybe your peer group?

Eric, this is Johnny. I'm going to go ahead and address that first. We are quite pleased with the turnaround in our operational and financial performance in our LTACs. My associate Don Stelly, who is relatively new to the company and has an extensive background in hospital management, being a former CEO of a for-profit hospital, has done a phenomenal job in working with his team to create metrics to control cost, enhance revenue.

I can tell you in dealing with the proposed change is somewhat twofold. We're maximizing our operational efficiencies. It's important to note that 79% of our patient base is not affected by the proposed rule. That'd be the short stay outliers, the high cost outliers. And we realize that we have these type of opportunities that will yield savings that will far surpass the 4.27% hit to revenue. We're doing that by appropriate case management, control of pharmacy cost, ancillary utilization. We're very confident that we can keep our LTACs functioning properly providing a great service to the patients that we serve. And we're continuing to properly assess and admit patients appropriate to be treated within our facilities, that's going to become very important in dealing with the short stay outliers, the high cost outliers. And so, I'm very pleased with where we are with our LTACs right now.

Great. And then Barr, question about Sarbanes. When do you guys have to be compliant with that? And what -- I think you've talked in the past about bolstering some of the, your financial, I guess assets, hiring additional people. If you could just expand or talk a little bit about that?

Sure, Eric. We have to be compliant December 2006 this year. We have retained an outside consulting firm, accounting firm to assist us with this implementation. And they're, we're well into it. We've gone through two phases, if you will. And so, I would tell you that we're on track and things are going well with the Sarbanes-Oxley work.

Great, well, thank you.

Thank you, Eric.

Thank you, Eric.

[OPERATOR INSTRUCTIONS]

And I'm currently showing we have no audio questions in the queue at this time. I'd like to turn the presentation back over to yourself, Mr. Myers for any closing remarks.

Thank you. In closing, let me just once again thank you for just staying in our call this morning. And also to all of our team members, and to all stakeholders in LHC Group, I want to sincerely thank you for the trust and confidence you've placed in our company and in the management team and all of our employees, and for standing by us through what could've been a rough fourth quarter. Together we made it through, and we look forward to a fantastic 2006. We look forward to speaking with you again in the future soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the presentation, and you may now disconnect. Have a great day.