LHC Group Inc (LHCG) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2006 LHC Group Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Cheryl Schneider of Porter, LeVay & Rose. Please proceed ma'am.

Thank you operator and thank you everyone for joining us this morning for LHC Group's First Quarter 2006 Financial Results Conference Call. Joining us today from management are Keith Myers, President and CEO of LHC Group, Barr Brown, Chief Financial Officer, and John Indest, LHC Group's Chief Operating Officer.

However before I turn the call over to them, I must remind you of the Safe Harbor statements. 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 relationships with referral sources, increased competition for the company's services, increase competition for joint venture and acquisition candidates and changes in the interpretation of government regulations.

Therefore actual results may differ materially from any financial outlooks presented in the conference call. Further information or potential factors that would affect the company's financial results can be found on the company's form 10-K for the year ended December 31st 2005. As a reminder, LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

With the Safe Harbor read, it is now my pleasure to introduced management of LHC group and I would like to turn the call over to Keith Myers. Keith, please go ahead.

Thank you Cheryl, and good morning everyone. Thank you for joining us this morning. As you can see from this morning's press release, the first quarter of 2006 was a good one for LHC Group building on a very solid 2005. In a moment Barr will take you through the numbers, and Johnny will follow with a review of our operations. But first I'd like to review a couple of events that may provide some context for the rest of this morning's call.

As you all are aware, one of the keys to our continued growth is the strategic acquisition of home health agencies, and in the first quarter of 2006 we continued to successfully implement this strategy. In January 2006 we closed the acquisition of the assets of Stanocola Home Health in Baton Rouge Louisiana, due to the formation of a joint venture with General Health Systems in which LHC has majority ownership.

As mentioned previously, Stanocola began in 1924 as a subsidiary of Standard Oil and has already claimed significant market share in the Baton Rouge area. In February, we closed the acquisition of the 67% interest in Infirmary Home Health, a leading provider of home care services in southwestern Alabama. We are excited to welcome the patients and employees of both Stanocola and Infirmary to the LHC Group family.

In addition to aggressively pursuing acquisitions in the home health care industry, we are also continuously evaluating our current operations to ensure that they continue to compliment our business strategy. Towards this end, we signed a definitive agreement to sell our 15 bed LTACH in Morgan City Louisiana shortly before the end of the quarter. With the divesture of Morgan City we are left with seven LTACH locations. With the exception of our one LTACH in West Monroe Louisiana, our remaining six LTACH locations in south and central Louisiana are performing well and continue to produce double digit EBITDA margins as a group, even after the reimbursement cuts.

We have entered into preliminary discussions with three interested parties relative to the sale of our West Monroe LTACH. We anticipate receiving offers from at least two of these parties, and expect to evaluate these offers by the end of the second quarter. Also in the first quarter, we closed our non-skilled, private duty services in five Louisiana markets and one Mississippi market. Subsequent to quarter end we sold our Jennings Louisiana based outpatient therapy clinic, our New Orleans base home health care agency and closed our outpatient therapy clinic in Lafayette.

In total these operations contrived about 3.9 million in revenue during all of 2005, but produced a new operating loss of 1.3 million. With the exception of the operations in the Lafayette therapy clinic, these operations are reported as held for sale in our financial statements. Our Lafayette therapy clinic will be reported as discontinued operations in the second quarter.

Since the end of the quarter, LHC Group has signed letters of intent for 2 acquisitions. The first is a purchase of 100% of the interest in the home health and hospice operations of Baptist Memorial Home Care of Memphis Tennessee located in Forrest City Arkansas. And the other is the purchase of a 67% interest in Athens Limestone Home Health from Athens Limestone Hospital in Athens Alabama. Both of these acquisitions are in certificate of need states and we expect them to close in a matter of weeks.

Our acquisitions team continues to evaluate on a regular basis some very exciting opportunities involving potential home nursing agency acquisitions that would fit well into the LHC family. We are looking for agencies that have already embraced our culture of patient focused care and will benefit from our expertise and contribute to the company's profitability. Our focus to acquisition candidates will remain in rural markets where we can bring expert home-based services to those who need it the most.

That brings us to Barr who will cover the results for the first quarter. But before I hand him the floor I would like to publicly thank him for all the work he has done over the years for LHC Group, and to state for the record that it was difficult to accept his resignation. That being said, Barr has delivered on his commitments to LHC Group family and he leaves to pursue his dreams through the expansion of his [Doe's] Restaurant franchise and other business interests. He does so with my full and complete blessing and best wishes from every member of the LHC Group family. We've been lucky to have had him on the LHC Group management team for as long as we did and he will always be part of the LHC Group family.

Our search for Barr's replacement could not be going better. We are ahead of schedule and have been pleased with the quality and number of responses we have received. We began with a field of 31 potential candidates where were identified by our search forum. We have narrowed that field to approximately 5 candidates all with publicly traded healthcare experience. We began the interview process last week and plan to complete interviews this week and extend the formal offer to the top candidate shortly there after.

We are extremely pleased that our Controller Pete Roman's agreed to serve as interim CFO if needed during the transition period. We are blessed to have a former public company CFO in the controller's seat further evidence of the strong team that Barr's put in place over the years. Barr?

Thank you Keith, and good morning everyone. Our first quarter 2006 financial results were as Keith said, very strong. And here they are in detail. Our next service revenues for the quarter ended March 31st 2006 was 45.5 million, up 27.8% from 35.6 million in the first quarter of 2005. The increase to net service revenues resulted in non-GAAP earnings per diluted share of $0.26 and GAAP earnings per diluted share of $0.31. The company's non-GAAP earnings per diluted share excludes a mark-to-market, non cash benefit relating to the minority interests in one of the company's long term acute care hospital joint ventures, which became redeemable upon completion of the initial public offering.

As of March 31st, 2006, LHC Group had 16.6 million fully diluted shares outstanding. As compared to 12.2 million shares on March 31st, 2005. Included in our GAAP and non-GAAP earnings per share results was a $0.04 per share net gain on the sale of discontinued operations, offset partially by a $0.01 per share net loss from discontinued [operations].

In accordance with FAS 144, the company has included operations that were either sold, held for sale or closed as of March 31st 2006. These operations include our private duty services in Louisiana and Mississippi, our Jennings Louisiana based outpatient therapy clinic. The Morgan City long term acute care hospital and the New Orleans based home nursing agency.

Now I'd like to break our net service revenue down by business segment. Starting with the home based services segment. Net service revenue for the 3 months ended March 31st, 2006 was 32.7 million, an increase of 7.9 million or 31.9% from 24.8 million for the 3 months ended March 31st 2005. Approximately 1.4 million of this increase was attributed to the net service revenue generated from acquisition or internal development activity during 2006.

An additional 5.9 million increase in net service revenue was the result of acquisition or internal development activity during 2005. The remaining increase of approximately 600,000 reflects our internal growth. With respect to our facility based services segment, net service revenue for the three months ended March 31st, 2006 was 12.8 million. An increase of 2 million or 18.5% from 10.8 million for the three months ended March 31st, 2005. Approximately 600,000 of the increase was attributable to net service revenue generated from acquisition and development activity during 2005 and the remaining 1.4 million increase resulted from internal growth.

Day sales outstanding or DSO for the 3 months ended March 31st, 2006 was 80 days compared to 78 days for the same three-month period during 2005. However, I'd like to point out that our DSO for this quarter, when adjusted for acquisitions and unfilled accounts receivable would be a 69 days. The adjustment takes into account 2.7 million of unbilled receivables that the company is unable to bill at this time due to the lag in receiving the change of ownership for - after acquiring companies and 2.6 million of accounts receivable that was acquired during the latter part of 2005 and the first quarter of 2006.

There were no such adjustments for the comparable period in 2005. Continued improvement in DSO is a high priority for the company with a target DSO of below 60 by fiscal year end. On the reimbursement front, as many of you are aware, CMS recently finalized the prospective payment rule for the 2007 rate year which includes changes to short-stay outliers and high-cost outliers and will go into effect July of 2006. In addition we recently received the proposed DRG relative weight changes that will be effective October 1, 2006. We project the impact of these reimbursement changes will be a reduction in LTACH revenues of 3.8% in the third quarter of 2006 and 6.3% in the fourth quarter of 2006, based on our current patient volume and mix.

Before I turn things over to Johnny for his operational discussion, I would also like to take a moment to publicly thank all the talented members of the LHC Group's financial reporting team for their hard work, dedication and friendship. I'm very proud of the team we've assembled and I'm confident my successor will enjoy working with them as much as I have over the years. I also want to thank Keith and Ginger for giving me this great opportunity way backing 2007. It has been a great run and I will certainly miss everyone at the company.

And finally I am leaving on June 30th, and I leave with a very strong sense of accomplishment and fulfillment. And until then I will continue to work with Pete and my successor to ensure a smooth transition. Johnny?

Good morning everyone. And let me say Barr that Keith speaks for me as well. You have put together a great team in financial reporting and positioned our company well for the future. I too wish you all the best. I would like to begin by providing you with some operational data. Beginning with our home based services segment, total admissions increased 41.8% to 5051 in the three months ended March 31, 2006 from 4055 in the three months ended March 31, 2005.

Medicare admissions increased 32.8% from 3168 in the 3 month period ended march 31, 2005 to 4207 in the three-month period ended March 31 2006. We had a 11,034 completed Medicare episodes and 202,497 Medicare visits in the three-month period ended March 31, 2006. For an average of 18 visits per completed Medicare episode. Our average case mix for completed Medicare episodes in the first quarter of 2006 was 1.3 with an average reimbursement of $2,498 per episode.

With respect to our facility based services segment, patient days at our long term acute care hospitals increased 12.8% to 11,699 in the three months ended March 31, 2006 from 10,376 in the three months ended March 31 2005. Outpatient visits at our outpatient rehabilitation clinics decreased to 8,775 at March 31, 2006 a 23.6% decrease as compared to 11,485 for the three months ended March 31, 2005.

I am pleases do announce two technology initiates here at LHC, the first is our physician web portal product. We believe this portal will improve the efficiency of our record keeping processes and enhance patient care as well as our relationships with those physicians who wish to utilize this technology. Typical one of the most inefficient processes for any home health agency is obtaining signed physician orders. Historically agencies have printed out orders, mailed then to the doctor where they often sit on a desk waiting an approval. When agencies call and inquire as to whether or not the physician has signed the order it seems to be an annoyance. In addition paper forms are easy to lose - to misplace.

With our new physician web portal we can instantly post all orders online, the system sends an email notifying the physician that orders are awaiting his or her approval. The doctor simply clicks on the url link and the email message which brings the physician to a secure page on our local agency website, where they can review all orders pending with our agency. The physician can approve or modify any order including original orders, recertifications and supplemental orders electronically.

When the physician clicks the sign button the screen, approved orders are automatically entered to the physicians electronic - into the patient's electronic medical record. Doctors can approve the orders received from our agency with just a few clicks of the mouse, all online. No more hunting for paper orders buried on their desk.

The benefits to this system, as you might imagine are fairly significant. Administration becomes more efficient with less paperwork. We believe the order for approval system can be shortened by as much as 90% in showing compliance with a 14 day turnaround standard. The physician web portal allows for faster billing, which improves cash flow while enhancing patient care. Physicians can find these orders electronically from their office, their home, day or night. Instant electronic approval eliminates mail float and otherwise wasted time.

The climate of the physician web portal is scheduled to begin in Q3, '06 with full implementation to be completed by year-end. In addition to our physician web portal we will be bringing in additional technology as we move to laptops in the field which will provide up to date patient electronic medical records, 24 hours a day, seven days a week to every registered nurse on call.

The portal will introduce field nurses to new technology without introducing massive changes and the traditional loss of productivity associated with full point of care implementation. Once nurses see how much easier this makes their jobs, we believe the experience should ease the transition to additional field devices in the future. We estimate the cost of equipment and training at approximately $3,000 per location. We are confident that the company will recoup that investment quickly. We plan on rolling this product out in the third quarter of '06 with implementation completed by the end of the year.

Today I would like to offer special thanks to our start up and transition team. They have done a superb job with our most recent acquisitions of Infirmary and Stanocola. These agencies have been fully integrating to the LHC Group family, and we are very pleased with their continuing solid performance.

I will now turn the discussion back to Keith.

Thanks, Johnny. Based on the results we have here in the first quarter, we are reiterating our guidance for February 23rd 2006, for fiscal 2006. That is, we anticipate that net service revenue will be in the range of 200 million to [technical difficulty] million, and estimate non GAAP [technical difficulty] per share of approximately $0.95 to $1.00. All numbers exclusive of any future acquisitions.

[Technical difficulty] remains to continue the development of our core business [technical difficulty] through organic growth, [acquisitions] of de novo locations and acquisitions that meet our criteria, while also ensuring that all of our existing operations continue to compliment our business strategy, which is to be the leading provider of home and community based services to the elderly and disabled in the markets we serve.

We provide healthcare services to very special members of our society. The average age of our patient base today is 80 years of age. The median is 81 years of age. At an average of $2498 per 60-day episode of care, that comes to $41.63 per day. They age 65 plus population in the US is approximately 37.5 million and more than 5 million of that number are age 85 plus today.

According to CMS only an approximate 3 million beneficiaries currently receive Medicare home health services on an annual basis, roughly 8% of the aged 65 plus population. By the year 2030, the age 65 plus population is expected to exceed 70 million, but more importantly the age 85 plus population is projected to be near 10 [billion]. At roughly $42 per day, home care provides a win/win solution for both the patients and the payer. We will continue to not only deliver consistent quality healthcare but to also provide that care in the most cost effective and efficient manner possible so as to continue to deliver measurable value to both the patient and the payer.

Clearly the future for the services we provide is bright and with our proven operating model and the strong team we have in place, we are well positioned to play a vital role in caring for our aging population.

And now we'll open the call up for questions. Operator?

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Balaji Gandhi of Oppenheimer. Please proceed.

Good morning guys.

Good morning.

I just had a couple of things I missed, Medicare you listed the episode and visits, if you could repeat those for the quarter.

Johnny, you want to take that?

Yes, completed episodes for the quarter were 11,034. Average visits per episode 18.

Okay. 18 even. Okay. Great. And then I guess, in the release you said that internal growth was about 600,000 is that - is the right way to think about that then about 2 or 3% as pure internal growth?

Yes, as pure internal growth. That's correct Balaji.

Okay, and then I guess that was - didn't you effectively get more than that as a price increase, so was it the Medicare rate increase more than 3, so how would that - ?

Well the Medicare rate increases were a rate freeze, but with regard to the mark - the real add on, about 2.5% for us.

Right, so I guess - would that imply that there really wasn't a lot of volume growth internally and it all came from price or what's the contribution to that 600,000 that you got?

Yes, I would say that probably half of it is as a result of the real add on as it relates to 60% of our patients. The balance would have been just shear internal growth.

Okay, and then with the LTACH segment, if I remember correctly, previously you'd thought the proposed rule would be a 3.8%, I'm sorry a 4.2% hit in the third quarter, and now you think it might be 3.8 is that right?

That's correct, 3.8 and then it jumps to 6.2 for the fourth quarter as a result of the proposed, or our anticipation of the proposed DRG reweighting.

And that was never in your prior guidance or expectation, the reweighting?

The reweighting was not in our guidance. No that's correct.

Okay. So - I mean I guess if you still feel comfortable with your prior guidance I guess it means that the home health business is healthy enough where it can make up for that 6.2%. Is that the way to think about it?

Yes, in addition to some changes in the cost containment measures that we're making also on the LTACH side to - in attempt to offset those potential reweighting. Again, its proposed, it wont be effective - the final wont be effective - or come out until August, Balaji.

Oh, on the other DRG reweight right.

Reweighting is just proposed right now and we just factored that in as potential impact.

Okay great. And then going from 4.2 to 3.8 was just the short-stay outlier change helped you by a little bit I guess, is that -?

That's correct.

Okay. And then I saw this redeemable minority interest line on the income statement. What exactly is that?

The LTACH, the St. Landry [inaudible] LTACH has some physician ownership, about 5% as a result of that they had an operation to convert to LAC shares with those - their interests. About half approximately converted from the fourth quarter to the first, they actually cashed out, they didn't convert to stock. So as a result we're able to have a pick up in that redeemable interest for remaining shareholders. I'm sorry for the remaining physician ownership.

Okay and then what was the effective tax rate for the quarter?

31% and that is lower than or effective 38 as a result of the tax credits from the hurricane relieve that we're able to take advantage of in the first quarter and hopefully continue to take advantage of that throughout 2006.

Okay, so using the 31 would probably be safe?

Well I would - I would say that probably we should be in the neighborhood - again the tax credits vary dependant on the number of employees that you have each quarter that wee effected by the hurricane, so there is a possibility that that number could increase, decrease. So I would say that probably a safe would be effective tax rate in the range of probably 32, 33%. Just to give a little cushion.

Okay, great. And then just on lastly on the CFO search. I forgot did you mention the time you were targeting to maybe have somebody onboard?

Our intent continues to be to make an announcement before Barr leaves. We think we may beat that considerably. We'll complete interviews this week and from that way we start with the top candidate, so I think that's about all I can say at this time. I think we'll easily have an announcement before the end of June though.

Okay great. Thanks a lot guys.

And our next question comes from the line of Eric Gommel of Stifel Nicolaus. Please proceed.

Good morning.

Good morning, Art.

What - for the quarter what was your depreciation and amortization CapEx and acquisition expenditures?

Yes, depreciation was approximately 500,000 [Eric] and CapEx was right at 900 but there are a lot of one time CapEx in that first quarter that we're - we've incurred, it will not be reincur in these quarters, so CapEx should fall out in the - going forward in the 5 to 600 range for quarter on a quarterly basis. It's a little high in this first quarter.

And what was your acquisition expenditures?

Right at 3 million.

So embedded in your guidance on the CapEx side, you're expecting about 500 to 600, I'm assuming the 1 times items related to technology investments is that?

That is correct.

So are we going to see any more technology investment, I mean additional beyond this 500 to 600.

I think that, again based on what Johnny laid out to you from the standpoint of technology upgrades in the fields. We would certainly - that would be covered in our 5 to 600 per quarter going forward.

Great. And then do you have a number sort of embedded for acquisitions or is that something, I mean in your guidance do you have an acquisition expenditure number?

We really don't provide that Eric. Certainly we have a lot in the pipeline, but as far as projection of that expenditure for acquisitions, we do not.

Okay. And as it relates to the pipeline for potential acquisitions. I'm curious if you've seen a change at all maybe in valuations or maybe the players that are interested in acquiring targets, any substantive change in the environment at this point?

Eric this is Keith. I'm not sure I would say that we see a lot of movement in pricing but we do see more activity in the pipeline.

And then - other question I have is related to the accounts receivable. You talk about some of the, I guess legacy AR that you've acquired, what kind of strategies have you gone about to try to reduce that or are you going through sort of an intensive review of that AR in determining what is collectable or what is not, can you talk a little bit about that?

Absolutely, any of the AR that we take on in acquisition, its closely scrutinized but we are confident that all of it is collectible. However the reference you simply made to when we take on that AR the - without any corresponding revenue, the initial spike in our DSO, but certainly we're confident that all that AR is collectible.

Great thanks.

Thank you, Eric.

Thank you.

And our next question comes from the line of Art Henderson of Jefferies & Company. Please proceed.

Hi, good morning, just a couple of questions. Barr, could you tell us what the cash flow from operations was for the quarter?

Yes, it was right at 3 million.

Okay 3 million. And you said acquisition spend was at 3 million?

Roughly, yes.

Okay. Johnny on the - I know you talked about the physician web portal, but you also talked a little bit about the tablet PCs out in the field - your timing for getting those tablet PCs out in the field, I assume after the physician web portal roll out.

That's correct.

So is this more a 2007 event?

No we began - we plan on - the physician web portal is going to begin - we said beginning in Q3 to make sure - I need to rephrase my answer. They're basically going to happen simultaneously.

Okay.

Both in Q3 and we anticipate full implementation by the end of the year Arthur.

Okay, so there will be tablet PCs out in the field by the end of the year.

That's correct.

Okay, okay. And then real quick on the LTACH business. I think Keith you mentioned that, was it West Monroe, that you have interested parties looking at?

Yes.

Okay. Is that still classified in your income statement or have you moved that into - I mean is that in a discontinued ops line or is that in the full income statement.

We moved that into discontinued ops in accordance with FAS 144 and that we are actively marketing that.

Okay. Okay. All right now as far as the remaining six, do you feel comfortable with those facilities that you'll stay in that business for a while or are you kind of opportunistically thinking about each 1 and talking to potential interested parties on any of those?

Arthur, we're not in any discussions concerning the other six at this time. I think where we are, we're comfortable with the performance at this point and for the remainder of this year. We'll obviously continue to look at them but we're going to take a harder look at them again in '07.

Okay. And could you just sort of detail what kind of cost containment measures you're putting in place at those six to maximize your profitability there?

Yes, Keith I can answer that, this is Johnny, Arthur.

Hey Johnny.

We plan on number one, we think we have some excellent opportunity for decreasing pharmacy costs in our LTACHs from moving our pharmacists from outside of the LTACHs into the LTACHs and therefore getting better pricing related to that.

We also feel like we can enhance our case management and therefore do a better job as far as the case mix that we're bringing into our LTACHs. And adherence to our productivity standards, we feel like we can increase the volume also into our LTACHs, currently we're at 74% bed occupancy and we feel like we can get to 85 to 90%.

Okay, okay. Great. On the acquisitions that you guys are currently looking at, are these kind of 1 off locations or are you looking at some that have several locations. What are you sort of focusing on right now and kind of how much do you have - how many do you have in the pipeline that you're looking at that are sort of attainable?eNHHH

Arthur this is Keith, I guess I'm going to have to field this one. Clearly the opportunities we're looking at are much larger than the size we've looked at historically. And this time we're looking at a number of locations with more than one service site. 1 in particular is - would be in the double-digit service sites, and of course revenue size follows that.

As far as the opportunities that are attainable, our hit rate is certainly improving, much of that is because of the different strategies being implemented by a business development team, but I believe that at this time we have greater than five [LOIs] that are out that we feel really good about and so -

Okay, okay that's fair. Now is your Forrest City in Athens Alabama in your guidance now?

No.

Okay they are not in your guidance okay.

Typically when we go in, if you recall, we look at a lot of operations that are break even or maybe just a little better or worse than break even when we go in so for the first 4 quarters we're really implementing our model and we don't count on them to contribute very much.

Okay, okay great. Thanks, very much.

Okay thank you.

[OPERATOR INSTRUCTIONS]

And we do have a follow up question from the line of Art Henderson. Please proceed.

Barr, just one other question, I just wanted to also thank you for all of your hard work, and wanted to know when the new Doe's locations would be open?

I appreciate that Art and I look forward to hosting you.

I look forward to it as well, and maybe we can have a bottle of win again.

Very good.

You know his first location is about 100 yards from the home office, so I don't if his [plan] is to follow [the acquisition], I don't know [where].

Very good. Thank you.

Thank you.

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

Okay thank you operator. And thanks again everyone for joining us this morning. We really appreciate your support and I have to, once again, thank the fantastic team we have in place and thank Barr as he moves on to other things for all the great work he's done at LHC Group and the platform he's laid for the [technical difficulty] and our next earnings call. Thank you.

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