LHC Group Inc (LHCG) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 LHC Group Inc. Earnings Conference Call. My name is Lisa, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Cheryl Schneider from Porter, LeVay & Rose. Please proceed, ma'am.

Thank you, so much. I am delighted to welcome you all this morning for LHC Group's second quarter 2006 financial results conference call. On the call with us today are Keith Myers, President and CEO [technical difficulty] 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, change in the company's relationships to the referral sources, increased competition for services, increased competition for joint venture and acquisition candidates and changes in the interpretation of the government regulations.

Therefore, actual results may differ materially from any financial outlook presented within the call. Further information or potential factors that could affect the company's financial results can be found in the company's Form 10-Q for the quarter ended March 31, 2006. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

At this point in time, it is really my pleasure to introduce the President and CEO of LHC Group, Keith Myers. Keith, please go ahead.

Thank you, Cheryl, good morning. I'd like to thank everybody for joining us this morning. Our 2006 fiscal year continues strong with net service revenues of 49.6 million for the quarter, and about 95 million for the first half of the year. Our earnings for the quarter are $0.27 per fully diluted share, and for the first half of 2006, earnings are at $0.57 per fully diluted share and we continue to grow our business. In a moment our new CFO, Barry Stewart, will review the financial results, and after that our Chief Operating Officer, Johnny Indest, will go over operational developments during the last quarter.

First though, I want to say a few things to give their comments some context. In May, we closed on two acquisitions in Certificate of Need States that were mentioned in our previous conference calls. The first is the purchase of 100% of the interest in the Home, Health and Hospice operations of the Baptist Memorial Home Care of Memphis, Tennessee located in Forrest City, Arkansas. And the other, the purchase of 67% interest in Athens Limestone Home Health, from Athens Limestone Hospital in Athens, Alabama. These purchases have expanded our footprint in both Arkansas and Alabama, and we are pleased to welcome them to the LHC Group family.

Before the quarter ended we announced our intention to purchase the Kentucky based assets of Lifeline Home Health Care. That purchase closed last week, and it marks a major milestone in the development of LHC Group. Like Alabama and Arkansas, Kentucky is a Certificate of Need State, and Lifeline is the biggest acquisition we've ever made. It has a census of 2,400 patients and approximately 350 employees. As a result of the acquisition, LHC Group now has 17 locations in 29 Kentucky counties, with a population of over 750,000 people.

We are aware of the challenges we face in integrating Lifeline, but because it has such a strong brand name in the areas it serves and because the corporate culture of Lifeline so closely resembles LHC Group's, we expect to accomplish this in due course. During the last couple of weeks of discussions with Lifeline, Barry Stewart demonstrated that we did indeed hire the right guy to succeed Barr Brown. The transition from CFO to another went as smoothly as you can imagine, and Barry's performance in getting the job done should give everyone confidence in him and his talents.

Although Barr remains with LHC Group as a part-time consultant, the financial reporting is now safely in Barry's hands. Barr's resignation also extended to his seat on LHC Group's Board of Directors and we appointed Ambassador Nancy Goodman Brinker to fill his seat. Ambassador Brinker served as American Ambassador to Hungary from September 2001 to June 2003. She is also the founder of the Susan G. Komen Breast Cancer Foundation, named after her only sister, Susan, who died from the disease in 1980.

In 1986, President Reagan appointed her to the 18 member National Cancer Advisory Board. In 1992, she was appointed by President George H. W. Bush to the President's Cancer Panel, to monitor progress of the National Cancer Program. Additionally she was invited by Vice President Quayle to chair a subcommittee, monitoring research, progress and development in the fight against breast cancer. We are honored to have her as part of the team, and we will rely on her experience in healthcare and corporate government, as well as her entrepreneurial spirit in the coming months.

Finally, during the second quarter we had a follow-on offering that raised approximately $21 million. Some of the funds raised will go to general corporate purposes, but most of it is earmarked for future acquisition opportunities. There are numerous prospects, and our acquisition team is dedicated to determine which of them would fit well into the LHC Group family. For those of you new to the LHC Group story, our motto and our founding philosophy is simple. It's all about helping people.

We look 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 remains on rural markets, where we can bring our home-based services to those who need it the most. Our core business will continue to be the home healthcare industry. At the same time, we continue to monitor the developments of our seven LTAC locations. As noted in our previous conference call, six of our LTAC locations in South and Central Louisiana continue to produce double-digit EBITDA margins. Our preliminary discussions relative to the sale of our West Monroe LTAC continues.

That's the big picture for the quarter, so to provide some detail I'll turn things over to Barry for the financials. Barry?

Good morning. Thanks, Keith. LHC Group's second quarter and six month results show continuing strength in profitability. I'll review the quarterly results first, and then give a quick overview of the half-year results. Our net service revenue for the quarter ended June 30, 2006 was 49.6 million, up 37.8% from 36 million in the second quarter of 2005. Net income in the second quarter of 2006 reached 4.4 million or $0.27 per diluted share.

For the quarter ended June 30, 2005, the company reported a net loss of 600,000 or $0.04 per diluted share. As of June 30, 2006 LHC Group had 16.6 million fully diluted shares outstanding, as compared to 13.3 million shares at June 30, 2005. To get a little extra clarity on our net service revenue, let me break it down by business segment. On the Home Based Service side, net service revenue for the three months ended June 30, 2006 was 36.6 million, an increase of 47.6% from 24.8 million for the three months ended June 30, 2005. Approximately 7.1 million or 30.3% of the increase came from organic growth, while the remaining 17.3% came from acquisitions.

On the Facility Based Services side net service revenue for the three months ended June 30, 2006 was 13 million, an increase of 1.8 million or 16.1% from 11.2 million for the three months ended June 30, 2005. Approximately 1.6 million or 14.3% of the increase came from organic growth, while the remaining 1.8% came from acquisitions.

Days sales outstanding or DSO for the three months ended June 30, 2006 was 77 days, compared to 94 days for the same three-month period in 2005. DSO when adjusted for acquisition and unbilled accounts receivables, was 69 days. This adjustment takes into account 4.6 million of unbilled receivables that the company has delayed in billing at this time, due to the lag time in receiving a change of ownership after acquiring companies. There were no such adjustments for the comparable period in 2005. Very quickly let's look at our six-month results. Net service revenue for the six months ended June 30, 2006 was 95 million, an increase of 23.6 million or 33.1% from 71.4 million in 2005.

For the six months ended June 30, 2006 and 2005 84.8% and 86.3%, respectively, of our net service revenue was derived from Medicare. Earnings per share at the half-year mark in 2006 are $0.57 per share, up from $0.21 per share for the first half of 2005. Looking at Home Based Services, we had net service revenue for the six months ended June 30, 2006 of 69.3 million, an increase of 19.7 million or 39.7% from 49.6 million for the six months ended June 30, 2005. Approximately 13.5 million or 28.5% of the increase comes from organic growth, while the remaining 11.2% comes from acquisitions.

Facility Based Services provided net service revenue for the six months ended June 30, 2006 of 25.7 million, an increase of 3.8 million or 17.4% from 21.9 million for the six months ended June 30, 2005. Approximately 3.6 million or 16.4% of the increase comes from organic growth, while the remaining 1% comes from acquisitions.

With that, I'll turn things over to Johnny Indest for a discussion of our operations.

Thank you, Barry, and good morning everyone. As usual we'll start with some operational data. Total admissions to our Home Nursing Division increased 46.1% to 5,852 in the three months ended June 30, 2006, from 4,006 in the three months ended June 30, 2005. Medicare admissions increased 43.8% to 4,210 in the three months ended June 30, 2006, from 2,927 in the three months ended June 30, 2005.

The company also monitors patient census as a key performance indicator within its Home Based Services. LHC Group's average Home Based patient census for the three months ended June 30, 2006 was 9,807 patients, an increase of 30.5% as compared to 7,517 patients for the three months ended June 30, 2005. Organic Home Based patient census was 12.9% of the total growth. We had 11,977 completed Medicare episodes, and 208,298 Medicare visits in the three months ended June 30, 2006, for an average of 17 visits per completed Medicare episode. Our average case mix for completed Medicare episodes in the second quarter of 2006, was 1.31, with an average reimbursement of $2,590 per episode.

Looking at the Facility Based Services segment, we had an increase in patient days of 5.6% to 11,110 in the three months ended June 30, 2006, from 10,519 in the three months ended June 30, 2005. Our patient visits decreased to 5,157 at June 30, 2006, a 55.7% decrease as compared to 11,639 for the three months ended June 30, 2005, due to the sale of one of our clinics.

In our last call we mentioned the new physician web portal product, which we believe will improve the efficiency of our record keeping process and enhance patient care by replacing paper records with electronic records. They physician web portal allows for faster billing, which improves cash flow while enhancing patient care. Physicians can sign their orders electronically from their office, from their home, day or night. Instant electronic approval eliminates mail float, and otherwise wasted time. We have begun deployment, and we expect to have that process completed by the end of the year.

Keith already mentioned the Forrest City and Athens Limestone acquisitions. These have been fully and successfully integrated into the LHC Group family, and we have just started working on bringing Lifeline into the fold. We have identified the Lifeline clinical staff that will help us with this transition, and we are well underway. Melding our cultures together seems to be progressing well, as everybody is focused on helping people.

If there are any operations questions I'll gladly take them, but for now, I'll turn things over to Keith for our wrap up.

Okay thanks, Johnny. Before I wrap up and open the call for questions, I want to talk about our development activities just a little. As most of you already know, this is an area to which I allocate a great deal of my time. Working closely with Daryl Doise who heads up our Business Development activity, these days it seems that I'm on the road almost every week with Daryl, to make an initial presentation to one group or another.

Our acquisition pipeline has never been more robust than it is today. On the acquisition front, we are focused solely on home health agencies, or home health and hospice combinations. We have 13 active LOIs outstanding at this time. Our strategy has never been more clear. We continue our focus to be the premier provider of home and community based services to the elderly and disabled in the markets we serve, as we expand our service area through fairly valued strategic acquisitions that are fit with the LHC Group family culture.

To be part of the LHC Group culture is to understand the importance of relationships. Great service providers are those that enter into long lasting and meaningful relationships with their customers. They understand the concept of service to others before self. That's what we look for in any group, individual employee, or organization that joins the LHC Group family.

Without empathy and compassion, the services we provide would become shallow and meaningless. People are intuitive, the can see through hollow attempts at customer service, calculated to meet some prescribed organizational value based initiative. In other words, people can tell when someone is being nice, because it's time for an annual review. At LHC Group, it really is all about helping people, and that's what sets us apart.

Operator, we're ready to answer questions now.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Arthur Henderson with Jefferies & Company. Please proceed.

Hi, good morning, very nice quarter. I had a couple of quick questions on, I guess this is for Barry. Barry, do you happen to have the cash flow from operations and CapEx figures for the quarter?

No, I don't have that worked out yet, Art, we'll drop that in to the Q this week.

Okay. On organic growth, what is your definition of organic growth right now? How are you defining that?

Same store that we've owned for 12 months or more, and de novos.

Okay. And what's your de novo goals for this year so far? Where do you stand on those?

Well, I think we have said all along that we're going to do anywhere from 10 to 15 de novos, 10 to 15 acquisitions, and we stand at about six right now.

Six. Okay.

Seven. I just got corrected at the table, seven.

Seven. Okay. And then on the 13 LOIs that you talked about, are those relatively small agencies?

Art, this is Keith. I mean they would be below 10 million in revenue.

Okay. And what's your success rate with LOIs? I mean out of the 13, are these ones that are more than likely going to close, or 50/50 chance? How do you look at those?

You know, I would say a 50/50 chance would be a good number once we get to an LOI phase.

Okay. And integration of Lifeline, how is that progressing? What are you working on right now? Where are you putting your efforts and time at this stage? And what's the process going to be there?

Arthur, this is Johnny.

Hi, Johnny.

The Lifeline transition is going quite well. We did a considerable amount of due diligence before the take over. And good part of our time was spent identifying the correct operational people within Lifeline that could help us make sure that this transition was as seamless as possible. We're very pleased with the operational leadership that we have on the ground at Lifeline. All of them were leaders, or are leaders within the Lifeline system. We have a very good marriage of our cultures between the two companies.

Our focus right now is on the top line, making sure that not only we maintain the top line that we have, but increase that top line. We feel like there are lot of opportunities for growth in the revenue of the company. Number one, with increasing the Medicare mix within the company. Number two, with OASIS education, we feel like there is some case mix that might be able to be enhanced as far as that's concerned. We feel very good about the Lifeline takeover that we've done. Don Stelly who works directly with me, is in charge of this entire transition, and he's working on it on a daily basis.

And is the billing and all of that, is that already integrated?

No, Art, the back end part of the shop is going to take a little bit longer to go through the operation. The billing up there is still operating on their billing system and their billing initiative. We've just taken control of the cash.

Okay.

And it'll take a little while to run through that.

Okay. And then as far as guidance, can you give us an update, Barry, on what you're thinking for the remainder of the year?

I think that we're going to stick with the guidance that we already have out there, we're going to reaffirm where we stand at this point.

And does that include any contribution from Lifeline?

The only thing that you might pick up from Lifeline would be top line.

Okay.

The bottom line we're not putting anything in that we would say, so we're going to stay where we are at this point and just reaffirm.

And then the secondary, the proceeds that you got from that, is that -- what about a couple pennies dilutive?

Yes.

Okay. On a per quarter?

Well, the quarter is going to average out probably in the 17.2 to 17.3 range as you get two-thirds of a quarter on the averaging. But the year, you're going to get 1.150 million shares that are going to show up for five months out of the 12, so it won't be quite as high on that side, probably in the 17 to 17.1 range.

Okay, great. Thank you.

Your next question comes from Eric Gommel with Stifel Nicolaus. Please proceed.

Good morning.

Good morning.

Barry, I didn't ask -- do you have a depreciation and amortization number at this point, or is that going to be in the Q as well?

It'll be in the Q of course, but about 600,000 of D&A for the quarter.

You know recently the IPPS was published and I'm curious, were there any changes to your assumptions on the impact for the LTAC DRG waiting at this point, or was it as you expected?

It was pretty much as we expect, Eric. We put out there in our last call what we thought the net effect would be, and basically there were no surprises. We feel very confident on being able to meet the challenges presented by it. I think when we first put out the number, that there was a change of a tenth of a percent between the actual posted numbers and what we said on the last call. But we have some strategies in place, that we feel like are going to keep our LTACs functioning at a high level, and we're still very pleased and committed to the LTAC business that we're in right now.

Great. And then also on the Home Health reimbursement side, I'd be curious, Keith, in your thoughts on -- and assumptions you're looking at with reimbursement, particularly the market basket update that was proposed, the potential for the rural add on to stay on or go away. And also, you thoughts on refinement of the Home Health payment system potential impact, and maybe when you would expect to hear something and maybe see some changes take place?

Yes certainly it appears that the wins are in our favor, maybe even more so now than the last time we talked, Eric. So we're very hopeful. Of course we're not counting on it. You just never know when you're dealing with this type thing. With the changes in reimbursement, the restructuring, I still think that it will be fiscal '08 before we see anything put in place. I think we'll start to get some clarity in the last quarter of this year as to what CMS's thinking is in that regard.

Okay. And then my last question, we had a major senior living provider make an acquisition of a hospice company here just recently. And I'm just curious, you kind of talked about your strategy for acquisitions, it appears you're not looking pure play hospice companies. But I'm curious what you see as maybe the advantages that your model has in acquiring hospice companies, how you look at competition with standalone hospice companies? What you might bring to the table that gives yourselves an advantage over standalone? Thanks.

I think our model in hospice is based on a home health/hospice combination in a community. We don't do a lot of work in nursing homes or residential facilities, and I think that's what sets us apart. It is a different model, because the reimbursement is relatively the same, our cost is somewhat higher because of the distance we have to travel from patient to patient. But we do believe it's an important part of the continuum of care in home and community based services, so we are very committed to it. But again, I don't think you would see us pursuing a standalone hospice that had a significant part of their business in nursing homes, because that doesn't really fit into what we do.

Eric, this is Johnny. I would just add, I think part of your question was how do you feel like a free standing hospice can function in the face of some institutional providers looking like they're getting into the hospice business? Is that what you were saying?

Yes, and I was just curious what your thoughts as a home health provider getting into some hospice as well?

Well my thoughts on it is that number one, it doesn't overly concern me about institution-based people getting into the hospice business. I think more, and more, as we go down the road with an increasing elderly population in the United States, that they're going to want more, and more, demand more, and more that they be taken care of in the least restrictive environment, which is most often going to be their home. And I think free standing hospices are very well positioned to grow and expand in the home-based sector.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Balaji Gandhi with Oppenheimer & Company. Please proceed.

Good morning.

Good morning.

On the question about reimbursement, I just wanted to make sure I understood what percentage of your business was rural now with Lifeline included?

About 53, 54%.

So, if I remember that's about the same, right, as it was --?

Excuse me, Balaji, that's not with Lifeline included --.

Okay so then I guess --.

And from what we can tell with Lifeline, it look likes like 16 of the 17 locations will be rural.

And what about payor mix? How much is Medicare versus non-Medicare?

We're at 84% at our company today, but I think his question is about Lifeline, and Lifeline was about 53% Medicare. I'm getting a nod. What's the right number? [32%] Medicare? No, it's 53% Medicare.

Great. Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Brian Tanquilut with Jefferies & Company. Please proceed.

Hi, good morning guys, just a quick question Barry, on the DSOs. How should we look at that in Q3, with Medicare delaying payments as a result of the DRA?

I wouldn't expect it to drop any further, but the delay is only going to be the last couple of weeks of September. So, what you'll probably see is about two weeks where we're kind of hung up in there. We've got about -- I think we reported that in there, we've got about eight days that are held right now for provider member issues coming across. Some of those are going to start to relieve themselves during Q3, so it's part of the natural process. But if I were modeling this out, I'd leave it flat at this point.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from Arthur Henderson with Jefferies & Company. Please proceed.

You guys mentioned that, I guess six out of the seven LTACs that you currently operate have double-digit EBITDA margins. I'm just curious about that one LTAC that's not. Is that in the black, or what's going on with that one? Thanks.

It's contributing on a direct-cost basis, Art, but it's very low margins and West Monroe, that's the one that's also in the discontinued ops.

Okay. I'm sorry, that's Monroe?

Yes.

Okay, thank you.

[OPERATOR INSTRUCTIONS] There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Keith Myers.

Okay. I'll just say thank you again for joining us this morning, thank you for your continued support and confidence in the LHC Group family. We look forward to speaking with you again at our next earnings call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.