LHC Group Inc (LHCG) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter and nine-months LHC Group, Incorporated, earnings conference call. My name is Nicole, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Mr. Michael Porter, President of Porter, Levay & Rose. Please proceed.

Thank you, operator, and welcome, everyone, to the LHC's third quarter nine months 2006 financial results conference call. In a moment, you'll hear from Keith Myers, President and CEO of LHC, CFO Barry Stewart and John Indest, who is the Chief Operating Officer. Before that, we have to dispense with the legal formalities. 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 ventures and acquisition candidates and changes in the interpretation of government regulation.

Therefore, actual results may differ materially from any financial outlook presented herein. 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 September 30, '06. LHC Group shall have no obligation to update that information provided on this call to reflect any subsequent events.

Now, I am pleased to turn the floor over to the President and CEO of LHC Group, Keith Myers. Good morning, Keith.

Good morning, Mike. Thanks, and thank you all for joining us this morning. The third quarter of fiscal 2006 was another very good quarter, as we continued the accelerated growth trend that began in the first half of this year. Our net service revenues were 58.1 million for the quarter and 154.1 million for the nine months ended September 30th, 2006. Our earnings for the quarter were $0.30 per diluted share and $0.81 per fully diluted share for the nine months ending September 30th, 2006.

We are continuing to expand our geographic footprint through carefully selected strategic acquisitions and we are growing our business at an accelerated but healthy and sustainable rate. As is usual on these calls, our CFO, Barry Stewart, will review financial results and then [Johnny] Indest, our Chief Operating Officer, will provide an update on operations.

However, I would like to touch on the highlights of the quarter before handing it over to Barry and Johnny for more detail. Let's start with the successful integration of Lifeline in Kentucky. Our patience, perseverance, discipline and attention to detail during the due diligence phase of acquisitions has paid off once again, this time with LHC Group's largest acquisition to date.

We are more confident than ever in our systems and processes and the ability of our startup and transition teams to successfully integrate larger acquisitions. In less than one full quarter of operations, we have already began to grow revenues and improve margins by reducing the non-patient care expenses identified during our due-diligence phase. We are now well into the process of system conversion and are pleased with the progress that we have made to date.

I truly believe that Lifeline in Kentucky is on track to be another great success story for the LHC Group family. Before the quarter ended, we announced our plans to acquire the Florida-based assets of Lifeline Home Health. The definitive agreements have been signed to complete the transfer upon approval by the state licensing authority. We managed Lifeline entities in Florida in September and successfully closed the transaction on November 1st. The acquisition marks LHC Group's expansion into the state of Florida. The population covered by this acquisition is 1.46 million, with about 25% of that population being over the age of 65.

We also completed the acquisition of Union City, Tennessee, effective November 1st. This acquisition provides us entry into another important CON state in our targeted expansion geography. We completed our follow-on offering in the third quarter, increasing liquidity and traded volume. Net proceeds of approximately 21 million from the offering were used to fund the Lifeline transactions.

We continue to monitor activities in Washington. At this point, CMS has recommended the market basket increase for home health services in 2007. This market basket average increase is split at 3.3% for rural agencies and 2.9% for non-rural agencies. Please note that 55% of our patients served are in rural markets. We will continue to monitor activities in Washington closely as it relates to the rural add-on.

And now I'll let Barry Stewart, our CFO, provide financial details. Barry?

Thanks, Keith. Good morning, everybody. In brief, our third quarter and nine-month results illustrate profitability based on strong business operations. We'll start with the third-quarter financial results and then I'll review the nine months results briefly. Our net service revenue for the quarter ended September 30, 2006, was 58.1 million, up 50.4% from 38.6 million in the third quarter of 2005.

For the three months ended September 30, 2006 and 2005, 80.9% and 85.1%, respectively, of our net service revenue was derived from Medicare. Net income in the third quarter of 2006 reached 5.3 million, or $0.30 per diluted share. For the quarter ended September 30, 2005, net income was 2.8 million, or $0.17 per diluted share. Fully diluted, weighted average shares for the quarter ended September 30, 2006, were 17.6 million, as compared to 16.6 million for the same period in 2006.

Breaking these down by business segment, we find that on the home-based service side, net service revenue for the three months ended September 30, 2006, was 45.3 million, an increase of 71.6% from 26.4 million for the three months ended September 30, 2005. Organic growth was approximately $10.5 million, or 43.3% during the period. Looking at the facility-based services segment, net service revenue for the three months ended September 30, 2006, was $12.7 million, an increase of $500,000, or 4.5%, from 12.2 million for the three months ended September 30, 2005.

Organic growth made up the entire growth during that period. Day sales outstanding, or DSOs, for the three months ended September 30, 2006, was 72 days, compared to 79 days for the same three-month period in 2005. DSOs, when adjusted for acquisitions and unbilled accounts receivables, was 66 days. The adjustment takes into account $4.4 million of unbilled receivables that the company has delayed in billing at this time, due to the lag time in receiving the change of ownership after acquiring companies. There were no such adjustments for the comparable period in 2005.

And although the Center for Medicare and Medicaid Services, CMS, withheld payments during the last part of September, we were able to decrease DSOs five days in the third quarter as compared to the second quarter. This decrease includes the seven DSO day increase which is due to the withheld payments.

The withholding was due to a brief hold placed on Medicare payments for all claims during the last nine days of the federal fiscal year, and we have received payment on all of that as of October 2nd. Turning to the nine-month results, net service revenue for the nine months ended September 30, 2006, was $154.1 million, an increase of 44.1 million, or 40.1%, from $110 million in 2005.

For the nine months ended September 30, 2006, and 2005, 82.9% and 85.2%, respectively, of our net service revenue was derived from Medicare. Earnings per share at the nine-month mark in 2006 are $0.81 per share, up from $0.50 per share in the same period in 2005. Again, by business segment and looking at home-based services first, we had net service revenue for the nine months ended September 30, 2006, of $114.6 million, an increase of 38.6 million, or 50.8% from $76 million for the nine months ended September 30, 2005.

Organic growth was approximately $24.1 million, or 33.5%, during that period. Meanwhile, facility-based services provided net service revenue for the nine months ended September 30, 2006, of $39.5 million, an increase of $5.5 million, or 16%, from $34 million for the nine months ended September 30, 2005. Organic growth was approximately $5.5 million, which made up the total growth during that period.

We can drill down into these results further during the Q&A if anyone desires. Now, I'm pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of our operations.

Thanks, Barry, and good morning. Starting with some operational figures, total admissions to our home nursing division climbed 74.8% to 7,377 in the three months ended September 30, 2006, from 4,220 in the three months ended September 30, 2005. Medicare admissions rose 67.7% to 5,225 in the three months ended September 30, 2006, from 3,115 in the three months ended September 30, 2005.

We have identified patient census as a key performance indicator within our home-based services division, and we monitor it very closely. For the quarter ended September 30, 2006, our average home-based patient census was 13,524 patients, an increase of 81%, as compared to 7,471 patients for the three months ended September 30, 2005. Organic growth in home-based patient census was 26%.

We had 13,656 completed Medicare episodes and 238,906 Medicare visits in the three months ended September 30, 2006, for an average of 17 visits per completed Medicare episode. Our average case mix for completed Medicare episodes in the third quarter of 2006 was 1.32, with an average reimbursement of $2,628 per episode.

Looking at our facility-based services segment, we had an increase in patient days of 2.1% to 11,674 in the three months ended September 30, 2006, from 11,437 in the same period last year. Outpatient visits decreased to 4,287 at September 30, 2006, a 56.1% decrease as compared to 9,768 for the three months ended September 30, 2005, due to the sale of one of our clinics on April 1 of 2006.

We have made some significant acquisitions in recent months, and these transactions make up an important part of our growth strategy. We understand that successful integration of these operations into the LHC Group is crucial to our future success. I am very pleased to report that the integration of the Lifeline group of agencies in Kentucky has gone extremely well.

While it is true that careful due diligence and planning has significantly aided this smooth transition, I would be remiss in not attributing a great deal of the credit to the devoted managers and employees of Lifeline. Without their can-do spirit and design to be the best home care providers in the state of Kentucky, this transition would have been much more challenging.

As noted by Keith, we assumed management of the Florida group of Lifeline Home Health agencies on September 18th of 2006. As with our venture into Kentucky, we spent a good deal of time in due diligence and therefore entered into this management contract prepared to meet the challenges ahead. We have successfully placed an operations manager who has responsibility of oversight for all office locations.

We are also pleased that we have been able to significantly increase Medicare admissions throughout this area. I am very impressed with the employees of Lifeline Florida. They have embraced our company and are 100% supportive of our efforts.

Like Barry, I'll gladly take any questions you may have concerning operations in a moment. I'll hand things back to Keith now to wrap up.

Thanks, Johnny. Before we open up the call for questions, I'd like to update you just a little on business development activities. As many of you know, this is where I spend much of my time these days. On the acquisition front, we continue to focus solely on home health, or home health and hospice combinations. Our acquisition strategy remains the same, but with greater confidence and an appetite for larger acquisitions after our successful integration of Lifeline.

We will continue our goal of being the premier provider of home and community-based services to the elderly and disabled in the markets we serve. We will continue to expand our geographic footprint through fairly valued strategic acquisitions with a continued commitment to patience, perseverance, discipline and attention to detail during the due diligence phase, which has served us so well in the past.

I want to once again thank our employees and shareholders for the confidence and trust that they continue to place in our board of directors and our management team. I want to thank the caregivers for their commitment to the many patients, families and communities entrusted to our care. Rest assured that we are more focused than ever.

We are guided by a deep belief that the elderly in our society, our parents and grandparents, are not a burden to be discarded, but a box of gold to be treasured and protected. We have only one agenda, and that is to advance the mission, vision and objectives of the LHC Group family. It's all about helping people.

And, with that, operator, I think we're ready to open the call up to questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Eric Gommel with Stifel Nicolaus. Please proceed.

Good morning.

Good morning.

Can you just give me the CapEx number for the quarter and the actual acquisition expense for the quarter.

Well, the CapEx number was 754,000 and the acquisition number, we spent 15.4 million on Kentucky, which we disclosed, I think, in the press release at 15 and we picked up some legal fees behind there.

Okay.

And then -- yes, but we didn't close that one in the quarter. That's it for the quarter.

Okay, and then, just building on your comments on business development, Keith, the Kentucky acquisition was your largest to date, and what are you seeing relative to bigger targets out there, maybe in the 20 to $40 million range? You kind of said you have an appetite now, maybe, for a larger acquisition. So I'm curious what your [seeing] target was, valuation-wise. And then I think you talked about some LOIs last quarter, if you could update us on that?

Okay, the first part of your question, we've seen several targets in the market that would fit our company both in size and in culture and we've actually been approached with two opportunities that are significantly larger than Lifeline in Kentucky. And I guess what I would say about that is that initial conversations seem to be going very well.

With regard to the pipeline and LOIs, right now, I think we have 11 LOIs that are outstanding and active. Four of those are in the due diligence phase.

Okay, great. And then on -- there's a lot of concern on the reimbursement end, not so much with the cost of living update, but more related to potential changes to the reimbursement system that could impact home health operators in 2008 and talk about changes to rehab thresholds. I wonder how you guys -- what you may or may not be hearing out of CMS in Washington and what you think could be a potential change to the reimbursement system and how would you guys respond to it, maybe, talk a little bit about how you look at that.

Sure. First of all, let me say -- and I'm sure you've caught it already, I was looking at the wrong column earlier and I know you caught that the update is actually 3.1 and 3.6.

Right.

Sorry about that. But with regard to changes, I don't think we have any new information at this time. We still think that we're going to see some sort of proposal out at some point in '07. We feel very good about our ability to adjust to whatever changes but, more importantly, we continue to monitor national benchmarks and look at where our distribution is compared to those national benchmarks. And we just don't want to get too far out of range from national benchmarks, because we think in a budget-neutral reweighting we're going to fare well, as long as we're not an outlier.

Great. And then my last question, I'll jump out, can you talk a little bit about what you're doing maybe on the technology end of your business. You see a lot of the home health operators, at least we see, investing in technology. I'd be curious to see what you guys are doing maybe on your end. Thanks.

Eric, this is Johnny. I'll go ahead and take that question. Technology is certainly playing a larger and larger role in the home care industry. We are not completely committed to jumping into technology full force without making careful study and making sure that the return on investment, the employee satisfaction, all of those various variables are addressed. On the technology front, to specifically answer your question, we have moved into what a lot of people are using the term point of care, but in a limited fashion.

We have placed point-of-care devices into our home health agencies for our nurses who are on call and need electronic access to our records. We have actually polled our employees. There is no great call for technology as far as putting a computer in every clinician's hand, but we clearly heard from our employees the need for our on-call personnel. So you could call it a little bit of getting into the technology but not jumping into it full force and being able to work through some of the technicalities of that.

We also are strong believers in telemonitoring. At the recent National Home Care Meeting in Baltimore, telemonitoring devices, remote monitoring of patients' conditions, in my opinion, just about dominated the exhibit hall. And we are making a strong move into the telemonitoring end of things and are very pleased about that and certainly see the advantages of being connected and having telemonitoring devices in patients' home that qualify for the system.

Great, thanks.

Your next question comes from the line of Balaji Gandhi with Oppenheimer. Please proceed.

Good morning, everyone.

Good morning.

I just had a couple of items for Barry, I guess. Cash flow from operations for the quarter?

Seven million.

Okay. And then, depreciation expense? I don't think I found that in the release.

It wasn't. It's about 620,000, which is pretty consistent with our quarterly performance. I think it was 570 before that and roughly 500 or so before that.

Okay, great. And then, I guess more just a kind of commentary on the admissions. You guys have put up some pretty strong organic growth numbers. I guess you have 26.2% in the release. How should we think about organic growth, when you say organic admissions growth. Is that move -- is that parallel with the patient growth?

I'd say the patient growth is more census related. The admits are something that you're taking them into a system, but where you could get an issue on admits is you could discharge them from one agency and then pick them up in another agency. So I prefer to think of the number of patients that we are applying care for at each period.

Okay, so if you had to say -- I mean, do you have a number for the year-ago, for the patient, for the census?

Yes.

Do you have that with you here?

It's right here, 7,349 for the year.

I'm sorry, I didn't catch that.

Seven-thousand-three-forty-nine.

Okay, so it was a big increase, but any way you could break out how much of that was from the acquisitions?

I think the way that we put this -- let's see. Admissions, census, yes. You're looking for just the organic component of that.

Yes, right, of the patient count.

Yes, the organic on the patient census was 26%, specifically. It's 7,471. It's right in the release on the quarter.

Okay.

I think the number I gave you a moment ago was the year-to-date number.

Okay, so the 26% was the census and not the admissions, then, or both?

You got 26.2 on admissions and you got 26 on census.

Okay, great. That answers my question. Thanks.

Good.

Your next question comes from the line of Brian Tanquilut with Jefferies & Company.

Good morning, guys. Congratulations on a good quarter.

Good morning.

Hey, Barry, just a quick question on the DSOs. You did really well this quarter. I was just wondering how much more can squeeze out of the DSOs?

Let's see. I think we're at 72 days, so we can probably get it down to about 14. Isn't that what Medicare pays on? That's a little bit aggressive.

No, but if you factor in all the acquisitions that you guys are going to make in the future, what should we be --?

You've got to balance it. You've got to balance it. You've hit it right on. You've got to balance it against what you can do. You should say that probably where we are, sitting kind of mid 60s like that, we can take it down most likely into the 50s. But what you're looking at, even with the acquisition pace, what you're looking at is that we've taken the really low-hanging fruit off and the opportunity to do that now requires more systems capability and some more process-type work. That's going to take a while to actually get it down there.

But that would be the target. I'd just say it's going to take a while to get that in, three or four quarters.

Got you. And then, on the SG&A line, it looks like you guys are doing really well in controlling the SG&A rate. How should we be looking at that going forward?

I wouldn't change the kind of pure number at this pace. What you're looking at is a pop in the revenue. We didn't increase our administrative expenses. We just increased our revenue.

That's right. So the SG&A rate going forward, I think, should we think of it as sort of staying where we are right now to sort of the mid-32% range?

Thirty-two, 33, I'm very comfortable with.

Got you. And then, last question, on de novo developments, can you give us an update on that and maybe remind us what the economics are on your de novo development?

This is Johnny. I will chime in on the de novos. We continue to pursue de novos throughout our established locations, as well as our new acquisitions. In the third quarter, we added two de novo locations -- I'm sorry, in the second quarter, we added two de novos. We added one in the third quarter and we're looking at four in the fourth quarter.

Yes, the economics behind them guys is that it comes through the P&L statement, it's just salaries, rent and utilities. And as you take those in, over a nine to 12-month period, you spend about 150,000 to 175,000. So it would come through the P&L as just operating expenses. You wouldn't really see that pop up, and it only takes about 40 patients to reach that breakeven point.

So, depending on the demographics of the location that you start this in, is going to depend very much upon when you reach that breakeven point. We like to say it's going to give us about nine to 12 months.

Got you. Thank you so much.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Michael Wiederhorn with CIBC World Markets. Please proceed.

Good morning, guys. Congrats on the quarter.

Good morning. Thanks.

A couple of quick questions on Lifeline. Could you give me the revenue contribution it had on the corner, and, also, if you could give us some color on the progress you've made with initiatives to improve the case mix and the Medicare mix within that business?

Boy, very specific into that. I don't think we break out individual business units like that. Can we break it out, Mike? Yes, certainly. It beat our expectations is the way I would phrase it -- okay, we're making motions around the table right now, and I was expecting all southpaws, Mike. I'd rather not break it out on an individual --

That's fine. Can you just talk about the progress you made internally with Lifeline in terms of initiatives to improve the case mix and the Medicare mix from an operational side?

Sure. I'll go ahead and handle that, Mike. We've made quite a few initiatives within Lifeline in Kentucky. On the Medicare and the things, we have certainly focused on growing the top line of the business. We felt that there was considerable opportunities there. In Kentucky, there is a pretty strong Medicaid benefit and a lot of the emphasis within those agencies was on focusing on Medicaid business. We have worked very hard on the Medicare end of things, marketing toward that, growing the top line with that. And we've shown some pretty significant results just in a relatively short period of time related to that.

We've also focused a lot on length of stay. Lifeline had a very short Medicare length of stay, well short of national averages, and we've done a lot of focused effort on that. I just want to say again that, as you know, and we've stated in our releases, is Lifeline is the largest, most significant acquisition that we have done to date. And even someone who's been in the business as long as I have some trepidation about bringing on a large provider like that. Are we dotting all our I's, crossing all our T's?

I can't give enough praise and kudos to our operations team. They did a fantastic job of identifying the strong points, the areas of improvement, attacking those and showing positive results, as well as identifying the key players within the Lifeline Company itself and those people have just performed in a stellar fashion and it's given me, and through me the rest of our operations team, the confidence that we can handle acquisitions the size of Lifeline, but even we know that we can handle some big players coming onto our team.

Thanks, that was very useful. One other question -- actually, I have two other questions. Are there any one-time integration costs this quarter from the Lifeline acquisition? And, lastly, can you update us on guidance going into '07.

Thanks, Mike. The integration costs are pretty much coming through the P&L. Some of that's in the CapEx. I think I told you earlier 750,000. We did put about 150,000 of that CapEx into IT-related technology. We added some servers. We added a lot of PCs and so forth for the people up in Kentucky, plus some of that goes into the on-call program, which was being rolled out. But no specific one-time integration costs in Kentucky that you would say right now, that you would point your finger to.

I do have a systems conversion coming, and you will see part of that cost go into the fourth quarter for that. So as we convert them into the Mysis system, we will pick up that integration cost, but it will probably not be a P&L. It will probably be a purchase cost, because it's an outside party going to handle it for us.

And the second part of that, on the guidance, I'm glad we have everybody on the line for this. I prefer not to be in the guidance business, Mike, and thanks for bringing that up. Fourth quarter, what I would say is you've got a representative sample out of our third quarter for what you might look like in the fourth quarter.

Going forward into 2007, I think at a broad basis we would like to say that look at us on a volume basis. Our census numbers are out there, you have the reimbursement rates and consider that we're going to grow the business at 20% or so each year. So taken from there, and having the pricing out there, you should be able to take the volume and the pricing to derive the right revenue numbers from there. Margin-wise, I think that we've touched on our margins and I think that they're representative, also.

Okay, thanks very much. Appreciate it. Keep up the good work.

Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Thanks. Good morning, guys, Darren Lehrich from Deutsche here. Just two quick ones. First, wondering if you could just update us with regard to your hospital relationships. I know you have been in numerous discussions with some larger health systems and just want to get a sense for how those discussions are tracking. And, specifically, with regard to Lifeline, how many hospital relationships did you pick up in Florida upon closing of that acquisition November 1? Thanks.

Well, I guess the first part of the question is of the 11 LOIs that I mentioned a minute ago and the four that are in the due diligence phase, those would all be nonprofit hospital agencies that are in the pipeline. As far as one large single system, I'm not sure if I know what that is. Honestly, we don't have any one large single system in the pipeline that I think would apply here. We have some large hospitals, but there's no system involved. And with regard to Florida, our growth in Florida and in every non-CON state like Florida, Texas, for example, is going to be more heavily weighted on the nonprofit hospital side. So we are producing nonprofit hospitals in the state of Florida, and we do have some in the pipeline, but none are connected with Lifeline. The acquisition of Lifeline was only freestanding agencies.

Okay, I thought the intent was to get hospital relationships with those freestanding agencies. That's why I asked the question.

There will be an opportunity for some hospitals that may not have home health agencies now to acquire an interest in the home health agencies, in the Lifeline agencies in Florida. And those are some of the things that are in negotiations.

Great, okay, and then just lastly, and I'm sorry if I missed this -- visits per episode in the period. Thank you.

It was 17.

Okay, thanks.

[OPERATOR INSTRUCTIONS]

Your next question is a follow-up question from the line of Brian Tanquilut with Jefferies & Company. Please proceed.

Hey, Keith, I just a have a follow-up to Eric's question on reimbursement. I'm just wondering what we're hearing now in terms of the therapy mix system. I know there's been a lot of discussion of that, and sort of what do you think is the timing going to be for the release of that proposal time from Medicare? What are you hearing from -- I know you guys are very closely in touch with Washington.

Yes, again, we don't have any new information on that. It would all be a best guess, because you get different information coming out. I guess the consensus here is we believe that the earliest impact we would see would be fiscal '08, which would be 10/1/07, but I think we're hearing the same thing everyone's hearing. There's a proposal for an incremental distribution in buckets of three visits, and then there's talk about buckets of six visits. And when we run our numbers and try to predict what that would mean in a budget-neutral redistribution, we like what we're seeing in both of those models. Again, comparing ourselves to national distributions.

Got you. Thank you so much.

And there are no further questions at this time. I would now like to turn the call back over to Mr. Myers.

Okay, well, if there are no further questions, I'll just thank everyone for joining us again this morning. Thank you for your continued confidence and support and we look forward to visiting with you again next quarter.

Thank you.

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