LHC Group Inc (LHCG) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the LHC Group's first-quarter fiscal year 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference may be recorded.

It's now my pleasure to turn the call over to Eric Elliott, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Huey, and welcome, everyone, to LHC Group's earnings conference call for the first quarter ended March 31, 2012. Hopefully everyone has received a copy of our earnings release. If not, you may obtain a copy along with other key information about LHC Group and the industry on our website at www.lhcgroup.com. In a moment, we'll hear from Keith Meyers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Pete Roman, Chief Financial Officer of LHC Group.

Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include but are not limited to comments regarding our financial results for 2012 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I am pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. I'm extremely proud of the strong and well-balanced operating results our team has delivered once again during the first quarter. I'd like to congratulate and thank our entire team for their unwavering commitment to excellence and for consistently delivering the highest quality of care to the growing number of patients, families, and communities we serve.

As we look ahead to the remainder of 2012 and beyond, we're well prepared and well positioned to continue improving our operating results by controlling costs and capitalizing on the opportunities we see ahead for both internal and external growth.

While our team exceeded expectations in all aspects of our business during the past quarter, there are three areas that we want to emphasize during our prepared remarks, the first area being our ability to lower our general and administrative expenses by $4 million compared to the same quarter last year. The second area we want to emphasize is our organic admissions growth. We had more admissions in this quarter than in any quarter in the Company's history. Finally, we want to focus on our acquisitions pipeline, which has continued to improve both in terms of the number of deals and, more importantly, the quality of deals.

Don will discuss our cost control initiatives and our organic growth during his remarks, but in a few moments I'll discuss our acquisition pipeline. Before that, however, I'd like to say that LHC Group commends Senators Max Baucus and Orrin Hatch for calling attention to the need for Medicare program integrity improvements in a hearing before the Senate Finance Committee on April 24.

As most of you know, the Senate Finance Committee held hearings on healthcare fraud recently. The hearing focused on the effectiveness of the ongoing efforts to fight waste and fraud in federal healthcare programs, like Medicare, by governmental agencies. Importantly, the senators expressed a strong desire to prevent fraud and abuse before it occurs, a direction that has been a key tenet of our advocacy efforts in Washington. LHC Group is a staunch advocate for reforms that will target Medicare fraud and abuse, and fully supports the Senate Finance Committee's efforts in this area.

As you know, LHC Group is a founding member of the Partnership for Quality Home Healthcare, a national coalition representing more than 1,500 community- and hospital-based home health agencies nationwide. Through the Partnership, the skilled home healthcare community is working with lawmakers on proposals targeting fraud and abuse, and strengthening the integrity of the Medicare home health benefit. These proposals include stronger conditions of participation, improved screening during provider enrollment, and payment safeguards to help prevent abuse of the Medicare program.

These proposals will generate Medicare program savings, preserve beneficiary access, and strengthen the Medicare and Medicaid programs. In short, these policies will stop fraudulent providers, protect senior citizens and cost-efficient providers and taxpayers alike.

Yesterday, as a result of the hearing, six Senate Finance Committee members, including Chairman Baucus and Ranking Member Hatch, released an open letter to providers, soliciting input on program integrity reforms to prevent fraud and abuse and to ensure accuracy, efficiency, and value. The letter also solicits provider input on fraud and abuse enforcement reforms. The Partnership applauds this initiative and is already drafting our recommendations for the Finance Committee, which we'll be submitting in advance of the July 29 deadline.

We recognize that the threats of a copayment and perhaps accelerated rebasing will continue during the lame-duck session as Congress deals with the doc fix. But we are also optimistic that, during the lame-duck session, staff of various congressional committees will continue to understand the logic of the targeted payment reforms in the Partnership's SHHIPS proposal as opposed to across-the-board cuts. Additionally, the Partnership has begun to advocate for the SHHIPS package with regulators at CMS.

In sum, LHC Group and the Partnership look forward to our continued dialogue with Senators Bacchus and Hatch and their colleagues throughout Congress.

Before I get to the pipeline, I would like to quickly discuss our strategic alternatives process. As you can see from our earnings release, we spent considerable financial resources during the first quarter on the process. I'm very appreciative of the outstanding effort that our team has put into the process.

As indicated in the last earnings call, we do not intend to disclose specific developments regarding the strategic alternatives process review until our board of directors has reached a final recommendation. I know some of you may have questions about this topic, but I'll ask you to please understand that we're not able to address them at this time, as we are still in the process.

Now turning to the pipeline, we are currently in active negotiations with non-acquisition candidates in eight states, representing $67 million in trailing 12-month revenue. All of these opportunities are potential hospital joint ventures, several of which are parts of multihospital systems. During the first quarter, the volume of hospital systems with whom we are having conversations has also increased significantly as they recognize the important role of home care in reducing unnecessary re-hospitalizations.

These hospital and health system partnerships offer us the opportunity to be on the cutting edge in reshaping the healthcare delivery system toward a more cost-effective model, while at the same time offering significant opportunity to expand our geographic footprint and the number of patients we have the opportunity to serve.

Our history as the only national provider with experience in partnering with hospitals and hospital health systems has uniquely positioned our company for the future, as hospitals now recognize more than ever the importance of having an experienced Joint Commission-accredited home health operator as a partner.

While our current pipeline is heavily weighted toward hospital-based opportunities, we're also experiencing an increase in the number of conversations with potential freestanding sellers. This leads me to believe freestanding opportunities will once again become a more significant part of our pipeline in the not-too-distant future.

I'll now turn the call over to Don and Pete. But before doing so, I want to once again commend and thank our experienced leaders throughout our company, as well as our dedicated, hardworking employees, for their unwavering commitment to those who are privileged to serve across the country.

I'm proud to be part of the LHC Group team and know we have assembled a group of dedicated caregivers, employees, and leaders who, through their hard work, ingenuity, and commitment to excellence, have built a foundation for our company that will serve our patients and shareholders long into the future.

And now I'll turn it over to Pete for a review of our financial results. Pete?

Thank you, Keith, and good morning, everyone. For the first quarter of 2012, our consolidated net service revenue was $158.8 million. And net income attributable to LHC Group was $7.7 million, or $0.42 per diluted share. We recognized after-tax cost of $413,000, or $0.02 per diluted share, associated with our review of strategic alternatives.

Home-based segment revenue was $139.6 million, of which $138 million was organic. Total organic home-based revenue was 2.4% lower than the same quarter last year, and organic Medicare revenue was 5.2% lower. The lower organic Medicare census and a 1.6% decrease in revenue per completed episode, associated with a 2012 final rule, caused the lower organic Medicare revenue this quarter.

Hospice revenue grew 13.5% over the first quarter of last year, including a 5% organic growth. The facility-based segment revenue was $19.2 million for the first quarter. LTAC revenue in the first quarter of 2012 was $18.7 million, as compared to $18.5 million in the first quarter of 2011.

Our consolidated gross margin was 43.4% in the first quarter, a decrease of 1.6% from the first quarter last year. The decrease is primarily due to reduced home health Medicare rates from the 2012 final rule and higher transportation costs this quarter over last year.

G&A expense decreased to 32% of revenue, from 34% in the first quarter last year. The majority of this decrease is from lower expenses associated with our home office. Don will talk a little bit more on this.

For 2012, we expect gross margins in the range of 42% to 44% of revenue, and G&A in the range of 31% to 33%. Bad debt expense for the quarter was $2.8 million, or 1.7% of revenue, compared to 1.6% in the first quarter of 2011. We expect the expense to be between 1.5% and 2% of consolidated net revenue for the remainder of 2012.

DSO in the quarter was 53 days, the same as last quarter. It was 45 days in the first quarter of last year. Similar to the explanations we provided last quarter -- increased ADR activity, continued delays in child process approval, the process delays caused by the new claim submission format -- all those caused most of this increase.

In addition, our commercial revenue has increased as a percentage of total revenue, resulting in a higher percentage of commercial receivables, which take longer to collect than traditional Medicare claims. We expect our DSO to decrease over the year and stay around 46 to 48 days going forward.

The Company is reaffirming guidance for net service revenue of $640 million to $660 million, and fully diluted earnings per share in the range of $1.45 to $1.65. This guidance does not take into account the impact of any future acquisitions or share repurchases, if made; de novo locations, if opened; future reimbursement changes, if any; future legal and other expenses associated with the Company's ongoing investigations; or costs associated with our review of strategic alternatives.

We can drill further down into these results during Q&A. Now I'm pleased to turn the call over to Don Stelly. Don?

Thank you, Pete, and thanks to those joining in this morning. As Keith mentioned, we have select topics that we want to touch on in our prepared remarks. He's already mentioned our robust acquisition pipeline and the interest we're seeing with our hospital joint venture strategy. I'll address our current volume, cost controls, point-of-care deployment, and end with a brief LTAC update.

So first on the volumes. During the first quarter of 2012, our growth in total new home health admissions was up 5.7% compared to the first quarter of 2011. And the organic growth of total new home health admissions was approximately 5.6% when compared to that quarter. Growth in new home health Medicare admissions was up 2.5% -- was 2.5% as compared to the same period prior year, while organic growth for new home health Medicare admissions was 2.1%.

As compared to the fourth quarter of 2011, our new home health admissions were up 9% in Q1 of 2012. As Keith said, this was the highest quarter in our company's history in terms of admissions and was led by our admit volumes in March, the single best month in the history of LHC Group. We continue to work hard on our growth initiatives but want to reiterate an expected 5% to 7% home health organic growth rate for the year of 2012.

Staying with volume but now turning to census, sequentially we have grown home health ADC from 31,692 in Q4 of 2011 to 32,608 in the first quarter of this year, a growth rate of 2.9%. April continued this growth trend and finished with an ADC of 33,721, which was 3.4% higher than the average daily census number I just reported for Q1.

So in a nutshell, we're very pleased that both admissions and census are trending in expected directions. I'll be happy to address specifics during Q&A, but now I want to turn to cost control.

Our G&A expense for Q1 of 2012 was approximately $4 million less than same period prior year. If you were to exclude the $700,000 of expense associated with the strategic alternative process, we've reduced G&A expense almost $5 million from a year ago, Q1 of 2011, as compared to Q1 of this 2012.

Our team recognized prior to last year that in order for us to mitigate the impact of CMS cuts and take full advantage of synergies from external growth, we must control corporate overhead. It started last year when we made cuts in our home office SWB expense and placed tight controls on spending with third-party vendors and other initiatives. It was continued in the fall of last year when we reorganized operational support departments to provide for greater efficiency and enhanced quality. Because of our intense focus on G&A, we expect to continue leveraging support cost as we incrementally grow our patient day volumes and associated net revenues.

My next update is in regard to our point-of-care deployment. Today we have 73 total locations inside of our point-of-care model, and we plan to convert another 68 throughout the rest of this year, in 2012. Our present rollout plan has the remaining home health and hospice locations converting the following year.

For those agencies that have been inside of this model, we have demonstrated the operating margin improvement that we were anticipating. Specifically, for those agencies that are at a six-month post-conversion timeframe or greater, they have an operating margin percent of net revenue that is 5.8% greater than their aggregate baseline on start. This is ahead of where we thought they'd be at this point, and validates key assumptions developed during our pre-implementation phase. As usual, I'll keep you informed of further developments with this strategy, but will now end my prepared remarks by touching on our LTACs.

As most of you know, CMS published its proposed rule for LTAC reimbursement for the fiscal year 2013 last week. Basically, CMS is proposing to increase the LTAC standard payment rate by 2.1%, effective for discharges on or after October 1, 2012, through September 30, 2013. This increase will be partly offset by the proposed 1.3% reduction for the first year of a proposed three-year phase-in of a budget neutrality adjustment.

The proposed reduction would not apply to discharges occurring on or before December 28, 2012. Consequently, the LTAC payment rate as proposed will increase by 2.1% for discharges occurring on or after October 1, 2012, through December 27, 2012. And the LTAC payment rate will only increase 0.8% for those discharges occurring on or after December 28, 2012.

In addition, CMS is proposing a one-year extension of the existing moratorium on the 25% threshold policy, pending results of an ongoing research initiative to redefine the role of LTACs inside of the Medicare program.

We estimate the effect of Q4 of this year, 2012, LTAC revenue will be positively affected by approximately $300,000, while the effect on January to September of 2013 will be positively affected by approximately $350,000. So while neither of these net revenue pick-ups are material, we did think important to note and commit to update you on any relevant factors affecting this service line in the future.

In closing, I want to congratulate and thank our entire LHC Group team for a great start to 2012. Your unwavering commitment to excellence is truly amazing, and your dedication to our mission of service unparalleled.

Huey, we're now ready to turn the call over for the Q&A session.

Thank you, sir. (Operator Instructions). Darren Lehrich, Deutsche Bank.

Couple things I wanted to ask. Just on the point-of-care deployment, did I hear you right? You said versus baseline, your margin improvement was 580 basis points?

I actually didn't refer, Darren -- this is Don -- into basis points. What we did is we took the aggregate margin and we mapped out -- we were wanting to see at this point that, as a percent of net revenue, which, of course, you've got variation factors in there. We had mapped that out to be a 5% improvement, and we're seeing that as 5.8% over that aggregate baseline.

Okay, so I just misheard you. All right, that's helpful. I guess maybe the question there is, does that level of improvement alter your view on timing of rollout? I know you said about 68 more in '12, but just curious if that alters your view about wanting to go at this a little bit faster.

It's a good question and I appreciate it. I wouldn't use the word alter the view, but confirm the view. It's what we expected. It's what we think we can do and still add the accretion that we need to throughout the year and keep with the pace of not disrupting the operations to put us in a position that we'd want to regret moving so quickly. So in a nutshell, it confirms what we thought but is not going to alter the 68. We're going to keep on pace with that.

That's helpful. Just a couple other things. I'm curious if you could just give us maybe a spot number, Pete, on the joint venture revenue as a percentage of total home health revenue. Just curious where that sits today.

I don't think it's changed very much. If you just give me a second, I'll look up that number. I think it's probably in the high 40s. Sorry, I should've had that right off the top of my head there. It's --

No problem. I can ask the next one while you're looking for the number.

Well, it's 48.2% for the quarter.

And then I guess you mentioned some growth in commercial revenue. Would be great just to get maybe a broader update, Keith, perhaps, on the opportunities you're seeing in the non-Medicare marketplace and what you're doing there at this point. Just maybe a general update would be helpful.

Yes, sure. I don't think there's much change. We still see a positive trend in the rates that we're able to negotiate with nontraditional Medicare payers. I think much of that, in our case, can be traced back to the hospital joint venture strategy. Where we're in markets where we have a significant hospital partner, we're able to use that as additional leverage really to get in the door and make a strong argument for our value proposition.

Once we get in the door, we find it pretty easy at that point. Everyone really gets the value proposition of home health from a payer perspective. It's just simply been an issue of not being able to get high enough up the food chain for anyone to really listen to you and take you seriously. So we continue to be encouraged by that. I don't want you to walk away thinking it's a layup, by no means, because it's still hard to get in the door. But it continues to trend positively.

Okay, so the focus is still really more on just getting your pricing up and more episodic. I guess maybe the question was also a little bit more just about your interest in taking on more non-Medicare business overall and whether you're seeing any bigger opportunities along those lines.

Yes, okay, maybe I didn't understand the question clearly. Here's the way we like to say it -- we don't really care who the payer source is. If we're paid fairly and able to generate a margin and still deliver quality services and get paid in a timely manner, we don't care who the payer is, and I mean, that's truly how we look at it. So we would prefer to have an episodic rate, for example, from all commercial payers, but a significant percentage of them are not paying us episodic rates. They're not prepared to do that now, so we negotiate per-visit rates that meet our same objectives.

Got it. Okay, thanks very much.

Thank you, sir. Ralph Giacobbe, Credit Suisse.

Can you guys maybe talk a little bit more about the cost structure? And if you could, help us break down G&A a little bit to understand the fixed versus variable costs and maybe what the incremental opportunity is there as we look ahead.

I'll start it, and then Don probably has some things that he'll add. The fixed costs related to G&A -- there's two components to G&A that we look at. One of them is home office, and one of them is field unit G&A. And the field unit G&A is almost fixed, and by that I mean that if you have an agency that has a certain census in it, you're going to have administrative people in there and you're going to have a director of nursing. You're going to have people related to the operations of that agency that are going to be there because you have that physical presence.

One of the advantages of point-of-care that we see is to break that relationship, so there's some opportunity there to take that fixed cost and move it to more of a variable format. And that's about half of our G&A, so when you look at the percentages, it almost breaks down this way, and always has, that if we have a 30% G&A, 15% of that is field unit G&A.

And then the other half is home office, and home office is really kind of a mixed group. There are administrative services that we provide at home office because we think they're economically efficient, and so we're able to collect receivables, pay payables, generate financial statements, tax returns, all the back-office kind of things. And to a great extent, that's variable based on the census or the number of locations or the number of states that you're in.

Then there are other components of home office that relate to our organization's structure. The way we manage our businesses, we have local management, which would be the director of nursing or the branch manager. And then above that, there are regional and area and state and division management. We do that for both sales and operations. And to some extent, that's caused some of the growth in our G&A historically, where we acquired operations in a remote state that we didn't currently have operations in. With our organization's structure, you kind of have to build up the management on top of that. So the variability in that cost structure rests with your ability to look at how you're organized and structured, and develop strategies to either broaden the base that that management group sees or change the overall structure of the management group. So that's kind of my take on it. Don, do you --?

Yes, Ralph, these are the comments I'd add to what Pete said, building upon it. Think about it this way. We've been saying now for a few years that we're building the infrastructure and investing in that infrastructure through technology. And so if there's a concern out there of is this number in G&A sustainable, this is how we answer that. This hasn't just happened. We've been preparing for it for 24 and, intensely, the last 12 months revisited to get to a point where all of the technology, whether it be the way we pay people or the way we actually use point-of-care to model shift, and it's allowed us to leverage human resources.

We also are investing the type of talent, and change, in some cases, the people that run different asset groupings. And so last year we were able to decrease that, and going forward, when I said in my prepared remarks we can leverage it, that's exactly what I mean. We can add greater patient volume and greater asset size with less people than we did in years past.

And so Pete is right. We break it up into home office traditionally, which we call the Pinhook costs, and operational support. Both of those buckets have leverage strategies going forward to widen the gap between our actual headcount and our FTE count to the census numbers that we have in our five-year projections.

Okay. That's very helpful. And then I guess on the home health side, would you say you're taking share in your markets, or do you think it's sort of reflective of overall market growth? And then along those lines, have you seen the pressure of the payment cuts to competitors considering your more rural markets?

Yes, I'll take the first part and maybe let Keith talk about some of the competitive profile, and the answer is yes, we have taken market share. And it's difficult, and we could take it offline and get more granular if you wish, but just think of it this way. Three years ago, in markets that we were licensed to serve, we had just south -- between primary and secondary combined, just south of 9%. Today we're touching on 13.2%. If you just quickly do the math, whether it's to the admission or to the actual percent over the same period three years ago, we're 40% higher, so you've got to take that. The population in these rural markets aren't growing that fast, so we are in fact taking it.

But I don't want everyone on the call to get too far ahead. We've also talked about seasonality in the past, and we do see that. We've seen it now for the three-year trend that the first three and last three months of every year are much more stout. And, again, anybody who wants to get granular with the math there, I can walk you through that. It's still a fight. We have a lot of things going on out there, but we're differentiating ourselves in the products that we use and the throughput to take care of the patients.

So we are taking share. We're very pleased with the incremental growth that we're seeing. But it's still difficult, as Keith said earlier. So Keith, I don't know if you want to talk about what you see in the competitive landscape of people kind of folding up.

Yes, I don't know if we can say that we see that right now. I think the -- our ability to take market share is more a result of just overall overwhelming differentiators that we bring to the market, whether it's Joint Commission-accredited or different clinical programs that we're able to provide that maybe smaller agencies aren't. And I say that because I'm not seeing the volume significantly increase in the pipeline of opportunities. We see an increase, as I said, in the number of conversations we're having, but there's no panic sale going on among the small mom-and-pops, and I think those two would connect together.

Got you. And then just my last one. You talked about the deal pipeline. I guess I'm just wondering your willingness to do the deals in the context of the strategic alternatives, and are you at all in some sort of a holding pattern until that plays out?

Yes, that's a great question. We are definitely not in any sort of a holding pattern. I think I've gotten that question a couple times in the process. Our board was real clear when we went into this process that this was a review of strategic alternatives, and we completely separated the operations of the Company. And so there's been no wavering at all in that strategy.

Okay. Thank you.

Thank you, sir. (Operator Instructions). Kevin Campbell, Avondale Partners.

This is Wes Huffman in for Kevin. Just wanted to quickly ask -- in your prepared remarks, you touched on the expectations, I think it was for G&A and depreciation in the various line items. And I didn't get all those. I wonder if you could just mention those quickly again, please.

Sure. I talked about gross margins, and gross margins expectations for the year between 42% and 44%, and then G&A between 31% and 33%. Talked about bad debt expense at 1.5% to 2%. And that's really all the numbers that I had in there. We're running about $2 million a quarter depreciation. I don't really see that tailing off for the rest of the year. That's probably right where we're going to end up.

Okay, great. And just one more was -- I believe during the quarter, minority interest was around 1.3% of revenues, and you said 1.5% to 2% in the past, and so wonder if we could get some more details or an idea there of why that was lower.

I can only tell you that it goes up and down with the relationship between the ownership percent and the actual operation of that particular joint venture, so it does fluctuate a little bit. Honestly, I think the 1.3% looked a little low, so I would probably -- if I was looking for the entire year, I'd stay between 1.5% and 1.7%, maybe even as high as 2% going forward.

Okay, thanks.

Thank you, and it looks like that does conclude our time for questions and answers. I'd like to turn the program back over to Keith Myers for any additional or closing remarks.

Okay, thanks. On behalf of all of us here at LHC Group, once again, thank you for taking the time to listen in and participate in our call this morning. Have a great day, and thanks for your support.

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.