LHC Group Inc (LHCG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group's Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Eric Elliott. Please go ahead, sir.

Thank you, Jonathan, and welcome, everyone, to LHC Group's earnings conference call for the second quarter ended June 30, 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 Myers, 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 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. Let me begin by congratulating and thanking our team members throughout the country for their continued unwavering commitment to excellence and for consistently delivered high-quality care to those we are privileged to serve.

Our strong organic growth during the second quarter is a clear indicator that LHC Group is the post-acute care partner of choice for hospitals, physicians, and patients in communities we serve.

As we look ahead to the remainder of 2012 and beyond, we are well prepared and well positioned to realize continued improvement in our operating results as we capitalize on opportunities for internal and external volume growth.

Next, I'd quickly like to recap our strategic alternatives process. As you recall, our review process began in November 2011 and involved an objective review of all strategic alternatives for the company, including execution of the Company's operating plan for 2012 through 2016. Following this comprehensive review, our independent Board of Directors unanimously concluded that a continued execution of the Company's operating plan supplemented by a share repurchase program provided the best opportunity to enhance value for our Company's shareholders.

As such, on June 11, 2012, the Board of Directors concluded the process and also authorized the 10B5 plan under which the Company may repurchase up to 50 million of LHC Group's outstanding common stock. To date, the Company has repurchased approximately 700,000 shares of LHC Group stock.

Now I'll briefly discuss the CMS proposed rule for 2013. CMS estimates the net impact on the HomeHealth industry to be $20 million, or one-tenth of 1% overall reduction in payments in 2013. While base rates would increase the impact of changes to the wage index would lower total expenditures.

Specifically, components of the proposed rule are an increase in the proposed base rate to $2,141.95, or negative two-tenths of 1% over the 2012 rate -- I'm sorry -- or increase two-tenths of 1% over the 2012 rate of $2,138.52; a market basket update of 2.5%; a 1% reduction mandated by the Affordable Care Act; a 1.3% reduction related to case mix adjustments that would carry over from 2012; and wage index updates that would decrease industry payments by an estimated three-tenths of a percent.

In addition, other notable proposed changes in the rule are an improvement to the face-to-face requirement that would allow non-physician practitioners, in an inpatient setting, to perform the encounter and inform the certifying physician; an improvement to therapy assessment addressing missed reassessment visits and establishing ranges for reassessment visits.

We estimate the impact of the proposed rule to be a reduction to Medicare revenue of approximately seven-tenths of a percent in 2013 due to the changes to the wage index. The seven-tenths percent estimate does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and would reduce payments by an additional 2%.

Now turning to our acquisition pipeline -- on July 1st, we welcomed Texas Health Resources and Methodist Health System as significant new partners in the North Texas market, and we continue to engage in active conversations with similar larger multi-site systems around the country.

The increasing frequency and depth of these conversations clearly demonstrate that more and more hospitals and health systems are recognizing the important role of post-acute care and reducing unnecessary re-hospitalizations. It's also clear that we've established ourselves as the leader in post-acute care partnerships with hospitals and health systems throughout the country.

Now, more than ever, they recognize the importance of partnering with a national leader in post-acute care not only for HomeHealth but also for services across the post-acute care continuum.

Through our industry-leading partnership model we are uniquely positioned to help reshape the health care delivery system in a manner that improves quality and lowers cost. As a result, we are experiencing even more significant opportunities to expand our geographic footprint in the number of patients we serve, and we are well positioned and prepared to handle this growth.

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

Thank you, Keith. Good morning, everyone. For the second quarter of 2012, our consolidated net service revenue was $158.1 million, and net income attributable to LHC Group was $6 million, or $0.32 per diluted share.

We recognized costs of $250,000 related to our strategic alternative process, and legal costs of $546,000 related to investigations in the quarter. These totaled $470,000 after taxes or $0.03 per diluted share.

Total costs related to our strategic alternative process recognized during the six months ended June 30, 2012, was $940,000 before taxes.

Home-based segment revenue was $140 million of which all is organic. Organic Medicare revenue was 4.8% lower than the same quarter last year and total organic home-based revenue was 1.4% lower. This decrease in segment revenue was caused by lower average daily census in HomeHealth offset, in part, by an increase in revenue per episode and an increase in hospice revenue and census, all compared to the same quarter last year.

The facility-based segment revenue was $18.1 million in the second quarter compared to $19 million last year. LTAC revenue in Q2 2012 was $17.4 million compared to $17.8 million in the second quarter of 2011. This decrease in LTAC revenue was primarily due to a decrease in revenue per patient day caused by a decrease in patient acuity and a higher number of patient days in excess of maximum benefit.

The remainder of the decrease in the facility-based segment revenue is due to a reduction in pharmacy revenue related to a third-party contract that expired without renewal in the second quarter of 2011.

Our consolidated gross margin was 41.7% in the second quarter of 2012, a decrease of 1.7% from last quarter. This decrease relates to the effect of the unpaid LTAC days described above and employee group health claims submitted in the quarter.

We estimate the annual volume and costs of our group health plan, however, the timing of the expense is governed by the submission of claims under the plan. Last year we experienced this same volume increase early in the third quarter. However, for the year, the claim activity last year was as forecast. I expect the claim volume to return to normal levels for the rest of this year.

In addition, our gross margin was lower in the second quarter because of mileage reimbursement in the quarter, which had been increased in March due to increased fuel costs.

G&A expense decreased to 32.2% of revenue from 32.4% in the second quarter of last year. This decrease is from lower expenses associated with our home office. For 2012, we expect our gross margins to be in the range of 42% to 44% of revenue and G&A in the range of 31% to 33%.

Bad debt expense in the quarter was $2.7 million, or 1.7% of revenue compared to 2% in the second quarter of 2011. Last year the change in timely filing regulations, which reduced the period a Medicare claim could be submitted, increased our writeoff and bad debt expense. We are not experiencing that same level of writeoff activity this year, and we expect bad debt expense to be between 1.5% and 2% of consolidated net revenue for the remainder of 2012.

DSO in the quarter was 52 days, one day less than last quarter. It was 45 days in the second quarter last year. DSO is affected by ADR activity, which has increased this year, and process delays caused by the new claim submission format, which has been resolved but has not yet been completely caught up, and the relative volume of commercial claims -- all of these increased DSO.

We expect our DSO to decrease over the year and get to and remain around 48 days, going forward. We are reaffirming guidance for the 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; or future reimbursement changes. It also excludes legal and other expenses associated with the company's ongoing investigations and costs associated with our review of strategic alternatives.

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

Thank you, Pete, and thanks to everyone for joining us this morning. Today I'll address current volume, provide an update on our point-of-care deployment and end with a brief discussion of hospice.

First, volumes -- during the second quarter of 2012 our organic growth in total new HomeHealth admissions was 6.3% compared to Q2 of 2011 and organic growth in new HomeHealth Medicare admissions 2.1% as compared to the same period prior year. We continue to work hard on our growth initiatives and want to reiterate the expected 5% to 7% organic growth rate in HomeHealth new admissions for the year.

Staying with volume but turning now to census -- while HomeHealth census was down 2.8% in Q2 of 2012 as compared to the same period prior year, sequentially we have grown HomeHealth average daily census each quarter since Q3 of 2011. The average daily census for the Q2 2012 being 5.4% higher than that of Q3 of 2011. In a nutshell, we're pleased that both admissions and census are trending where we expect, and I'll update you further as we go.

Turning toward point-of-care deployment today we have 77 HomeHealth locations on our point-of-care platform [and inside] of that model as well as five of our 32 hospice locations.

We plan to convert another 38 HomeHealth and three hospice locations during the remainder of this year. By its end, we expect to have half of our HomeHealth revenue converted inside of home care home base.

Our present rollout plan has our remaining HomeHealth and hospice locations converting next year. It's important to note that for these agencies that have moved to the system and inside of this model, we continue to see the operating margin improvement that we expected.

Again, I'll keep you updated on any further developments, but now I want to turn my last prepared comments onto the hospice segment.

On July 24th of this year, CMS issued its final rule for hospice for the fiscal 2013 year. The 2013 rule increases Medicare reimbursement payments by 0.9% or fiscal year 2012 rates and specifically it includes the following -- a 2.6% inflationary market basket update; a 0.6% reduction for the fourth year of CMS's seven-year phase-out of its wage index budget neutrality adjustment factor; a 0.7% reduction for the productivity adjustment; a 0.3% reduction to the market basket as mandated by the ACA; and, lastly, a 0.1% reduction related to the wage index changes.

As Keith mentioned, with HomeHealth, the proposed rule that I'm speaking of, the 0.9% increase in hospice rates does not include any projection of sequester.

In closing, I want to congratulate and thank our entire team for a strong first half of 2012. Your unwavering commitment to excellence is amazing, and I'm honored to be part of your team.

I'll now turn the call over to Jonathan for Q&A.

Thank you. (Operator Instructions) Kevin Ellich, Piper Jaffray.

Good morning, I have a few questions. Keith, I was wondering if you could give us an update on the pipeline -- how it looks, how many deals you guys have, and just any update on that front?

Yes, because of the multi-site systems now in the pipeline, it's not the same as it has been in the past where we had specific closing dates on individual hospitals. When we're looking at some of these multi-systems, we're having to bring them in in phases, so I'm a little reluctant to put a number out there. It would be much larger than the numbers we've put out in the past, and I just don't want to give the impression that those closings are as imminent as they had been in the past. So that's why I'm staying away from specific numbers here.

Okay, that's understood. And then could you talk a little bit maybe about some of your expectations? Have they come down relative to a year ago?

Relative to a year ago, maybe not. I think it's been, for the most part, flat for the last year. And to kind of give you an idea of where we see that range, it's probably somewhere in the 60% to 80% of trailing revenue, and we use trailing revenue because in a lot of the base cases, especially in the partnerships or joint ventures, we're going into a provider where there was no positive margin, there was no EBITDA margins. We're using our revenue most of the time.

Yes, that makes sense. Okay, then, I guess, given the proposed B schedules that came out, I was just wondering if you could give us your updated view on the regulatory legislative environment? And also rebasing in 2014?

Yes, on rebasing, I hope you're not asking for my view on what I think rates are going to be, because if I knew that I probably wouldn't be on this call, I'd be somewhere else. I hope I'm not coming off as being Pollyanna-ish in any way, but I think we see a net positive in Washington, D.C. right now. It's a shame to say that we look at the proposed rule that just came out and have to view a flat or slightly negative change as something positive, but it is better than it could have been. In fact, better than we thought it would be.

And I think the work that we're doing in Washington, D.C. with both the partnership and the alliance is having a meaningful impact. I'm privy to a lot of the dialog that goes back and forth with staffers in Washington, D.C. and, honestly, that was dialog that wasn't happening four or five years ago. So I'm encouraged by that. And, as I always point everyone -- to Eric Burger runs the day-to-day for us on the partnership, as most of you know, in Washington, D.C. And I would encourage analysts to stay in touch with Eric for more details.

Absolutely. Okay, I just have a few quick ones for Pete. Pete, going back to your comments on the gross margin and G&A ranges for the year -- was that for the year or was that for the second half of 2012?

No, that's for the year. You have to kind of take into consideration what happened in the first six months, but we model ourselves internally on an annual basis.

Right, right, but the bad debt range of 1.5% to 2% -- that's what you expect for the second half, right?

Yes. I think bad debt is something that this year it's improved significantly over last year, and I really think the primary drivers are -- we have an improved process related to commercial claims and following up on those claims. But the big improvement has been us getting our arms around this reduced timely filing requirement with Medicare.

When they went to 15 months, when they went to a rolling 12 months from 15 months at a minimum, it really caused a little bit of a change in our internal processes and how hard we follow up on those claims. We took all that hit last year. So consequently I think our bad debt expense last year was a little bit higher than it would have been had they not had that change. Now, this year, you're kind of seeing it normalize back down.

Got it, okay. And then in your prepared remarks, Pete, you made a comment about a reduction in pharmacy because a contract expired without renewal. I'm just wondering which contract that was and how much of an impact did it have?

Yes, we've never really disclosed individual contracts related to the pharmacy business, and I don't think that's -- I don't think we're going to change that now. Just, I think, what we can talk about is we look at the pharmacy business not only as an internal cost support process related to our LTACs, but we also try to leverage the business model that we have and the G&A costs we have associated with our pharmacy by going out and getting third-party contracts. This isn't the first one that has canceled, and we have other contracts that we're looking at to replace it.

So -- there is going to be some pluses and minuses individually within the quarters, but, in the long term, we believe that that's a viable business model to help offset some of the costs that we have that are more or less fixed because we provide pharmacy services to our LTACs. So it's a method of kind of reducing our overall G&A mode.

Ralph Giacobbe, Credit Suisse.

Maybe I'll start out with just talking about how you think results -- or how results did compare to your internal projections both in terms of the HomeHealth as well as the LTAC side. I know you talked about the timing of some payments that may have influenced a little bit of the quarter. And then just how you're thinking about the back half of the year -- anything for us to keep in mind in terms of timing of those payments related to 3Q versus 4Q?

Okay, I can start that out. The HomeHealth side, or the home-based side of the operating results was actually very good, and we were very pleased with it. We maintained what I think is excellent cost control as we were rolling out our home care home-based into new agencies. I think that the salaries and productivity related to the clinicians -- I think we do a good job managing that.

You can see that quarter-over-quarter -- when you compare to last year, census did drop off, but if you think of last year, the drop last year occurred in the third quarter. So there were a lot of events that happened in April and in the early part of last year that resulted in lower census, but it didn't actually happen in the second quarter, it happened in the third quarter.

If you go from that quarter forward, we've had increases in census quarter-over-quarter every quarter right up until the second quarter this year. So we think we have decent growth. Right now our mix is moving a little bit more toward commercial than maybe we had predicted, but the overall census growth is still good. Our hospice operations were excellent and had tremendous growth over last year, and we're seeing that business model really start to take shape.

On the LTAC side, it was not where we thought it was going to be this quarter, and that was primarily driven by an increase in unpaid days. Quarter-over-quarter, we actually had a decrease in patient days, and there's fixed costs associated with the LTAC. So you kind of see those kinds of things right at the margin level. So on that side, on the facility side, probably we're a little bit lower than we had originally thought.

The big driver this quarter with operating results, really, though, is the health care claims. And that's something that fluctuates quarter-to-quarter. And even though it's reserve accounting, and by that I mean you establish some kind of a tail, a reserve tail for claims that have been incurred but not reported at the end of each quarter -- even though you have that, that reserve doesn't really move around a whole lot, balance sheet to balance sheet. And we've actually got that disclosed as a single line item with our other self insurance reserves on the balance sheet so you can sort of see that it stays relatively flat.

And the result of that, then, is that when a -- we forecast a monthly claim expenditure number, and what that is is the -- how much we expect employees to submit in terms of health care claims. And when that number goes significantly up or down from what our forecast is, it's almost -- it looks like cash basis. So when you increase those claim submissions by $1 million, you have to reestablish that reserve up to pretty much a flat level. And so, consequently, you increase the expense.

Year-to-date, we're right in the ballpark of where we thought we would be. So what you're not really seeing is that in the first quarter, we had a benefit. We had about -- the claim experience was about $1.3 million lower than what we had forecasted. What you're seeing is in the second quarter, we had a catch-up of about $850,000. I suspect in the third quarter there will be another catch-up of about half that, and then the fourth quarter will be flat.

And so for the year, even though you have movement within the quarters -- for the year, the expense that we're talking about normalizes out and falls right in line with our guidance.

Okay, all right, that's helpful. Along those points I think you made there was a couple of things I just want to dig down. One, you talked about the strong commercial growth. Is there anything -- these admissions mainly coming from facility setting, community setting? Is there anything in terms of mix there that you can tell from the commercial side?

Ralph, this is Don, I'll take that. Maybe a little bit of color into our managed care business, maybe I haven't before. But you'll remember vividly about three years ago we canceled just south of 200 contracts -- I think it was 189 if my memory serves me correct. Don't hold me to that but hold me to the point I'm getting to.

We now only have 71 -- three national and 14 regional. And the lion's share of that is really because of our joint venture relationships and the throughput that they have into those facilities. So the answer to your question is it's mostly from facilities.

And if the basis of your question is mix and/or risk, I'll try to address both. That's why we've seen our mix shift, as Pete said, maybe even a little bit moreso than we thought is because we're really getting some legs with some of our quality initiatives, and this is really growing on us. That's a good thing. But it also, of course, poses risk that we know that could be canceled. And how do we insulate ourselves from that risk, is one, showing the value proposition and doing that at the table with our joint venture partners.

So even if we had any of these national, like Humana, for example, that would want to cancel national arrangements with any home care company, we still feel that in markets that we have substantial presence like in New Orleans with our Ochsner Partner, we have a very good value proposition that we believe will continue that arrangement.

Granted, Pete also said that we've got issues collecting, and it takes a little bit more back office. So his commentary about keeping a close eye on this is perpetual for us. So any substantive change, we'll let you know, but that's kind of the story, and I hope I answered that question.

Yes, you did, that's helpful. And then just my last one, just on the LTAC side, does the guidance assume continued softness in that segment? I mean, I guess, what can you do, or help us understand, the magnitude of what you saw and what you could do to turn that around? And then do you expect that higher unpaid days to moderate as we think about the second half of the year?

Yes. This is Don again, and I'll take that. Actually, the guidance doesn't take into the softness that we saw. It takes in more of the predictability that we've been having over the last two years in some of that.

When you look, I think we have a total of 220 beds, there were two things that hit. One, we didn't have the occupancy inside of that portfolio to start with, so you had a volume issue, and that's related to sales. But then we had longer lengths-of-stay patients in there, so it took our (inaudible) day number higher. We've never seen that. That was the highest number we've had in any quarter that I can remember since I've been here.

And so those two components -- we're back up in volume right now and we're back -- we call it (inaudible) days of those below the geometric length of stay -- it's back in line.

So I think what I would do is I would go back to 2011 and just make it first quarter and look at the seasonality adjustment there but factor in that inconsistency quarter-over-quarter for the last two or three years.

Okay and, sorry, just one more on that front, though, just to understand. The length of stay was up. I think you mentioned the acuity mix down. Is that not the right way to think of -- is there a disconnect there or am I not thinking about that right?

Yes, you're thinking about it right in logical terms, but it has to do with can you find a placement for those patients after they meet their geometric length of stay? So regardless of your case mix, if you've got them ready to discharge to an area, and you can't find placement for them, that's usually when we see that geometrical length of stay get sucked down, being that you have too long a length of stay.

And it really was an anomaly. When you're talking about 220 beds with approximately 80% occupancy, if you get 9 or 10 patients that I just explained, it blows your quarter. We work very hard to begin discharge planning upon admission, but in certain cases, it's just kind of stacked up on us, and we couldn't get them out of there.

Kevin Campbell, Avondale Partners.

I wanted to start with the commentary on wage inflation and maybe what you guys are seeing there and how we should model that, going forward?

Sure. We factor in about a 2% number, and if you -- you know, internally, when we compare quarter-over-quarter and take a productivity adjustment through or try to account for productivity, it ends up being right in that range. And that goes not only for clinicians up in cost of sales, but it goes also for G&A in the field as well as home office.

And, Keith, maybe you could talk a little bit about the strength in the M&A pipeline particularly on the JV front and what you guys really think is driving that other -- you know, is it any one factor or is it a multiple thing?

Yes, I think it's exactly what I said. I think more and more hospitals are focused on the need to control readmissions and, even more than that, to be able to leverage post-acute providers to help improve the quality and financial performance of the host hospital. And I think in order to know that they can do that in the significant way in the future, they're realizing that they can't leverage 50 or 60 different HomeHealth providers, for example. They need to choose a handful that they can rely on and leverage their volume with -- I think -- you know, obviously, (inaudible) what they're thinking.

So I think that's bringing them to the table, and once they get to that point, when they look at who the providers that they would bring to the table are, I believe our name pops to the top of the list pretty quickly, because of the credibility we established going back to 1998 in partnering with hospitals.

So I think that's driving it. And what's different about that is if you'd asked me this question five years ago or before, in almost every case it would have been driven by a review of their financial performance and perhaps the CFO saying our HomeHealth agency is not doing well financially and we were being brought in to improve the financial performance of the HomeHealth agency alone.

Now it's just much different. We're being brought in as a partner in the whole system to help improve the overall continuum of care.

That's helpful, thank you. And then, lastly, I just -- I know you guys mentioned you would buy back 700,000 shares. How much room does that leave on the $50 million?

About $38 million.

$38 million, left. Okay, great. And, presumably, the 700,000 shares is incorporated into guidance?

No, it is not. We don't adjust EPS for share buyback.

Okay, so the 700,000 you've done, to date, is not included in that range then?

That's correct. That's right.

(Operator Instructions) Frank Morgan, RBC Capital Markets.

A question related to the PPS rule -- those interchanges in base and functional assessment -- how big a deal is that? Does that really help jump start the growth in the (inaudible) and your overall census growth? Is that a big enough deal to offset some of the pricing pressures that may or may not materialize down the road? Thanks.

This is Don. In my opinion, no. I think it's pretty much irrelevant. I think we've got system issues and workflow that we've got to change, but I don't think it's substantive either way.

I will say this -- nobody in the industry seems to be talking about the survey issues that have come out of this. That's a much bigger thing in my mind. All the more reason to have a quality operation. Because if you've got operations that aren't doing very well in addition to the penalties on a per-day basis, them bringing in or making you bring in interim leadership and just the multitude of financial hits that can occur would be a bigger issue than anybody's talking about, and I've said that offline.

But neither of those issues -- I'm just bringing them up to let you know I don't think, face-to-face, the therapy is relevant at all, and I do think that the latter that I spoke of is relevant but no risk to us.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to turn the program back to Keith Myers for any further remarks.

Thank you, Operator^. On behalf of all of us here at LHC Group, thank you once again for taking the time to listen in and participate in our call this morning. As always, we are available to answer any questions that may come up between our quarterly calls. So have a great day and thank you, again, for supporting and believing in the mission of LHC Group.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.