LHC Group Inc (LHCG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group first-quarter 2015 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, today's conference is being recorded.

I would now like to introduce your host for today's call, Mr. Eric Elliott. You may begin, Sir.

Thank you, Kevin. And welcome, everyone, to LHC Group's earnings conference call for the first quarter ended March 31, 2015. 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. In a moment, we'll hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Dionne Viator, 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 2015 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. I'm extremely proud of the strong and well-balanced operating results our team delivered during the first quarter. I'm particularly pleased with our ability to once again achieve solid organic growth rate and home health admissions of 6.5% compared with the first quarter of 2014.

I would like to congratulate and thank our nearly 10,000 team members for their unwavering commitment to excellence and for consistently delivering high-quality care to the growing number of patients, families and communities we serve. Since we had our last earnings call just two months ago, we'll keep our prepared remarks short in order to allow more time for Q&A. However, before I turn the call over to Don and Dionne, I would like to touch on a couple of items.

First, in April, Congress passed the SGR repeal bill. In this bill, there were two items that were specific to home health. One, the SGR bill included a two-year extension of the rural home health add-on payment of 3%. The rural add-on payment, which was set to expire on December 31, 2015, has now been extended to December 31, 2017. There was overwhelming congressional support for the rural add-on, I should add.

Number two, the SGR bill also sets the annual update for all postacute care providers, including hospice, at a positive 1% for 2018, net of any adjustments, with the sole exception being the penalty for non-submission of quality data. The SGR bill, along with the ACA, has now given us visibility through 2018.

With regard to external growth, consolidation activity continues to accelerate, and our in-house corporate development team is reporting record activity in the first four months of 2015. We continue to focus on hospital joint ventures and smaller acquisition opportunities that have been the bread-and-butter of our growth strategy for the past 20 years.

Thus far in 2015, we have logged 96 new opportunities in this category. Of these 96, we decided to pass on 68 after our initial review. The remaining 28 received in 2015 remain active, giving us a total of 39 opportunities in the pipeline at this time under evaluation of this smaller size.

In addition to our traditional core pipeline activity, our executive team is meeting more regularly with investment bankers, evaluating larger strategic opportunities typically greater than $50 million in annual revenues. We are also continuing to strengthen our relationships with managed care payers and piloting value-based purchasing models that create better alignment between our organizations.

I'm happy to address any of these further during the Q&A, but now I'd like to turn the call over to Dionne.

Thank you, Keith, and good morning, everyone. If you've had a chance to review our earnings release, you will notice that we have now broken out each of our different service lines into the income statement. Specifically, it includes home-based services, which is home health; community-based services; hospice services and facility-based services, which is primarily made up of our LTAC.

Since you now have the ability to see the operating results of each service line, I will no longer go through those during my prepared remarks. Instead, I will focus on the key points during the period.

On a consolidated basis, our gross margin was 40.7% of revenue in the first quarter of 2015 as compared to 40.5% in the first quarter of 2014 and 41.7% of revenue in the fourth quarter of 2014. The decrease in gross margin compared to the fourth quarter of 2014 was principally driven by seasonal increase in payroll taxes of approximately $1 million over the fourth quarter, which lowered the gross margin by 40 basis points. And the remaining decrease is due to an increase in our self-insured health care costs during the quarter.

Our general and administrative expense was 30.7% of revenue in the first quarter as compared to 33.4% in the first quarter of 2014 and 31.7% of revenue in the fourth quarter of 2014. The decrease in G&A compared to the fourth quarter of 2014 was due to the elimination of certain general and administrative expenses in association with the completion of our organization-wide conversion to point of care, as discussed on our last earnings call.

Our bad debt expense represented 2.7% of revenue in the first quarter as compared to 2.1% of revenue in both the first quarter of 2014 and the fourth quarter of 2014. The increase in provision for bad debts was directly attributable to an additional reserve being recorded for patient service claims related to prior-period patient care associated with two commercial payers. These adjustments are an isolated occurrence and negotiation between the parties are ongoing.

Our effective tax rate in the first quarter of 2015 was 41%. Regarding 2015 full-year guidance, we are raising our full-year 2015 guidance issued on February 25, 2015 for net service revenue in the range of $755 million to $775 million to a new range of $765 million to $780 million. In addition, the Company is revising its fully diluted earnings-per-share in the range of $1.50 to $1.70. We are raising the lower end and establishing a new range of $1.55 to $1.70.

This guidance does not take into account the impact of future reimbursement changes, if any, future acquisitions or share repurchases, if made, de novo locations, if opened, or future legal expense, if necessary. For the full year of 2015, we continue to expect a gross margin to be in the range of 40.5% to 41.5%; G&A as a percent of revenue to be in the range of 31% to 32%; bad debt as a percentage of revenue to be in the range of 2.0% to 2.5%; and our effective tax rate in 2015 to be in the range of 40.5% to 41.5%.

That concludes my prepared remarks and I'm now pleased to turn the call over to Don Stelly.

Thank you, Dionne, and good morning to everyone. And we appreciate you listening in to our prepared comments.

I'll start with volumes briefly and stay brief, as Keith said, so we can get to the Q&A. But during the first quarter, we too had our fair share of weather-related issues, just as we did last year in the same period. This year, however, we saw approximately 150 of our agencies experience either partial or total closure inside of the quarter. But, we were pleased as our clinicians certainly put patient care first, and our operations and sales team continue to grow the business.

As Keith alluded to, we saw 6.5% organic growth when compared to the same period prior-year. And that, in combination with what we believe our sales and marketing development efforts are producing right now, lead me to go ahead and guide us toward an increase in our organic growth for the year of 4% to 5% versus what we talked about last quarter, as you will recall was 2% to 3%.

Moving on briefly to a couple of regulatory updates. Over the last couple of weeks, CMS has released proposed rules for both hospice and LTACs for fiscal year 2016. On the hospice front, the proposal was released on April 30 of this year. The components are as follows. An estimated 1.3% on approximately $200 million increase in the payments for fiscal year 2016. This rule also proposes two different payment rates for routine homecare that would result in a higher base rate for the first 60 days of hospice care and reduced base payment rate for 61 or more days of hospice care.

These differing payment rates would further the goal of more accurately aligning the per diem payments with visit intensity as well as the cost of providing the service and care. The proposed rule also includes a service intensity add-on payment, and the proposed SIA payment is a payment that would be made for the last seven days of life in addition to the per diem rate or the RHC or routine homecare level of care. If certain criteria were met, the payment would not be made to providers with patients residing in SNFs and nursing facilities.

The SIA payment policy encourages visits to patients at the end of life and improves provider accountability. Additionally, the policy begins to address industry and other organizational concerns regarding the need for increased payment for more resource-intensive days.

The proposed rule for LTACs was released on April 17 and those components are as follows. The pathway for SGR Reform Act of 2013 directed CMS to establish two different types of LTAC PPS payment rates, depending on whether or not the patient meets certain clinical criteria. Standard LTAC PPS payment rates and new site-neutral LTAC PPS payment rates, the latter based on IPPS rates. The law transitions the payment reduction for site-neutral cases for the first two years of the revised LTAC PPS by required payment based on a 50/50 blend of the standard rate and the site neutrality rate.

CMS projects that the LTAC PPS payments would decrease by about 4.6% based on the proposed rates for fiscal year 2016. This estimated decrease is primarily attributable to the statutory decrease in the payment rates for site neutrality cases that do not meet the clinical criteria to qualify for the higher standard LTAC PPS payment rates.

CMS's analysis of 2013 data shows that approximately 54% of LTAC discharges will be paid at the LTAC PPS rate and 46% subject to the new site neutrality rates, consistent with the industry's estimates and, by the way, consistent with LHC Group's current patient population. Cases that do not qualify for the higher standard rate will see an increase in that payment rate of 1.9%. For us, this rule will become effective for two of our eight locations beginning 6/1 of 2016 and then the remaining beginning 9/1 of 2016.

In closing, I too and we are extremely pleased with our first-quarter performance, and truly we feel great about our momentum across all facets of the business as we proceed into the year. To our team members listening this morning, thanks for all that you do. You did a fantastic job. You are valued and appreciated.

And to all, again thanks for listening to our prepared comments. And Kevin, we will now go into the Q&A section of the call.

(Operator Instructions) Kevin Ellich, Piper Jaffray.

Thanks for taking my questions. First off, nice quarter, guys. Keith, wondering if you could remind us what percent of your revenues are exposed to the rural add-on that was extended?

45%, roughly now.

Okay. Great. Thanks. And then for the development activity, on the 28 or 39 deals that you have in the pipeline, is there a dollar value that you guys could put on that to help us kind of think about that?

So let me say it this way. So a lot of -- in that pipeline that we refer to as smaller deals that include the hospital joint ventures, I mean, they will really range from -- I'm just thinking -- I don't have the pipeline in front of me but some as low as $1 million in trailing revenue where it's just really you are going in and with an opening into a market. And then going to grow market share to probably on the high-end right now in that pipeline $20 million or so. And not many of those.

I mean, but the sweet spot I guess would be -- the average would be in the $5 million to $10 million range. That's kind of what we see. I don't have them added up so I don't want to tell you that's what the average of that group is but that's where they typically run.

And then I hope I got the point across right in prepared remarks but, separate and apart from that effort, and this is something we just started really focusing on really the right at the end of last year, and it's really become part of what we do on a day-to-day basis, is the executive team is meeting on a very regular basis with investment bankers. And not just -- you know we always have bankers that come in and call on us, but we've had -- we have several groups that we spend more time with. And they've invested the time in getting to understand exactly where we want to grow and how we want to grow on larger deals.

And so we are being much more focused and specific in managing those. Those of course take longer to develop and some of them we think might be coming to market at some point in the future, but not really ready yet. And then there are some that are nearer. But that's a new process for us. In the past, we used to kind of sit here and not put a lot of effort into it but we did just sit here in receive mode. So we are trying to be more proactive about that.

Great. And then actually if you could add a little bit more color on that last point, Keith. I guess what sort of deals are you guys evaluating with these bankers? Are they core home health? Hospice and LTAC? Or are you looking to kind of add something else to the business? And I guess what are the criteria that you are looking at when you are evaluating these deals? And if you have any thoughts on potential timing, that would be helpful as well.

Yes. That's a good question. So, on the larger deals, I mean, we are really looking to -- those would typically be home health, hospice, or community-based services, kind of the short answer. Something that we believe we've perfected our model in and we are looking to scale up and go into new areas.

You know, we are also always looking at new opportunities to -- where it makes sense to expand a service offering and pile anything that are small that we wouldn't go do an acquisition to -- that's not typically how we do it -- do an acquisition to kind of enter a new space.

And, on the timing, there's really not much I can say about timing for obvious reasons. But I'd just -- I would just -- I can just tell you that the numbers would -- should tell you that we are pretty active. We are generating a lot of activity here, and it would be surprising if we had all this activity and didn't have acquisitions to show for it at the end of the year.

Got it. Okay, that's helpful. And then I guess I kind of want to wrap my last question into two things. There's been a lot of movement or activity by Medicare with their shift to value-based reimbursement models. I think you guys have kind of dipped your toe in the water with ACOs and BPCI. Wondering what your thoughts are there?

And then on top of that, there's the postacute care bundling legislation on the hill. Wondering what your thought is? And kind of long-term strategically, where do you think that positions -- you know, that puts the Company? And what would you like to add to kind of I guess best position yourself when bundling does eventually happen down the road?

Sure. So let me just take the -- to kind of attack this first at a macro level. We really like this continued movement towards postacute bundling, and are very encouraged that we're -- we continue to move more and more towards a general acceptance of site-neutral payment, and where all providers, postacute providers, that are capable of underwriting the risk and delivering on quality will have an opportunity to be the convener or the coordinator, as the backpack bill refers to it, of those services. I mean that's very encouraging.

But if I can take just a minute, I'm going to step back in time a little and remind you that this is something we've been working on -- and not just we, LHC Group, but the leaders in the industry for a number of years. Back in 2010, when we all came together and formed the partnership for quality home health and then the alliance for home health quality and innovation, it was to try to look ahead outside of just fighting year-to-year reimbursement changes, to look ahead and try to have some voice in shaping the future of how we'd to be reimbursed.

What you see in the backpack bill is really the result of a study that we commissioned in 2012 by Dobson and DaVanzo. It was a clinically appropriate and cost-effective placement study. And that's published. It's on the -- it's available through the alliance for home health quality and innovation. And, as always, I encourage all of you to reach out to Eric Berger in Washington, DC that heads up the partnership for us to follow up in more detail.

But what that basically did was long before we were involved in BCPI bundles or whatever, it told us that patients that were placed in the most cost-effective settings, appropriately placed, experienced the same outcomes at a much lower cost. And for us, with the bundles we are involved in now, and working with the companies like naviHealth, for example, is one that we work with, when we go in and analyze all the data, and look at where all of the savings are coming from in these postacute bundles, more than two-thirds of the savings is coming from just the shift of patients from SNF to home health.

And then the other is -- the other third comes from patients being shifted from LTAC and IRF down to SNF. So, for the final part of your question, when we think about what is it that we will and in the future, to better position us to capitalize on that value -- to be able to capture that value, it's things like -- and Don can speak more to this, but it's things like a wound care capability, the ability to care for higher-level wounds in the home, in home infusion services.

Those are the reasons that a lot of the patients are in SNF units. The reasons we aren't caring for them in the home health industry today is because the payment is not there. But if you move to a site-neutral payment, then that really turns that on its head. And I would argue that no one is better positioned in home health to create that value.

Don, do you want to --?

Yes, Keith, probably not a lot to add to that because you really hit the nail on the head. I mean, we see the in-home service model that we are running today evolving to where we take care of a much more broadened patient issue type.

For example, Keith talked about wounds, but we also see IV patients sitting in SNF beds that we can now take. And so we are going to have that evolve over time into where we broaden the breadth of services inside of our Company.

But also, Kevin, back to your comment about us dipping the toe into the water of ACOs, I have, inside of a spreadsheet that we work on in our internal market development pipeline, a list of 402 ACOs in our portfolio states. That toe in the water now has us in 10, with really only one of them being a non-pure play on volume. The one that I talk about is a 90% part of the Medicare rate and our upside is up to, I think, 120.

So really in any of those, there is no risk and any upside just isn't recognized yet. But I guess what I would say to that is, we like kind of how that toe feels in that water. But not all ACOs are equal in these markets and some of them are much more loosely run. Some of them have a much tighter provider network and we like the latter. And we intend to go ahead and kind of bring those into the portfolio as the year goes. And I'll probably keep updating on you that as we go forward.

Sounds good. Thanks, guys.

(Operator Instructions) Toby Wann, Obsidian Research Group.

Thanks for taking the question. Could you maybe talk a little bit about your recent experience on the commercial insurance side? Medicare Advantage and just kind of the trends you guys are seeing there relative to history? Thanks.

Sure. Are you talking in terms of the volume?

Yes, both volume, rates, et cetera. I mean, just in kind of a general -- in general.

Okay, all right, I just wanted to make sure.

You are seeing more and more people in Medicare Advantage so, commercial is kind of becoming a bigger part of your business I would think. So just kind of your all's experience with those sorts of things.

Yes. Sure, okay. I've got it. I just wanted to make sure I was answering what you -- the question correctly. So we are seeing an increase in managed care penetration in the larger population centers, as you might imagine.

One thing that's a little unique about LHC Group is the -- as we just mentioned, is the higher percentage of rural mix we have. One of the reasons we are really happy about the extension of rural add-on because -- we like rural areas because we don't have to deal with as much of the managed care penetration. As you can imagine, the managed care companies, the good news is that you have a lot of volume in one spot. The bad news is that you have a hard time negotiating the rates that you can be profitable at.

What we are encouraged by -- so we are able to operate profitably because we are leveraging our scale to drive efficiencies to be able to do that business. But, long-term, they are going to continue to reduce rates and we're not going to be able to continue to reduce costs. So what we are excited about is the pilots that we have that we are looking at, and value-based purchasing, and that becoming very much a part of their language.

One thing I've noticed is when you go in and you are trying to negotiate rates with a commodity approach, that you should raise your rates on all home health, it just really falls on deaf ears and you don't get anywhere. But the minute that you introduce your willingness to go at risk for performance, that changes the whole conversation. And that's where we are with, I would say, with almost all of them now.

You know, the devil is in the detail now. It's how do we work it out and how do they -- some of them actually get it and want to go with models we propose, but then it becomes a matter of how do they track it for us and separate us from all the other home health providers, because we are not capable of taking 100% of the market.

And that just all isn't coordinated yet. So I hope that answers the question. I mean it's business that is profitable for us now. But you know -- but looking ahead as we continue to do volume, we can't continue to get ratcheted down on the rates. There has to be some upside for us based on performance and I think we're going to get that.

What percent of your overall home health hospice business is derived from managed care, if you don't mind?

Toby, this is Don. Right now -- in fact I was going to almost chime in on Keith when you said that it was a bigger part of our business. We are about 76 -- exactly 76.1% of our total census is still Medicare, and that's only actually varied from 75.9% when we were sitting here last year. So you can actually see that it's really not a big tick-up.

But I want to echo what Keith said, is that our clinical teams are doing some modeling right now that want to take this as a big opportunity. But we've got to do some things differently and get in front of the managed care payer, so that things like telephony and tele-monitoring are adjunctive and remote, but yet still get the same outcome. So while it's not substantively different than it was last year, our view of this as opportunistic is probably different than last year.

Yes, Don, that's a good point, Don. So when I say -- Don just shared those numbers with you. What I didn't say is that we limit the number of the managed care business we are taking in now. So, if we did not limit that, managed care would be equal to or maybe greater than our Medicare. So when I say we are able to generate some small margin on managed care business, it's because we are being very selective with which ones we contract with.

Yes, that's helpful. Thanks for the questions.

Kevin Ellich, Piper Jaffray.

Sorry to get back in the queue so quickly. Just had a couple of quarter questions. So hospice margins were down. Wondering if you could provide some color there, and when do you think we should see margins improve?

And then going back to the strong organic home health admissions growth, I think you did have an easier comp due to weather. Don, can you remind us how many agencies were hit last year with the really harsh winter weather? Just kind of trying to figure out what the normalized organic admissions rate should be. Thanks.

I'll answer the volume questions, Kevin, and then I'll throw to Dionne and we'll kind of maybe tagteam the hospice. But I don't have the specific number of agencies last year, but it was more. And you are right, that the comp and the hurdle was fairly weak. And before the weather hit us this year, we thought we were going to knock it out of the park. And remember I was so -- I was pretty excited about that during our last call.

But in my prepared comments, I'm trying to guide still to that 4% to 5% organic growth rate for this year. I mean, I -- honestly, I think it's a little conservative. But when I did our last projection in MORs and kind of took some seasonality into account, I got to the upper limit of that 5%. But I don't want to kind of get outside of that right now, and you guys get ahead of us on those volumes.

So I would probably stick with 4% to 4.5% as a pretty solid number. And I'll know a little bit more on our next call.

And so, just to kind of sum it up, we did have -- in our portfolio, we had tremendous weather impact this year as well. In fact, because of our Elk Valley location now being mature, which came on with Deaconess, those billable hours hurt us fairly deeply. And so all of that factored in is kind of why I moved away and moved up from that 2% to 3% organic growth rate.

Dionne, do you want to hit the hospice on those margins?

Sure. So the question about hospice and the decrease in margins there between this quarter and the last quarter in 2014 is primarily related to volume. We have had a reduction in volume between quarters, and then in this first quarter of 2015, the increase with payroll taxes has made a difference there as well.

Great. And if I can, I'll just add to that. I think the payroll tax is probably substantive to there, is because when you look, pre-NCI, we are about almost 11% this period compared to about a 13% run rate. A lot of that was driven between just those two things that she alluded to. So I think that's going to blend back up if I was modeling it in, Kevin.

Okay. And just want to confirm a couple of things too, Dionne. I think in your prepared remarks, you said payroll tax hit gross margin by 40 basis points this quarter? Is that right?

Correct.

And what was the healthcare cost or the medical claims? Did you quantify that?

I didn't quantify it in my prepared remarks. But that was large claims that were right below $1 million as well for the current quarter.

Got you. And then last question on the financial stuff is, what's your current availability on your credit facility, in case you guys do look at doing some bigger deals?

On our current credit facility, we have about $165 million, but in discussions about that as well.

Okay. Sounds good. Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Keith.

Okay, well, with no further questions, then thank you for joining us again and for listening on our call this morning. And as always, any questions that come up between calls, please feel free to reach out to us. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.