The Ensign Group, Inc. (ENSG) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Ensign Group Incorporated Second Quarter Fiscal Year 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, this conference is being recorded. I’d like to introduce your host for today’s conference Mr. Chad Keetch, Executive Vice President. Sir, you may begin.

Thank you, Vince. Welcome everyone and thank you for joining us today. We filed our 10-Q and accompanying press release yesterday. All of these announcements are available on Investor Relations section of our website at www.ensigngroup.net. A reply of this call will also be available on our website until 05:00 p.m. Pacific on Friday, August 28, 2015. Before we begin, I have a few housekeeping matters. First, any forward looking statements made today are based on management’s current expectations, assumptions, and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by Federal Securities Laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, any operation we mention today is operated by a separate independent operating subsidiary that has its own management, employees and assets. References to the consolidated company and its assets and activities, as well as the use of the terms we, us, our, and similar verbiage are not meant to imply that The Ensign Group Inc, has direct operating assets, employees, or revenue, or that any of the various operations, the service center, real estate subsidiaries, or our captive insurance subsidiaries are operated by the same entity. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business. But they should not be relied upon to the exclusion of GAAP results. A GAAP to non-GAAP reconciliation is available on yesterday’s press release and in the 10-Q. And with that, I’ll turn the call over to Christopher Christensen, our President and CEO. Christopher?

Thanks Chad. Good morning everyone. We’re pleased to report that we just finished a record quarter on almost every front. Our organizations leaders and their team achieved new heights on both clinical and financial performance during the quarter. Each of our business segments gained strength as many of our newly acquired and transitioning operations outpaced even are fairly aggressive projections. The success is due to the talent and hard work of our incredible local leaders and their teams. Results like these are only possible because of our disciplined focus on the fundamentals. We continue recruit, train and support the best local leaders in the business and we’re confident that they will continue to deliver industry leading performance both financial and clinical for our patients, our communities and our shareholders in all our new and existing markets. As we stated last quarter 2014 was the largest acquisition year in the organization’s history and we’ve already transition 49 new operation so far in 2015 making this year our largest growth year ever. It’s periods like this one with all the opportunities that growth can bring where Ensign’s bottom-up first who then what leadership paradigm really shines. As of August 4, 2015 we have 60 operations in our recently acquired bucket which is the highest number of operations in that bucket in our history. In addition we’ve acquired 14 home health and hospice agencies and open to the required 10 urgent care clinic since January, 2014. Now more than ever before our recent growth puts us in a very strong position for significant organic growth potential as our recently acquired and transitioning operations start to mature through 2015 and 2016 and beyond. Remember because most of the operations we acquire will take time to transition clinically and financially, it takes several quarters for those new operations to be meaningfully accretive, although some of our recent acquisitions have included strong performance out of the gate, our recent results are mostly due to the performance in our more matured facilities leaving us with significant organic growth opportunities across all our operational buckets. We are pleased that our balance sheet remains strong leaving ample liquidity to facilitate additional growth that we expect to take a short breather as we focus on our newest operations our pipeline remains strong. As Chad will discuss in a minute we continue to actively seek several transactions to acquire real estate and at least healthcare related operation. With operating results running ahead of schedule improving reimbursements taking effect later this year in key states and the record number of acquisitions this quarter we’re raising our previously announced guidance. In our release yesterday we increased 2015 annual revenue guidance to a range of 1.29 to1.315 billion with net income guidance to a range of 65.8 million to 68 million. We also increased our previous guidance on earnings per diluted share of $2.47 to $2.56 for the year even after including the otherwise dilutive effect of the spinoff completed in June of last year and the issuance of 2.7 million additional shares of Ensign stock we completed in the first quarter this year. Other key quarter over quarter numbers include consolidated adjusted EBITDAR was 50.3 million an increase of 33.8% consolidated adjusted net income climbed 27.5% to 15.8 million while adjusted earnings per share outpaced the prior year quarter at $0.60 per share. Same-store skilled mix revenue grew by 159 basis points to 53.9% due to an increase in both Medicare and managed care days of 288 and 796 basis points respectively. Cornerstone Healthcare, Inc., our home health and hospice subsidiary, grew its revenue by $7.2 million, an increase of 57% and adjusted EBITDA by 40.3% to $3.3 million and consolidated revenues for the quarter were up 24.4% to $311.1 million. While these results are impressive they're only made possible because of the consistent and longstanding performance of our caregivers at each of our operations. The biggest factor by far and achieving these results has been and will forever be because of the transformative effect of compassionate service that occurs every day patient-by-patient, resident-by-resident across our organization. While there are many tangible and intangible metrics that we used to demonstrate the high quality outcomes to the healthcare communities we serve, we're also pleased to report the number of skilled nursing operations achieving 4 and 5 start ratings has improved again. As of the end of quarter, 72 of these operations carry that designation. These improvements continue despite the recent changes in CMS star rating system that made it more difficult to achieve 4 and 5 start ratings and we remember most of the facilities we acquired are 1 and 2 start facilities at the time that we acquired them. We expect to see continued improvements as our leaders and caregivers strive to be best providers of both acute care services in all of our markets. Before we turn the time to Suzanne to discuss more about our financial performance, I'd like to turn the time over to Chad to discuss our recent growth. Chad?

Thank you, Christopher. We have seen record growth so far this year and the second quarter in cents we acquired 14 skilled nursing operations, 23 assisted and independent living operations, 1 home health business, 1 hospice agency and 1 home care business. Those include the following. In St. George, Utah, Coral Desert Rehabilitation and Care has 60-bed all-private transitional care operation. And Panorama City, California the underlying real estate of Panorama Gardner's nursing and rehabilitation center of a 143 bed skilled nursing operation, that have been operated by an Ensign subsidiary since September 2000 under a lease. In Idaho, Heritage Assisted Living of Boise, a 100-unit assisted living operation. Heritage Assisted Living in Twin Falls assembly at unit living operation and Woodstone assisted level, a 85 units assisted living operation. In Utah, Wasatch Healthcare and Rehabilitation, a 63-bed skilled nursing operation and St. George Rehabilitation, a 130-bed skilled nursing operation. In Bainbridge Island, Washington, Bainbridge Island Health and Rehabilitation, a 69-bed skilled nursing operation and St. George, Utah, Gentle Touch home care, a private home care business. In San Jose, California, Managed Care at Home a Medicare and Medi-Cal certified home health agency. In Whittier, California, the underlying ground lease for The Orchard Post-Acute Care Center, a 162-bed skilled nursing facility that had been operated by an Ensign subsidiary since September 2006 under a lease. In Arizona, seven skilled nursing operations with a total of 730 skilled nursing beds and three independent and assisted living operations with a total of 784 units, all under a new long-term master lease; making enzymes Arizona based on portfolio subsidiary Bandera Healthcare Inc one of the largest providers of the complete continuum of post-acute healthcare services in the state of Arizona. In Olympia, Washington, Olympia Transitional Care and Rehabilitation, a 125-bed skilled nursing operations; in Westlake Village, California, Buena Vista Hospice, a Medicare and Medi-Cal certified hospice agency serving the Ventura County area. In Wisconsin 15-assisted living operations with the total of 761 units under a long-term master lease with an options to purchase the real estate and lastly in Orange and Whittier, California, two assisted living operations with a total of 188 units under a long-term lease. These acquisitions bring Ensign's growing portfolio to 178 healthcare facilities, 27 of which are owned, 13 hospice agencies, 14 home health agencies, three home care operations and 17 urgent care clinics across 12 states for a total of 225 independent healthcare operations. As Christopher mentioned earlier, we continue to see a very healthy pipeline for growth across all the states in which we operate. We are also considering additional opportunities in a few new markets, while we expect to take a much needed breather over the next few months, we do expect some mild growth in the third and fourth quarters. We continue to work with small owner operators, mid-size regional operators, national operators and healthcare REITs to source additional opportunities across all our geographies and we continue to be a buyer of choice. As our footprint continues to expand so does our ability to grow. We remain very excited about the many growth opportunities we see before us and believe that our unique approach to growth continues to be scalable and because of the many transitions we’ve completed, we have the best and most experience transition teams in the business. What distinguishes Ensign from so many other buyers including real estate investors is our field driven transition strategy. This army of leaders includes our clinical and operational leaders and professionals from information technology, human resources, benefits, compliance, construction management, accounts payable, accounts receivable, legal and contracts. It’s because of their tireless efforts and their dedication to our mission that we are able to grow the way we have been able to grow while maintaining our performance. What makes this growth possible is the personal commitment of each and every one of these individuals both in the field and in the service center. And with that I’ll hand it back to Christopher.

Thanks Chad, it's really been a remarkable period of growth for our organization. We’re excited for the new opportunity this growth provides for so many. However, I want to emphasize today that while our team of expert operators and clinicians across the organization have been successfully transitioning dozens of new operations. They’ve simultaneously been achieving record improvements in our same-store operations. As we discussed before, our consistent growth throughout our history has shaped our operating strategy and the day-to-day lives of our operators. And even though our growth might appear from the outside more than normal, our local leaders and clusters have become accustomed to maintaining a dual focus on transitioning our newly acquired facilities, while continuing to achieve clinical and financial excellence in our transitions and same-store operations. As our leadership and our footprint expands so does our ability to grow without over burdening any particular corner of the organization and because of our local leaders are an integral part of our decision making process on every single acquisition, we’re confident that with the careful guidance of our clusters and operators that we will successfully integrate each of these new operations into the Ensign family. We get regular questions about what we are doing to produce results like this quarter’s. While some things are universal like growing census or increasing acuity across in operations patient based, how that census is growing and how that acuity is increase very widely from market-to-market, operation-to-operation and leader-to-leader. That’s why Ensign’s local leadership model is so critical in times like these. As always let me share a few examples, we Whittier Hills Healthcare center located in Whittier, California has seen remarkable growth under the leadership of Executive Director, Robert Gray and Director of Nursing Services, Ofelia Gomez. Their remarkable team including physicians and therapist have transform Whittier Hills in one of the most trusted providers of post-acute services in that greater LA market. Due to their consistent outcomes through state-of-the-art services, they have developed a tremendous reputation for short-term rehabilitation services and have become a go to partner for most of the key manage care providers in their market. That care improves and people return home quickly demand for their services has sky rocked. As a result, Whittier Hills have seen a sharp spike in managed care and Medicare days which were up 63% and 15% respectively over last year. Additionally, their skilled mix revenue percentage was up an impressive 715 basis points with total revenues increasing by 21%. This is led to an impressive 79% increase in EBITDAR quarter-over-quarter all while improving clinical results and patients outcomes in dramatic fashion. Similarly, we also saw some impressive performance from the team of Sunview Health and Rehab Center, in Youngtown, Arizona. CEO, Sean Hill and COO [indiscernible] have partnered with the medical community in vital solution for sub-acute and post-acute services in Western Phoenix. With the focus on post-acute continuing performance, readmission process length for stay management and sophisticated care pathways, the Sunview team has made a true difference in the life of their residence. Likewise Sunview has continued to build up their impressive suite of sub-acute services enabling them to take more critical patients thus providing solutions for their acute partners. Accordingly, sub-acute days have improved for the quarter by an incredible 23% with total occupancy growing by 174 basis points. In addition total skill mix grew by 625 basis points to 71% of total revenues and total EBITDAR grew by over 45%, all compared to the same quarter last year. Lastly, Elite Home Health and Hospice posted outstanding growth under the leadership of Executive Director Brian Wayman and Director of Nursing Sherry Osborne [ph]. Elite’s top line revenue grew by 27% and EBITDA increased by 43% from the comparable period in 2014. This growth was driven by the expanded use of Elite’s Hospice services. As it became the Hospice of choice for many of referral sources. Elite’s total census grew by 68% and its hospice revenue grew by 69% over the same period of last year, while Hospice has becoming an increasingly important contributor to Elite’s success, the agencies larger home health service line has also continued to experience strong growth and operational improvement. Average daily home health census increased 8.4% and home health revenue increased 18%. Through its strong quarter and commitment to clinical excellence, Elite has become a key resource to the healthcare communities of Eastern Washington and Northern Idaho. There really are dozens more stories like this and I can't stress enough the importance of having highly confident and empowered local leaders of the helm of every single operation. As wonderful these examples are in each case we would emphasize that these operations are far from mature and significant organic upside exists not only in our recently acquired and transitioning operations but also in our more matured operations most of which continue to grow and perform and outperformed months after months and year after year. And with that I'll turn the time over Suzanne to provide more detail on our financial performance and then we'll open it up for questions. Suzanne?

Thank you, Christopher, and good morning everyone. Detailed financials for the second quarter are contained in our 10-Q and Press Release filed yesterday. Highlights for the quarter ended June 30, 2015, as compared to the quarter ended June 30, 2014, included record quarterly revenues of $311.1 million on a GAAP basis, a 24.4% increase. Same-store revenues increased $11.5 million or 5.4%. Same-store skilled mixed revenue increased 159 basis points to 53.9%. Same-store Medicare days increased 288 basis points and same store managed care days increase 796 basis points which resulted in overall diluted adjusted earnings per share of $0.60. Other key data cash and cash equivalents were $50.6 million at June 30, and we have $100 million of availability on our $150 million revolving line of credit as of our filing. We are increasing our annual 2015 revenue guidance to a range of $1.29 billion to $1.315 billion, with an adjusted net income guidance to a range of $65.8 million to $68 million. We are also increasing the annual diluted earnings per share guidance of $2.47 to $2.56, which includes the issuance of 2.7 million additional shares in February of this year. These projections are based on diluted weighted average common shares outstanding of approximately $26.6 million. The exclusion of acquisition-related cost and amortization cost related to intangible assets acquired; the exclusion of operational losses associated with developing operations, which have yet achieved the stability; the exclusion of cost incurred related to a new HR and payroll system implementation. The exclusion of breakup fee, net of cost received in connection with the public auction; the inclusion of anticipated Medicare and Medicaid reimbursement rates net of provider taxes, our tax rate of approximately 38.5%, the exclusion of stock-based compensation and the inclusion of closed acquisitions. In giving this number I'd like to remind you again that our business is not symmetrical from quarter-to-quarter. This was largely attributable to variation in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activity, variations in insurance accruals related to our self-insurance program and other factors. We'll be happy to answer any specific questions you may have later in the call, and now, I'll turn it back to Christopher.

Thanks, Suzanne. And thanks to all of you who have joined us today. We hope this discussion is helpful. As always, I want to conclude by thanking our outstanding partners in the field, at the service center and across the entire organization for their continued efforts to make Ensign the best organization in the healthcare sector. We'd also like to thank our shareholders again for your support and trusting confidence. Turn the time now over to Q&A portion of the call and before we do that I guess I'd like to introduce Barry Port who is our Chief Operating Officer and who is also available to answer any questions and I guess Vince if you want to instruct everyone on how we handle Q&A.

Yes sir. [Operator Instructions] Our first question comes from the line Ryan Halsted with Wells Fargo. Your line is open.

So certainly a very active year with acquisitions, so congratulations on that. My first question on a more recent yield that you announced clearly more of a focus on assisted living and independent living communities, so I'm just curios if there is anything changing in the market in terms of how you are approaching acquisitions, that sort of lead you to look at those deals as opposed to traditional skilled nursing facility deals?

Ryan, we are constantly looking for the right price deals in the right markets. We have sprinkled in assisted living constantly, actually over the last decade and it just so happened that the right price deal in the right market where we had leadership that wanted to be involved or leadership that was already involved in this acquisition just came together on a couple of different fronts. So you’ll notice we had not only the acquisition and Wisconsin, but almost as many units in Arizona even though fewer facilities. But they come when they come and when they’re at the right price and we have the right talent and it make sense that we grow, we do it. It’s not the other way around. We didn’t get together and say, hey, let’s just go get some Assisted Living Operations, even it may looks that way.

Okay. But I guess just sticking with this line of question as far as the opportunity in those markets I mean do you see this a way, as a platform for expanding within that market I guess I’m specifically referring to Wisconsin which I realized you had some presence there, but now certainly a much greater presence there. What’s the market opportunity there across the entire spectrum of services you offer?

That’s a good point; you’re making the fun better than I am. It is a great platform and it will give us much more -- much better vision into these markets from an assisted living standpoint it’s not the only reason. We’re excited about these assisted living operations, we think was a great not only platform for Wisconsin, but great facilities in and off themselves even if we didn’t acquire anything else. But you are right, we will have much better visibility into Wisconsin than we’ve had in the past because these are spread throughout the state and we like that sail up.

That’s great. Maybe just a last one on that point a technical question. So there is some leases associated with these how should we think about the lease expense? Are they operating leases and guidance on?

Yes, definitely they’re operating leases, they’re I think -- you would think just like every other Assisted Living that we’ve brought into it, there are relatively good rates. We did pay some key money upfront that will be amortized over the lease.

Ryan, this is Chad I know we noted this, but acquisition in Wisconsin, that leads actually has a purchase option for all the real estate for all 15 facilities.

Okay. Then last one from me. How should we or how are you guys viewing the growth profile of the home health and hospice segment. Is it still predominately an acquisition story or judging by the increased disclosure and the strong EBITDA growth, is there a pretty good opportunity for organic growth, is that kind of how you are looking at that business now for some more material organic growth in the near term?

It’s not so just similar I worry that somehow people might think that we’re now taking nothing but performing assets on the skilled side. The vast majority of what we’re taking in home health and hospice and in skilled nursing and in assisted living are still underperforming assets. So to answer your question directly we think we have significant organic upside in our Cornerstone portfolio. We still will take acquisitions. We still will every once in a while buy the right performing operations. But most of these that we’re taking are either underdeveloped or underperforming assets that just need the change their quality of services or their reputation or in some cases just some of the market efforts that they’ve made and we think it is probably more of an organic growth story than it is in acquisitional growth story, but you will still see us make acquisitions.

Thank you. Our next question comes from Elizabeth Moran of Stifel. Your line is open.

Hi. This is actually Elizabeth calling for Chad Vanacore, with the Medicare rate increase and move for 2016 finalized, do you have any early thoughts on how the new rules on reporting in quality metrics will impacted the business?

Yes, I can take that one. We have been working on a lot of the quality metrics that they’ve rolled out for a long time already. So we feel really good about what they’re rolling out. Obviously we don’t get measures from the reimbursement impact on this until 2018, but we feel really good about this. We have systems in place and have been working on them for a long-time.

So balanced turned opportunity rather than challenge for you?

Correct.

Okay. And then just more broadly, I know you spoke about the rent impact from the Wisconsin acquisition, but more broadly on, in terms of all the acquisitions in the prior leases how should we be thinking about impact to your rent and maybe DNA also in the second half.

So, all of the acquisitions that we have taken are all operating leases. And so we included in operating with the rent line and that will be included in depreciation or amortization line.

And no quantifying that at this point?

No, not this time.

Okay and one just last one, since same facilities skills improves, show mix improves substantially for this quarter year-over-year do you foresee that sort of rate of improvement continuing or should we expect in moderation in the future?

That's a good question, if you look at as we have substantial growth it could be more difficult I suppose next year but remember we have a large number facilities that will move into the same-store bucket and will be early in that same-store bucket when you’re comparing next year to this year. And so I think there are quarter where we do as well as we wish we would, but I don't see any slowing given what we see early in third quarter and given some of the efforts of the resources that are working on the field and more importantly the folks that are in the facility. So I guess the shorter answer to your question is that we feel good about the pace.

Thank you. Our next question comes from Frank Morgan of RBC Capital Markets. Your line is open.

Good morning, you've touched on the Medicare environment and Medicare way outlook, but just curious as you look around some of you key states how do see the Medicaid environment shaping up and lot of the states that you operate?

Frank, this is Barry. I think pretty similar to what we saw last year, most of it will happen towards the end of this year and from what see so far some states aren't' finalized with legislative sessions and finalizing budgets, but it looks pretty similar to what we saw last year and pretty much either slight increases or descent increases in most states.

We really phased with what's out there right now.

So for our purposes maybe flat to up 1% of the Medicaid side?

I think that would on the low side Frank for our states. I think for the states that we're in because of what we're seeing, where we dominant I think it's probably more closer to 2%.

Okay and in term of those states that are the bigger ones that matter could you maybe call out some of those in the kind of the rates you're seeing specifically?

Yes, it's time to meet again, nothing is really finalized. California has announced kind of preliminary rate which looks higher than it actually is being when it nets out, but it's in that range that Christopher mentioned from what we're hearing Texas where have large presence and Arizona similar.

As well as Utah.

Yes.

Those are four biggest states by far and that's -- those are four that impact us the most and they have all announced positive rate increases.

Got to you and on the subject of Medicare maybe just a thought about this comprehensive care joint replacement model thing a lot of people are talking about now, is something you participate you have faculties involved in that and if so what do you think about it?

Obviously, we've talked about before that we're participating in the value base purchasing model, we actually ourselves in model three. And so the joint replacement run by the hospitals will just pair really well with what we've saw going on in some of the systems and processes and procedures that we put in place, as well as the people that we have in place aligned and I think that there is a still questions on who will control some of these patients between the two models, but we're excited about it and we think it really goes well with the BPCI model that we have to the extent that we have a little bit more control over the patient.

And Frank just as far as strategically how we're aligning ourselves, we're adding expertise and resources to make sure we gear ourselves towards a value based reimbursement environment rather than the one that we're currently seeing ourselves in, so this is a path of progression that we see ourselves moving towards.

Thank you. Our next question comes from the Dana Hanbly of Stephens. Your line is open.

Can you just -- how do define what you're calling a breather?

Well, July and August we're pretty significant acquisition monthly. I guess you won't see a repeat of those this year. But there are some other deals that are great opportunities for us and so I don't know if I can say a number, but you will still see us make a handful of deals.

Okay but this wasn't a situation where you've done a bunch of deal and you kind step back and said either one, we're not ready for that -- we have invested enough to be ready for this or something happened that triggered the gene necessitate that you just kind put everything on hold?

No that's a great point of clarification, absolutely not, it's just it does take some work on the deal side and on the operational side and we advanced these things and push them through and got them done and now it's time to work on the other one, but it will take a little while.

I’ll just sort of add to that, I mean -- we’re always very cognizant of the effort that goes into each and every one of these transitions and typically we’ll do what we can to kind of spread it out a little bit and deal close when they close and we just happen to have lot happen in July and August. But the stuff that we kind of have remaining is just kind of a matter of timing.

Well it also doesn’t mean that we’re turning down deals that we would otherwise do. I mean I think it's just there is a good window right now that allows us to transition these effectively.

And then Suzanne the cash flow, I think you guys generated over 60 million in EBITDA so far this year, operating cash was about 6 million, 7 million so far. Should we see that pick up pretty meaningfully in the second half of the year?

Yes, one of the things that slows us when we have the new acquisition, as you might recall that some of the cash is hung up in accounts receivable, until we can actually collect this and as our license gets them clear. So we’re going to have that because we’ve had pretty large acquisitions that’s going to continue on for the next little while takes about six to nine months for that cash flow to catch up with us from those acquisitions that you’ll continue to see, the receivables build for a while and then we’ll get some relief at the beginning of next year, later this year.

And then last one for me, you said there is 100 million available on the revolver, was that as of the quarter end or is that as of now?

As of the filing date, as of now.

Thank you. At this time there is no other questions in queue. I’d like to turn it back to management for any closing remarks.

Again we appreciate everybody’s time and thank you Vince for managing this call.