The Ensign Group, Inc. (ENSG) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to The Ensign Group Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Chad Keetch. Sir, you may begin.

Thank you, Kayley. Welcome, everyone and thank you for joining us today. We filed our earnings press release yesterday, which can be found on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available on our website until 5 p.m. Pacific on Friday, September 2, 2016. Before we begin, I have a few formalities to cover. 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 may 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 terms we, us, our and similar verbiage are not meant to imply that The Ensign Group has direct operating assets, employees or revenue or that any of the various operations, the service center, the real estate subsidiaries or our captive insurance subsidiary 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 reports. A GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available on our Form 10-Q. And with that, I will turn the call to Christopher Christensen, our President and CEO.

Thanks, Chad. Good morning, everyone. We are pleased to report that we completed the second quarter with an adjusted earnings per share of $0.33, which met consensus estimates. Here are a few highlights from the quarter. Consolidated GAAP EBITDAR for the quarter was $60.3 million, an increase of 27.2% over the prior year quarter and consolidated adjusted EBITDAR was $65.5 million, an increase of 30.3% over the prior year quarter. Transitioning skilled revenue mix increased by 130 basis points over the prior year quarter to 55.9% and same-store skilled mix days increased by 35 basis points over the prior quarter to 30.4%. Same-store revenue for all segments grew by 6.9% over the prior year quarter and same-store TSA revenue grew by 6.3% over the prior year quarter. Transitioning revenue for all segments grew by 6.3% over the prior year quarter and transitioning TSA revenue grew by 5.8% over the prior year quarter. Cornerstone Healthcare, our home health and hospice subsidiary, grew its segment income by 45.2% over the prior year quarter and revenue by 8.5% – sorry, by $8.5 million to $28.5 million for the quarter, an increase of 42.9% over the prior year quarter. And finally, consolidated GAAP revenues for the quarter were up $99.5 million or 32% over the prior year quarter to $410.5 million. And consolidated adjusted revenues for the quarter were up $92.5 million or 30.4% over the prior year quarter to $396.6 million. While we met consensus on an adjusted basis, we want to acknowledge that our results so far this year have not taken full advantage of the opportunities that exist across our portfolio. As most of you know, our consistent success is seldom the product of any one thing, but rather reflects the aggregate effect of dozens of small things across the organization. Likewise, the softness in this quarter’s results has resulted from a number of small deficiencies rather than any one big headwind. As I will talk about in a few minutes, we believe these challenges, which are result of things we didn’t do are surmountable over time. Our outstanding field leaders are fully engaged on all fronts to identify and overcome weakness wherever it occurs. Because of them, we were in confident that Ensign’s future both near-term and long is very bright. While we were very pleased with the contribution of some of our recently acquired operations, the majority of our newer operations continue to have significant upside. After completing the largest acquisition in our history during the quarter, we now have 72 recently acquired and 29 transitioning skilled nursing and assisted living operations, combining for 49% of Ensign’s current portfolio as of July 1 of this year. With substantially more organic growth potential in our existing operations than at any other time in our organization’s history, after increasing our annual earnings guidance last quarter, we determine that some of the performance we expected will take a few quarters longer to realize than we initially anticipated. As we continue to absorb a significant number of new operations across our organization, our focus has been to take the necessary steps to set these operations up for success over the long-term. As a result of this delivered effort to ensure a proper transition for our new operations, some of the performance we expected to occur in the latter part of 2016 will carryover into 2017. Therefore, we are revising our 2016 adjusted earnings guidance to $1.35 to $1.42 per diluted share and we are reaffirming our 2016 revenue guidance of $1.625 billion to $1.66 billion. In order to provide our investors with more clarity regarding our organic growth expectations, we are also announcing 2017 guidance – revenue guidance of $1.818 billion to $1.842 billion and our adjusted annual earnings per diluted share of $1.62 to $1.70. We hope that this guidance will demonstrate how excited we are about the growth we see on the horizon. As we explained in the recent past, new acquisitions have a dilutive effect on the momentum of our same-store results. And given the sheer volume of acquisitions completed over the last 18 months, we have experienced some softness in same-store results as our operational leaders and resources have been focused on transitioning so many newly acquired operations. Whenever we see an unusual surge in growth over a short period of time, we naturally expect a temporary impact of our short-term earnings. However, we have always taken the long view of our business and we are excited about the enormous opportunity to unlock the inherent value in our existing portfolio. We remain financially sound, with one of the lowest debt ratios and strongest balance sheets in the industry, a solid cash position and very manageable real estate costs. Even after the most acquisitive years in our history, Ensign’s rent adjusted net debt to EBITDA ratio after capitalizing our leases at 8x is still only 3.9x as of quarter end. And as EBITDAR and our cash flow from our newly acquired operations catch up, we are committed to maintain our leverage at very conservative levels. Before we provide more details on our financial performance, I would like Chad to give us some additional detail on our acquisition pipeline. Chad?

Thank you, Christopher. During the quarter, the company announced the acquisition of 18 skilled nursing operations that were previously operated by affiliates of Legend Healthcare. With the addition of the Legend Healthcare operations, we added 2,177 skilled nursing beds across 18 operations. The Legend portfolio largely consists of newer skilled nursing assets with the median age of 8 years, with 11 of the 18 operations opening in just the last 8 years. In addition, our operating subsidiaries have also agreed to sublease four newly constructed skilled nursing facilities from Legend, one of which is open and operating and three of which are in various stages of development and are expected to be completed in 2016 or early 2017. All four of the subleased facilities are expected to be purchased by NHI approximately one year following the completion of construction and will be added to our NHI mater lease upon the consummation of the purchase by NHI. We also acquired the operations and real estate of Riverbend Post Acute Rehabilitation, a 152-bed skilled nursing facility in Kansas City, Kansas. The Riverbend acquisition was effective July 1, 2016 and included the underlying real estate. Riverbend, which had been previously operated by a nonprofit organization, adds to our growing presence in a market where we have a strong cluster of Healthcare Resorts and adds Medicaid beds to our short-term transitional care operations in Kansas. We were very excited to open additional Healthcare Resorts during the quarter, bringing our total number of Healthcare Resorts to 6, with 3 in the Kansas City market, 2 in Texas and 1 in Colorado. We also expect to open several more in Texas, Kansas and Colorado in 2016 and 2017. These newly constructed healthcare campuses add an important strategic service offering and will complement our growing number of healthcare operations in several markets. These state-of-the-art resorts feature private transitional care beds and private assisted leaving suites. During the quarter Cornerstone, our home health and hospice holding company, completed the acquisition of hospice for Wright County, a county owned provider in Clarion, Iowa. Cornerstone continues to seek opportunities to build our service continuum in markets where we have a post acute presence. These additions bring Ensign’s growing portfolio to 208 healthcare operations, 35 of which are owned, 16 hospice agencies, 16 home health agencies, three homecare businesses and 14 urgent care clinics across 14 states. We continue to actively seek transactions to acquire real estate and to lease, both well performing and struggling skilled nursing assisted living and other healthcare related businesses in new and existing markets. The pipeline is very healthy. However, the pricing expectations for many sellers have been increasing over the past few months. As a result, our local operators have been passing on most of the recent opportunities we have been seeing. Many of the deals we have been evaluating include portions of larger portfolios, which tend to be competitive processes. Multiples for operations with higher skilled mix have been creeping upwards and many sellers that are looking to exit the business or to lease certain geographies have been pointing to higher multiples for assets that, in our view are not comparable and don’t justify the same multiples. As we have shown throughout our history, we will remain disciplined in our acquisition strategy as we follow a contrarian pathway to growth. When prices and competition increase, we turn our focus to the enormous organic growth potential within our existing portfolio. As Christopher mentioned earlier, the organic growth potential within our portfolio has never been greater. We don’t grow for growth sake and do not have artificial or arbitrary growth goals. We grow when it make sense to grow. Given the noise around value based payment models, narrowing networks and other changes on the horizon, we expect to continue to see many opportunities over the next few months and years as – and we also expect pricing to improve as smaller and regional operators seek to exit. In the meantime, thanks to the support of our bank group and the health of our balance sheet, we have ample liquidity available to us to grow in a significant way and we will remain patient as we see these changes result in many opportunities in both new and existing markets. And with that, I will hand it back to Christopher.

Thanks Chad. I also want to reiterate a few points that Chad made and remind you that since we went public almost 9 years ago, we have maintained a consistent double-digit earnings growth rate. The source for that growth has varied over time based of the volume of acquisitions. In large growth periods, newly acquired operations have represented a larger percentage of earnings growth. On the other hand, in years where we take a step back from acquisitions to focus on organic growth, same-store operations represent a much higher percentage of earnings growth. Given the number of newly acquired operations in our existing portfolio, we expect a larger percentage of our 2016 and 2017 earnings growth to come from our recently acquired operations. And we remind you that even with the differences in the number of acquisitions we have made throughout our history, our consolidated growth rate has remained steady. As I mentioned earlier, our challenges this quarter did not stem from any one thing. Included in our adjusted quarterly results are the following; A slower than expected transition of the Legend operations in several of our other newly acquired operations; Second, a poorly executed implementation of labor management system; Third, typically higher bad debt on newly acquired operations, which was exacerbated by the sheer volume of transitions; Fourth, marked softness in occupancy in our same-store which was only partially offset by a nice tick up for the managed care days; And last, sluggish performance of our operations in our three newer states. I will address each of these things, all of which combined to impact the quarter. As although you have been following us know, the Legend acquisition is the largest single transaction we have completed to-date and that acquisition was on the heels of our largest growth year in our history in 2015. While we are very excited about the potential inherent in our entire portfolio, due to the delivered efforts I mentioned earlier, the transition of Legend and our other newly acquired operations is taking longer than we projected. More specifically, our training programs and our quality initiatives, now more than ever before, must be at the highest levels to ensure the highest quality healthcare outcomes possible. As hospital systems, physician groups, managed care organizations and our patients focus more and more and quality outcomes, we have invested more time and money earlier in the transition process than we have in the past in order to change the reputation that we inherit. Attracting and retaining the best talent and providing them with the best resources available requires a higher level of sophistication and more human capital than ever before. We have learned over and over again, that regardless of whether CMS start rating or other quality measure is the result of the actions of the prior owner, it is critical that we pay more and more attention to survey outcomes and CMS start ratings immediately after we take control. That investment and focus may have a short-term impact on our results, but it sets us up for success over the long haul. We are confident that we are headed in the right direction and the steps we have been taking will lead to better performance across a much longer period of time. In addition, while we are closing the Legend acquisition, we were in the process of simultaneously completing an organization wide implementation of a new human resources system. We are excited about the new system, but the timing and execution of the implementation, which was my mistake, prove to be a bigger distraction to our transition efforts than I predicted. To be clear, our local operators rely heavily on the existence of properly managed labor costs, which is by far our biggest expense. As a result, we saw a direct impact in our cost of services in the latter half of the second quarter and the first part of the current quarter. The combined effect of our largest acquisition and this complicated implementation made it more difficult for our local leaders to make appropriate operational adjustments. In addition, we saw some marked softness in occupancy and especially skilled mix in our same-store, which was only partially offset by a nice tick-upward in managed care days. The decline was in part caused by many of our field leaders’ involvement in our expanding newly acquired and transitioning portfolio. We would like to emphasize that we do not feel this is due to any single industry change and either payment model or payer shift, but rather it was caused by our own distraction in dilution of focus in this area. But we are happy to note that both occupancy and skilled mix trended up in July. We have many reasons to be positive about the second half of the year and particularly, the fourth quarter, which is when we historically have our best occupancy and mix. We have seen a slight increase in our bad debt. With every new operation we acquire, there is significant shift towards the transition to our procedures in order to improve the quality of our collections. These changes often include a shift to a sophisticated electronic medical record system and compliance driven documentation. Each change represents a significant opportunity for improvement in our new operations, but it also requires new leadership in business office manage to learn a different system. Prior to 2016, this has had a very minor impact, but given the sheer volume of collections for our new operations, the cumulative impact has exacerbated the totals. Please note that our same-store bad debt continues to decline. Again, our same-store bad debt continues to decline. As such, we expect these bad debt levels to trend towards our same-store averages as each of these operations mature in the rest of 2016 and through 2017. Over the past few quarters, we have also grown in a few of our newer states Wisconsin, South Carolina and Kansas. Each time we enter into a new state, it takes extra effort and more time to gain the trust of the healthcare community that we are serving. In addition, we are still learning about the state’s specific programs related to reimbursement, attracting talent and navigating a regulatory environment. The short-term dilution we experienced in any new transition is magnified when we are in a new state. From a historical perspective, this is not a new phenomenon for us. However, adding 26 operations in three new states within a short period of time is unprecedented for us. We are seeing great progress in all three states since the latter part of the second quarter and we expect the trend to continue. Our local leadership teams across the organization in partnership with their colleagues at the service center are working relentlessly and tirelessly to integrate all of our newer operations. We are confident that these transitions are headed in the right direction. We have made significant progress in each of these areas and we anticipate that in 2017, we will begin to reap the benefits of all of our as we more fully transition them into healthy Ensign quality operations. We continue to be pleased with the progress that we are making with our managed care relationships as they continue to grow in most of our markets. As we discussed last quarter, we continue to embrace the shift in payer source as managed care becomes a larger part of our business. For example, managed care patient days grew by 5.4% for same-store and by 12.6% for transitioning operations during the quarter, a trend that has been consistent over many years for us. We continue to work closely with our managed care partners to establish exclusions for many items that are not excluded by Medicare, including certain high cost medications and certain specialty services. We are also able to offset some of the differences between Medicare and managed care with more predictable skilled volumes, which often allows us to manage our staffing needs with less volatility, thus helping us with more consistent labor patterns. In some cases, it takes time to see the increased volumes for managed care relationships and we expect to see that improve as our newly acquired and transitioning operations roll on to our managed care networks. Our local leaders have been and remain determined to become the preferred provider in all of our markets and we are seeing that occur systematically as they continue to drive superior outcomes. We are also pleased to report that we continue to improve clinically. During the quarter, we saw the number of skilled nursing operations achieving 4 and 5-star ratings improve again. As of the end of the quarter, 81 of those operations carried that designation, representing an increase of 11% since the beginning of the year. And remember that the vast majority of the facilities we acquire are 1 and 2-star facilities at the time that we acquire them. On the reimbursement front, CMS has announced a 2.4% market basket increase in Medicare rates for our skilled nursing operations and we also expect to see some increases in our rates for home health and hospice services. In addition, several of our operations continue to participate in various bundle payment programs and capitated rate programs across several markets. While the impact of these early stage programs is immaterial to our financial results, we have experienced the net positive from our participating bundles relative to the CMS target price. To be clear, we do not see the shift of value-based payment as anything but a positive based on our results so far. In the midst of the emerging value-based payment reimbursement environment, we have seen our leaders adapt in impressive fashion. We would like to highlight a couple of these operations that have seen significant improvements as our leaders have helped to shape the healthcare landscape in their respective communities. Wellington Rehab & Healthcare, one of our very first acquisitions in 1999, located in Temple, Texas, has partnered with one of the larger hospital networks in the state as part of the comprehensive joint replacement program. Led by Executive Director, Mike Muhlestein and Director of Nursing, Amy Long, this facility has created tight alignment with upstream and downstream providers. For these partnerships, the facility has worked for the hospitals that create patient education programs and other clinical programs, including hip and femur in order to create seamless and effective transitions while reducing readmissions and length of stay. As a result of these new programs, Wellington has seen a consistent increase in revenue, posting a 19% increase over the same quarter in 2015. Mike and Amy have worked hard to help Wellington achieve a CMS 5-star rating, becoming one of the preferred short-term rehabilitation providers in the county. Their staff of skilled nurses and therapists have worked relentlessly to improve outcomes in both of their operation’s reputation of quality. As a result of their focus, these outcomes have been rewarded in spite of competing in one of the more competitive healthcare markets in the country. Over the last year, they have seen skilled mix revenue increase from 40.2% in the second quarter of 2015 to 50.9% in the same quarter in 2016. Likewise, Medicare revenue has improved by 87%, leading to a 36% increase in net income quarter-over-quarter. In another mature operation, Monte Vista Hills Healthcare Center located in Pocatello, Idaho has seen some dramatic operational improvements as a result of similar partnerships with physician groups and ACOs. Led by Executive Director, Clayton South, and Director of Nursing Services, Cathy Richmond, the Monte Vista team has enhanced care systems in order to manage new types of diagnoses while also discharging them home safely. From dietary services to sophisticated therapy modalities, they cater to each patient’s needs, lending to some of the lowest readmission rates in the entire market. Because of these outcomes, this operation has seen an increase of skilled services as Medicare revenues have improved by 69.4% since the same quarter in 2015 and total revenue has climbed 21.6% overall. Clayton and Cathy have leveraged their CMS 5-star rating, their improved reputation and trusted relationships to drive significant improvements in skilled mix occupancy and overall occupancy, which were both up by 8% and 4%, respectively compared to the same period last year. Both of these examples demonstrate that even in an ever-changing Medicare environment, through the right partnerships and superior outcomes, we are able to drive significant organic improvements in all of our assets. Next, I would like to ask Suzanne to provide more detail on the company’s financial performance. Suzanne?

Thank you, Christopher and good morning everyone. Detailed financials for the quarter are contained in the 10-Q and press release filed yesterday. Highlights for the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015, included record quarter revenue of $410.5 million or 32% increase. Same-store revenues were up 6.3% and transitioning occupancy was up 1.4 percentage points to 73.3% and transitioning skilled mix days increased by 230 basis points, all of which resulted in GAAP diluted earnings per share of $0.22 and diluted adjusted earnings per share of $0.33. Other key metrics as of June 30, 2016 included cash and cash equivalents of $33.5 million, $263 million of availability on our $450 million credit facility with an accordion of $150 million and 32 un-levered real estate assets. As we discussed last quarter, after we acquired a skilled nursing facility, we experienced temporary delays in our ability to collect on our receivables. More specifically, following the transfer of ownership, we undergo a process with Medicare, Medicaid and managed care agencies to transfer the contracts and billing codes to an Ensign-affiliated account. This process results in delays in the receipt of payments for services provided at our recently acquired operations. As a result, we experienced temporary spikes in our accounts receivables, followed by each acquisition while we wait for the paperwork to be completed. This temporary delaying collection results in an increase in our accounts receivable and can result in negative free cash flows, which is consistent with what we would expect during periods of significant growth. And looking at the results, you may have noticed that we made a non-GAAP adjustment in connection with an insurance reserve related to a settlement on a general liability claim. The claim was related to an accident associated with property repairs and was not connected to healthcare operations. As Christopher mentioned, we are reaffirming our revenue guidance and adjusting our earnings guidance for 2016. We are projecting $1.625 billion to $1.66 billion in revenues and $1.35 to $1.42 per diluted share. The guidance includes diluted weighted average common shares outstanding of 52.6 million, the exclusion of acquisition-related costs and amortization, the exclusion of losses associated with the development of new operations and startup operations which area stabilized, the exclusion of cost associated with the system implementation and exclusions of the result of single closed facility, the inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax – tax rate of 38.5%, the exclusion of stock-based compensation, the exclusion of insurance reserve in connection with the settlement of the general liability claim and the inclusion of acquisitions closed to date. We are also announcing our 2017 earnings and revenue guidance. We are projecting $1.818 billion to $1.842 billion in revenues and $1.62 to $1.70 per diluted share. The 2017 guidance is based on diluted weighted average common shares outstanding of approximately $54.2 million and a 36% tax rate. Both of these reflect the adoption of a new accounting standard that will become effective in January of 2017, which effectively re-classes the tax benefit associated with stock compensation from the dilutive share calc into the tax rate. The exclusion of the acquisition-related cost and amortization related to patient-based intangibles, the exclusion of losses associated with the development of a new operation and startup operations, which are yet stabilized, the inclusion of anticipated Medicare and Medicaid reimbursement rates, net of provider tax, the exclusion of stock-based compensation and the inclusion of acquisitions closed to-date. In giving you these numbers, I would like to remind you again that our business is not symmetrical from quarter-to-quarter. This is largely attributable to variations in reimbursement systems, delays and changes in state budgets, seasonality and occupancy in skilled mix, the influence of our general economy and census and staffing, the short-term impact of our acquisition activities, variations and insurance accruals related to our self-insurance program and other factors. And with that, I will turn it back over to Christopher.

Thanks, Suzanne. We want to again thank you for joining us today and express our appreciation to our shareholders for their confidence and support, but also appreciative of our leaders and colleagues in the field, in the service center for making us better every day. We are very excited about the future and the organic growth potential that remains in our portfolio, but we do want to turn it over for question and answers to Kayley if you instruct the audience on how we will proceed.

[Operator Instructions] Our first question comes from the line of Seth Canetto with Stifel. Your line is open.

Hey, good morning.

Hey Seth.

First question, I know you guys said that the revised guidance isn’t attributable to one meaningful headwind, but is it fair to say that the two largest are the performance of the Legend portfolio and that acquisition as well as the new labor management system that you implemented?

I think those are two of a few, yes. I don’t know if I can say that those are the two major influences, but I am happy that both of those things are improving in a big way. But certainly, we anticipated a little bit better performance out of the gate from the Legend acquisition and we certainly did not expect as many challenges with the introduction of that system as we had.

Alright, great. And then just looking at the Legend portfolio acquisition, relative to Wisconsin, South Carolina and Kansas, are there any specific headwinds related just to Texas that you guys weren’t anticipating or really what’s leading to the underperformance?

No, this is Barry. I think it’s really just the sheer volume of acquisition at once. It really takes an army of leaders to get involved. And if we spend days and weeks away from their own operations to make sure that they are transitioned properly and have the right support manpower. And with 18 operations in a single state, it does create a tremendous amount of distraction for the existing same-store operators.

And one thing to note on the Legend operation, we did actually have access pretty early on, actually for the entire quarter and so it really didn’t just impact the latter half of the quarter. It did impact the – our whole quarter on the same-store front.

Alright. Thanks. And then you guys mentioned in your remarks that the pricing for [indiscernible] is getting more competitive and it sounds like you might slow your acquisition pace based on that, is that fair to assume and are you going as slow growth because of all the distractions with the new acquisitions or is it just that the environment is more challenging?

I think it’s both, but I let Chad say more.

Yes. It’s both, but certainly, we have seen a lot of acquisition opportunities that tend to be portions of larger portfolios and those are typically broker or bank-led opportunities that become competitive. And we just – when we get to pricing points that weren’t comfortable with, we bow out of those processes and we will remain disciplined as we talked about.

Alright, that’s it for me. Thanks a lot.

Thank you.

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

Good morning. I guess I would like to go back to that last question, maybe if I could just get some anecdotal examples of the kind of things that you were seeing, like say in Legend, related to what originally felt like what would be just some basic examples of those kinds of things that would slow that process down, I guess that would be my first question?

Okay. Are you talking about Legend, Frank?

Yes.

Yes. So I think Legend actually had some declining occupancy as we were transitioning those operations. We are seeing that reverse now, but obviously we didn’t anticipate that decline just as we are requiring them. And since we only had them for two months in the quarter, it’s – we are not – because we are not centrally focused and because we don’t think that works anyway, we – it’s very difficult to just change that momentum in a matter of 60 days. But actually, we still feel very good about those operations. We still feel very good about the acquisitions. They are newer facilities with healthy occupancy relative to Texas and strong skilled mix. And so we think that they are going to be tremendous acquisition for us. It’s just we have two months of evidence so far and they weren’t tremendous.

And I would just add, one of the things that they had that was – they had really great labor reports. And so, that combination of us switching those labor reports at the exact same time kind of left them, how they were used to looking at labor blind and so that had a huge impact on both specific operations because that’s was such a big transition.

Got it. And I guess that was actually going to be my next question, what was on the new labor system, is it fair to say that – I guess any more color you can provide on exactly what caused the issue, but also any more color just on how you feel where you are with it and having it work through the system now?

Well, as I said in the script Frank, I made a mistake and didn’t introduce it the way we introduce everything at Ensign. Thought it was going to be much more simple than it was, thought we could introduce it across the organization that everybody would love it and embrace it and it would be a huge help to everyone, and that was pretty naïve on my part. And so we didn’t have the reports we thought we were going to have out of the gate. We didn’t have the information we thought we were going to have. There were some, some glitches, too many to talk about probably now. But I am happy to say that it’s gotten much better. I wish I could say it’s perfect today. It’s not. But I think we learned a lesson. I think that it was a little bit of an expensive lesson. You probably hear us a little apologetic in this call just because the quarter was okay. It just could have been so much better, without some of the mistakes that we made. So I feel like it’s a good system, just wasn’t implemented well and wasn’t introduced well. And I think that we are getting through that now and we will be, I think during this quarter, we will be in good shape.

Just the closure there, you have implemented that now, it’s not like there is another wave coming, its everywhere, basically…?

Yes. I mean that was part of the thing is that we actually pulled the band-aid off and did a company wide all of our operations all at once. And so that – I mean that was part of the issue that when there was issue, there was issue across the entire organization.

Got it. Last one and I will get back in the queue. When you made a reference to how you are dealing with some of these – you see nothing but upside from some of the payment model changes and things you are involved here today. But are you involved in any kind of projects where today a lot of the BPCI – we are – we had other operators commenting that it’s in the short run, things like are actually hurting their occupancies and per DMs that they are incentivized to get people lot quicker. Their length of stays are going down even more, but they will eventually get bonus payments on the back end. What would you want in terms of your participation – maybe just explain and reinforce your comment that there is nothing but upside here? Thanks.

Well, let me just – one of the things we didn’t mention Frank, and you bring up a good point, that I hope is okay to talk about, is – one of the lessons we have learned, I think from this is that we do need to watch our long-term census as well. I mean, we need to make sure that as we cycle folks through on a much quicker basis and the volumes increase, I don’t think that we knew exactly what that would mean to our overall census. And I think that even though our skill mix has consistently climbed except for this quarter and we said why. And our occupancy has consistently climbed except for this quarter and we have aid why. We need to adjust a little bit better to that in the rest of our operations. But I don’t think – I will let Barry mention more on how we are doing with BPCI and what we see with that. But we went through the data as we do all the time and found that the volume in the areas that we thought we were going to be impacted have actually increased and we are seeing – we didn’t just guess that there are positives. We are seeing positives almost across the organization. But I will say that there are a – there is a state or two where we are seeing more and more challenges. They are just not major states for us.

Yes, Frank, we are seeing real – some good consistency in the volume of BPCI patients. We haven’t seen that fluctuate really up or down. And we have seen great success in our performance quarter-over-quarter since we started that demonstration project. So I – we are not seeing, I think what you are hearing. Where we are seeing more churn, which is something we have been seeing for years, is in the – on the managed-care front. That, obviously, length of stays are more aggressively decreasing on the managed care front. But volume is also improving as well as we have seen in this last quarter. Managed care continues to go up for us. So and same goes with CJR as well. We actually, like everyone else, got a little bit worried and defensive about the fact that some of those patients would bypass post acute and we have actually seen the opposite be true. We have seen an increase in the number of our Medicare admissions as CJR patients and that speaks to the partnerships that need to be in place and the systems that you have to have in place to be a preferred provider for the acute systems for them to utilize you as a resource to truly save costs.

You mentioned BPC, I am sorry, you mentioned CJR the new ones that they are talking about now in cardiac, do you see those and maybe other ones that are rumored to be happening like COPD or congestive heart failure, do you see those as an opportunity or is that just more of a loss? And then I will hop off. Thanks.

Yes, no, good question. No, we – so the three new areas, two are cardiac focused and one is the tip and femoral fractures and we actually see those as big opportunities as well. Again, there is a lot of unknown about the MSAs that will be impacted by the myocardial infarction and bypass graft bundles, but in the – looking at the overall picture these are patients that are very, very sick, lots of comorbidities. They are very expensive patients to take care of. And even, unlike joints, which can often go home, like we see under CJR for healthier patients, these patients and these bundles are pretty sick folks. And so we see again another opportunity for our relationships to be leveraged and our systems that we have from a clinical standpoint to be leveraged as these rollout and we have more clarity of what geographies it will impact.

Okay, thanks.

Our next question comes from the line of Dana Hambly with Stephens. Your line is open.

Thanks for taking the questions. Christopher, I think back in 2013 you did a bunch of acquisitions and kind of took a slowdown after that through first half of the year. Last year, I think through the first half and again on the second quarter, you announced that you were going to take a breather. And then we have this time around, is there something – and you recovered in the past, is there something you see different this time around in some of those past examples?

No, I think it’s the exact same thing. I think we are trying to give clarity without involving everyone in every single aspect of our business, but I think anytime you go through that kind of growth, if you are doing it the right way, there is a time that digestion. There is a time where we need to make sure that everybody that we bring on board understands what we are trying to become and how we are doing it and make sure that systems are implemented properly. And I think tendency is if there is just a whole wealth of opportunities out there, just take advantage of all of them and grow – while the growing is good. And I don’t think that that’s the right way to grow. It’s not the way that we have done in the past. It’s not the way we will do it now. And you are right, it is a repeating story. In fact, if you went back to our beginnings, we did the same thing in 2003. We did the same thing in 2007. It’s a recurring story. And maybe there is a way to figure it out so that we don’t have to take a breather, but I am not sure that, that – I am not sure that’s the right thing to do either. I worry that if you did that, Dana, that you would be neglecting and ignoring the needs of the people that just joined you. And so, I don’t see anything different this time, except for, the only difference was the implementation of that system that maybe should have waited or should have been done earlier. That’s probably the only difference.

Okay, that’s helpful. And then on – you didn’t reduce the revenue guidance, is that because you saw the July occupancy bounce back or are there other drivers that caused you not to reduce revenue for the year?

Yes. I mean, we think that second quarter was a bit of an anomaly. We have already seen that it is and July is not generally a great occupancy month. So, to see it bounce back was good. But we feel comfortable with the guidance that we gave, Dana, based on what we see in the future.

Okay. And then on the same-store growth, it seems we have focused more on the occupancy, but it did grow 6.5% in the quarter. So, can you talk about some of the drivers on the pricing there?

Yes. One of the drivers on the pricing I mean you saw go across the board, every single payor source increased and then we did get a nice little bump on one of our Medicaid supplemental payments came in the quarter.

Which is quality based.

Okay, that’s more one time or?

No, it’s several times – well, yes, I mean, it’s something that is accrued over the year, but we have to make sure we are going to get it before we reflect it. And so it will be reflected – I wish I could tell you exactly how many times, but probably a couple of times during the year.

Okay, thanks very much.

Our next question comes from the line of Ryan Halsted with Wells Fargo. Your line is open.

Thank you. Good afternoon. Christopher, you mentioned on the call and I think you have mentioned in the past, working with managed care payers to try to drive more predictable skilled volumes. I was hoping you can maybe elaborate on some of the things you are working on with those payers?

I could probably answer, Ryan. This is Barry. We continue to have meetings with the big managed care providers and develop those relationships. It’s something that has evolved over time from kind of being a market-by-market to more of kind of a national conversation we have. But at the same time, they expect every individual operation to do their part and have the right outcomes for them to be able to put the trust and faith. And the good news is we see that becoming kind of an acknowledgment of us as an organization and less as an individual concern as they have had in the past, because we have been able to demonstrate the outcomes over wide geographies. So really, it’s just kind of an evolution of the relationships that continue to have, Ryan. We have these conversations at a national level now more than we have had before. And we talk about the metrics, the drivers, we talk about how to evaluate the outcomes on a regular consistent basis and have these joint operating discussions on a regular monthly and sometimes weekly basis. And as these relationships have continued to improve, we are seeing different geographies, volumes improve over time and that’s been consistent in our – as you see, our managed care occupancy continue to climb fairly consistently quarter-over-quarter over the last many, many quarters.

Okay, that’s helpful. So, I guess my follow-up question is as you are expanding into new geographies or exploring, expanding into new geographies, I mean, how have you approached developing these networks sort of from scratch? I mean what’s kind of the successes and the challenges you faced in really being able to translate some of the success you have had in legacy markets over to the new markets?

Yes, no, that’s a great question. And we have seen that. Typically, in the past, as you know, we have talked about when you go into a market, it’s been this kind of lag where we have to develop the relationship and get credentias, but as we have seen even in markets like South Carolina and other markets that we have recently gone into and in Kansas, with the Healthcare Resorts, we have been able to leverage these relationships and really, it’s based on metrics, Ryan. I mean, as you are able to demonstrate the outcomes that are consistent with their length of stay and readmission rates, it really catches their attention, because they know it’s a focus of our utilization, it’s something that we are measuring. And without the outcomes that we can point to, when you go into a new state, the natural default is for most managed care providers to say, well, it show us and then we will look at it later. We are not seeing that as we have in the past because of what we have been able to demonstrate in other markets.

And like even on some of the newer acquisitions, we are actually doing it before the acquisition even closes. So, we are contacting the managed care providers, letting them know hey, we think we are going to have an acquisition in this market, what information do you want from us how can we – so the discussions are happening as soon as the acquisition start to pop up on our radar screen.

Okay, that’s helpful. On the acquisition strategy and your comments about maybe being more disciplined and maybe taking some time to sort of digest what you have acquired, you did announce that you have increased the available credit. I mean, do you think it makes sense to pursue acquisitions or growth in other avenues like the home health and hospice business that you guys have been growing quite impressively?

Yes, we will continue to pursue those for sure. We are currently – we just want to make sure that we absorb what we need to absorb in a healthy way. There are parts of Cornerstone that are ready to acquire when the right opportunities come forward. We are not – there is no – we are not saying we are not doing acquisitions anymore, but I think that because of the pricing that we see and because of the opportunity we see in our existing portfolio and the need to focus on taking full advantage of those opportunities, I think that you will probably see us take a little bit of a breather, but I – but as opportunities come forward and as Cornerstone feels like they are the right opportunities for them, which is our home health and hospice entity, we will still pursue those opportunities, but they have to be the right ones. Does that answer your question, sort of?

Yes, no, that’s helpful. Maybe last one for me, just on the labor side, I know you mentioned there were some systems integration disruption, but I was just wondering, in general, what’s sort of the labor outlook, the labor cost outlook? Was there any pressure in the quarter or has there been any signs of any pressure on nurse wages and what have you?

Yes, there has been. We certainly have seen that over the last few months in particular and a lot of the markets that we are in, in Texas, Arizona, Utah, Idaho, parts of California, parts of California, the unemployment rate is very, very low. And when that happens, we tend to see a bigger challenge in finding extraordinary nurses that are available and we actually have many strategies to combat that, but nonetheless, we are seeing some short-term pressure.

Okay. Anyway you can potentially quantify just the sort of how wage growth has been trending in those markets in your cost of services line?

I would be guessing and Suzanne would be upset if I did that, so I think – they are – I think that it’s been more than usual. And if you look at usual, I think you are talking in the 1% to 2% range. And so, it’s probably slightly more than that.

Okay. Yes, that’s helpful. Thanks for taking my questions.

Thank you, Ryan.

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Mr. Christensen for closing remarks.

Well, thank you everyone for your time and again I want to thank everyone in the organization for pulling together and doing the phenomenal job through the less sort of while. We are very excited about the future as I have said and thank you for your time and attention.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.