Alcon Inc.
Q3 2008 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, thank you for standing by and welcome to the ALC quarterly results 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 be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I will now turn the conference over to your host Senior Vice President and CFO, John Buono. Please go ahead.
- John Buono:
- Good morning, ladies and gentlemen and welcome to the third quarter Assisted Living Concepts investor conference call. I'm John Buono, Senior Vice President and CFO; with me here today are Laurie Bebo, our President and CEO; and Eric Fonstad, our Senior VP and General Counsel. A replay of this call will be available approximately one hour from its completion until December 4, 2008. You can access the re-broadcast by clicking on the Investor Relations section of our Web site at www.alcco.com or by dialing 800-475-6701 or international 320-365-3844 and using the access code 963372. Ms. Bebo will begin by commenting on our third quarter operations followed by my presentation of the financial results for the quarter. We will then welcome your questions. But first, please note that this discussion includes forward-looking statements regarding our future operations. Such statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. These risks include those listed in our public filings with the Securities and Exchange Commission. We suggest that you refer to these filings. In addition, our remarks include certain non-GAAP measures. Please see our earnings release issued earlier this morning for the reconciliations of these measures to their corresponding GAAP measures. These materials can be found through the Investor Relations section of our Web site at www.alcco.com. Now, I will turn it over to Laurie.
- Laurie Bebo:
- Thank you, John. Good morning. The third quarter of 2008 produced our first increase in private pay occupancy on a same-store residence basis since second quarter of 2007 and more importantly this trend continued through the month of October. The financial expenses relating to our annual conference and the impact of hurricanes Gustav and Ike, the EBITDAR margins remained healthy at approximately 28.4% comparing favorably to the prior year third quarter EBITDAR margin of 28% and down from second quarter of 2008. Important contributing factors in the improvement in margins over the prior year period and the growth in the percentage of our private pay residence are our ability to continue to successfully manage very well expenses consistent with the needs of our population. Average private pay occupancy in the third quarter of 2008 increased by 139 units over the third quarter of 2007. This increase includes the addition of 481 occupied private pay units in January 2008 through the acquisition of operations of Serbia and the partial quarter impact of 18 occupied private pay units from the acquisition of a residence in Dubuque, Iowa. This increase was partially offset by a reduction of 360 private pay occupied units in our same residence portfolio. Average private pay occupancy in the third quarter of 2008 increased by 17 units as compared to the second quarter of 2008. More importantly, October was the first month since we announced our strategy of increasing our private pay mix and we achieved an increase in total occupancy. Occupied Medicaid units in the third quarter of 2008 decreased by 544 as compared to the third quarter of 2007. Average Medicaid occupancy in the third quarter of 2008 decreased by 86 units as compared to the second quarter of 2008. Medicaid occupancy is currently just over 600. Since the third quarter of 2006, we have achieved a 12.5 percentage point improvement in our private pay revenue mix. Our economic conditions continued to be unfavorable they increased private pay occupancy by 17 units in third quarter of 2008 as compared to the second quarter of 2008. This increase came in spite of disruptions from two major hurricanes. Our increased private pay segment was largely concentrated in Middle America while we continued to experience challenges elsewhere especially in the North West. In the third quarter of 2008 and 2007, the average occupancy rate for all of our residences was 68% and 77.6% respectively and private pay revenues as a percent of total revenues was 92% and 86.2% respectively. We are encouraged by a reduction in the number of private pay move-outs in the third quarter of 2008. Move-outs in the third quarter of 2008 were 9.6% lower than the second quarter of 2008 and 2% lower than the third quarter of 2007. Move-ins was consistent with the all-time high level of the second quarter of 2008. Overall average rates in the third quarter of 2008 increased by 7.5% over the 2007 third quarter and 0.9% from the second quarter of 2008. Privacy rates increased by 4.9% over the 2007 third quarter and were flat from the second quarter of 2008 while average Medicaid rates increased by 5.4% over the 2007 third quarter and 3.9% from the second quarter of 2008. Turning to our expansion plan, construction continues with our program to add 400 units to existing owned buildings. We expect to complete license, and begin accepting new residents in approximately 250 units by the end of the fourth quarter of 2008 with a targeted completion of 80 units in the first quarter of 2009 and the remaining units by the end of the second quarter of 2009. To-date, cost is then consistent with our original estimates of $125,000 per unit. During the third quarter of 2008, we repurchased 122,000 shares of our Class A common stock, at an average price of $5.25 per share. This brings the total number of shares repurchased under our repurchase program to 8.2 million shares at an average price of $7.36 per share. $60.4 million have been spent in total on our share repurchase program. We continue to believe that share repurchases are attractive investments, with the current market prices it is roughly equivalent to repurchasing our residences at less than $65,000 per unit. I'd like to turn the call back to John to review our financial results.
- John Buono:
- Thank you, Laurie. Earlier this morning, we released our financial results for the third quarter ended September 30, 2008. In July 2007, we acquired a residence located in Dubuque, Iowa, and in January 2008 we acquired the operations of eight residences comprising the CaraVita portfolio of properties. Each of these acquisitions is included in our results from their respective dates of acquisition. When I refer to same residence basis, I am excluding from the current year's results the 499 residents added from the acquisitions of CaraVita and Dubuque which were not included in the third quarter of 2007 results. Revenues of $58.4 million in the third quarter of 2008 were a 0.7% increase from $57.9 million in both the third quarter of 2007 and the second quarter of 2008, on a same residence basis, revenues were $54.1 million in the third quarter of 2008, a decrease of 6.6% from $57.9 million in the third quarter of 2007. Overall increases in revenue from the 2007 third quarter resulted from $4.3 million in additional revenues associated with the acquisitions of the Dubuque residence and the operations of CaraVita, and overall same store rate increases averaging 7.5%. These increases were partially offset by a decrease of 544 units occupied by Medicaid residents and a same store decrease of 360 units occupied by private pay residents. Increased revenues from the 2008 second quarter resulted primarily from the increases of 17 units occupied by private pay residents, a 1% increase in overall rate and one additional day in the third quarter partially offset by a decrease of 86 units occupied by Medicaid residents. Residence operations expense decreased by $0.2 million from the third quarter of 2007, primarily from lower operating expenses and associated with a reduction in labor through right-sizing labor as occupancy declined partially offset by additional operating expense from the acquisitions. In addition, in the third quarter of 2008 we experienced losses of $200,000 from hurricanes Ike and Gustav, this included non-cash losses of $160,000 related to property damage. Residence operations expense increased by $1.2 million from the second quarter of 2008, primarily from a pre-seasonal demand in utility as the losses incurred as a result of hurricanes Ike and Gustav. In the third quarter of 2008, general and administrative costs increased approximately $800,000 from the third quarter of 2007, primarily from a change in timing of our all company annual conference which took place in the third quarter of 2008 and the second quarter of 2007. In addition in the 2007 period, we reversed expenses related to employee stock depreciation rights. General and administrative costs increased by approximately $500,000 from the second quarter of 2008 primarily from the timing of the all company’s annual conference. In the 2008 third quarter, adjusted EBITDA was $11.6 million, down from $12.6 million in the 2007 third quarter and down from $12.9 million in the 2008 second quarter. Adjusted EBITDAR was $16.6 million in the 2008 third quarter, up from $16.2 million in the 2007 third quarter and down from $17.9 million in the second quarter of 2008. Margins from operations defined as revenues less residence operations expenses divided by revenues were 33.9% in the third quarter of 2008, up from 32.9% in the third quarter of 2007, and down from 36% from the second quarter of 2008. In the 2008 third quarter, net income was $3 million compared to $4.2 million in the 2007 third quarter and $4.3 million in the 2008 second quarter. Earnings per share from continuing operations were $0.05 per share compared to $0.06 per share in the third quarter of 2007 and $0.07 per share for the second quarter of 2008. Cash flow from operations for the first nine months of 2008 was $40.3 million compared to $35.4 million in the 2007 year to date. Compared to the 2007 third quarter, cash flow from operations in 2008 improved primarily from the release of $7.5 million of restricted cash associated with a letter of credit securing self-insured general and professional insurance and the release of funds previously provided as security under a bond agreement in Oregon. Cash used in investing activities decreased from $36.1 million in the first nine months of 2007 to $24.1 million in the first nine months of 2008 primarily from the purchase of the Dubuque facility for $24.4 million in 2007 partially offset by an increase in maintenance capital expenditures and our expansion program. We expect our expansion program to require an additional $20 million in cash in the fourth quarter. Cash used in financing activities was $24 million in the first nine months of 2008 compared to $10.2 million in the first nine months of 2007. In the first three quarters of 2008, we used $21.3 million to purchase our common stock and reduced our borrowings by $2.7 million. We remained in a comfortable liquidity position. As previously announced, during the third quarter of 2008, we were able to increase our revolving credit line by $20 million with no additional collateral or changes in interest rate. At September 30, we had $49 million outstanding under our $120 million line of credit using $71 million in available borrowings. We remain confident that our cash flow from operations, plus amounts available under our credit lines will be more than sufficient to service our cash needs including our current expansion program. We do not have any significant debt obligations until our credit line matures in November 2011. We will now welcome your questions.
- Operator:
- (Operator instructions) Our first question will come from Kevin Ellich from RBC Capital Markets. Please go ahead.
- Kevin Ellich:
- Good morning, thanks for taking my questions. I guess the brief question I have is given the weak economy Laurie, I don’t know if you can give us a little bit of your insight as to how that is impacting occupancy and have you noticed any significant trends on that front?
- Laurie Bebo:
- Good morning Kevin. I think our comments have been pretty similar to last quarter as far as – we are seeing some folks that will move out and go back home with their kids. Typically we are seeing things like where the housing and life may be ball parked in the past, we are seeing (inaudible) lost their job or perhaps has decided not to work due to the increasing gas prices, now those have come down, but for probably some different reasons we have seen that there are people that who have not been able to (inaudible) and they are trying to probably (inaudible) the family, so those kinds of situations are still going on and I don’t think that there is a trend that is any worse or better really than the second quarter of 2008.
- Kevin Ellich:
- Okay, that’s helpful. Then going back to the comments about October where you saw the private pay move in, do you think that is really kind of the inflection point and do you think we have seen the bottom now?
- Laurie Bebo:
- I think it is too early to call it a trend certainly Kevin but we were very pleased with taking the private occupancy (inaudible) October being the first month where we are actually seeing an overall increase in occupancy one month over the other while we are certainly (inaudible) about it, but I think it is a little too early to call it a specific trend.
- Kevin Ellich:
- Okay thanks.
- Laurie Bebo:
- Thanks Kevin.
- Operator:
- Our next question is from Derrick Dagnan from Avondale Partners. Please go ahead.
- Derrick Dagnan:
- Good morning. I wondered you just kind of characterized some of the occupancy numbers you gave us, it sounds like what happened, you had a drop in move-outs but the move-in rate was steady is that what you said on the call?
- Laurie Bebo:
- Yes, it was Derrick.
- Derrick Dagnan:
- And so I think that means that the end of period numbers were probably better than the average as you moved into October and then obviously you will be commenting on in February, is that correct?
- Laurie Bebo:
- Yes I think you can definitely glean that from that comment that October is beginning to increase, definitely the end of the quarter being better than the beginning of the quarter.
- Derrick Dagnan:
- Then on the cost side it sounds like excluding the impact of hurricane cost, your operating expenses are increased sequentially and the main driver there was utilities, is that –
- Laurie Bebo:
- It is not very typical for our trends for the year meaning we are going to see because we are in states where we are going to run a lot of the patients in the third quarter so electricity costs for example are going to be much higher for us in the third quarter versus second.
- Derrick Dagnan:
- So, it is more utilization and not necessarily a change in utility rates, is that fair to say?
- Laurie Bebo:
- Yes and I think –
- Derrick Dagnan:
- And the last one, I was wondering, does the Dubuque move into the same sort of numbers in the fourth quarter and if so would that have – shall we expect some sort of impact there?
- Laurie Bebo:
- If I could, I just want to go back to something Derrick, the equipment, there is quite an increase in cost this year over last year, I just wanted to clarify that around this driver it is just the typical seasonal trend on utility.
- Derrick Dagnan:
- Okay.
- Laurie Bebo:
- Okay I did not answer it, if you could just repeat your last question.
- Derrick Dagnan:
- On the Dubuque property, they did not move into the same store portfolio beginning in the fourth quarter and if so should we expect some sort of impact there?
- Laurie Bebo:
- We tend to move into the same store for fourth quarter as far as the impact. We would have given you the numbers, correct me, with Dubuque and without, so I am not sure what other impact you are looking for.
- Derrick Dagnan:
- Okay, I just did not want to be majorly surprised by anything in the same store occupancy numbers looking worse or physically [ph] better year over year and not having being driven primarily by paid out as – it is something we need to think about you have heard it before.
- John Buono:
- Derrick, just to clarify that, the way we count the same store is we take Dubuque, the number of residents that it had in it at the date of the acquisition, so we are consistent with how many units we have taken out in prior periods. So, any impacts of Dubuque since it has been acquired are already in those numbers. So you won’t see any surprises in our same store numbers.
- Derrick Dagnan:
- Okay, thank you very much.
- Laurie Bebo:
- Thanks Derrick.
- Operator:
- Your next question is from Jerry Doctrow from Stifel Nicolaus & Company. Please go ahead.
- Dan Versi:
- Good morning, this is Dan Versi [ph] calling in for Jerry. Pardon me, the question just centers around – last quarter you talked about doing some 80 some [ph] triage and perhaps closing down some under-performing assets, so we just wanted a general overall strategy for the company whether it is closing down under-performing assets or picking up acquisitions development or just a general idea of the overall strategy for the company going forward.
- Laurie Bebo:
- Hi Dan, we commented that in equipment we have seen some communities that are not moving ahead as quickly as we would like and we are continuing to evaluate what kind of opportunities we may want to take advantage of with those properties, it may be to close them temporarily and refurb down to take a look at it in a different business plan for the community and further ongoing discussions and announcements (inaudible) right now. So we don’t have an announcement related to that at this time.
- Dan Versi:
- Okay. Do you see any further opportunities for more acquisitions or development I think I am just looking for strategy there?
- Laurie Bebo:
- As far as acquisitions go, I think that I have really noticed that it has been a little bit quiet. We certainly are still seeing a few things come across our deck for sale and we would say that we are going to continue to evaluate those. We do have extra cash which can be I think quite helpful at a time like this where others might be challenged at raising some money and we will continue to be take a look at those opportunities. We are really pleased with how the exit entry program has progressed. We are just about to start and actually tilling up those units and we are excited to share with you the outcome of those results in the coming quarters and we will be making decisions as far as the extent in the next couple of quarters to look at additional potential plans or is there more out there for sale at a better price, those kinds of things we will certainly continue to be looking at.
- Dan Versi:
- You don’t have a feeling one way or another on that trade-off between acquisition developments yet or you are still working on that?
- Laurie Bebo:
- I think, my guess is we are probably going to continue to see the price come down on units for sale over the next quarters and so we will just have to continue to see where those are at and what we think the potential return is on those types of opportunities.
- Dan Versi:
- Thank you.
- Laurie Bebo:
- Thank you.
- Operator:
- (Operator instructions) We do have a follow-up question from Kevin Ellich. Please go ahead.
- Kevin Ellich:
- Yes, I was just wondering if you would go back to the revenues operating system, did that significantly – we see there is a certainty in impact but John what do you think, should that come back to normalized trends or did I miss something there?
- John Buono:
- No, I mean, the pick-up and the impact Kevin is the ability of expensing along with the hurricanes obviously, so we gave you a number on the hurricanes of $200,000, the utilities will come back a little bit but historically they have been high in the fourth quarter but not as high as the third quarter.
- Kevin Ellich:
- Okay, that’s helpful. Just wanted to make sure I got that right, in Q4 did you say development or your expansion CapEx will be about $24 million?
- Laurie Bebo:
- We said $20 million.
- Kevin Ellich:
- $20 million, okay, thank you.
- Laurie Bebo:
- You are welcome.
- Operator:
- We have a follow up from Derrick Dagnan. Please go ahead.
- Derrick Dagnan:
- I was wondering, you mentioned a reasonable impact, could you give us some more color on occupancy and how, I think you said in the middle part of the country it improved but there are certainly still areas of weakness, could you give us a little more color on why that may have occurred or what you are seeing?
- Laurie Bebo:
- Definitely. What we talked about is the West Coast has been more challenging to bring allowance as far as the occupancy and so the reasons we talked about for that I think includes just past reputation for the buildings as being part of the Medicaid program and that is something that we have looked at a variety of different opportunities (inaudible), the successes certainly come from a variety of areas as we mentioned this part of [ph] America, we are seeing real nice improvement in Texas as an example and certainly there are other places in the country. You can see middle America for us is the combination of the Indiana, the Mid West, the Wisconsin, the Iowa and Nebraska areas.
- Derrick Dagnan:
- When you mentioned making changes on the West Coast, what specifically have you been thinking about doing, is it a rebranding or give us some more color there if you could?
- Laurie Bebo:
- Sure. We certainly see an opportunity to probably have a restart with some of the properties there, there are great markets, there are very upscale areas and we need to start fresh from that not necessarily a past reputation of Medicaid associated with the building. We have got an opportunity to upgrade our physical plant a little bit and we certainly think that as a fresh start in creating new opportunities for the building to building a reputation. It has got good reputation from a tier perspective. We don’t have any challenges from a regulatory perspective or from an overall service bulletin perspective, so those things are certainly going for us and we just need to I think in some instances either to try to have a little bit different business model which may include a particular change in focus from 10 AL [ph] to something a little bit different and the other opportunity that we have certainly is to start over rebuilding the building, new names, everything.
- Derrick Dagnan:
- My last question is with the increase in occupancy, how have you guys reacted with your labor? You have been (inaudible) or when you look at these properties, are you having to go out and hire new employees in some cases?
- Laurie Bebo:
- As always we are going to continue to staffing the needs of our residents. So whatever those needs are, if there is an increase in resident population and an increase in their needs, we will certainly staff accordingly. That can take on many different forms, it could mean that you are thinking to hire somebody new, it could mean that you are just changing your current staffing pattern or schedule for existing employees, so some combination I would say there.
- Derrick Dagnan:
- Okay, thanks very much.
- Laurie Bebo:
- Thanks.
- Operator:
- Thank you. Our next question is from Stefan Mykytiuk from Pike Place Capital. Please go ahead.
- Stefan Mykytiuk:
- Hi, good morning.
- Laurie Bebo:
- Good morning Stefan.
- Stefan Mykytiuk:
- Couple of questions, I guess first off the rate of decline in the Medicaid patients or units, I would suppose the units have kind of continued to diminish, I am wondering is that sustainable or is that just because you are getting down to the core people or the core buildings where they are sticking around or what is causing that trend?
- Laurie Bebo:
- Sure. I think Stefan what you are seeing is something pretty consistent as a percentage but basically as the total numbers of Medicaid continued to drop, you are absolutely right we previously have seen numbers for a total of 60 has come on as far as our drop in Medicaid occupancy. Then we were trying for about 50 and now when we look at the numbers we are trailing at probably just on to 30 per month in Medicaid that we are decreasing. So I think that it is likely to continue to succeed that trend and it will probably decrease over time such that when we have got 300 folks on Medicaid as an example, it may be dropping down to 10 per month that you end up losing due to attrition.
- Stefan Mykytiuk:
- I got it. Do you think it is still kind of – just letting lose you know maybe 5% a month or something like that as a trend that is how we should look at it really as a percentage of units that is for Medicaid?
- Laurie Bebo:
- Yes.
- Stefan Mykytiuk:
- Okay.
- Laurie Bebo:
- And you are right too that you are going to have some outliers and as you get down to smaller numbers of people that we are looking at, who is to say when the last 100 people leave as an example, it is turning actual attrition at this point and so we can’t necessarily predict when those changes in population are going to occur.
- Stefan Mykytiuk:
- Okay and in terms of the pricing environment, are you seeing competitors kind of change their strategy in terms of pricing or is it still pretty firm out there?
- Laurie Bebo:
- No, I think it is depending on the market. We have got markets where we have seen people actually increase their rates for different reasons probably potential cash price use or challenges with regard to other expenses that they are looking at maintaining their previous margins. Then I would say the majority of the markets we are seeing people taking a look at either holding their prices or perhaps cutting a short-term deal to get it moving or accomplish a move-in, so there is a mix out there.
- Stefan Mykytiuk:
- Do you think that is more common, the three months or the three move-in and those kinds of things as opposed to people actually cutting the monthly rate?
- Laurie Bebo:
- Definitely the idea that people are turning accretive a deal for winning perspective residents I think is happening probably more typically than increases in cost, as far as how people chose to attracting residents whether it is through discount or whether it is through short-term promotion, let me say that is all with the board, I don’t know if I could give you a comment on to what is the majority out there but definitely the majority is some sort of attractive value propositions for the new residents.
- Stefan Mykytiuk:
- Okay. My last question is just when are the costs going to start coming in for the expansion units?
- Laurie Bebo:
- We have already booked. (inaudible) that we will be spending about $20 million in fourth quarter.
- Stefan Mykytiuk:
- Yes but that is CapEx, I am talking about when do we start to see it increase in kind of operating cost due to those units in terms of incremental labor heating or utility whatever it is?
- Laurie Bebo:
- Sure. You are probably are starting to see in our utility costs a slight impact because divisions are being seeded; the additions were using air conditioning, that is going to be more of a fixed cost basically when those units come up. The labor for the variable expansions like additional food cost as an example, you are going to start to see that only as the new residents come in. So, there is going to be operating revenue with those additional expenses.
- Stefan Mykytiuk:
- Okay. And you have been pre-selling kind of those knowing that you have them come again, coming online.
- Laurie Bebo:
- Definitely we are focused on pre-selling the units. There are challenging things; they are trying to pre-sell them too early because typically they are talking to folks who have a need, that's more likely to move in, but we certainly have the ability and have been focused on trying to pre-sell them.
- Stefan Mykytiuk:
- Okay, perfect. Thanks very much.
- Laurie Bebo:
- Thanks Stefan.
- Operator:
- (Operator instructions) At this time, there are no questions in queue.
- Laurie Bebo:
- Thank you all.
- John Buono:
- Once again a replay of this call will be available in approximately one hour until December 4, 2008. You can access the re-broadcast on our Web site at www.alcco.com.
- Operator:
- Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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