Gen Digital Inc.
Q2 2020 Earnings Call Transcript
Published:
- Operator:
- Thank you for standing by and welcome to the Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to our speaker today, Lori Mayer, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.
- Lori Mayer:
- Good morning and thank you for joining us today. We issued our press release last evening. This announcement is available on the Investor Relations section of our website at genesishcc.com. A replay of this call will also be available on our website for one year. Before we begin, I'd like to quickly review 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, including statements about the impact of the COVID-19 pandemic. These statements are subject to risks and uncertainties that could cause our actual results to differ materially 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 law, Genesis Healthcare and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes that arise as a result from 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 Genesis Healthcare has direct operating assets, employees or revenues or that any of the various operations are operated by the same entity. Our discussion today and the information in our earnings release and in our public filings include references to adjusted EBITDAR, EBITDA, adjusted EBITDA, which are non-GAAP financial measures. We believe the presentation of non-GAAP financial measures provides useful information to investors regarding our results because these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business, but such non-GAAP financial measures should not be relied upon at the exclusion of GAAP financial measures. Please refer to the company's reasons for non-GAAP financial disclosures and its GAAP to non-GAAP reconciliations contained in today's earnings release. And with that, I'd like to turn the call over to George Hager, CEO of Genesis Healthcare.
- George Hager:
- Thank you, Lori. Good morning and thank you for joining us today. I have a number of members of the Genesis Senior Management team on the call today, including Dr. Richard Feifer, Genesis Healthcare's Chief Medical Officer; Dr. JoAnne Reifsnyder, our Chief Nursing Officer; as well as Tom DiVittorio, our Chief Financial Officer. Before I turn the call over to Dr. Feifer, I would like to make a few opening remarks. From the very beginning of this pandemic, we have been focused on the best interest of our patients, residents and staff, while confronting the extraordinary challenges presented by COVID-19 including severe shortages of personal protective equipment and testing. We took early decisive and ongoing action to prepare and control for the coronavirus in our buildings. And to this day, we continue to provide our centers with the latest precautions and protocols to manage through this pandemic. Since our first case, back in the middle of March 2020, 241 of Genesis' 361 facilities have reported one or more positive cases of COVID-19 among patients and residents. Three of these facilities have cleared their outbreaks and are now accepting new admissions. Nearly 80% of our positive COVID-19 cases among patients and residents occurred in just five of the 25 inpatient states where we operate, New Jersey, Connecticut, Massachusetts, Pennsylvania and Maryland, clearly some of the earliest and hardest hit community outbreak areas across the country, the so called early hotspots. In fact, all of these states are in the top 10 states for COVID-19 nursing home infection rates and death rates according to current CMS data. I'm extremely grateful for the heroism, resolve and sacrifice of our frontline caregivers and workers fighting the pandemic. Along with our dedicated regional and corporate staff who are supporting their efforts on the ground. I'm also very proud of the leadership role Genesis is playing in the fight against COVID-19 in partnership with the administration, public health officials at the federal state and local levels, our peers and partners in the industry, as well as the academic community. I'd now like to turn the call over to Dr. Richard Feifer, Genesis is Chief Medical Officer. Dr. Pfeiffer?
- Richard Feifer:
- Thank you, George. As we are close to five months into this pandemic, I wanted to take a few moments today to provide an update on where we are with managing COVID-19 in our facilities. Let me begin by saying that this virus is unlike any other infectious disease we have experienced in our careers or our lifetimes, not only because of the complex nature of the virus itself, but also because we along with the rest of the healthcare community, have had to learn about this virus in real time. As the outbreaks began in our facilities, nobody knew how to best control and treat this virus. And even now, months later, there are still many open questions which we and the medical community are working to answer going forward. With that said, we have made a lot of headway in understanding how to limit or contain the spread of COVID-19 if the virus should make its way into a facility. We have learned about the critical importance of testing and screening people even when they are asymptomatic and cohorting people based upon test results, not upon symptoms for exposure. Throughout this pandemic, we have had an unwavering commitment to protect our patients and residents. As we have learned more about COVID-19, we have implemented new protocols and procedures to help keep everyone as safe as possible, even as we admit new patients and residents. First, our centers have established what we call Admission Observation Units, so that new patients can be admitted safely following a rigorous screening process. Patient contact and interaction are minimized while they are monitored for changes in condition and are tested for COVID-19 at several intervals during their 14 day stay on the unit. Staff members are trained in the use of personal protective equipment, PPE and proactive clinical infection control guidelines. All staff members are screened for temperature and other symptoms every shift, work only if they pass this clinical screening process and are tested for COVID-19 on a regular basis. In fact, we have gone above and beyond state and federal requirements to test our patients, residents and staff frequently, as it is one of the best ways to protect our patients and residents from the virus. All Genesis locations have an infection control specialists focused on infection control procedures, as well as staff education. In addition, each facility ensures that an infection control designee is present on all shifts 24 by seven. This focus has resulted in a 94% of infection control surveys conducted in our affiliated center achieving a zero-deficiency rating on nearly 900 focused infection control surveys conducted by state and federal officials during the pandemic as of July 28, 2020. This is significantly better than national averages. We use a high touch cleaning checklist to ensure our patients and residents safety, we use EPA approved disinfectants that are effective against the virus and other microorganisms. We also understand how difficult it has been for patients, residents and their families to be isolated from one another. We remain committed to keeping our patients and residents connected with their loved ones. Some states are already allowing visitation outside with appropriate precautions for residents without symptoms. In states where outside visitation is not yet available or for those who cannot visit outside in approved states, we provide the ability for families and loved wants to connect via video conferencing technology and we update families via regular video conference calls. I would now like to address the issue of testing. The current process of sending out PCR polymerase chain reaction tests to outside labs has slowed significantly as turnaround times for tests or in some cases back up to five to seven days or more, making these tests nearly useless. We are thankful to CMSs recent action to address the testing issues that the industry has experienced for months. CMS has made a commitment to deliver point of care testing devices to every nursing home in the country over the coming months. These point of care tests are antigen tests, which are very different from the PCR tests that the industry has been using and also different from antibody tests. Antigen tests also look for the virus, but are less sensitive, so could lead to more false negatives. But they also have the very important advantages that they are faster, providing results within an hour of sampling and considerably less expensive. The ability to have easy access to instant results for our patients, residents and staff will allow us and the industry to more effectively fight this virus. As of today, we have been notified by CMS of about 34 Genesis facilities that will be receiving the next deliveries of point of care testing devices. We expect the remainder to receive their devices in the coming weeks to month. That said it remains possible or even likely that we will still need PCR tests in addition to antigen test, especially for symptomatic residents with initially negative antigen test results. For screening of asymptomatic residents, antigen testing may suffice if it is run more often to make up for the lesser sensitivity. Turning back to my earlier comment about efforts to continually learn more about this virus through careful analysis, you may be asking yourself, why was Genesis hit so hard by COVID-19 and other nursing home providers were not. The truth is that there are over 15,000 skilled nursing facilities in the US and not all have had the same experience with this battle. Genesis was hit early and very hard by the initial COVID-19 surge that occurred in the hotspot, Mid Atlantic and Northeastern state before much was known about the virus or how to contain it. I would like to share a few details with you. First, Genesis was initially exposed to COVID-19 in March. At that time, CMS hadn't even issued its first guidance for universal face masking and masks were in short supply nationwide. Ultimately, CMS issued guidance on April 2, although Genesis had already fully implemented universal masking in late March, but by this time, the virus had already spread. Two, early in the pandemic, not much was known about asymptomatic carriers of the virus. It wasn't until the end of March that the CDC released a report on Kirkland, showing that nursing home residents can be asymptomatic, but carrying the virus and spreading it. In this instance, 57% of residents who initially tested positive were asymptomatic. But by the time this information was available, the virus had already spread. Three, third relates to cohort, early in this pandemic, there was an inadequate guidance and departments of health told us that patients already exposed should not be moved around the building for fear of spreading the virus unintentionally. So for example, if you had a positive patient and a roommate not showing symptoms, and not yet tested, departments of health instructed us to not move the roommate. It wasn't until the end of April that CMS issued guidance to cohort positives with positives and separate exposed roommate. But by this time, the virus had already spread. And four, the final point I will bring up today, although there are plenty of other examples, is testing. Early in this pandemic, tests were scares. In some cases, we were instructed by departments of health to presume symptomatic patients who're positive, as tests simply weren't available. And there certainly weren't enough tests to proactively test all patients, residents and staff on a regular basis like we do today. We were fighting a virus with a blindfold on. The good news is that we know so much more now about how this virus behaves and as a result, we can utilize better infection control, testing and cohorting practices, particularly as the necessary supplies and equipment have become more readily available. Ultimately, we are now able to reduce the amount of virus available to create exposure and infection. While additional study is needed, added knowledge treatment and tools to fight the virus appear to have significantly improved the case recovery rate and better control the spread of the virus if it does enter the building. Finally, nearly 90% of impacted disabilities now have resolved their outbreaks, particularly in areas of the country where we saw significant immunity prevalence early in this pandemic. We are now seeing new outbreaks in some southern states with community outbreaks including Florida, New Mexico and Arizona. This harkens back to the research studies I shared with you last quarter completed by Brown University, Harvard University and the University of Chicago, which showed that the two key factors that determine whether the virus enters and spreads within a nursing home. First, its location, whether the surrounding community is a high-density area heavily affected by COVID-19 and second, the size of the facility. The larger it is the more traffic in and out, no matter how many restrictions are in place. These two factors continue to correspond to our own experience. Before I turn the call back to George, I want to thank all of our physicians, nurses, aides, therapists and other center and regional staff members who have been working around the clock to keep our patients, residents and employees safe during this difficult time. They are true heroes and we will forever be grateful for their commitments and compassion.
- George Hager:
- Thanks Rich. The pandemic obviously has had a material impact on our business operationally and financially. In the second quarter of 2020 we estimate the negative impact of lost revenue and higher expenses caused by this pandemic was $213 million that is before taking into account approximately 228 million of federal and state financial support. I'd like to emphasize that first number, the impact of the pandemic in just the three months ended June 30 was $213 million. We're very grateful for the federal and state financial support received thus far. But as this pandemic continues in some areas it intensifies, additional and timely support is needed to continue funding the higher cost of labor and the significant precautions and protocols we have put in place to keep our patients, our resident and our employees' safe. In addition to escalating costs, occupancy levels are down over 11%. Although occupancy appears to have hit bottom, the pace of recovery in new admission has been very slow thus far. And now let's take a minute to provide perspective on the dramatic disparity between the pandemic impact on our centers located in states having high density COVID-19 outbreaks in their community as compared to our centers and state with low to moderate outbreaks. Financially speaking, the key performance drivers in this business have always been and will continue to be the overall occupancy levels and the ability to effectively control labor costs. Even a 1% change in occupancy or labor cost in this business is a big deal, all other drivers quite frankly pale and compare. Genesis' same-store occupancy in the second quarter of 2020 dropped 11% from the sequential quarter and the weighted average wage rate per hour for our nurses, which includes RNs, LPNs and CNAs, grew 29% over the second quarter of 2019. Please keep in mind, our nursing staff make up 50% of Genesis' entire labor force. Now, let's look at these same statistics in the five hard it states of New Jersey, Massachusetts, Connecticut, Pennsylvania and Maryland where we operate nearly 50% of our beds. In these five states occupancy in the second quarter of 2020 dropped 17% more than twice the 8% drop in all other states. In the state of Connecticut our occupancy actually decreased 23%. Also in these five states, our weighted average nursing cost per hour in the second quarter of 2020 increased 45% over the prior year quarter. In the state of New Jersey, the hardest hit state in our portfolio, the weighted average nursing labor cost per hour increased 63%. These are astonishing figures that highlight just how wide the range of impact can be on skilled nursing facilities, located in markets having high prevalence of community spread, compared to those with low or moderate communities spread, which brings me back to the issue of adequate and timely funding support. Early in the pandemic, the federal government moved swiftly and decisively to infuse much needed support to all skilled nursing facilities across the country. The three rounds of funds distributed to date from the Provider Relief Funds were allocated to all skilled nursing facilities across the US on a pro rata basis regardless of whether or not they were heavily impacted by the virus or not. This pro rata allocation was generally based on historical revenue and facility size. Again, this approach was simple, swift and effective. But a consequence of this approach is that some providers received more funds than they need and others received significantly less than they need. Because of our geographic density in hard hit market early in the pandemic and the resulting disproportionate impact to our occupancy and operating costs, coupled with what appears to be a slower and more complex recovery that initially held for. Genesis and many others in the industry need timely and additional government sponsored financial support, which is essential to meeting our responsibilities and obligations to patients, residents, employees and all other stakeholders. On August 7, the administration announced some details around the distribution of the $5 billion provider Relief Fund allocation, specifically earmarked for skilled nursing facility. While we greatly appreciate the support that the administration has provided to the skilled nursing industry throughout the pandemic, we are concerned that this round of funding does not address the acute incremental funding needs of skilled nursing providers disproportionately impacted by the virus. We strongly believe skilled nursing providers should afforded the same treatment as acute care hospitals who were granted additional federal funds based on the number of COVID-19 patients they care for. We will continue to engage and work closely with our industry advocates, elected officials and the administration to thoughtfully articulate the resource needs of our industry, particularly those hardest hit by the pandemic. We're so appreciative. In conclusion, I just want to want to express my sincere appreciation. We are actually humbled by the commitment and dedication of all those caregivers at Genesis and around the nation who put the well-being of our frail and vulnerable seniors ahead of their own. We will never stop fighting for our patients, our residents and our staff, as well as the industry as a whole. With that I'd like to turn the call over to Tom DiVittorio, Genesis' Chief Financial Officer. Tom?
- Tom DiVittorio:
- Thank you, George. Good morning. My comments this morning are focused on the pandemic's impact to our second quarter financial results, along with some updates through July. I will also address liquidity and other capital related matters. Beginning with the top line, reimbursement rates grew across all payer types, with weighted average rate growth of 11%. This increase reflects higher patient acuity, as well as COVID specific supplemental funding provided by many state Medicaid programs. We recognized $40 million of additional COVID-19 state funding in 2Q '20 and $46 million year-to-date. We have commitments for an additional $10 million of supplemental state funding, and we remain optimistic that additional funding will be appropriated over the next few months As George noted, operating occupancy of 77% in 2Q '20 was down 11% on a same-store basis from 2Q '19. The occupancy low point in the quarter occurred in the month of June when occupancy was 74.2%. Occupancy grew 60 basis points to 74.8% in July and continues to move in a positive direction thus far in August. These trends in occupancy correspond to the number of facilities we placed on self-imposed admission restrictions over the course of the second quarter. At its peak in May, the company had voluntarily placed over 140 of its facilities simultaneously on admission hold. And over the course of the entire quarter 217 facilities had admission restrictions for some period of time. By the end of June, there were only 41 facilities on admission hold. And there are currently just 31 facilities with these restrictions. At the outset of the pandemic, these self-imposed restrictions were implemented to limit risks of potential spread of the virus by individuals, either testing positive for COVID-19 or those who exhibited symptoms. With the recent rollout of our Admission Observation Units, we have adapted our operating model to safely admit patients while operating in a COVID-19 environment. Our operations team members are hard at work executing on a series of census development plans designed to rebuild occupancy in the new COVID-19 arena. We remain hopeful, occupancy will grow at an accelerated pace as we get past the seasonally weak summer months and as hospitals in our markets continue ramping up elective surgical procedures. Excluding state and federal support recognized during 2Q '20, we estimate the net impact of lost revenue caused by the pandemic, once adjusted for a commensurate reduction in variable costs resulted in reduced earnings of $67 million. Moving now to operating expenses, in the second quarter of 2020, we incurred over $145 million of incremental operating expenses as a direct result of the pandemic. This increase stems from higher labor costs predominantly in the nursing function, and includes increased use of agency staff, overtime and bonus pay, as well as additional workers compensation related expenses. Increases in non-labor costs stem from both the cost and usage of personal protective equipment, medical equipment, testing, dietary support and enhanced cleaning and environmental sanitation costs. Nearly 90% of the $145 million of COVID specific cost incurred in the second quarter were labor related. These cost levels have come down since their peak in the month of May, as we systematically reduced reliance on expensive agency labor and thoughtfully ratchet back enhanced pay programs and practices that were absolutely essential during the peak of the outbreaks, we experienced in the initial hotspot COVID-19 markets. Moving now to liquidity and related matters, although the pandemic had a material impact on the company's revenues and expenses in 2Q '20, the timely receipt of $228 million of federal and state grants proved sufficient to offset the $213 million of COVID related costs and lost revenue. As a result, the company was in compliance with financial covenants at June 30, 2020 and remains in compliance today. Liquidity at June 30, 2020, was $282 million. Included in liquidity is approximately $150 million of funds received under the Medicare accelerated and advanced payment program, administered by CMS. Recoupment of these advances is scheduled to begin next week, and will be [indiscernible] 2020. We are hopeful the federal government delays the scheduled recoupment of these funds, but to date, no action has been taken. Looking past the June quarter, the adverse effects of a depleted occupancy base and higher expenses necessary to safely operate our facilities are expected to moderate, but persist. These conditions have and will continue to result in operating losses and the depletion of liquidity levels until such time as our occupancy and expense levels return to pre-pandemic levels. Until such time, we remain reliant on timely receipt of federal and state resources to fund operating losses and to ensure the company can continue to meet all of its financial obligations. Because the pace of business recovery cannot be predicted and the continued timely receipt of adequate government financial support cannot be assured, we determined that such conditions raised substantial doubt about the company's ability to continue as a going concern. Given the circumstances, we are reviewing our options to materially reduce expenses and increase liquidity without negatively impacting our overall operations and the care we provide. We will continue to vigorously advocate for Genesis and others in the skilled nursing industry who were disproportionately impacted by COVID-19 by virtue of their physical location in relation to communities having high density outbreaks. Regardless of these financial challenges, we remain squarely focused on serving our patients and residents through the current COVID-19 environment and into the future. And with that Ran, please open up the line for any questions. Operator, I would ask if there are any questions at this time.
- Operator:
- [Operator Instructions] Your first question comes from the line of Frank Morgan from RBC Capital. Your line is now open. Please ask your question.
- Frank Morgan:
- I guess I'll start with that last comment you made Tom about addressing going concern issues. Any initial thoughts on kind of what you might proceed with obviously, that this advanced payment - repayment that will start soon is clearly an issue, but any initial kind of thoughts on what - how your strategy may develop?
- George Hager:
- Yeah. Frank, this is George, I'll take that. Look, what's hard to measure right now is the extent of the recovery. As you know, July and August are traditionally, seasonally low octane levels for the industry, at least in our market. So it's very difficult to measure the extent of the recovery. We still do not have clarity around the $5 billion - recently announced $5 billion allocation. That allocation is critically important. It has both a pro rata allocation in it, as well as a value-based component to it. We still are lacking detail on both method and timing for that allocation also critically important. We continue to do everything possible prioritizing protection of our - and safety of our patients and staff. Around the cost levels, we'll continue to look at bringing down agency utilization, premium labor costs as a result of the pandemic, so it's a moving target at this point. We are continuing to focus on maximizing liquidity, driving expenses at the lowest possible level we can and continuing to advocate for the necessary support we need, as we are principally located in the early hotspot states from the federal and state government to support our efforts.
- Frank Morgan:
- Got you and I know you mentioned additional divestitures that you'd complete in the quarter. But is there anything there from a timing standpoint you think you could realistically do at this point? Are there enough assets that you could shed in any kind of timely manner or get any kind of other kind of concessions or assistance?
- George Hager:
- Frank, it's been surprising, especially in the earlier parts of the pandemic, we weren't able to execute some transactions, there continues to be strong interest, especially in terms of our market on the East Coast as the pandemic accelerated and more significantly impacted some of those markets, the ability to execute some of those transactions became more difficult. I do think when we get a little more clarity around recovery rates on senses, we can begin getting the transactions that we actually have in the market completed. And I think the very positive thing from a financial perspective is the per bed value in our industry pre-pandemic continue to be very, very strong and especially in serving that market. So we will continue to pursue those transactions. They are liquidity enhancing transactions. And they continue to meet our strategic objectives to narrow our footprint and focus on the markets where we are strongest from an operating perspective. But you sit here today, I would say those transactions are delayed for some period until we see recovery rates on senses.
- Frank Morgan:
- Got you, one final one and I'll hop off here. Did you break out like how much you potentially could receive in incremental state programs in terms of temporary relief? And then you said noticed that the skill mix drop - or like it was a drop on the insurance side not so much on the Medicare side any color there and I'll hope off.
- Tom DiVittorio:
- Yeah. Frank, thus far, we have $10 million of hard commitments from the states that we're operating in. But we expect that we're going to see more there. It's tough to quantify until we have validation from the States but we know states like New Jersey are working on something that we're hopeful for. And other states that have provided funding up to a certain date, we expect that they'll continue to extend those additional dollars as the state of emergencies continue in those states, but tough to quantify beyond the $10 million of hard commitments we have today, but again, optimistic there. And then Frank your last question, remind me?
- Frank Morgan:
- Yes, it looked like your skill mix, - it looked like it was like the commercial or insurance that drop, but the fee for service not seen flat, just what - thanks?
- Tom DiVittorio:
- Yeah, so when you think about the fact - with the three day hospital stay being lifted and one of the strategies there from the government, which was very wise, was in cases where we could care in place for patients, traditional long-term care Medicaid patients say that had skilled needs as a result of COVID, we could keep them in our beds out of the hospitals and care for them effectively in our building. So imagine that although a fair amount of our traditional skilled mix, on the Medicare side, the short stay patient was depleted, because of discharges and because of lack of admissions, we were able to supplement that with the skilling of patients that required skilled care that traditionally would have been in a long-term Medicaid status. On the insurance side, however, those are typically more your traditional very short stay younger patient population of the greater than 65s. And of course those were the patients that we - were discharged and not being readmitted. And very few of our long-term care patients who are dually eligible at that stage of their life are choosing Medicare Advantage plans. They're there. They're falling back on traditional indemnity. Does that answer your question?
- Frank Morgan:
- It does. Thank you very much.
- Tom DiVittorio:
- Thanks Frank.
- Operator:
- There are no further questions, please continue.
- George Hager:
- There are no further questions we very much appreciate everyone's continued support of Genesis. Obviously, this is a very difficult time for not only Genesis, but the industry. We, as I said, appreciate your support. Hope everyone stays safe and well as we see the virus to begin to accelerate in certain markets. Tom and Rich and JoAnne and team, Lori and be available for questions after the call. Thank you again and stay safe.
- Operator:
- This concludes today's conference call. Thank you for participating. You may now disconnect.
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