Gen Digital Inc.
Q4 2017 Earnings Call Transcript

Published: 16 Mar 2018

[Operator:]

Good morning. My name is Eileen, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the Fourth Quarter and Fiscal Year-End 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Lori Mayer, you may begin your conference.

[Lori Mayer:]

Good morning, and thank you for joining us today. We issued our earnings press release earlier this morning. This announcement is available in the Investor Relations section of our website at genesishcc.com. Replay of this call will also be available on our website for one year. Before we begin, I would 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. 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 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 mentioned 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 had direct operating assets, employees or revenue 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 and 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’ll 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. Over the past several years, the post-acute industry has gone through revolutionary change with increased regulatory focus on value, cost efficiencies, outcomes, care coordination and patient-centered care. As healthcare reform continues to transform the delivery of healthcare by changing reimbursement and holding providers accountable for cost and quality of care provided. The industry continues to experience declining total occupancy, skilled mix and length of stay. Further compounding these issues, government reimbursement rate growth is not keeping pace with inflation in cost, particularly nursing labor cost and the strength in labor market. And population growth is at an all-time low, as an 85-year old today would have been born in the middle of the Great Depression. Certainly, Genesis is no exception. The 2017 has proven to be another challenging year. We too continue to experience the headwinds impacting the entire industry, but our strong leadership, partnerships and national scale have helped us navigate through this difficult time. At this time, we are focused on positioning the company for long-term success, as we see the negative trends beginning to ease. So with that, I would like to focus the majority of my comments today looking forward, looking forward to 2018 and beyond. In February 2018, we announced the completion of a major financial restructuring designed to improve liquidity, reduce the cost of capital and improve the overall financial health of the company. In summary, first, we modified our lease and loan agreements, reducing fixed charges by $62 million annually from 2017 levels, including $54 million of permanent annual cash rent reduction, representing an 11% decrease in 2017 annual cash rents and $8 million in net annual cash interest reductions, representing a 10% decrease in cash interest obligations after taking into account the new ABL financing. Second, we entered into a new $555 million, five-year credit facility with MidCap-Apollo. Most significantly, this new credit facility eliminates our prior facility forbearance agreement and extends our ABL maturity three years to 2023. And third, our existing term loan lenders expanded our second lean term loan by $40 million. This in combination with our new ABL facility improves our overall liquidity position by $70 million. While we will not provide guidance again in 2018, as there are too many moving parts, not only related to the industry, but also in our own capital structure and with our own transactional activity. I will say that these refinancing agreements will significantly increase free cash flow and earnings in the coming year. Going forward, in 2018, we will continue to have a number of opportunities to improve our overall capital structure and reduce our cost of capital

[Tom DiVittorio:]

Thanks, George. Good morning, everyone. I’ll focus my comments first on operating results and trends and then on capital structure and balance sheet related matters. Revenue in 4Q 2017 of $1.33 billion declined $75 million or 5.3% from 4Q 2016 and adjusted EBITDAR of $143.6 million declined $13.1 million or 8.4% from 4Q 2016. Over 60% of the revenue and adjusted EBITDAR decline is attributed to the net impact of divestitures in excess of acquisitions. The remaining decline in revenue and adjusted EBITDAR is due to organic contraction, principally caused by lower occupancy and skilled mix, impacting both of our business segments and nursing wage inflation exceeding reimbursement rate growth. With respect to occupancy and mix, operating occupancy in 4Q 2017 of 84.7% declined 40 basis points from the prior-year quarter. This is the lowest current quarter over prior-year quarter decline in occupancy over the past seven quarters. Skilled days mix in 4Q 2017 of 18.7%, declined 60 basis points from the prior-year quarter. Within the category of skilled days mix, Medicare mix declined 80 basis points from the prior-year quarter, while the insurance category, which largely consists of Managed Medicare days increased 20 basis points. During the fourth quarter of 2017, we experienced a 2.3 decline in skilled patient admissions as compared to the fourth quarter last year. This is improved from a 5% year-over-year skilled admission decline in 3Q 2017. Within the 2.3% skilled patient admission decline, we experienced the 6.4% decline in Medicare admissions, offset by a 2.6% increase in Managed Medicare admissions. Average length of stay for patients discharged to home in the fourth quarter dropped 1.3 days as compared to the same quarter last year, while average managed Medicare patient length of stay were flat compared to the same quarter last year. Given the differential in the reimbursement rates and the average length of stay of Medicare patients versus Managed Medicare patients, this trend along with the overall decline in occupancy is one of the two primary contributors to our organic contraction this quarter. On the topic of all-in nursing labor cost versus reimbursement rate growth, 4Q 2017 wage inflation for non-overtime hours worked by our employed nursing staff grew 3.3% over 4Q 2016. Including overtime hours and agency costs, our all-in nursing wage cost per worked hour grew 3.6% in 4Q 2017 over 4Q 2016. These wage inflation statistics are unchanged from the trends we saw last quarter. This 3.6% all-in rate includes – continues to exceed the approximate 1.3% weighted average reimbursement rate growth we received from our payers over the same period. This relationship is the second of two primary contributors through organic pressure we experienced this quarter. As we look further ahead, here in 2018, and beyond the highly accretive impact of [indiscernible] we believe, we can balance continued organic pressure by aggressively managing our costs, further streamlining our operating support model and continuing to optimize our portfolio and geographic footprint. Now the capital structure and balance sheet matters. Restructuring transactions outlined by George, have had a significant favorable impact on the company’s financial profile. In addition to providing $70 million of immediate liquidity, the $62 million of fixed charge reductions improved Genesis’ pro forma fiscal year 2017 credit profile as follows

[Operator:]

Thank you, sir. [Operator Instructions] Your first question comes from the line of Joanna Gajuk from Bank of America. Please ask your question.

[Joanna Gajuk:]

Hi, good morning. Thank you, this is Joanna Gajuk. So on the – I guess, restructuring, two questions. So first, on the new covenants, either, can you talk about the level of those? Or maybe a better way to talk about it is the cushion you have versus those revised covenants now?

[Tom DiVittorio:]

Yes, Joanna, we obviously have a lot of different covenants in the many agreements we have and, I think, some of that information will be disclosed when we file our 10-K later today. I think, the important point is that we have really a substantial amount of cushion in these go forward covenants. I’d say, more so than we’ve had in the recent times.

[Joanna Gajuk:]

Okay, Okay. That’s good to hear. And then the second on the topic, so obviously, the progress you made on this restructuring, obviously, very positive. And there’s still couple of items outstanding, right? So can you give us color, if you can, on what’s still left? And how far along, I guess – you talk about before – about refinancing some debt. So where you stand there? Or any other color of any items that are outstanding, will be great.

[Tom DiVittorio:]

Yes. Sure, Joanna. I mean, there are opportunities for us and we’re actively pursuing opportunities, as George mentioned, to continue to reduce our cost of capital. We still have a fair number of properties that are under certain real estate bridge loans, where we believe, we can through refinancing those loans, maybe not necessarily with HUD financing, in the near term, but with other more traditional mortgage financing instruments to further reduce our cost of capital on some of our real estate debt.

[Joanna Gajuk:]

Great. So now you got, what, $60 million or so? And I guess, you talk about $80 million to $100 million, kind of, reduction when everything is said and done. So how should we think about the timing? Can you remind me whether you said it is going to be by the end of the year or midyear or whenever? And when you’re going to, kind of, finalize everything that you’re working on.

[Tom DiVittorio:]

Joanna, the bulk of what we were targeting, we have accomplished. And let me just comment on the – in our prior disclosures, we talked about a range of possibilities with respect to fixed charge reduction in the $80 million to $100 million range. That was clearly before we had gone down a path of deciding to take out and refinance our very large and important ABL credit facility. So when you – if you, for a moment, take into account or put aside the new ABL credit facility, we actually achieved about $72 million of the $80 million to $100 million of fixed charge reductions that we originally laid out. Obviously, the new credit facility, which provides us significantly more liquidity than the old facility is a bit more expensive, but there are opportunities for us, as George pointed out, and not just in the refinancing transactions, that I mentioned on the real estate side, but we have a fair number of leases with smaller landlords that are underperforming, over market rents, and we’ll turn our attention next to those opportunities, but we’re not prepared at this point to sort of recast the range. Feel like we accomplished a significant component of the restructuring, previously laid out, and we’ll keep you posted on our progress on the other opportunities that we’re working through.

[George Hager:]

Yes, Tom, if I could just add a few points. I think, it’s been publicly disclosed that both Sabra and Welltower are selling additional assets and majority of those assets will be subject to new leases where we will continue to operate those assets. In connection with those transactions, we also have continued opportunity to reduce overall cost of capital, Joanna. So these transactions, we expect, will occur over the year, we can’t predict exact timings when Welltower and Sabra will execute those transactions with new landlords, but we are encouraged by the progress in those transactions and the impact those transactions will have going forward for Genesis.

[Joanna Gajuk:]

Great. That’s helpful. And then, since I have here, George, on the, I guess, operations or fundamentals, can you just give us your, kind of, view in terms of where we are on the skilled nursing? Fundamental environment, whether you see things stabilizing or getting worse or improving? I mean, it sounds like you turn a little bit more, maybe optimistic, because of the demographics, soon turning, but any time frame that you can outline in terms of where you think the benefits will start to be meaningful? And I guess, what do you see in terms of Medicaid rates outlook, whether there’s meaningful improvement there? Thank you.

[George Hager:]

Joanna, I’ll talk about census and the overall environment, and I’ll let Tom, speak to the Medicaid rate issue. As Tom said in his comments, we are seeing moderation in the pressure, easing up the pressure on census. I do think that at – by the end of 2018 and clearly sometime in 2019, we’re going to begin to see demographics marginally impacting demand while we continue to face length of stay pressure and pressure from continued value-based initiatives, which, we think, overall, in the long run, are good for the industry, but we see things moderating and as Tom also mentioned in his comments, we are extremely focused on the cost side of the business. We are focused on our support model. We are focused on other elements of operating cost that we believe can be managed to offset any marginal pressure in 2018. And clearly, the restructuring has a very, very material impact on free cash flow and earnings as we look forward. So we think, 2018 will be, obviously, a growth year for us. We might continue to see some marginal pressure on census, but we believe that can be more than offset by effective cost control as we look forward to the demand-supply fundamentals improving going forward at the end of 2018 and into 2019.

[Joanna Gajuk:]

I’m sorry, can I follow-up on the – on this comment there? So you said that $50 million are cost savings? Or you’re saying that you are finding even more cost savings for this year, for 2018?

[George Hager:]

Did you say $50 million of cost savings?

[Joanna Gajuk:]

Yes. $50 million that, I guess, you talk about before. So is that what you’re referring to benefiting 2018? Or there’s additional cost that you are finding?

[George Hager:]

Joanna, we’re not going to quantify or make any projections or forecast our guidance for 2018, but I will say – tell you that there are cost savings opportunities above those previously proposed.

[Joanna Gajuk:]

Great. Thank you. I’ll go back to the queue.

[George Hager:]

And then Tom, if you want to address Medicaid rates?

[Tom DiVittorio:]

Yes, sure. So Joanna, as you know, over the last two years, we’ve sort of been hovering around this sub-1% weighted average Medicaid rate growth. I think, again, we’re not, obviously, providing a whole lot of guidance here, but I would say that our Medicaid rate expectations for 2018 aren’t much different than what we’ve seen over the last two years. It does seem that over the last two years, we’ve had more negative surprises as the year has gone on. I’m hopeful and there may be some, I’d say, early signs that perhaps, this year we see more positive surprises, but I think, it’s a little too early to tell.

[Operator:]

Your next question comes from the line of Dana Hambly with Stephens. Please ask your question.

[Dana Hambly:]

Thanks for taking the questions. You noted, Tom, in the prepared remarks on the two main pressures on your organic growth and I feel like you’ve answered, but I just want to make sure I’m fully understanding. Within those – the two main pressures, what – where do you feel that you exert the most control? And then what are some of the areas there where you’re just, kind of, subject to market forces?

[Tom DiVittorio:]

Well, I’d say where we exert the most control is probably around the wage inflation issue. They’re both difficult to control. So let me just preface by saying that, but there are opportunities. I mean, we made some investments, Dana, back in – starting back in the third quarter of last year, to try to stabilize our labor force in some of the more difficult labor markets. And we made those investments and they are important investments and the objective there, of course, is to stabilize and ultimately improve retention rates and reduce turnover and that over time should result in less reliance and utilization of expense of agency and overtime hours. So I think, there, we have some opportunity to continue to try to aggressively work towards realizing the return on those investments, but again, it is challenging in a labor market like we have today that is quite robust.

[Dana Hambly:]

All right. Okay. The other operating expense category, I had it up about 12% year-over-year, even though, revenue is down. Could you just remind me some of the bigger ticket items in that bucket? And what really is driving the growth there?

[Tom DiVittorio:]

Yes. The driving factor there, Dana, when you’re looking on a year-over-year basis is, you recall, in the second quarter of last year, 2017, we entered into the strategic partnership around our dining services. And so, what you have is really a reclassification of employed labor that used to be in salaries, wages and benefits, then shifting down to other operating expenses as a purchased service or labor. So it’s more, I think, that – what you’re looking at there is more classification between salaries and wages than it is any real meaningful growth.

[Dana Hambly:]

Okay. All right, but, like, professional liability expenses, other things like that, pretty stable?

[Tom DiVittorio:]

Yes. Yes. In fact, if anything, maybe, a little bit of positive movement there.

[Dana Hambly:]

Okay. All right. What are your capital expenditure needs for the year? And did you have a general rule of thumb on either per-bed spending or per-facility spending that we can use?

[Tom DiVittorio:]

We typically look at it sort of in the aggregate. So obviously, we have capital spending needs beyond just what’s happening on the ground and facilities. We’ve got an IT infrastructure. We have a large rehab company. So when you take all of the capital needs, but still divide them over the company’s bed base, we tend to spend around about $1,100 a bed across the portfolio. And we’ll continue to spend at that level.

[Dana Hambly:]

Okay. Any big, kind of, nonroutine capital needs that you need to spend on either this year or next year?

[Tom DiVittorio:]

Not capital needs where it will come off of our balance sheet, necessarily. We are – As we have in the past, we’ve got a couple of de novo, new-build projects, power back projects, two in particular

[Dana Hambly:]

All right. Great. And you said, Tom, K should be out later today?

[Tom DiVittorio:]

Yes. It’ll be out later today. Again, just buttoning up the – as you can imagine, with all the moving parts of the transactions we closed over the last couple of weeks, there’s a lot of audit work to be done and that’s quite frankly the reason for our somewhat delayed announcement timing and filing of the K.

[Dana Hambly:]

Sure. Okay, all right. I appreciate the time. Thanks.

[Tom DiVittorio:]

Thanks, Dana.

[Operator:]

Your next question comes from the line of Frank Morgan with RBC Capital Markets. Please ask your question.

[Frank Morgan:]

Good morning. I think, one of the areas you focused on was the continuation of portfolio rationalization and maybe, even exiting some of your non-core markets. I’m just curious, what is the potential there in terms of how much you could do? And are there complications or lease maturity dates, before which you can do that? But I’m just interested in markets that you want to get out. How much would that represent? And how much deleveraging would come with that? And then, how much would be the cash flow impact from exiting those markets?

[George Hager:]

Frank, I – we’d like not to be terribly specific here, because the transactions and there are many that are in process that we expect to execute in 2018. I will say that some of those assets are owned and obviously, we have much more flexibility there. But even with the leased assets, we really do not have much concern about lease termination dates. We have worked with our landlords in the past regarding exiting leased properties and getting the appropriate reduction in our lease rates – in our master lease rates from our landlords. And generally speaking, our major landlords have been supportive of us, disposing or exiting markets where we don’t operate effectively, this because of lack of density, lack of experience, lack of history, et cetera, but if I was going to put a ballpark number, we operate well over 50,000 beds. If you wanted to think about a number of facilities or so, I can be thinking in the 10% to 15% range of our properties that are in non-core markets – non-core markets with operating metrics that are significantly lower than our operating metrics in our core markets. And as I said in my comments, there are some selective opportunities for us to attractively increase our density in some of our core markets. So on a net basis, I’d still might use that 10% to 15% range over time with no specific timing on execution during the year. I think, all those transactions will happen incrementally over the entire fiscal year of 2018, but many transactions, currently, well in process.

[Frank Morgan:]

Thank you very much.

[Operator:]

[Operator Instructions] Your next question comes from the line of Joanna Gajuk from Bank of America. Please ask your question.

[Joanna Gajuk:]

Thank you. Yes. Just follow- up on – we didn’t talk about it. The BPCI, right? So you gave the number. Can you remind us what was your, I guess, payments in fourth quarter from the BPCI program?

[Thomas DiVittorio:]

Yes, Joanna, in the fourth quarter, we recognized. [Technical difficulty] of gain share in that program.

[Joanna Gajuk:]

I’m sorry. It just broke up. How much was it?

[Thomas DiVittorio:]

$4 million.

[Joanna Gajuk:]

$4 million. Okay. All right, so it was roughly as expected, right, because you talk about $4 million to $5 million in the fourth quarter.

[Thomas DiVittorio:]

Yes.

[Joanna Gajuk:]

All right. Then so, and then where you spend on MSSP, I guess, we talk before about that you did not receive the bonus payments in 2017, but what’s the expectation for 2018 if there is one to be made now in terms of any bonus payments in 2018?

[Thomas DiVittorio:]

Joanna, in 2018 for MSSP, we do not have any gain share reflected in our expectations or in our view of our growth opportunities in 2018. And the reason for that is that the Medicare Shared Savings Program is reconciled and settled on an annual basis, retrospectively. We did not receive our reconciliation until very late in fiscal 2017 related to 2016 activity. We have made significant adjustments to how we are operationalizing the Medicare Shared Savings Program, but they were made late in the year in 2017 and early in 2018. So no expectation to recognize gain share in 2018, which would’ve related to 2017 activity, but we do have expectations that, that program will be a very positive program for us going forward and we’ll expect gain share going forward into 2019.

[Joanna Gajuk:]

Okay. I see. And then, on a, kind of, related topic in terms of Medicare reimbursement and advanced proposal that CMS came out with previously. Do you expect the CMS to finalize this advanced proposal the way – exactly as it was proposed or is there any risk that CMS might decide to make some changes and make it worse, maybe, for the industry and also the timing of it? Whether we’re going to hear from CMS late April, May, and whether they would pursue it for fiscal 2019? Thank you.

[George Hager:]

Joanna, if you’re referring to RS – RCS-1?

[Joanna Gajuk:]

Right, correct.

[George Hager:]

Yes, in early March, CMS actually announced that they don’t have an RCS-1 proposed policy at this point and – nor did they have a timeline for implementation. So this was really the first formal indication from CMS since they released the advanced notice last year that they weren’t prepared to have a specific policy recommendation on RCS-1. So – and we’re not really surprised by that. I mean, we actually generally support RCS-1, but we knew that it’s quite complicated in terms of its implementation. And so – we’re not surprised that the timing at this point is a bit unclear. We expect that if it does get implemented, it’s going to be a couple of years out.

[Joanna Gajuk:]

Okay. So at this point, it’s not going to happen this year for 2019 or maybe next year they will come out with something for the future implementation?

[George Hager:]

Joanna, I think is something not yet implemented, which we would expect it would. We believe, earliest is likely fiscal 2020, government fiscal 2020 would be [indiscernible] is the most likely time period that we see today. We do think that a system like RCS-1 might get implemented. We think that on the margin with what we know today and the analysis we’ve done is positive for the industry. And not necessarily from the top line, because the mandate on the implementation of the new program is that it’d be implemented on a budget-neutral basis, which would say that it should equate to normalized revenues at historic levels. I think, where we have tremendous opportunity in an RCS-1 type program is more flexibility around managing cost. And that’s why, I think, we, as an industry, would generally be supportive of an RCS-1 system or even an episodic system, but at this point, little hard to tell. What we believe, more likely, that something like RCS-1 will be implemented out in fiscal 2020 or beyond.

[Joanna Gajuk:]

Great. Thank you so much.

[Operator:]

[Operator Instructions] There are no further questions at this time. You may continue, Mr. Hager. George.

[George Hager:]

Thank you very much for joining us. Looking forward to a very successful 2018 with the significant components of our restructuring behind us. Thanks for your continued interest and support. I think, that concludes our call.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.