LHC Group, Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the LHC Group First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It is now my pleasure to turn the floor over to Eric Elliott. Please go ahead, sir.

[Eric C. Elliott:]

Thank you, Huey, and welcome, everyone, to LHC Group's earnings conference call for the first quarter ended March 31, 2013. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy along with other key information about LHC Group and the industry on our website at www.lhcgroup.com. In a moment, we'll hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Pete Roman, Chief Financial Officer of LHC Group. Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2013 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events. Now I'm pleased to introduce the CEO of LHC Group, Keith Myers.

[Keith G. Myers:]

Thank you, Eric, and good morning, everyone. I'd like to begin by once again congratulating and thanking our 8,500 team members for their unwavering commitment to excellence and for consistently delivering high-quality care for the growing number of patients, families and communities we serve. I've never been more proud of our team. Through their hard work, ingenuity and commitment to excellence, our team of dedicated professional caregivers have positioned our company to be successful not only in the current environment, but long into the future. Since our last earnings call was just 2 months ago, we'll keep our prepared remarks short this morning and allow more time for Q&A. So before turning it over to Pete, I wanted to talk a little bit about pipeline activity. As I mentioned on our last earnings call, the volume of inbound calls to our corporate development team related to potential acquisition or partnership opportunities continues to increase. With the triggering of sequestration, we anticipate this volume to increase even more. Without question, hospitals and health systems around the country recognize that LHC Group is the industry leader in post-acute care partnerships. Our 15 years of hospital partnership experience, as well as our proven clinical programs that are reducing ER visits and readmission rates continue to set us apart as the post-acute partner of choice for leading hospitals and health systems across the country. And we can talk more about this in the Q&A and answer any other questions you'll have, but at this time, I'll turn the call over to Don and Pete. Pete?

[Peter J. Roman:]

Thank you, Keith, and good morning, everyone. For the first quarter of 2013, our consolidated net service revenue was $162 million and net income attributable to LHC Group was $6.3 million or $0.37 per diluted share. Sequestration reduced revenue by approximately $1.2 million in the quarter. Home-based segment revenue in the quarter was $142 million with $137.8 million organic. Compared to the same quarter last year, total Home-based segment revenue growth was 1.7% and Medicare revenue growth was 2.6%. Facility-based segment revenue was $20 million in the first quarter, approximately $800,000 higher than the same quarter last year. Our consolidated gross margin was 42.4% of revenue, down from 42.9% last quarter. Payroll taxes, which are higher in the early part of each year, primarily accounted for the increase in costs over the last quarter. We also benefited from lower employee group health claim experience, which is also normal for the first quarter of that year. And finally, we only transitioned 4 agencies to point of care in the first quarter and that began in March. We expect to transition 75 agencies over the remainder of 2013. Our G&A expense increased as a percent of revenue to 31.9% compared to 31.3% last quarter. The increase is due to the reduction of revenue from sequestration and the additional G&A related to the recently acquired Home Health and hospice service lines of Addus. Over 2013, we expect gross margins in the range of 40.5% to 41.5%, and G&A in the range of 31.5% to 32.5%. These margins include the effect of sequestration, which we expect to be approximately $3.3 million each quarter for the rest of the year. Our patient receivables from commercial payors continue to increase as a percent of total receivables and are 33.9% of total receivables at March 31. As these receivables increase relative to our total, our bad debt reserves increased as a percent of receivables. This quarter, we also identified a few batches of commercial claims, which we consider to have a higher non-collection risk due to either problems with the change in the claim submission format or administrative processing issues. Based on that assessment, we accelerated recording of the reserve on those claims, which resulted in an increase of bad debt expense in the March quarter. These claims would have generated a reserve normally as they ace out over the year had we not made the adjustment in the quarters, but this is simply a move between quarters during the year. Over 2013, we expect bad debt expense to be 2% of revenue or less. For the first quarter of 2013, our effective tax rate was 41.9% and was higher due to our writing off a state tax refund that we were unable to recover. For the year, we expect our effective tax rate to remain around 41%. We are reaffirming our full year 2013 guidance issue on March 6 for net service revenue of $660 million to $680 million and fully diluted earnings per share in the range of $1.10 to $1.30. This guidance includes the impact of sequestration, as well as the impact of the recently announced acquisition of Home Health service line of Addus HomeCare Corp. This guidance, however, does not take into account the impact of other future reimbursement changes, if any; future acquisitions or share repurchases, if made; de novo locations, if opened; or future legal expenses related to the previously disclosed investigation and lawsuit, if necessary. We can drill down on these results further in Q&A. Now I'm pleased to turn the call over to Don Stelly. Don?

[Donald D. Stelly:]

Thank you, Pete, and thanks to all joining our call this morning. I, too, will keep my prepared remarks brief as to allow more time for Q&A. So first, let me touch on volumes. Overall, growth and total new home health admissions was 9.1% compared to the same period prior year and organic growth was 3.7%. I'm pleased to note that this now extends our trend of positive organic growth in total new admissions for 18 consecutive quarters dating back to the third quarter of 2008. As I previously stated last quarter, we still expect organic growth in Home Health admissions to be around 5% for the year and I will keep you abreast of any material change to that. Our Home Health average daily census increased 8.8% to 35,481 in the first quarter of 2013 as compared to 32,608 in the first quarter of 2012, while organic growth in our Home Health average daily census was 1.7%. Additionally, we also saw our hospice and LTAC service lines hold greater volumes there in this quarter as compared to the same period prior year. All teams helped to exceed our internal expectations for the quarter and volume, and while we remain pleased with that and where we are, we're laser-focused on capturing the opportunities in front of us. Turning to our point of care deployment. We continue to convert our portfolio to point of care, as Pete alluded to, and we like our process, our results and, honestly, we like that our teams have adapted to this beautifully. Since our last call, 14 agencies total have gone live, which now brings portfolio in that model to 131 agencies. I mentioned on the last call that we were seeing about a 200-basis-point improvement in margin -- operating margin from pre-conversion baseline. That number still holds and is a contributory factor for our overall improved efficiencies inside of the reporting quarter. Lastly, I'll comment on Addus and its acquisition. The results for the first quarter were in line with our expectations, and while we still have a lot of work to do, we're on track by breakeven expectations, as we said last call. In closing, I'd actually like to address our LHC Group team. We talk about putting noise aside, paying attention to the details and capturing opportunity. These results are reflection of you doing just that. So well done, and thank you. Huey, we'll now go into the Q&A portion of our call.

[Operator:]

[Operator Instructions] It looks like our first question comes from the line of Darren Lehrich with Deutsche Bank.

[Darren Lehrich:]

I wanted to just ask for a little bit more of an update on Addus. And I think you gave us some pacing of your integration activities and how you expected that to play out. Just wondering if that's still in line with some -- how you're thinking about it and any commentary you can help us with on Q2 and the impact or dilution from Addus out of the gates? Was that looking any different than what you talked about previously?

[Donald D. Stelly:]

Darren, this is Don. I'll take the first part of that. Just a little bit of color. I think during the last call, we told you that we expected inside of this quarter a $0.04 dilution based on the acquisition. When all was said and done, we actually are shy of that, just above $0.03, but let me tell you it was because of the G&A that we did not add. Really at the operational level, it did exactly what I thought it would do. The volume runs, both from what we're doing historically and what we think we're going to do, is also on track. And so what we're looking at is the whole year this thing will break even. So as it loses money in these first few months, it certainly will turn that around as expected in the last, but I wouldn't, on a yearly basis, bake in any accretion for it right now. We still have a lot of work to do. We still have many factors that all that we knew in diligence, are now front and center to take it to an area where we really want it to produce well in 2014. Specific to this quarter, I'll let Pete talk a little bit about where we are and where we think we'll be for.

[Peter J. Roman:]

Yes, well, as far as the first quarter goes, we thought we would be about a $0.04 loss. Came in a little bit below that, not a great deal, maybe $0.005 or better than that. When we forecasted out, we're reducing the loss in the second quarter to about half of that. And then it turns around thereafter. I mean, one thing that you kind of have to remember on this one is that we're in a couple of new states that are -- California and Illinois that have some pretty substantial operations. We're just getting our arms around all that kind of stuff. We're also rolling out point of care in California. So I think that there's enough moving parts in the Addus transaction. Really, I feel comfortable with the breakeven across the year and kind of the slope that we have on it, but I kind of agree with Don. I don't think I'd bake any kind of accretion just yet into that acquisition.

[Darren Lehrich:]

Understood. And do you have all your tie-in notices? I'm just wondering where you stand with regard to ability to collect from Medicare.

[Peter J. Roman:]

Yes, not yet. Not yet.

[Darren Lehrich:]

And the timing for that is what?

[Peter J. Roman:]

I mean, I think probably the second quarter would be a good -- that would be relatively timely in my mind since we just acquired it, but it could very well go into the third quarter.

[Operator:]

[Operator Instructions] Presenters, at this time, I am showing no additional questioners in the queue. I'd like to turn the program back over to Keith Myers for any additional or closing remarks.

[Donald D. Stelly:]

Can I say just one thing? I mean this is -- I don't mean to interrupt. Every quarter for the last however many years, we've been able to provide some insight and some color to the numbers and the financial statements and our expectations, and we've gone through and thanked a lot of people for the stuff they do, but I don't think we've ever really thanked Eric. And Eric has been doing an excellent job analyzing our numbers, giving us data and color so that we can come out here and really give meaningful information on these calls. So I just want to take a minute and thank you. You make us look real smart and you make our jobs a lot easier.

[Eric C. Elliott:]

I appreciate it.

[Keith G. Myers:]

So thanks, and let me just mention one other thing. I encourage you to -- all of you that are watching the events unfold around rebasing co-pay or any of those things in discussion in D.C., to stay in touch with Eric Berger at the partnership. Visit the website, www.homehealth4america.org. There's new information that will be published today. Eric just had a press conference this morning and released new data from Dobson DaVanzo and Avalere, that the core of our argument with -- and discussions, I should say, rather than argument, with CMS, MedPAC and members on the Hill that are getting traction. So I won't get into detail there, but there is information that's available, I think, that would be useful for you to understand our position as we lobby and hopefully get them to do the right thing. So on behalf of all of us here at LHC Group, thank you, again, for taking the time to listen in and participate in our call. And as always, we are available to answer any questions that may come up between quarterly earnings calls. So have a good day. Thank you for your support, and thank you for the confidence and trust you place in us. Have a good day.

[Operator:]

Thank you, gentlemen. And thank you, ladies and gentlemen, for your participation. This, again, does conclude today's conference. Thank you, and have a wonderful day. You may now all disconnect.