LHC Group, Inc.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the LHC Group's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn the call over to your host for today, Mr. Eric Elliott, Senior Vice President of Finance. Sir, you may begin.

[Eric C. Elliott:]

Thank you, Ben, and welcome, everyone, to LHC Group's Earnings Conference Call for the Second Quarter and 6 months ended June 30, 2014. 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 lhcgroup.com. In a moment, we'll hear from Keith Myers, Chief Executive Officer; Don Stelly, President Chief Operating Officer; and Jeff Kreger, 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 2014 and beyond. Actual results can 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. We are very pleased with our financial performance during the second quarter of 2014, and with our continued ability to execute our long-term growth strategy. Over the past 18 months, we have executed 10 transactions, acquiring 81 locations in 21 states. These locations had produced $151.1 million in aggregate trailing 12-month revenues at the time of acquisition versus the total purchase price of $101.5 million in cash. These numbers include our recently announced definitive Asset Purchase Agreement with Life Care Home Health scheduled to close on September 1. As we look ahead to the remainder of 2014 and beyond, we are well prepared and well positioned to continue increasing shareholder value by focusing on producing greater efficiencies and capitalizing on the opportunities to increase our geographical footprint in home health, hospice and community-based services. Upon the closing of the Life Care acquisition, our footprint will consist of 352 locations across 30 states. We are pleased to report that the integration of our previously announced acquisition of Deaconess Home Care and Elk Valley Health service continues to be on schedule and meet expectations. We are currently transitioning those locations to our point-of-care system and expect to be fully converted to our point-of-care by the end of the third quarter. We continued to be excited about the number of home health, hospice and community-based service acquisition opportunities on our growth pipeline. Valuations are favorable so, therefore, we recently increased our revolving credit facility from $100 million to $225 million, and with only $70 million outstanding on our current -- in our current leverage ratio at 1.3% EBITDA, we are well positioned to capitalize in this environment. Our future plans also include strategies to leverage our reputation and goodwill to more aggressively overlay hospice and community-based services in markets where we have a strong presence as a home health provider. I'll now turn the call over to Don and Jeff, but before doing so, I want to once again welcome the Life Care employees that will soon be joining the LHC Group family and commend and thank all of our dedicated hard-working employees for their commitment to those we are privileged to serve in communities across the country. Jeff?

[Jeffrey M. Kreger:]

Thank you, Keith, and good morning, everyone. For the second quarter of 2014, our consolidated net service revenue was $188.9 million. Our net income was $6.1 million and our fully diluted EPS was $0.35 per share. Included in pretax earnings for the quarter were $947,000 of unanticipated expenses comprised of the following 3 items

[Donald D. Stelly:]

Thank you, Jeff, and good morning to everyone. Earlier in the year, I discussed initiatives that we knew key going into this 2014. If you recall, those were

[Operator:]

[Operator Instructions] Our first question comes from the line of Frank Morgan of RBC Capital Markets.

[Frank G. Morgan:]

This is a very high-level question about the regulatory backdrop. I'm just curious, do you sense we are getting near some type of inflection point with regard to the regulatory backdrop, certainly, this -- removing the physician narrative? Just be curious in your thoughts on that, and any other signals that you see out there that would suggest that maybe this pendulum is starting to swing back to a more normalcy after a period of a lot of cuts and a lot of mechanical changes?

[Keith G. Myers:]

Yes, Frank, this is Keith. I'll take the first stab at that. While I hesitate to say it, it does appear that we've got a little less headwind today than we had a year ago. And certainly, if we're reading the tea leaves on face-to-face and some of the other things were hearing, it seems that way, but I don't think we're out of the woods yet, and I say that to tell you that we're really redoubling our efforts in Washington, D.C. at the partnership level. And we're not taking our foot off the gas there by any means. I still think there's a lot of work to do. Don, do you want to add anything there?

[Donald D. Stelly:]

Yes, Frank, I'll add and probably echo Keith. Landscape in total, I guess, is hard to opine on, but this face-to-face consideration is huge for us. It's huge for the patients, it's huge for the way we front end [ph] the admissions and candidly, it's huge on the backside because the majority of our compliance efforts tend to be around face-to-face, whether it's our own internal processes of putting agencies on bill hole when it's not proper, to that of the third party. So we couldn't be more pleased with that. We actually think it's going to be a huge tailwind for us in our growth initiatives, and I think my only other comment is we'd like to hope that's the case, that we have some relief. But I hope you see in my prepared remarks, what I'm really trying to convey is that I think the company and -- looking through our shareholder eyes, we believe our shareholders are very pleased with the results we've been able to turn in, in these last couple of years, while we position ourselves for long-term viability. And part of that electronic health platform, part of the data mine and then business intelligence is to mitigate regulatory nuances, honestly, faster than others and more appropriately. So while we hope we have some relief, I'm not going to tell you we're counting on that, and so we're preparing for it.

[Frank G. Morgan:]

Okay. Well, maybe I think you made reference to the hospice business, the opportunities you're seeing there in terms of your development pipeline. I'm just curious what are you seeing and what do you think is really driving that growth? And where do you see valuations in that space? And then, finally, the positive adjustment, the $972,000. Could you explain that just a little bit more? And then, if there were any other sort of prior-period related adjustments that you maybe you didn't callout that are there.

[Keith G. Myers:]

This is Keith again, I'll take the first part. On hospice, there really 2 things, I mean, we talked about in the prepared remarks that in markets where we have a strong presence in home health, we're sourcing smaller hospice providers in those markets, and in many cases, maybe rebranding those, but really just leveraging the relationships we have in the market to build a strong program. And in those cases, multiples are lower because many times you're just buying the, really, the license to operate in the skeleton staff. On the other side, I mean, more broadly, we're looking at bigger hospice opportunities to accelerate that strategy a lot. And if there's significant overlap in existing home health markets for us, that makes it more attractive. And where we see multiple in hospice is probably somewhere around 1x revenue, and we tend to look at it more in a revenue multiple than an EBITDA multiple because, honestly, we see a lot of hospices that come to us that have been somewhat prepped for sale and the EBITDA multiples are -- we don't believe would be sustainable long term. So Jeff, you want to take the other question?

[Jeffrey M. Kreger:]

Sure. Frank, this is Jeff Kreger. On the contractual reserve matter, effectively what it relates to, Frank, is in fact, last year, that -- not even from this year, in prior years, we had over recorded a contractual on some commercial payer contracts, which effectively means we had, in fact, under recorded the expected revenue. As the billings came through, and we realized the cash collections, it came to our attention during the quarter that over recorded contractual was, in fact, no longer necessary, and we removed that reserves. So that was the $972,000 impact, we believe onetime. We've got our contractual contracts and payment -- expected payment rates now more appropriate lined up in our systems.

[Frank G. Morgan:]

And any other short callouts that are positive or negatives from prior periods?

[Jeffrey M. Kreger:]

No, really just those we mentioned. The $972,000 of revenue pickup onetime, and then we had the $947,000, the 3 combined expense items that I talked about in my earlier remarks.

[Operator:]

Our next question comes from the line of Ralph Giacobbe of Crédit Suisse.

[Ralph Giacobbe:]

Maybe address the margins. You showed a nice sort of sequential jump, and on a year-over-year basis, it was flattish after some years of pressure. So, I guess, do you think we're at an inflection point with margins at least stabilizing? And maybe, talk about your recent deals and the impact they've had, and what you expect for them to have sort of on the margins going forward.

[Donald D. Stelly:]

Ralph, this is Don. I'll take at least the first part, maybe Jeff can chime in. I think you're absolutely right, I mean, when you dump in the kind of revenue and acquisitions that Keith alluded to over the last 18 months, none of which were fully accretive when we bought them. We've actually taken that dive, and if we just kind of tipped those out and did an apples-to-apples; it's affected our gross margin by about 140 basis points. So considering the margin that we turned in this quarter, understanding now that we do have those of the tipping point of accretion, I know Jeff alluded to where Addus now was versus where we bought it at. We actually see upside on that margin. That's what I was alluding to. And again, I know I'm beating a drum here, we're almost complete with our point-of-care conversion. The interesting part is that every one of those acquired assets, historically, we'd brought over on their legacy system and had to put them in queue to convert. We actually have made the approach now regardless of size that we do that immediately upon conversion. And so, the combination of operationally their [ph] drag, fixing that, and then, you overlay when we have it converted to point-of-care. We actually see upside in the margin of that book of revenues that we've [ph] put in from the last 18 months.

[Ralph Giacobbe:]

Okay. All right. That's helpful. And then, just maybe one of those lines [ph] in the release and in your prepared, I think you talked about sort of improving efficiencies. I'm sure some of that is the point-of-care, but obviously again, we've had sort of many years of reimbursement pressures where you seemingly squeezed cost and worked on those efficiencies. So I guess I'm just wondering where those incremental opportunities lie above and beyond sort of point-of-care, and if you can frame how much of the cost structure can potentially come out.

[Donald D. Stelly:]

Well, I'll leave the quantification probably to Jeff, but let me explain. When we say capture and efficiencies [ph], it really is not point-of-care that creates it. It's point-of-care that allows us to see the productivity, the skill mix and other nuances operationally inside of every episode much more concurrently than when you're on paper, and you have a staleness of [ph], turning it in or anything like that. So we get to take the labor force and make them more efficient inside of the episode. The second part is, is that with point-of-care, and if you look, I'll disclose this. When you look at all of the visits we make in an annual period, roughly, and don't hold me to the exact number, about $3.5 million, a [ph] lion's share is teaching and training. The point-of-care device allows us to become much more efficient of the things we have to teach and train inside of the episode. So it's a combination of both. It's using point-of-care to become efficient in managing the labor, and it's using the labor in a different fashion to

[Ralph Giacobbe:]

Okay. All right. And then, just on the, I guess, overlap argument. Can you give us a sense of maybe what percentage of your markets sort of have a hospice offering where you're sort of have a relationship? Or think sort of that could become part of LHC? And then, how quickly maybe can you build that out? And along those lines, how quickly can you build out community care?

[Donald D. Stelly:]

It's a bunch of good questions. I guess let me start by -- when you only have 37 locations out of our total 340 plus, you can see that we have a lot of upside. You add that to the fact that we have 251 identified that we could have hospice, then we have to go to your question of timing

[Keith G. Myers:]

Yes, I mean, so there are opportunities. There are always opportunities out there to accelerate how quickly you can add -- with just a [ph] hospice, for example, into markets. But it comes at a price, and you have to really weigh that against the alternatives of buying a small provider if you have enough influence, and you can build a substantial program from the ground up, so to speak. So we're actually assessing both of those.

[Operator:]

Our next question comes from the line of Darren Lehrich of Deutsche Bank.

[Darren Perkin Lehrich:]

Just first, I wanted to ask about your organic census [ph] growth. Obviously, much better result than first quarter. I'd be curious to get just some commentary from you about progression of census, and sort of, how you're thinking about how the balance of the year looks as it relates to volume?

[Donald D. Stelly:]

Darren, Don, again. As you can tell in the schedule, we were pleased with our organic admission growth, but it really didn't translate to census growth, if you look at same period prior year, but let me tell you why that this is. Is that when you look -- when we, I guess, probably 2 or 3 years ago, started this really accelerated acquisition track, we're seeing that the acquisitions we're buying have a different patient population. And because of that, the admits don't have the same length of stay or recert [ph] rate. For example, we -- in some of the Northwest, it's just a different chronicity factor. They're not as chronically ill, as they are debilitated and mobility restoration more prevalent. So we've seen our revenue-per-patient day, our revenue-per-episode demonstrate that. So I didn't want to mislead you and say that we expect to see that trend the same. With that, like others in our space, we're really starting to track the things that are moving so quickly and acquire so quickly, the incremental growth, and we're really pleased that we had about 7% incremental growth from last quarter. A part of that is bad [ph] weather hurt us, and it was not a hard comp, candidly, but I think you'll see that trend continue a little bit more. So in summary, I think, for the admits that we bring in, we will not have congruence senses growth like in the past because our footprint is changing so drastically. I mean, you look just 3 or 4 years ago, we've essentially almost doubled the amount of States [ph] that were in, and it just comes with a different demo, so to speak.

[Darren Perkin Lehrich:]

Yes, that's helpful color on what we're seeing here at these trends. So okay, and then the other 2 more things. Just first on the Life Care Home Health acquisition. I know you're not including into guidance sum [ph] until it is completed. Just could you frame for us in your mind the potential accretion that you see there? How it might be any different from an integration standpoint than some of the other transactions that you've been talking about here? And just any color you can give there.

[Donald D. Stelly:]

Again, Don. It's very early on in some of the details, but I can assure you it's not going to be accretive this year. It's definitely losing money, it's geographically dispersed. So the difference between it and Deaconess for us is that it's not as tightly knit because it's essentially coast-to-coast for us. Other than that, it's no different. We're going to deploy point-of-care and home care, home-base immediately. We intend to flip it around. Jeff said it. Although that, it is not in our guidance, I am comfortable saying that it's certainly not anticipated to adversely affect what we have effectively moved our range up too. Albeit, we do expect to be accretive beginning in January. So I'm really not concerned about it. When you look at what we've been able to do with Deaconess and Addus, this is a very important one for us, but it's scaled much smaller. And quite candidly, I think going to be easier to bring in.

[Darren Perkin Lehrich:]

Okay, that's great. And then, you referenced 3 unprofitable branches that you exited or disposed of. How much of a drag were those branches in the first half of the year? Just to get a sense for kind of the swing factor. Is that something we should think about?

[Donald D. Stelly:]

Jeff, you want to take that?

[Jeffrey M. Kreger:]

Yes, the 3 we closed down, Darren, were probably $300,000-or-so pretax dilution prior to their closure, which occurred over the course of 60 days in May and June.

[Darren Perkin Lehrich:]

Okay. And that $300,000, is that, that's a figure for the quarter? Or is that an annualized number?

[Jeffrey M. Kreger:]

Pretax loss for that 5- to 6-month period.

[Darren Perkin Lehrich:]

Okay. That's helpful. All right. And then, just last thing, I think the prior question or had asked about the community-based strategy, and I'm not sure that we got a full picture, but do you think that you have the ability to open those locations pretty easily in some of your existing markets? And maybe just a little bit more of an update on kind of the medium-term strategy to build some of that out?

[Keith G. Myers:]

Okay. Yes, this is Keith. Darren, I'll take that. So maybe I wasn't clear enough. Opening up on the agency from scratch as a -- just a start-up is really the last resort. It's not what we want to do. It's -- there are 2 ways we approach it, I mean, one is to buy a small provider, either in a community or in a region, maybe a cluster of 3 or 4 providers; and the other is to look at larger opportunities that are maybe multistate to fill in the service area. We're doing both of those. So really the last resort is a start-up, and I don't see us doing very many start-ups at all. That just takes too much time. We would rather buy just a small provider, and there are a lot of those opportunities available. We hardly ever come across a market where we don't easily find a provider to buy on the small side.

[Operator:]

[Operator Instructions] Our next question comes from the line of Matthew Gillmor of Robert W. Baird.

[Matthew D. Gillmor:]

Keith, you'd mentioned some ongoing advocacy efforts in D.C. with the partnership. Just curious if you could provide an update on what the top priorities are at this point?

[Keith G. Myers:]

The -- first of all, as I always -- I would encourage and point everyone -- encourage everyone to reach out and point you to Eric Burger [ph], who's an extremely capable and seasoned executive that we have leading that effort in D.C, but really, our focus is on education and the presentation of credible data to try and shape the thinking or reshape the thinking of policy makers in Washington, and that's what we found to be most effective. The emotional pleas and that type of advertising and messaging just doesn't resonate anymore. And so, we've been doing a lot of work with data. And then, even more recently, the data that differentiates the -- some of the more sophisticated and better-run agencies from agency -- agencies that are not so well run, because I think we all know when a bad story comes out in the press about a small agency that's not doing the right thing, there's this tendency in Washington for them to extrapolate that across the whole industry. So we realize that we need to do a better job of telling the good stories. So those are the 2 things that I think are most effective for us right now, but I do encourage you to follow-up with Eric.

[Matthew D. Gillmor:]

Okay. And just as a follow-up to the rule proposal. There were some changes to some of the case waits as well, and I was just curious if you'd been able to do any work and asses how that might impact LHC if that was something to call -- callout for next year?

[Donald D. Stelly:]

I think in -- and Eric's here with me. I think when we scored everything, it was a negative 0.8% apples-to-apples comparison, is that correct?

[Eric C. Elliott:]

That's correct [ph].

[Donald D. Stelly:]

And that's all the gives and takes inside of that rule, for those case wait changes.

[Operator:]

And I'm showing no further questions in queue. I'd like to turn the conference back over to Mr. Keith Myers for any closing remarks.

[Keith G. Myers:]

Okay. Thank you, Ben, and thank you, everyone, for joining us this morning, taking time to listen and participate in our call. As always, we're available to answer any questions that may come up between our quarterly calls. Thank you, and have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.