Allied Healthcare International Inc. F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

| About: Allied HealthCare (AHCI)

Allied Healthcare International Inc. (NASDAQ:AHCI)

F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

November 25, 2008, 10:00 am ET

Executives

Adam Holdsworth – IR, The Investor Relations Group

Sandy Young – CEO

Paul Weston – CFO

Analysts

Jeff Silber – BMO Capital Markets

Carl Wilk – NorthPointe Capital

Operator

Greetings and welcome to the Allied Healthcare fourth quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. (Operator instructions)

It is now my pleasure to introduce your host Mr. Adam Holdsworth. Mr. Holdsworth, you may begin.

Adam Holdsworth

Good morning and thank you for joining the call. On the call today, we have Sandy Young, Chief Executive Officer and Paul Weston, Chief Financial Officer.

Before we begin, I would like to take some moment to read the Safe Harbor statement. The following discussion, as well as the answers to your questions may include a number of forward-looking statements. Any forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties, including those set-out under the caption entitled Forward-looking Statements in the Annual Report and the company’s latest Form 10-K.

These risks and uncertainties could cause actual results to differ materially from the company’s forward-looking statements. In addition, please be advised that because of the prohibitions on selected disclosure the company, as a matter of policy does not disclose material that is non-public information on conference calls.

If one of your questions requires the disclosure of material non-public information, the company will not be able to respond to it. Just a reminder that a replay of this call will be available for one week, by dialing 877-660-6853, for domestic participants and 201-612-7415 for international participants. When prompted, please enter account number 2866 and conference ID number 304583.

I will now turn the call over to Mr. Young. Go ahead, Sandy.

Sandy Young

Thank you, Adam. Good morning and good afternoon to our U.S and European investors. This is Sandy Young and I am joined with Paul Weston, our CFO. I am going to ask Paul to take us through the earnings release and highlight some of the main points and then after that I will make some comments for about 7 to 10 minutes and then we’ll open up the call for questions. I’ll hand it over to Paul.

Paul Weston

Good morning and good afternoon ladies and gentlemen. All of you have had the opportunity to read our press release issued this morning. You have seen that we have reported net income of $2.9 million for quarter four, compared to $2.4 million in quarter three, $1.8 million in quarter two and $1.7 million in quarter one. Earnings per share increased to $0.06 in quarter four, compared to $0.05 in the previous quarter.

For the full year, our net income from continuing operations at $8.8 million compared to prior year $3.6 million, an increase of 143%. Earnings per share for the year were $0.19 compared to $0.08 in the prior year.

Looking in more details for the fourth quarter of fiscal 2008, at constant exchange rates revenues increased by $6.4 million or 8.8% through $79.6 million compared with $73.2 million reported during the same period in fiscal 2007. Contributing to the increase in revenues was Allied’s Homecare staffing, which grew by 16% to $60.9 million.

While Nursing Home staffing revenues declined by 9% to $10.4 million compared to prior year and Hospital staffing declined by 10.5% to $8.3 million. Revenue for both these businesses was similar to quarter three.

Total gross profit at constant exchange rates for the fourth fiscal quarter increased 7.2% to $24.3 million, compared with $22.7 million reported for the comparable quarter in fiscal 2007.

SG&A costs, as a percent of revenues in the fourth quarter of fiscal 2008 were 24.8%, compared to 25.9% in the third quarter and 26.4% in the second quarter and 27% in the third quarter. Operating income for the quarter increased to $4.3 million, compared to $3 million reported in the quarter ended September 30, 2007.

Income from continuing operations for the quarter increased to $2.9 million as previously mentioned compared with $1.5 million for the prior year.

Looking at the whole year at constant exchange rate, revenue increased $20.2 million or 7.3%, to $298 million compared to $277.8 million for the year ended 30, September 2007. Contributing to the increase in revenue was Allied’s Homecare staffing, which grew by 12.7% to $225 million.

Gross profit for the year increased 7.4% to $90.2 million, compared to $84 million reported for the comparable period in fiscal 2007. Gross profit margin for the year ended September 30, 2008 was 30.3%, compared to 30.2% for the comparable period due to the change in the mix of the business as a result of the overall growth in our homecare staffing, which typically operates at higher margins.

Operating income for the year increased to $12.7 million, compared with $8.7 million reported in the year ended 30, September 2007. Income from continuing operations for the year increased to $8.8 million, compared with $3.6 million for the prior year.

Allied’s net cash balance at the end of the fiscal year was $26.2 million compared with $20.2 million at the previous year-end. For fiscal year 2008, cash inflow increased by $6 million, depreciation was $3.2 million and amortization cost was $1.6 million. Capital expenditure was $3.3 million.

Day Sales Outstanding was 21 days for the month of September, compared with 26 days in the same period in 2007. This is the lowest level achieved by the company, but was impacted by the timing of invoicing as well as fluctuations in currency exchange rates. The company anticipates DSO will return to its historical rate of 25 to 27 days per month in upcoming quarters.

Filing our press release this morning, we’ve also included a table showing our last four quarters revenues and gross profits in Pound Sterling. As all our revenues and gross profit arise in the United Kingdom, apart from a small branch in Australia, I hope this gas enabled investors to fully understand our underlying revenues and gross profits.

I’ll now pass it back to Sandy.

Sandy Young

Thank you, Paul. We are pleased with our revenue growth this quarter, at constant price is showing 8.8% growth. Let me talk about each of our sectors separately. Homecare is our biggest sector 76.6% of our total revenues and growing at 16% revenue quarter four ‘08 over quarter four ‘07. This compares with quarter-over-quarter growth of 14.5% in our third quarter and 11.4% in our second quarter, so an accelerating rate of growth.

As a reminder, our Homecare service provides care for individuals in their own homes. This includes (inaudible) social care for older people or elderly people. Support for individuals of all ages of learning disabilities and continuing care, which is a health related care service for individuals of all ages with complex care need.

Most of these services funding by the top tier through the 104 of the local authorities and 150 of the primary care of hospital trust. It is a very different arranging from the US Medicare systems and we have no involvement with insurance companies.

Just to refresh your memories, the big dynamics of the homecare sectors are firstly contractor awarded for typically three years and to date there is no change in that process and it does give us stability. The UK homecare sector have grown by 10% in the last 12 months, we have faster rate of growth from the average.

The sectors there was too many smaller payers, but we see that reducing as an example, just been a last few weeks I can think the number of tenders, but one in particular where the North of England is attain to gain just now, they typically split the area into zone and we can see you are going to reducing some 12 suppliers going to four, another zone reducing from eight going to three. That’s again the backdrop in my view of the local authorities using far too many suppliers that we are seeing this coming to quite routinely.

The top five companies account for the less than 20% of the homecare market and we are number two in that marketplace. There is still about 20% of local authorities who provide this service internally but there has been a continue trend to outsource and we see that continuing.

At present, there are no signs of credit crunch affecting our business. If anything it will make it easier to recruit staffs and an overview even with the local authorities tighten their spending, we think the consolidation trends and our low market share will be sufficient to compensate.

Within homecare we’ve recently appointed a Clinical Services Director to help us through continuing care and we plan to recruit a head of learn disabilities to support this area of growth. In both of these areas this services carryout by about 50% or less of our 108 branches. We have opportunity to standardize and expand. We’re also looking at our private homecare market, which represents about 20% of our homecare business; we have opportunities to penetrate the sector more effectively.

If we’re consider Nursing homes which represented 13% of our revenue in quarter four, where our revenues declined 9% quarter four of ‘08 over quarter four ‘07. This compared to the quarter-over-quarter decline of 2.2% in our third quarter to 12.1% growth in our second quarter. The sectors in volatile, but we’ve noted in the management discussions of revenue and gross margin increased slightly in quarter four.

As a reminder our Nursing home sector, is what I would call typical agency staffing with numerous short-term assignments. Residential care home or Nursing care homes that use this service have been under pressure to cut costs by local authorities and many look at a higher compliment of permanent staffs and really rely on agency staff as a last resort, but that’s the trend has been in place more than a year, it’s not just something happens in the last two months.

Out smallest sector Hospital staffing is represented 10.4% of our revenue in quarter four declined by 10.5% quarter four ‘08 over quarterly four ‘07. This compared to the decline of 21.7% in quarter three, but a growth of 12.1% in quarter two.

As a reminder our Hospital staffing business supplying staff to NHS hospitals or public hospitals in Europe and also some private hospitals. It’s an agency staffing business and one that is relatively volatile.

Having said that, if you model our trend in the sector over the last two years, you’ll see that the biggest reductions in revenue were last year rather than this year, and you will see that when you look at the revenues in the management discussions that although they’re moving in little bit and they’re not moving significantly and we came back over to the prior year. You will certainly see a big drop during the course of last year at a faster position note and we hope going forward, we hope to at least maintain these revenue levels.

Move away from our discussions with revenues, looking at our gross margins a little more detail and just like to make following comments. We’d always indicated our gross margin that fairly robust after in 30% level.

This is true again in quarter four and even if you take the management discussions they show all our margins in pound sterling, the outcome is much the same. Even if you break the sector down over the quarters and you will see the same trend, I wouldn’t suggest any particular trend although we do slightly higher margins in the second half of the year than the first half of the year.

I’m pleased to see that our efforts to control SG&A are working and as Paul indicated quarter four is 24.8% and this percentage has reduced every quarter. We’ve recently appointed the Business Improvement Director, specialist in efficiency and improvement processes with a 108 branches and 12 head offices support call centers are rimed will extend throughout the company with the aim of reducing complexity, reducing cost and improving quality.

I think important to point out here, that the operationally efficiency opportunities exist as well as I call (inaudible) opportunity. In other words, in this last year we spent 77 million on our SG&A and our ability to the focus on this and make it more efficient that something we can do regardless of revenue of growth.

Our new Business Improvement Director also had significant experience of Sarban-Oxley operational improvement processes a large IT project umbrella, but of course hardware IT project starting to get direct to branches in February next year our experience will be very valuable. You will recall our new system umbrella has been facing over two years, so in any quarter only about 12% to 15% of our branch will be affected and we get this intentionally just to make sure we can keep the focus and drawing the business.

The biggest issue had now is non-operational and that’s a movement of the pound sterling versus the door. That trading level in the business there is no effect in the credit terms so far, although we’ll obviously vigilant and not complacent. Older people will always need care and the favorable economics of homecare and continuing care and learning disabilities are quarters of cost.

Lastly just the Northern cash, I know from the economist last week end that they were encouraging companies to poured cash and the $26 million that of September year end we see no difficulty in our working capital exposure. We still anticipate making an acquisition or more than one acquisition that provides opportunity comes along and just a recap, we’ve discussed before the sort of acquisitions we’ve interested in would be a significant homecare provider in our market where we had benefits of integrations, one of our special events and continuing care are learning the stabilities, or perhaps build on that did favor geographical niche, with certain cities with our presence is quite low.

Thanks all I wanted to say as an overview. I’m happy to take any question that you might have now. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Jeff Silber – BMO Capital Markets

Congratulation on a very good quarter and the end of a solid year.

Sandy Young

Thank you, Jeff.

Jeff Silber – BMO Capital Markets

No, problem. Sandy in prepared remarks, you talked a little bit about gross margin trends, and you mentioned how they were volatile, but the second half of this year look a little bit better than the first half. Are there any specific reasons for that and should we expect those kind of seasonal trends to continue next year?

Paul Weston

Yes. It’s Paul, Jeff. What tends to happen is most of your charge rates raises come through in April of the financial year, and the pay raises which get paid through the staffs, tends to occur anytime from that quarter through the following two or three quarters.

So, sometimes in Q3 you get the benefit of most of the charge rate raise about much pay rate raise in that quarter. More paid rate raise comes in quarter four, by the time you get into quarter one most of that rise come through the system, and then in Q2 you’ve got more benefit of charge rate raise or pay raise.

Paul Weston

So, we are really saying is that it tends to be a little stronger in the second half of the year then the first half of the year.

Jeff Silber – BMO Capital Markets

That makes sense. I know it’s still little early, but are you planning on rising billing rates in April and if so, you have any identification how much?

Paul Weston

Yes, we are planning to raise them, we’ve already written to local authorities to rise that question with them and from memory I think the figure is about 5.5%, definitely not ballpark, because it’s made up of two components, an element for the retail price and execute as wage inflation and as an element for some additional and holiday that has come about the new legislations.

These were holidays that we add last year so, in a few more days that people have to catch up and the balance is this year, but we’ve already written out to local authorities now and although was a time from implementing this are going to be probably April next year end of May.

Sandy Young

Okay. Fairly that’s our indicated rate to them, in the main government-spending limit last year, they issued up to 2% restriction on the government and in lot of cases our rate raises were fairly close to government levels. We have some circumstances where they rate closer to the inflation rates in some other towns.

Paul Weston

I think the other point I would make there, is that we grow business that operate its like all contract by contract, so we don’t have situation were on a certain day in a year, all our staff, all our caters have a certain percentage increase. So, if we find individual contracts, where we’re not getting to the increase that we want, then we don’t impact on the same increased to our cares. Its fair to say, if you got an extreme case, you’d end up with the rates never moved didn’t people joining you, but we find over the years that we’ve been able to find compromising that and to do automatically have to an increase on to cares side at the same moment.

Jeff Silber – BMO Capital Markets

Okay. Great and again just focusing on gross margin and drilling down to the homecare market. For the fourth quarter when you looking at US dollars the gross margins were down a bit, any specific reason why is that a trend we should expect to continue going forward?

Sandy Young

I would say it’s not really significant, I mean there is a complete basket of different contract in there so, I think it was 7.2% so, I don’t think its really material enough.

Jeff Silber – BMO Capital Markets

Okay, great. Thanks very much.

Sandy Young

Okay. Thank you, Jeff.

Operator

Thank you. Ladies and gentlemen, our next question comes from the lines of (inaudible). Please proceed with your questions.

Unidentified Analyst

Hi, guys. Paul just couple of questions for you. Coming back to the homecare side of the operations, as of the end of September 2008, can you give us a feel for the run rate of the hours were?

Paul Weston

We don’t disclose that.

Unidentified Analyst

Okay. Moving on then, what’s your split between block and spot contract in the homecare business?

Paul Weston

Again, we haven’t disclosed that historically. The number of contracts that we have about 300 different contracts and probably 50 to 60 those are block contracts and the balance are spot contracts, as without business, we don’t disclose that at this stage.

Unidentified Analyst

I’m not sure if you can for the next question then. I’m trying to get a feel for the year as a whole, how you fair in terms of net contract wins or losses at the period?

Sandy Young

The moment the only large contract wins that we have sell it on was the study which we one area this year, we have steady stream of the contract coming in month-on-month and we don’t paying to report the result of same kind of other contracts that reach expiry, it obviously was 16% growth in Homecare, a mixture of that is from generating moreover to an existing contract and the test amounts from the new contracts.

Unidentified Analyst

Okay, Thanks lot Sandy. You had an interesting comment on the conference call regarding faster acquisitions going forward. I mean what’s your sort of broad point of view in terms of acquisition multiples in this business?

Sandy Young

Paul.

Paul Weston

Thank you, view of the acquisition multiples what probably generally known in the marketplace that will be coming down. We believe that the businesses have been over valid in the past and you will seeing prices runs up four to five, there is a probably high multiples bigger the size the organization that the four to five seems to be this was a the range at the amount.

Sandy Young

It’s fair to say that current climate had also become more difficult for some organizations in the UK, because the relatively few people who got cash and therefore to some extent it’s more of a buyers market then it was.

Unidentified Analyst

Okay, thanks a lot guys, just one final one for me, just sort of truing to the other two parts of the revenue stream. Can you give us the broader review in terms of your view to the outlook for the two particular businesses, the hospital and the nursing staffing business is going forward?

Sandy Young

The hospital staffing business, it’s partially sort of declining trend, really go back three years and I think this quarter’s probably and I’m seeing the last of that because if you look at the historic trends, you can see the graph comes down and relatively speaking flatten those this year.

Our view is that’s we don’t want to exit that for the movement. We probably don’t want to later decline progress and we are probably put more efforts in to than we have done and we will probably and how that provided through a select number of branches, which is two already, but we are probably focused more clearly in that so that we have maybe 15 branches that absolutely promote this and the rates we concentrate on Homecare and other sector.

Unidentified Analyst

Okay, guys thank you very much for that.

Sandy Young

Okay, thank you.

Operator

Thank you. Ladies and gentlemen, our next question comes from the line of Carl Wilk with NorthPointe Capital. Please proceed with your question.

Carl Wilk – NorthPointe Capital

Are there any legislation proposals or changes that may occur, positively down the road that we have to worry about?

Sandy Young

I wouldn’t say so, there is a review on just now what the health and social care provisions in the UK, the care agenda that the government is reviewing, but that’s very much over longer time period. They are looking at how to fund it over the next 15 to 20 years, they can see the growth in the population, and they are wondering how they are going to pay for it.

Obviously they are looking at, whether people should be making private provision at this stage, but that’s a very much long-term saying in the decision and that will come out. The composition ends actually, in another week of so and then the report comes out next year.

I think the only other trend is the move towards individual budgets and have local authority give you right to appoint to provide you a vigilant, but that’s really been on the goal most of this year and it kind of has interfered with our progress and we have an number of direct customer NOE, and so I think answer to you question is there is nothing in the horizon that keep me awake at night.

Carl Wilk – NorthPointe Capital

Great thank you.

Paul Weston

To other one, just to mention to you, when you read our 10-K you will see the changes in holiday pay legislation, the second page that occurs in April 2009, where the holiday placement going often 24 days to 28 days, previously that went off back in 2007 from 20 days of 24 days and then, if you look in the 10-K there are some changes occurring in the VAT sales tax system, which could have some indications on our Nursing home establishments type business, so that will refer to in our 10-K.

Carl Wilk – NorthPointe Capital

Thank you, Paul.

Paul Weston

Anyone else

Operator

Thank you. Ladies and gentlemen there are no further questions at this time. I would like to turn the call back to management.

Sandy Young

Okay. Thank you very much for joining the call this afternoon. I know Adam Holdsworth is arranging some investor meetings in the next few weeks, we’ll be in the US, in early December and happy to follow-up and talk to you late. So, thank you very much for joining the call this afternoon and good afternoon.

Operator

Ladies and gentlemen, this concludes today’s teleconference and you may disconnect your lines at this time. Thank you for you participation.

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