Call Start: 10:00
Call End: 10:56
RehabCare Group, Inc. (RHB)
F4Q and Full Year 20008 Earnings Call
March 4, 2009 10:00 am ET
Executives
Gordon McCoun - Investor Relations
John H. Short Ph.D. - President, Chief Executive Officer, Director
Jay W. Shreiner - Chief Financial Officer, Senior Vice President
Kevin J. Gross - Senior Vice President - Operations of Hospital Division
Analysts
Pito Chickering - Deutsche Bank Securities
Rob Hawkins - Stifel Nicolaus
Sheryl Skolnick - CRT Capital Group
Rob Mains - Morgan Keegan
Pito Chickering - Deutsche Bank Securities
Operator
Good morning ladies and gentlemen and welcome to the RehabCare Group, Incorporations Fourth Quarter 2008 Earnings Conference Call. (Operator Instructions) I will now turn the call over to Mr. Gordon McCoun.
Gordon McCoun
Thank you and good morning everyone. Welcome again to the conference call to discuss RehabCare’s fourth quarter and full year 2008 earnings. With us today from management are John Short, Chief Executive Officer of RehabCare Group and other members of the senior management team.
Before we begin, I would like to remind you that this conference call contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks, and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission including its most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.
Do not rely on forward-looking statements as the company cannot predict or control many of the factors that may affect the Company’s ability to achieve the result estimated. The Company makes no promise to update any forward-looking statements whether as a result of changes in underlying factors, new information, future events, or otherwise.
With these formal remarks out of the way, I would like to turn the call over to Dr. Short. John, please go ahead.
John Short Ph.D.
Thanks Gordon, good morning, and thank you for joining us today. I am John Short, President, and CEO of the Company. With me are Jay W. Shreiner, Chief Financial Officer and the members of my executive management team, all of whom will be available to answer your questions at the conclusion of our remarks.
As you might remember, 2007 was a year in which we were focused on integrating the Symphony acquisition and raising our profitability.
In 2008 we shifted our focus to returning to growth in each of our business units while continuing to improve operating earnings. I am pleased to report we accomplished that objective. Our three core operating divisions achieved top-line growth over 2007 driven by higher same store revenue and the opening of three new hospitals in our Hospital division.
During 2008 our contract Therapy and Hospital Rehabilitation Services divisions posted solid gains and their consistent performance helped deliver a gain of $0.32 consolidated diluted earnings per share over the prior year. This represents a 43.8% increase over fiscal 2007. Excluding changes in both periods the increase was 26.7%. Permanent resolution of the 60% rule also cleared the landscape for increased patient volume in our inpatient rehabilitation facilities and unit growth in our HRS division.
For a Hospital division it was a year spent reevaluating our growth strategy, centralizing our business functions, ramping up census development efforts and securing the right leadership. Our fourth quarter results indicate that we’re moving in the right direction.
Healthy cash flow and continued reduction of debt in 2008 also has given us an enviable liquidity position in a difficult credit environment. Our financial strength will be key to continuing our growth strategy and reinvesting in our business in 2009.
Now let me discuss some of the highlights from the quarter as they pertain to our core operating divisions and share with you your helpful hints for 2009.
Operating revenues in our Contract Therapy division in the fourth quarter improved by 11.4% over the prior year quarter to $110.7 million, a result of a 13.8% same store revenue increase. The division had a net gain of four units over 2007 signing 37 new client locations in the fourth quarter. At the end of the quarter the number of signed, but unopened contracts stood at 20. We expect continued top-line revenue growth in our Contract Therapy division in 2009 with 4% to 6% year-over-year same store growth. We believe the division will experience stable to modest unit growth for the year. New business will be offset by lost clients due to client ownership changes and consolidation in response to the current economic climate.
Year-over-year operating earnings increased by 3.1% points to 7.1% in the fourth quarter, this was above our targeted range of 5.5% to 6.5%. The fourth quarter was favorably impacted by a 3.4% market basket increase for skilled nursing facilities which we were able to pass on to some degree to approximately half of our clients. For planning purposes we are assuming no market basket increase in the fourth quarter for this year. We are maintaining our targeted range for contract therapy operating earnings margin in 2009.
Fourth quarter operating revenues in our Hospital Rehabilitation Services division increased 12.6% over the fourth quarter of 2007 to $43.7 million. Fueling this was a 4.7% year-over-year increase in acute same store discharges. For 2009 we expect growth in same store discharges to remain in the 5% range.
In 2008 the Hospital Rehabilitation Services division experienced its first unit growth in three years improving its performance in both unit openings and closings. At December 31, 2008 we operated 157 programs compared to 154 at the end of 2007. During the year our IRF contracts increased from 107 to 113. In the fourth quarter we signed five new IRF contracts and had seven openings.
For 2008 we opened 16 IRFs compared to seven in 2007 and experienced 10 closures, five of which ceased operations, compared to 15 in 2007. The number of signed, but unopened IRF contracts at year-end stood at three, all of which are expected to open in 2009. The division expects a continued modest net increase in units in 2009.
Our hospital rehabilitation services operating margins in the fourth quarter were 13.3% down from 15.5% in the fourth quarter of 2007. The fourth quarter of 2008 included a $1.2 million pre tax charge resulting from a bad debt write down related to an outpatient transaction. Excluding this charge, the division would have reported a 16.2% earnings margin in the fourth quarter. Our outlook for operating earnings margins during 2009 is between 14% and 16%.
Revenue in our hospital division in the fourth quarter increased 27.5% over the same period last year to $30.3 million reflecting a 3.2% same store revenue increase and the opening of three new hospitals during the year. At the end of 2008 we were operating a total of 11 hospitals, six IRFs and five long-term acute care hospitals, or LTACHs.
In April of 208 we opened Northland LTAC Hospital, a 35-bed facility in north Kansas City which completed its Medicare demonstration period on December 1st. On June 1 we completed our joint venture with Floyd Healthcare Resources which gave us 80% ownership of the specialty hospital, a 24 bed LTAH in Georgia.
We are now in the process of developing a 45 bed replacement hospital in Rome which is scheduled for completion in the second quarter of 2009.
St Luke’s Rehabilitation Hospital, our new 35 bed IRF admitted its first patient on November 4, 2008. The hospital is a joint venture with St Luke’s Hospital in St Louis, Missouri.
Also contributing to revenue in 2008 was Central Texas Rehab Hospital, which we opened in late 2007 with our partner Seton Family of Hospitals in Austin, Texas. Together we have begun an expansion relocation of this hospital which we expect to complete in the third quarter of next year.
In 2008 we reevaluated the risks and opportunities associated with our growth strategy for this position and determined that it was in our best interest to exit three scheduled projects in the fourth quarter. They included our planned joint ventures in Kokomo, Indiana and Redding, Pennsylvania and our acquisition of the Rehab Hospital of Rhode, Island. These decisions were a necessary part of a refined strategy for the future of our hospital division.
We are on track to open Greater Peoria Specialty Hospital, a 50 bed LTACH we are developing in Peoria, Illinois with Methodist Medical Center early in the third quarter of this year.
The $700,000 improvement in operating earnings we experienced over the third quarter, which was impacted by the hurricanes, includes a negative impact of $1.5 million charge related to the cancellation of our planned project in Kokomo and the acquisition in Rhode Island.
Looking at 2009 we expect sequential improvement in operating earnings performance with total year operating losses reduced by $3 to $4 million compared to total year 2008.
For full year 2009 we expect revenue between $140 and $150 million driven by strong growth in mature and de novo hospitals. We are assuming no market basket increase for either LTACHs or IRFs for fiscal year 2010. Including announced expansion projects, we expect break even operating earnings in 2010.
Turning to an update on the legislative and regulatory landscape, 2008 brought relief to our contract therapy programs with the extension of the Medicare Part B therapy caps exception process and physician fee schedule. However, both of these provisions are scheduled to expire on December 31, 2009. So, while we enjoy a favorable regulatory landscape in the near-term, we continue to be focused on securing a permanent solution to both of these issues. We believe congress will take action later this year in the form of Medicare or healthcare reform legislation.
While the economic stimulus plan contained very little on Medicare payment issues, we support the investments in health information technology and comparative effectiveness research. We will also be addressing the impact of the 2010 healthcare budget proposal from the Obama administration released on February 26. While details of the plan are pending, the section covering bundled payments as proposed to acute providers will likely create much discussion.
A bundled or episodic payment could result in significant cost savings and improved patient outcomes, especially if it produces more streamlined regulation. For example, the need for some rules would become unnecessary, such as the 60% rule for IRFs, the 25 LPAC limited stay rule and the three day hospital admission criteria for SNFs. Given that acute care hospitals and
SNFs are our client and joint venture partners, we believe we are favorably positioned to adapt to a bundled payment system, should it become reality over the next several years. We will continue to measure the impact on our business as details are made available.
I will now turn the call over to Jay Shreiner, who will review our consolidated financial results for the quarter and provide our outlook for 2009.
Jay Shreiner
Consolidated net revenues for the fourth quarter of 2008 were $194.2 million compared to $171.8 million in the fourth quarter of 2007, a 13.1% increase.
Consolidated net earnings were $5.7 million or $0.32 per diluted share in the fourth quarter 2008 compared to $5.1 million or $0.29 per diluted share in the fourth quarter of 2007.
For the full year 2009 we anticipate strong consolidated revenue and net earnings growth. Quarterly results will be impacted to a lesser extent by hospital start up and ramp up losses than in 2008; however, consistent with 2008 operating results in the first quarter will be impacted by the resumption of normalized run rate costs such as self insurance and employee benefit programs and fewer calendar days.
Now turning to the balance sheet, for the 12-month period ending December 31, 2008 we generated cash from operations of $48.7 million. We spent $18.5 million of capital expenditures, including $13.6 million in our hospital division, primarily on developing joint ventures. The remaining $4.9 million of capital expenditures was principally related to information systems.
Day sales outstanding in accounts receivable decreased to 66 days at the end of the fourth quarter 2008 compared to 71.8 days at the end of the fourth quarter 2007 and 70.1 days at the end of the third quarter of 2008.
At December 31, 2008 we had approximately $27.4 million in cash and cash equivalents compared to $10.3 million at December 31, 2007. We built cash balances during the quarter in light of the challenging credit environment.
Total debt outstanding at the end of the year was $57 million compared with $74.5 million at the end of 2007. Net debt, or outstanding debt less cash and cash equivalents, stood at $29.6 million at the end of 2008 compared to $64.2 million at December 31, 2007.
The effective tax rate for 2008 was 38.1%. The effective tax rate for 2009 is projected to approximate 39% after consideration of minority interest and equity income.
During 2009 we expect continued strong operating cash flow with day sales outstanding of approximately 70 days. We expect capital expenditures of approximately $14 million, of which approximately $5.5 million relates to hospital strategic and maintenance capital with the remainder primarily related to information systems.
Now I will turn the call back over to John.
John Short Ph.D.
With sound results in our mature businesses improving performance in our hospital division and a healthy balance sheet, we are primed for continued growth and some exciting new initiatives in 2009. One of these initiatives is our IT road map. The technology takes a central role in emerging healthcare reform efforts. We continue to position ourselves at the forefront of technology in post acute care.
In 2009 we will roll out the next generation in point of care technology in our CT and HRS divisions. This technology will replace the current hand held devices used by our therapists to track patient care data. We will also be implementing an upgraded web based application for our therapy management system that will offer important new functionality such as integrated labor management and an online patient scheduler.
The successes we enjoyed in 2008 are a testament to the skill and dedication of our greatest asset, our people. We want to thank them for their daily commitment to building value in the rehab care brand and for delivering the highest quality services that help people regain their lives.
I closed our fourth quarter 2007 conference call with the following: If you liked us in 2007 you’ll love us in 2008. Well, stay tuned in 2009, because we’re just getting warmed up. Thanks to each of you for your continued support.
With that I would like the operator to open the call for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Pito Chickering from Deutsche Bank.
Pito Chickering - Deutsche Bank Securities
Looking at the contract areas business in 2008, so stepping back a little bit, your same store growth is pretty extraordinary. I was wondering if you could give some details as to exactly why it was so strong during 2008 and I think you’re projecting a little bit for slower growth in 2009, but just give us more feeling on what happened in 2008 and sort of where that can go in 2009.
John Short Ph.D.
We’d like to believe a lot of it was the fact that the clinical programming that we’re putting in place as well as providing access to therapists to our clients really took hold in 2008, coupled with increased productivity so we could see more patients as a result of especially completing the integration of Symphony in that year.
The reason why we toned it down in 2009 is because historically we’ve grown more closely in the 4% to 6% range than we've grown in the 12% to 14% range. We would love to be pleasantly surprised in 2009, but for the time being, we’re going with history.
Pito Chickering - Deutsche Bank Securities
Looking to 2009 are you facing any additional therapy shortages or are you guys comfortable with the current staffing in the business right now?
John Short Ph.D.
We continue to experience a therapy shortage. The good news is it seems to be lessening. Our vacancies are down. Our time to sell is down. Our turnover is down. So, I think the silver lining to the current economic situation is that the labor markets have softened and we’re going to try and take full advantage of that by filling as many of our vacancies as possible and retaining as many of our people as possible so we don’t go through the retraining costs of new hires.
Our campus hiring initiative has also continued to blossom. We did over 500 campus hires in 2008. We’re looking to do about 600 campus hires in 2009, so we think we’ve got the model in place to handle the growth we’re talking about.
Pito Chickering - Deutsche Bank Securities
Okay and looking at the greater Peoria, LTAC opening in the third quarter, can you give us some feeling for what the LTAC start up losses absorbed were during 2008 on Northland and if that holster of the comparable grant are different. Comparable for Peoria and kind of what lessons you guys learned during the LTAC start up process.
John Short, Ph.D.
We anticipate that we would see similar types of losses for Peoria. We are taking what we learned from North Kansas City and applying that, but we would still anticipate seeing start up losses in the $3 to $3.5 million range for 2009.
Pito Chickering - Deutsche Bank Securities
Okay and then thinking about a bonus budget and bundlings’ through out your business segment. My question is actually more so on the Hospital Rehab division. If there is bundling in that division, couldn’t there actually potentially be growth in that division as hospitals want to in-source hospital rehab and there is maybe not as much pricing pressure there? Am I thinking about that correctly or how should I think about the potential bundling impact on that one division?
John Short, Ph.D.
We tend to agree, although we caution everybody that there aren’t a lot of details and this is not legislation yet and they’re talking about a kind of 14 quarter roll out, which gives everybody a lot of time to try and figure this stuff out, but we think you’re absolutely correct.
What Obama’s plan has clearly signaled is now every hospital in America has to have a post acute strategy; because they have to figure out do we want this risk? Do we want to take the responsibility for post acute in exchange for taking the additional money or do we want to off load it to somebody like us. So they are all going to need post acute partners. Whether it’s through a contract, like we do in our HRS division, or a joint venture like we do in our Hospital division, or remember this could very likely include SNFs. How do we deal with bringing those into that bundle? So, we see a ton of upside opportunity out of the proposed bundling.
The other upside, of course, is that it eliminates the need for a lot of costly existing regulation. In the HRS and IRF divisions you don’t need a 60% rule, for example; you don’t need a three hour rule. For LTACs you don’t need a 25% rule or a 25 day to stay rule, or a demonstration period. In SNFs you don’t need RUGs and you don’t need three day qualifying periods. So, if we got rid of those kinds of regulatory impediments, saving the relatively modest savings in the outlying years that are encompassed in the Obama plan would not be very difficult.
Pito Chickering - Deutsche Bank Securities
Can you provide some more color on bad debt write down related to the outpatient transactions?
John Short, Ph.D.
We did an outpatient deal in St Louis where we invested in and provided services to a small outpatient company that was owned by a not for profit foundation. Unfortunately, those foundations operations did not do well. They started to not pay us, it impaired our loans to us and so eventually we just pulled the plug, brought the operations back in to our St Louis joint venture and therefore wrote off the $1.2 million in bad debt that was associated with that deal.
Operator
Your next question comes from Rob Hawkins from Stifel Nicolaus.
Rob Hawkins - Stifel Nicolaus
In the quarter, you mentioned how in the first quarter you have sometimes higher accruals for med mal, workers comp, but was there a true up in the quarter, particularly the free standing hospitals related to med mal or workers comp that helped the numbers and can you help us quantify that, if there was one?
Jay Shreiner
There was no significant true up in the fourth quarter for the hospital division. If you look at our helpful hints, we are suggesting for the Hospital division that we expect sequential improvement in that division. So most of the items that we’re talking about will be in the HRS and CT division, which are consistent with what we’ve seen in the first quarter of other years.
Rob Hawkins - Stifel Nicolaus
Okay, and then help me as we go from fourth quarter to first quarter. You got the market basket update in the nursing homes. You salary increases and benefits changes do those happen in the fourth quarter or do those happen in the first quarter?
Jay Shreiner
They happen through out the year.
Rob Hawkins - Stifel Nicolaus
Is it fair to say then that the kind of 7% number on CT in seasonally high quarters you might be kind of towards the higher end of your guidance and then seasonally lower quarters you might be towards the lower end? Is that maybe a good way to look at it?
Jay Shreiner
It’s a good way to look at it, right. That’s why we have not changed the guidance number.
Rob Hawkins - Stifel Nicolaus
Then you have talked a couple of times during the quarter about acquisition opportunities, maybe being able to take a large free standing hospital acquisition, because there are quite a few out there right now and be able to snap that on to your existing overhead that supports that division and possibly getting a pick up. Can you give us any visibility on where that stands and what your thoughts are on that still?
John Short Ph.D.
Well we are still in an inquisitive mode. We believe the Obama plan, should it come into fruition, is going to force consolidations. So we think it’s going to be a variety of more fragmented players out there that are going to want a broader home and a bigger company with a greater both financial base as well as a continuum of care. We are still aggressively looking at those opportunities. We are analyzing those opportunities now through a bundling prism as well as what it would do positively for our back office leverage and our scale, but that stuff hasn’t changed. It’s just being refined.
Rob Hawkins - Stifel Nicolaus
Does the fact that the Obama budget, that there really 3 1/2 years out, fourteen quarters I think put it, does that change your sense of urgency or timing on doing something?
John Short Ph.D.
Well fourteen quarters is forever.
Rob Hawkins - Stifel Nicolaus
Yes, I know, but you sounded kind of more near-term from earlier in the year at a couple of conferences.
John Short Ph.D.
Well I don’t think our timing has changed much. I mean the nice thing about having 14 plus quarters to react is that given our cash flow whatever we buy, for example, this year we can almost pay off by the time bundling occurs, so we’re really more worried about how do we continue to build our portfolio, build our company during the next 3 ½ years to also lay the foundation for how we’re then going to take advantage of the Obama plan, however it comes out of congress, for the subsequent five or six years. Remember the savings that they’re talking about, especially in the first couple years of the plan, are very modest compared to the overall postage you’d be spending. You know 1% or 2% is not going to be difficult, especially if they give us legislative relief in a lot of these other areas.
Rob Hawkins - Stifel Nicolaus
I’ve got it and then I’m intrigued by the technology roll out that you mentioned, looking beyond CTS into some of the other areas and then maybe even changing some of the CTS stuff. Can you give us a little more color on that? It’s been impressive what it’s been able to do for your CTS margins. The guidance gives us some good color on how much you plan to spend there next year, but can you give us a sense on what that might mean down the road in terms of an IRR or margin improvement in some of those divisions?
John Short Ph.D.
We continue to believe that there are margin opportunities in all of the divisions as a result of these investments. We’ve been very impressed by the margin opportunity we’ve gotten out of our historical technology investment in terms of our palm technology.
On the contract therapy side, basically what this does is put everybody on iTouch devices that are wireless and we’ve just begun to really explore how we can use the phenomenal power of an iTouch in our clinical settings. We’re also going to do the same thing in our outpatient and out inpatient HRS divisions, because in both of those, while we do not have hand held technology, so neither of those benefited from that, and we believe what we’ve learned in our Contract Therapy division over the last seven or eight years is relatively adaptable to our HRS both in and outpatient groups. So, while we have not budgeted for it and we have not given you a helpful hint for it, we’re anticipating upside there that will provide a very healthy return on that investment. It will take us awhile to implement however.
Rob Hawkins - Stifel Nicolaus
Implementation completed in a year and results in 2010, should we think about it that way, or is it something that takes longer?
John Short Ph.D.
I think you’ll start seeing results in the later part of 2010, but it’s going to take us most of 2009 to begin the roll out, we’ll finish it in the first two quarters of 2010 and then you’ll start to see the real impacts in Q3, Q4 of 2010.
Operator
Your next question comes from Sheryl Skolnick from CRT Capital Group.
Sheryl Skolnick - CRT Capital Group
Thank you for the year-over-year comparisons, they are very, very helpful helping my brain think through things, how they have changed year-over-year.
Do you do some end of year tax adjustments in the fourth quarter that I missed, because it seems like your tax rate, your provision for taxes, are higher in the first three quarters of the year than the fourth and is that something we should model in for 2009?
Jay Shreiner
Our best estimate is, again 39% for 2009 that was our guidance for 2008. We finalized our state tax returns in the fourth quarter for the prior year and as a result of that we were able to reverse about $300,000.00 of tax accruals primarily related to state taxes. So that brought our tax rate for the quarter down to about 36.1% and for the total year 38.1%. But I think if you look at modeling on a total year basis 39% is still a good rate.
Sheryl Skolnick - CRT Capital Group
Okay, but it could still vary in the fourth quarter next year as you settle up on your state taxes?
Jay Shreiner
That’s right.
Sheryl Skolnick - CRT Capital Group
Okay, that is fair enough. If I can just go to the contract therapy business, I just need a little bit of clarification on what you said. Clearly the kind of stunning results you had in the fourth quarter, I’m sure you’ll take them, but don’t want to rely on them being repeated. John, when you described why things might back off a little bit, did I hear you say that you might have fewer units next year, because of consolidation? I heard you say that, but are you also expecting that there will be slow down in demand within a unit?
John Short Ph.D.
We’re not expecting a slow down in demand, we’re just not expecting the extraordinary growth in same store demand we saw in 2008, because we haven’t seen that before. If it’s the start of a trend believe me we’ll take it and we’ll staff up for it. We do think we’re going to have flat to modest growth in the number of units because the SNF industry continues to go through a consolidation effort and while they’re consolidating it makes it much more difficult to sell more units.
Sheryl Skolnick - CRT Capital Group
Sure okay. I just wanted to make sure I understood that. So, of the 13%, almost 14% same store growth, it sounds like what you’re trying to say is like 3 ½% of that was price and 10% of that was volume, is that right? Or the weighting is more equal?
John Short Ph.D.
No, it’s more in line with what you said. It might be a little bit heavier on the same volume.
Sheryl Skolnick - CRT Capital Group
And we just don’t really know where all of these high intensity patients came from?
John Short Ph.D.
Well obviously they came out of acute hospitals. The interesting thing to us, however, was our same store growth was strong both in our Hospital division as well as our HRS division. We’re not exactly sure what has generated it, because the volumes on acute care haven’t shown that kind of growth, but we think a lot of it is just continued aging of a population; so that you’re getting a pro rate increase in the number of Medicare and elderly patients and we, of course, are the primary beneficiaries of that.
Sheryl Skolnick - CRT Capital Group
Right and since bundling and Obama vision is the topic of the day for a lot of us, and it’s a different vision than many had, but not the congressional budget office who sort of gave them the road map. As I look at that, and I hope you’re familiar with it, they have sort of mapped out 100 options that the administration could pick from and then score each of those options for savings. One of them was clearly the bundled payment and within the bundled payment they talk about a 30-day episode.
I know I’m putting the cart before the horse here, but one of the questions that arises from what you said, and I agree with you wholeheartedly, that acute care hospitals in building integrated delivery systems, been there done that, weren’t wonderful at it before, because managing a rehab patient or in the rehab part of stay is different than acute care and procedure driven management. So, I agree that your expertise is extremely valuable in building out that continuum. It was the last time, it will be again.
What I am a little bit worried about is, if they are only looking at a 30-day window, might that not mean that you have one set of regulations for the patients in the first 30 days, and a different set of regulations if the patients are in the 31st through infinity number of days?
John Short Ph.D.
Yes, we don’t understand how they’re going to do that either. There are obviously a ton of unknowns in the proposal, but we’re pretty comfortable, actually, with 30 days, because the vast majority of our patients in post acute settings get dealt with within a 30-day period post acute discharge. So, you are talking about a very few number of patients that aren’t handled in that 30-day period.
Sheryl Skolnick - CRT Capital Group
Okay and that’s where I was going. So, even if they did limit it to 30 days, you’re comfortable that your programs are directed at doing what needs to be done within 30 days?
John Short Ph.D.
Well correct and also remember that if we can eliminate a lot of the regulatory, you know, [interposing] we can shorten length of stays in both our IRFs our LTACs and our SNFs, because it basically gives us a great incentive to manage patients and treat patients 24-7.
Sheryl Skolnick - CRT Capital Group
Right and for your contract, and the one place I was curious about was in your contract therapy, if we could think about length of stay there in the program. I imagine this is all still sub acute and therefore still within the 30 days?
John Short Ph.D.
That is our assumption, but obviously we would sure like some clarification on that. We’re assuming that sub acute in SNFs are contained within the 30-day period and our challenge there is to help our contract therapy clients move their average length of stay from the 30 or 35 days that they currently do, down much closer to the 15 days that we think it’s possible in a SNF environment.
Sheryl Skolnick - CRT Capital Group
Okay, all right, so that’s an opportunity for you to help them out there as well. Not to mention running these units on behalf of the acute care hospital.
John Short Ph.D.
Correct.
Sheryl Skolnick - CRT Capital Group
So, if I could just sort of encapsulate where you’re going with your guidance. I mean obviously this year was a very pleasant surprise. Would the right 2008 EPS to look at, excluding charges, be somewhere around $1.18?
Jay Shreiner
We don’t give that specific type of guidance.
Sheryl Skolnick - CRT Capital Group
Okay, let me ask the question a different way then. It looks to me as if you had $0.14, is that right? There was $0.09 of charges in this particular quarter? Were there any other charges during the year that you’ve pulled out?
Jay Shreiner
No, those are the only ones that we’ve identified.
Sheryl Skolnick - CRT Capital Group
Okay and the reported EPS was $1.00 and the reported EPS on a GAAP basis including that was $1.00 what?
Jay Shreiner
It was $1.05.
Sheryl Skolnick - CRT Capital Group
So if I add $1.05 and $0.09 I come up with $1.14?
Jay Shreiner
Correct.
Sheryl Skolnick - CRT Capital Group
Okay so if I start with $1.14, in the past you’ve sort of given us a sense of what the growth rate on that EPS could be. Are you willing to do that again in terms of what you expect sales and earnings, you said strong? Can you be a little bit more specific?
Jay Shreiner
Not at this point. I mean…
Sheryl Skolnick - CRT Capital Group
I guess what I’m afraid of is that this was just such an unusually strong quarter. I would hate to put a 15% growth rate on top of something that is sort of a, one time, gee we got lucky.
Jay Shreiner
I think over the longer term that’s a good rate, but I don’t want to fine tune it to quarters or years.
Sheryl Skolnick - CRT Capital Group
I didn’t think you would, but I had to try. Be that as it may, let me ask a final question then. Given the turn over rates of patients in your various and sundry programs then, volume your growth rates can vary quite significantly from quarter-to-quarter is that right?
Jay Shreiner
Again, it is hard to tease out how much of it is regulatory induced and how much is just our clinical programs, at different mixes of patients. One of the reasons why we’re being cautious about 2009 is because it is still a relatively new world for us in terms of the last set of regulatory changes we have now adapted to.
Sheryl Skolnick - CRT Capital Group
Thanks very much, terrific job and enjoy the glow, you deserve it.
Operator
Your next question comes from Rob Mains from Morgan Keegan.
Rob Mains - Morgan Keegan
Jay, could you go through and HRS the additions and closures in the fourth quarter by the three lines there?
Jay Shreiner
In acute care we had seven openings and four closures, that [inaudible] of three and sub acute we had four closures and for outpatient we had three openings and one closure.
Rob Mains - Morgan Keegan
I would assume that the guidance that you’ve given in terms of modest growth, you had said that’s going to be mostly on the ARU side?
Jay Shreiner
Yes.
Rob Mains - Morgan Keegan
You know one of the things that we’re hearing about the acute care business is between bad debts and volumes and endowments and everything that there is kind of a deer in the headlights mentality there in terms of making any kind of moves. Your backlog would kind of refute that. Do you have any comment in terms of whether the current environment is either increasing or decreasing their willingness to look at opening up units?
John Short Ph.D.
Well we’ve experienced a great sales year in ’08 and we’re looking forward to a great sales year in ’09. We’re getting more system action, just like our West Penn deal, which was basically an entire continuum with care management gluing all of the pieces together. It was like Obama had looked at West Penn said, wow let’s do that more often. So, we are going to be marketing all of those aggressively in’09. The great part about the Obama deal is that it’s put bundling on the lips of every CEO and CFO that runs an acute care hospital, because they have to figure out what are we going to do about it and we’re going to position ourselves to help them think their way through that.
Rob Mains - Morgan Keegan
I have one kind of detail question about the guidance. Where you talk about $3 to $4 million of operating income improvement in the free standing hospitals, I am assuming that the number you’re comping to is the one that does include the $1.5 million of termination fees?
John Short Ph.D.
Yes.
Rob Mains - Morgan Keegan
Okay, when you look at the improvements then, the $3 or $4 million this year and then kind of break even in 2010, obviously I assume that not having new hospitals that will have start up losses is part of it, but it sounds like you’re having some operating improvements from certainly where we were, at least, in the second and third quarters. Could you summarize where you see the improvements to date and where you think it’s going to go further?
John Short Ph.D.
Well under Kevin Gross’s leadership we have had very nice rebound in terms of our both census development as well as our cost controls in both our mature hospitals and how we’re handling our start up facilities; having mature leadership in that division has paid significant dividends. Kevin has made some personnel changes in terms of leadership at a variety of our hospitals and gotten everybody really focused on improving their operating performance to match what our peers are doing. So, we anticipate sequential improvement through out 2009 and 2010 to get that division where we know it can be.
Does that answer your question Rob?
Rob Mains - Morgan Keegan
It does and then the last question, if I look at both CT and HRS, your margin guidance is below where you were in the current quarter on a normalized basis. Now I know that part of that is what you get seasonally in the first quarter and part of it is that you’re assuming no market basket. But, is there anything that kind of makes you feel that where you were in the fourth quarter was unusual anyway?
John Short Ph.D.
Well I think the biggest thing on CT is we had never gotten there before, so yes it was unusual. We would love to be able to tell you we can run it at 7% operating margins forever, but until we do that for several quarters in a row I am not going to say that.
On HRS we’ve continued to have strong performance on our bottom line ever since the cessation of the 60% rule. We had basically the first two quarters of ’08 were kind of re-gearing up and we really saw the benefit in the last two quarters of ’08. We think we can sustain that in spite of no market basket increase. Obviously if we get market basket increases in any of these, we’ll adjust accordingly.
Rob Mains - Morgan Keegan
Okay, fair enough, that’s helpful. Thanks a lot.
Operator
Your next question comes from Pito Chickering from Deutsche Bank Securities.
Pito Chickering - Deutsche Bank Securities
On the contract therapy business you have been in the business for quite some time. I was wondering if you can provide a sort of history lesson on what occurred during the last economic recession period, when Medicaid budgets became stressed, how that impacted your business from a revenue margin and the way you think about the current environment for the business today?
John Short Ph.D.
From the Medicaid perspective, the impact Medicaid has on us is bad debt. Because, when our clients are stretched they try to stretch us. We were heartened by the stimulus package having such a nice slug of Medicaid dollars in it, which will hopefully take the pressure off of states, which will then take the pressure off of our clients, which should let us continue to manage our bad debt at the level that we’re talking about.
Now should the economy get worse, should the stimulus package not work, there are a variety of draconian scenarios one can think about. So far though, our clients have not exhibited any increase in their desire to not pay us and we think the Medicaid allotment is going to continue to that for the foreseeable future; so we feel relatively comfortable, at least as comfortable as you can feel in these times, regarding Medicaid.
Pito Chickering - Deutsche Bank Securities
So it just confirms the volume growth and I guess your pricing growth during the time period was effectively unchanged? It was more a question of some clients just not being able to pay you or stretching out their payables to you?
John Short Ph.D.
That is correct.
Pito Chickering - Deutsche Bank Securities
Okay at this point Kevin Gross has visited all of the free standing facilities you have. Can I may the assumption that you’re pretty comfortable with the current portfolio and there is probably going to be no optimization of that portfolio? Or is there potential for a few changes of the current 11 facilities at this point?
John Short Ph.D.
Well again, we reserved the right to both acquire and/or sell any of our facilities, should they not meet our performance requirements, or should we get concerned about the markets that they’re in, or should we get an offer we can’t refuse. So, at least for the time being, we are happy with what we have. Kevin has visited all of those facilities on multiple occasions.
Again, we are in an inquisitive mode, so you shouldn’t expect us to stay at 11, 12 with the opening of Peoria. If we get a deal we can’t refuse or want to do a joint venture with one of our existing facilities, you shouldn’t be surprised by that either.
Pito Chickering - Deutsche Bank Securities
Are there any facilities that are sort of on negative watts at this point, because they’re running way below expectations or are you pretty comfortable with those in general?
Kevin Gross
It is a mixed bag, as you would imagine. We have several of our facilities that are meeting and above our expectations and we have several that are below our expectations. Each of those that are below are on a specific improvement plan that is going to drive sequential growth this year.
Pito Chickering - Deutsche Bank Securities
With these special improvements primarily coming from the bottom performers is it shaping up better or is it just a general across the board for performance was generally operating better than the fourth quarter versus [interposing]
Kevin Gross
I think certainly the bottom performer is moving up closer to our expectations is going to be the majority of the growth.
Pito Chickering - Deutsche Bank Securities
Then from a management standpoint how did you get that fast improvement in there? It is pretty a nice improvement sequentially. I would like a little more detail on what you did to help guide that process.
Kevin Gross
There are a couple of things. One we have made some management changes, as John indicated, in the portfolio. We’ve changed three of our CEOs and have new people now in place that have much more experience in running post acute facilities and are implementing plans to improve those facilities.
The second thing is that in the last two quarters we have added 15 marketing people across the portfolio. Each of them have specific targets and territories that they’re now working. So our strategy has been to set a goal of having one marketing person for every eight beds or every eight ADC that we look to fill. So we have significantly increased that staff. There has been some training, obviously, that occurred in the fourth quarter. Those people are now in place and are going to be delivering sequential same store growth in admissions.
Operator
Your next question comes from Rob Hawkins from Stifel Nicolaus.
Rob Hawkins - Stifel Nicolaus
Can I get a little clarity again on the CTS business here? When you look at the same store growth have you guys taken a look at which of those contracts may have been Legacy Rehab care, which of those might have been Symphony, or maybe if not Symphony contracts traditional Symphony territories and how does the same store growth compare between the two?
John Short Ph.D.
There was no bias one way or another. We had nice same store growth in all of our regions.
Rob Hawkins - Stifel Nicolaus
What is Medicare advantage doing across all of the three divisions, you know, CTS, how is that playing a role in volume increases? You guys had a very wide geographic spread. What is that doing to the rehab units; how is that playing out in your free standing hospitals in terms of pricing and volumes?
John Short Ph.D.
Clearly we, as you indicated, we cover the entire spectrum of, we’re in markets where there is very heavy Medicare Advantage penetration and we’re in markets where there is hardly any. Interestingly enough Miami is one of the markets where there is heavy managed care penetration and that’s our best performing hospital. We’ve been pretty adroit through our managed care contracting group to continue to point out the value proposition of putting those patients in our facilities whether, quite frankly, they’re Medicare or non-Medicare and in markets that have high Medicare Advantage we have aggressively gone after those patients. So, at least at this point in time, we don’t care much as to whether or not it is Medicare Advantage or it is non-traditional Medicare.
Rob Hawkins - Stifel Nicolaus
Are you seeing stronger growth from that and better pricing? Can you give me kind of a direction, if you will, on those volumes and the pricing related to Medicare Advantage?
John Short Ph.D.
Well I think we’re seeing pricing keep up with traditional Medicare. It’s certainly not above traditional Medicare growth. The advantage we’ve got with Medicare Advantage programs is we don’t have to follow the traditional Medicare rules, so we can become somewhat more efficient, therefore our margins can stay relatively the same with traditional Medicare.
Given what the Obama plan is proposing to do to Medicare Advantage, it’s anyone’s guess as to how aggressive that segment is going to grow over the next couple of years.
Rob Hawkins - Stifel Nicolaus
Then would it be safe to say, in this bundled environment, that the regulatory ease that you might get from that, would that be similar to the health and profitability? I mean, is that comparable to what you might expect, the way you’re getting better profitability, productivity efficiency on Medicare Advantage?
John Short Ph.D.
We think so. You know, if you take a lot of the rules out of the equation that really have no clinical foundation and just let us develop care management plans and treat according to those care management plans, putting the patients in the most appropriate site. We can handle the 30-day issue quite effectively. And, we can easily, we think, handle the cost savings goals that the plan has in place for 2014 through 2019, especially given that kid of time frame to adjust. So, we view most of this as upside.
Rob Hawkins - Stifel Nicolaus
Okay, fair enough, thank you.
Operator
Your next question comes from Sheryl Skolnick from CRT Capital Group.
Sheryl Skolnick - CRT Capital Group
You mentioned acquisitions a couple of times, but you haven’t described if there’s been any change in pricing or evaluation. I would imagine with some of the uncertainty surrounding bundling and the budget that there might have been some recent changes either in the number of facilities that might be for sale in a panic sale, or valuations. So, could you give us some color on that please?
John Short Ph.D.
Well we haven’t seen any panic selling. We have seen prices come down over the last year, but most of that is because of the financial markets and the state of the economy. I think it’s too early for either us or sellers to really figure out is the Obama thing a good thing for either of us, or a bad thing for either of us. Our look at is says it’s a good thing for us and we’ve got to add that criteria to assess any of the acquisitions we’ve got, potentially, on the plate, so we’re certainly refining our screening. We would love for some panic selling to take place and if you hear of any please make sure they get our business card.
Sheryl Skolnick - CRT Capital Group
I certainly will, because it is not all that unusual for people to see this and just sort of say, okay fine, throw up their hands and say I’ve had enough. Because whatever they do in congress it will be complicated, difficult, and make life, you know, to understand, I would think, for the individual or small number of facilities operator.
John Short Ph.D.
We hope you are correct.
Sheryl Skolnick - CRT Capital Group
Yes, Okay great, thank you.
Operator
There are no further questions in the queue. Do you have any closing remarks please?
Kevin Gross
As a reminder, this conference call is being web cast live on our website www.rehabcare.com and will be available for replay beginning at 1:00 pm Eastern Time today. Thank you for your participation and support. That concludes our call.
Operator
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating.
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