Kindred Healthcare's CEO Presents at Barclays Global Healthcare Conference (Transcript)

Mar.12.13 | About: Kindred Healthcare, (KND)

Kindred Healthcare, Inc. (NYSE:KND)

Barclays Global Healthcare Conference

March 12, 2013 10:15 am ET

Executives

Paul J. Diaz - Chief Executive Officer, Director and Chairman of Strategic Development Committee

Analysts

Bryan Sekino - Barclays Capital, Research Division

Bryan Sekino - Barclays Capital, Research Division

[Audio Gap]

Kindred Healthcare today, which is the largest provider of post-acute care in the United States, and I think we're going to be hearing a lot more about this company over the years ahead and how post-acute care can help us both lower cost and improve quality of care of patients' lives. With us today is Paul Diaz, CEO of the company. With that, let me turn it over to Paul.

Paul J. Diaz

Thanks, Bryan, and good morning, everyone. Great to be here in Miami, my hometown. Let me get started. First, I'll note to you that we will be making certain forward-looking statements, and specifically refer you to our website where you will find our recently issued Quality and Social Responsibility Report and a tremendous amount of information about the company, including our recent financial earnings, et cetera.

And let me now tell you that the quality report gives you a great sense of our strategy. And together with this investor presentation, again, for those new to the company, I think will give you a good sense of our strategic direction and our ambitions and goals.

I'll start with our first goal. We continue to work very hard every day across 46 states and over 2,200 locations to be the premier provider of rehabilitation services and post-acute care in the United States. At a time when certainly health care is challenged and reimbursement is challenged, we continue year-over-year to improve on our quality metrics and continue to deliver on our commitment to shareholders in terms of earnings, and we'll talk about the recently released fourth quarter results.

In terms of our organization, when you think about us, we are the largest post-acute provider in the United States. But increasingly, our focus is being deep and broad and diversified in our integrated care markets. We really see 2 things happening in health care: One, the need to be a partner and collaborate with others in creating more integrated care models and more patient-centered opportunities. And two, the opportunities of size and scale that an enterprise level can bring us in terms of cost reductions, in terms of investing in information technology and other opportunities.

But as you can see, we're quite diverse from our long-term acute care hospitals, our transitional care hospitals, licensed as LTACs, our in-patient rehab hospitals, as well as our nursing and rehabilitation centers and growing Home Health and Hospice business.

Really, there are 3 things that I think we have to be able to do and they are at the core of our continued care integrated care model. We have to be and want to be a leader in coordinating and delivering high-quality care in a very transparent way to our patients and to Medicare and Medicaid and the Medicare Advantage Plans that we work with. We have to be part of lowering health care. And part of the way we do that is reduce length of stay in acute care hospitals. And reduce length of stay in the hospitalizations throughout an episode of care. We'll talk a little bit more about what we mean there, but that is a very important part of our value proposition.

And we also believe that we're at the beginning of a process that will probably extend over the next 10 years of really seeing dramatic change in the way health care is delivered, the way health care is paid for. And so we're leaning into new care delivery models and new payment models and try to develop capabilities to make us more successful and enable us to participate in these more integrated care models.

Today, we're caring for over 0.5 million patients across the U.S. in all our sites of service and all our different service lines, we continue to excel and outperform national benchmarks in terms of quality and outcome.

And then the way the patients and families think about value proposition, we're getting more patients home more quickly and doing it with lower rates of rehospitalizations every day. And again, you'll see a lot more detail around these quality outcomes in our quality report.

Take a -- spend a few minutes about each of our divisions, won't go through all the details here, but we are the largest operator of transitional care hospitals in the United States, as our hospitals are licensed as long-term acute care hospitals and increasingly a growing inpatient rehab facility business. We have 6 freestanding inpatient rehab facilities today, a number under development. But also operate an acute rehab unit business that is quite successful within our rehab care division, and we'll talk about that.

But our Hospital division continues to outperform, and I think you'll see in this first quarter the benefit of what was a pretty strong flu season, a pretty strong start to the year in our Hospital division here in this first quarter and as you saw in the fourth quarter of last year.

Our Nursing Center division. This is really a tale of 2 stories here. On the one hand, very challenging environment, particularly on the Medicaid side, given, really, the lack of growth in Medicaid reimbursement for skilled nursing facilities. And on the other side of the spectrum, our newer subacute type facilities, our transitional care facilities that we're finding great success, where our new facilities are returning patients home in 20, 25 days with really great outcomes. And so I think what you'll continue to see over the next few years is a real commitment to our transitional care centers and subacute business. And that subacute business is sometimes within our transitional care hospital, but a movement away from more traditional Medicaid skilled nursing facilities and, again, are fairly challenged in today's reimbursement environment.

RehabCare, the largest provider of contract rehabilitation in the United States, the largest employer of therapists. One of the gems within our company. It is the place where within our facility-based business and really across our enterprise, a lot of the hope and recovery is generated from -- in over 2,000 sites of service and just great clinical outcomes driving pretty strong organic contract growth in really both our SRS business, our skilled nursing business, as well as our hospital contract rehab business.

And Kindred at Home, small part of the enterprise today, but a $200 million and growing particularly in our integrated care markets. I think you'll see a lot of activity from us in terms of the opportunity for us to continue the care for patients and care for patients at home, both in terms of traditional Medicare home health, as well as hospice. But over the next year or 2, I think what we're excited about is to talk about what Kindred at Home can be in terms of supporting medical homes, enabling home health and really bringing a whole new customer experience to both private duty and new models of care at home.

I'll spend a couple of minutes trying to put those pieces together in terms of our strategy and what we're excited about, again, as we see the changes in health care over the next 10 years. First, numbers that you're pretty familiar with, when you look at almost 50 million Medicare beneficiaries today, almost another 9,000 or 10,000 joining the program each day and increasing focus on the opportunity to better care for the duals that aren't represented on this chart. You see that there's just a tremendous need to better manage post-acute care.

With this slide, hopefully it helps you see as well that what we see is that many post-acute patients, many Medicare beneficiaries and many dual patients with multiple chronic diseases end up needing care in multiple settings, whether they be long-term acute care hospitals or skilled nursing facilities and home health. And you see that almost 61% of these patients who leave acute care hospitals at some point in the 90-day episode need home health as part of their recovery process. And again, that's part of the patient opportunity we see and part of the shareholder opportunity we're pretty excited about.

So a lot of effort across Kindred today to position ourselves to get patients to the most clinically appropriate setting through our Continue the Care programs and to do that in the most cost-efficient way and really move people through a continuum of care, regardless of which side of service they start off but in a very patient-centered way and try to develop capabilities, quite frankly, that will enable us to lean forward into new payment models, whether they be bundling or other at-risk payment models that I think we're going to see more activity from.

So really 3 activities happening within our integrated care markets: First, Continue the Care is about building out this service continuum and particularly adding home health and hospice today; creating transition capabilities, central intake line and care management capability to manage care transitions that are often so difficult and expensive; and as I've mentioned before, really beginning to experiment and participate in new payment models, including the CMS bundled payment model that we have partnered with the Cleveland Clinic and see that as a great source of learnings as well.

And the outcomes we expect are better care for our patients, lower costs, lower rates of rehospitalizations and margin improvement across our enterprise, in particular in these integrated care markets.

So let me summarize our strategy and hit our financial results very quickly, and we'll have some time in the breakout. There are really 6 things that we have to do at Kindred every day to be successful. Succeeding in the core is not an option. So every day, we've got to do a good job for our patients, and we need to do that through an engaged workforce and our teammates that we work very hard to enable them to deliver good care. We have to do that in a cost-efficient way, very focused on operating cash flow and selecting our receivables. We had a very good year in that regard this year. We are accelerating this integrated care market strategy that we've talked about, developing these service lines and operationalizing Continue the Care.

And as I mentioned earlier, we are very excited about the opportunity to aggressively expand our Home Health and Hospice in our integrated care markets and beyond. We just think that, that is an area where we can bring a lot of value, where we can bring our capabilities, compliance programs and clinical capabilities, technology capabilities and really empower home health in a very different way for a patient experience.

Let me spend a minute or 2 talking about our repositioning strategy. One of the things that we have been very objective about is kind of where we see the next 10 years in terms of the company and which businesses we think have the best growth prospects and the best margin prospects, and I'll talk about that for just a second.

And as we look forward to '14 and hopefully more clarity out of Washington, we're going to continue to look at more shareholder-friendly opportunities as well, whether they be stock buybacks or dividends, given our free cash flow generating capabilities.

So I'll just hit very quickly the development activities. I think what you can see in the next couple of slides for yourself that we've been very active in Home Health and Hospice. We continue to build de novo transitional care hospitals and transitional care centers in the markets where we want to be and where we think there's a demand. We're seeing great high-teens, low-20 IRRs on these projects, and we'll continue to deploy capital selectively in these kinds of development.

Probably the area we've been talking the most about over the next few months that you'll see more transactions is accelerating our exit of unprofitable facilities. This is predominantly leased skilled nursing facilities that, again, the future earnings prospects we think are quite difficult and redeploying that capital into our strategy and into home health and hospice, in particular. So most of you know that we are in the process and we'll complete in the next few months the divestiture of 54 facilities previously leased from Ventas. Over the next 90 to 120 days, we will probably announce a number of other transactions where we will be selling noncore assets, both skilled nursing facilities and hospitals and using those proceeds to delever first, and then look for other growth opportunities, second.

And then beginning this summer and this fall, we will be going through another process with Ventas, where another 86 skilled nursing facilities and 22 transitional care hospitals come up for renewal. And again, that will be another opportunity for us to really look at how we can reposition and move the company.

These slides -- this slide is intended to give you a sense of where we come from and where we think we can go. If you look at Kindred before RehabCare and our nursing center business in particular, or if you looked at our owned asset mix and if you look at where we expect to be in 2016, and certainly, we hope to grow the Home Care piece even stronger than you see in 2016 here. You're going to see a very different company with a very different capital structure, a lot less earnings leakage around leases and escalators, a lot more owned assets and a lot higher-margin profile business and with much better organic growth capabilities. And a company that, I think, will trade at a much higher multiple than where we were going into 2010.

Let me summarize before I run out of time here our financial results. We had a good Q4. Tough year last year in the context of lots of different things, but we delivered on the earnings guidance that we set out for at the beginning of the year. More importantly, I think in addition to increasing operating income in the context of a lot of reimbursement changes, we continued to deliver on our free cash flow number, so we're quite pleased with that. And as you can see, our $97 million of free cash flow really enabled us to continue our growth and continue to delever slightly in the fourth quarter.

Going into '13, reimbursement is still the elephant in the room for us, having reduced almost $128 million of costs over the last couple of years, including the synergies from RehabCare. We face another $100 million of reimbursement cuts going into this year. Our guidance, as we'll talk about in a minute, includes all the known reimbursement cuts, including sequestration, the cuts that you see laid out here is a little bit of the source of confusion for some in the marketplace in a pretty tough Medicaid environment. So we have a plan. Our plan includes additional cost-reduction measures, obviously includes strong organic growth. We are off to a good start, as I mentioned earlier and mentioned on the call several weeks ago, in terms of our volumes, particularly in our Hospital business. And we're very pleased with the project management office that's leading our Project Apollo efforts. We expect that we will have another $60 million to $70 million of savings this year from Project Apollo. And again, this year, notwithstanding the lower earnings number, we expect to generate nearly $90 million of free cash flow again this year, and that will position us well.

A little bit further reach into Apollo, and in the Appendix, you'll see some more detail, will give you some more confidence around our guidance. These are identified savings. These savings will grow as we go into 2014 and 2015. Some of these savings are difficult. We've -- one of the things that -- in the face of $100 million of wage cuts -- of rate cuts we instituted was a wage freeze. But these cuts are real. They've been identified, and we do expect to see the benefits of them as we approach the sequestration cuts.

We've got a good balance sheet, great financial flexibility in terms of our credit capacity, which really enables us to be opportunistic as we see opportunities in our integrated care markets to grow. And as I said, in the near term, we'll use asset sales to delever and look for the right opportunities in terms of M&A activity.

One of the ways that we have been delevering in terms of reducing our most expensive debt is reducing lease obligations. Last year, we purchased about $111 million worth of real estate, and you can see that essentially, about a 9% effective cost borrowing at 4.5%, a good qualitative and quantitative trade for us in terms of reducing lease obligations and converting that to fund the debt.

Our guidance, again, for the year is between $1.10 and $1.30, includes the free cash flow number that I spoke to earlier. We have a high level of confidence that we can deliver on this. Again, off to a good start. And our cost mitigation programs, together with the strong start of the year, I think position us well to deliver on these numbers this year.

So with that, I'll just wrap up. Certainly, a lot of changing in post-acute care and in health care. I think we're going to be right in the middle of it as people really look to manage patients in a much more effective way as the patients broaden. And we've got a great track record for success, both clinically and operationally, and we appreciate your participation here today.

Bryan Sekino - Barclays Capital, Research Division

I agree. I think we'll end the webcast there. And then, if anyone wants to participate, we've got a few quick questions on the audience response system. Is that teed up and ready to go?

All right, so we only have like 6 seconds to answer each question. So if you have an answer, please put it in quickly. So the first question is do you believe health care reform will be a positive for the company in 2014? 1, very negative ranging to 5, very positive.

[Voting]

Bryan Sekino - Barclays Capital, Research Division

Okay. So 50% say neutral. No one is saying very positive, which, I think, you have a different opinion on that.

Paul J. Diaz

I'd put in a positive category, not very positive.

Bryan Sekino - Barclays Capital, Research Division

Okay, all right. So the next question is do you expect the company to contract rates on exchanges that will be closer to, 1 for Medicaid rates, 5 for commercial rates?

[Voting]

Bryan Sekino - Barclays Capital, Research Division

All right. So most of the answers are in the 2 to 3 range. Paul was thinking maybe in the 4 range. Next question, please? What will utilization trends look like in 2013 for the company? Number 1, significant increase ranging to 5, significant decrease.

[Voting]

Bryan Sekino - Barclays Capital, Research Division

All right, 80% saying an increase. Next? How would you like to see the company deploy capital in 2013? And then it ranges from M&A to investing in the core business.

[Voting]

Paul J. Diaz

Very helpful, thank you.

Bryan Sekino - Barclays Capital, Research Division

I think this may be the last question coming up, maybe 1 or 2 more. Do you think the company will grow earnings in 2014? 1 for yes, 2 for no.

[Voting]

Bryan Sekino - Barclays Capital, Research Division

Everybody seems to think yes. And do you currently own the shares?

[Voting]

Bryan Sekino - Barclays Capital, Research Division

83% is saying no. So there's the opportunity to profit.

Paul J. Diaz

Well, thank you all for coming.

Bryan Sekino - Barclays Capital, Research Division

Oh, I'm sorry, there's one more. What is your current bias on the stock? Ranging from positive to negative.

[Voting]

Bryan Sekino - Barclays Capital, Research Division

71% neutral. No one is saying negative. So all right, very good. Thank you very much. So we're going to go to the breakout in just a couple of minutes.

Paul J. Diaz

Thank you.

Bryan Sekino - Barclays Capital, Research Division

I don't think we'll take any questions here. So thanks, everybody.

Paul J. Diaz

Thank you.

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