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Five Star Quality Care, Inc. (NYSE:FVE)

Q4 2009 Earnings Call Transcript

February 18, 2010 10:00 am ET

Executives

Tim Bonang – VP, IR

Bruce Mackey – President and CEO

Paul Hoagland – Treasurer and CFO

Analysts

Kevin Ellich – RBC Capital

Joel Ray – Davenport

Michael Demaray – Elevated Capital

George Walsh – Gilford Securities

Operator

Good day and welcome to the Five Star Quality Care fourth quarter 2009 earnings result conference call. All participants are currently in a listen-only mode. You will have an opportunity to ask questions during the Q&A session. (Operator Instructions) Please note the call is being recorded.

And at the time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you, operator. Good morning, everyone. Joining me on today's call is Bruce Mackey, Five Star's President and CEO and Paul Hoagland, Five Star's CFO. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would also like to note the recording and retransmission of today's conference call is strictly prohibited without prior written consent of Five Star.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, February 18, 2010. The company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding the supporting period. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.

And now I would like to turn the call over to Bruce Mackey.

Bruce Mackey

Thanks, Tim and thanks to everyone for joining us this morning. For the three months ended December 31, 2009, net income from continuing operations was $0.02 per basic and diluted share compared to net loss of $0.21 per basic and diluted share, respectively, for the same period last year. However, the fourth quarter of both 2009 and 2008 included certain non-operating items.

The 2009 results included several items that in aggregate resulted in the positive impact of $412,000 or $0.01 per diluted share. These items included, one, a $317,000 gain due to the early extinguishment of our convertible senior notes. Two, a $73,000 unrealized gain on our UBS put right related to our auction rate securities. And three, a $22,000 unrealized gain on our holdings of auction rate securities.

By comparison, the fourth quarter of 2008 included several items that in aggregate had a negative affect of $7.9 million or $0.5 cents per basic and diluted share.

As a reminder, these items included, one, a $5.4 million loss on impairment of our investments in certain marketable securities held by our captive insurance companies. Two, a $5.9 million unrealized loss on our holdings of auction rate securities. Three, a $1.8 million loss due to impairment of long lived assets and four, a $5.9 million loss due to impairment of goodwill, offset by an $11.1 million gain resulting from UBS AG's agreement to repurchase our auction rate securities at par at our election between in June 2010.

Excluding these items, net income from continuing operations per diluted share was $0.01 in the fourth quarter of 2009 versus $0.04 in 2008.

I would like to point out some additional items that on a sequential basis negatively affected our results this quarter. On October 1, our skilled nursing Medicare rates affectively were decreased by 1.1%. This decrease amounted to approximately $400,000 of lost revenues.

In addition, our state Medicaid rates have not kept pace with inflation. Many states are under enormous budgetary pressures right now due to the weak economy and have either cut their Medicaid rates from prior years or reduced the increases they have historically given.

At year end, we pay out accrued vacation time. This year end was no different and we paid out approximately $13.9 million of accrued vacation time. There are many benefits to paying out vacation time such as lower overtime and third-party staffing costs. However, we incurred an additional $725,000 of payroll taxes related to these payouts.

We incurred about $500,000 of extra cost related to holiday activities that took placed during the fourth quarter. Most of this was related to higher food costs that we expect to come back to a normal level during the first quarter of 2010. These extra costs are used to help out in our marketing and resident retention efforts.

And lastly, we took an additional charge of $500,000 related to bad debt expense. Some of this expense is related to our private pay business and the remainder of this charge is related to government reimbursed skilled nursing business. We have seen many states cut the staff and departments responsible to process state payments and this has dragged out our collection efforts. We are hopeful that even though we have taken then charge that we will still recover some of these amounts. In total these additional items account for 5/10 per fully diluted share.

As we told you for the past two years, occupancy remains the key for Five Star and the Senior Living industry. At Five Star, we saw continued signs of stabilization in our occupancy.

Occupancy for the fourth quarter of 2009 was 86.1% compared with 86.1% a quarter ago and 87.7% a year ago. Same-store occupancy for the fourth quarter 2009 was 86.5% compared with 87.9% a year ago. Occupancy as of this past Friday has actually increased by 20 basis points to 86.3%.

For those who listened to the NIC MAP [ph] conference call earlier this week, NIC reported sequential industry occupancy decreases across all Senior Living product types.

While our occupancy is flat with the third quarter, when we break it down a bit we saw the following. We had net increases in our assisted living and independent living units. We had a small decrease in our Alzheimer unit. This decrease is primarily related to resident debts and moves to higher levels of utility.

We had sizable decrease in our skilled nursing occupancy. We have noticed that many of our referring hospitals are having occupancy issues related to the overall economy. Even people with Medicare and healthcare coverage are putting off getting the care they need because they aren't willing to make the co-pays associated with the coverage due to the poor economic climate.

Another reason for the decrease in our skilled nursing occupancy in the fourth quarter is due to the Thanksgiving and year-end holidays. This was expected. Many people defer planned surgeries until after holiday season. To highlight this, in the fourth quarter 2009, we averaged 891 Medicare A patients in our skilled nursing units. So far in 2010, through this past Friday, we averaged 1,009 Medicare A patients.

It is apparent that the efforts we have been putting into our sales and marketing efforts are having a positive impact. Our web traffic has increased significantly over the past year. In the first quarter of 2000 -- I am sorry, in the first quarter of 2009, we averaged just under 20,000 monthly visits to our website.

In the fourth quarter of 2009, our average monthly visits increased to just over 50,000. That is an increase of 150%. I expect that increase to keep climbing in 2010.

In January 2010, we rolled out several test Pay Per Click campaigns with Google and Yahoo. While it is too early to tell the impact from these campaigns, we have already seen our web traffic increase even further.

We are also seeing increased traffic to our buildings. By utilizing the lease tracking system we put into place in late 2008, we can see that inquiries are up. For example, on a same-store basis, our inquiries in January 2010 increased 3.2% over January 2009. This increased traffic is leading to increased deposits.

In the fourth quarter 2009, we averaged 255 deposits per month and we took 92 more deposits in total than in the third quarter of 2009. January 2010 deposits were very strong. We reported 383 deposits for the month which is a 60% increase over our fourth quarter 2009 monthly average.

We have continued to do a good job of pushing rate where possible. Our average daily rate increased 1.9%, year-over-year overall and more importantly, 2.3% on a same-store basis. On average, Five Star has increased its same-store average daily rate by over 4% over the last 8 quarters.

As we highlighted on recent calls, we are discounting selectively in some markets. We are targeting specific rooms and challenged communities that have been tough to sell and have been vacant for some time. This will have some negative pressure on our rates, but overall, we expect our private pay rates to increase in 2010 between 3 and 4%.

Moving on to other metrics. Wages and benefits, as a percent of Senior Living revenues were 51.7% in the fourth quarter, up from 50.3% a year ago and up slightly from 51.3%, in the last quarter. This year-over-year increase is primarily related to operating new communities and higher than historical compensation and workers -- I am sorry, health insurance costs at our same-store communities.

G&A as a percent of revenues was once again 4.5% as we maintain the leanest operations in the industry. This level is a good run rate for 2010.

Our core senior living business continues to be profitable. More than 85% of our total company revenues come from this business. Almost 70% of our senior living revenues are coming from private pay sources.

In the fourth quarter of 2009, Five Star Senior Living produced $18.3 million of EBITDAM, compared to $18.6 million for the third quarter. The decrease is primarily related to the items I mentioned earlier, offset by expected reductions and utility costs as well as some reductions in our health care insurance costs.

The rehabilitation hospitals which account for 8% of our total revenues, made about $100,000 of EBITDAM during the fourth quarter. Our hospitals generated about $1.1 million more in EBITDAM in the fourth quarter of 2009, compared to the fourth quarter of 2008.

Our renovations continue to progress. We are getting ready to begin working on our third wing at the New England Rehabilitation Hospital which will be a traumatic brain injury unit. This unit will help fill a need in the area, will help with the hospitals compliance with a 60% rule and will allow the hospital to take on additional non-CMS 13 compliant patients.

We are also close to signing a lease with a third party hospital in the Greater Boston area that allow us to move forward with the our fourth inpatient satellite unit.

I am hopeful that Five Star will see the benefit from this additional unit in early 2011. Braintree recently completed its second wing and began admitting patients in that wing just last week.

The pharmacy operations, which make up 6% of our total revenues, made $40,000 on EBITDAM basis during the fourth quarter. While this is an improvement of almost $575,000 of EBITDAM in the fourth quarter of 2008, this was a step back from the third quarter of 2009.

Revenues were up over the third quarter by $161,000, but we did incur several expenses that were related to prior quarters, that negatively impacted this quarter's pharmacy results. As of the end of December, we are currently servicing approximately 12,200 customers and have expectations to add almost 1000 additional customers during the next several quarters.

The majority of those customer additions will be third party customers.

I would now like to update you on our recent acquisition activities. In December, we began to lease from senior housing, one senior living community located in Georgia with a total of 53 assisted living units. Occupancy at this community is approximately 90%.

This community is very close to an existing Five Star community and will benefit from some ability to share costs.

In total, during 2009, we acquired 11 senior living communities with 952 units. After taking into account these acquisitions, Five Star now operates 217 senior living communities in 30 states. We have the capacity to take on additional acquisitions, while adding very little to our corporate and regional personnel.

One of Five Star strengths is its financial position. Five Star ended the quarter with $11.3 million of cash. At year end, Five Star had an uncapped line of credit with Wells Fargo for $40 million. Five star has a put right to sell approximately $75 million of option rate securities to UBS in June 2010, from which we will net $35.1 million inside of additional cash after paying off the credit facility we have with UBS.

Five Star has no near-term debt maturities for our senior notes or mortgages. The closest maturity we face is in October of 2013, when our senior notes can be put to us. We have $49.7 million of convertible senior notes, currently left that can be put to us in October, 2013.

In 2009, we have purchased and retired $76.8 million par value of our outstanding convertible senior notes with $39.9 million plus accrued interest. And last, we own 25 communities that we operate.

22 of these communities unencumbered and have a net book value of approximately $129 million. Our four keys to success remain the same. Increase occupancy and average daily rate, while holding labor and G&A costs in check. Throughout the past year performed consistently on the last three.

While we believe that occupancy improvement is the most important key to improving our bottom line and we have seen consistent science of occupancy stabilization over the past two quarters. It is our belief that occupancy growth in the industry going forward will come through steady and measured improvement.

In order to recognize the full benefit of future occupancy improvement, we felt the need to closely scrutinize those areas on the cost side where we have historically performed well.

We are taking a fresh look at ways to operate more efficiently and provide more predictability to our operations. This effort is being led by Paul Hoagland In January, Paul assumed the position of Chief Financial Officer. He brings more than 15 years of public company experience to the CFO to Five Star. Paul joins us most recently from Friendly's Corporation, a publicly traded restaurant company with over 600 restaurants, 15,000 employees and 5000 grocery outlets on the east coast. Previously Paul was CFO at NE Restaurant Company, a publicly traded operator of 120 brand restaurants including recognizable names such as Bertucci's and Chili's.

We specially targeted Paul because of his hospitality experience, because of the similarities it has with the senior living industry. Paul has an extensive background running large complex financial departments at service focused organization. He also has a great track record of working hand-in-hand with operations to improve financial results.

Paul has been on board with Five Star in its new role for just over a month now. I'm excited with the attitude and fresh approach that Paul has brought to the table.

At this point, I would like to turn the time over to Paul Hoagland, our Chief Financial Officer.

Paul Hoagland

Thank you, Bruce and Good morning everyone. For the fourth quarter our senior living revenues increased $12.8 million, or 5.2%, to $260.4 million, as compared with the fourth quarter of 2008.

Revenues from communities acquired or leased after October 1, 2008, or our new communities accounted for most of the change for a total of $11 million. In addition, a 7/10 of a point increase in same store senior living revenues accounted for the rest of the increase, rising on a 2.3% increase in average daily rates, offset by 155 basis point decline in occupancy.

Senior living operating expenses increased $12.3 million or 6.6% to $198.7 million when compared with last year. Again, most of the increase or $8.8 million was from our new communities.

Higher same-store operating expenses especially in health care, insurance, explains the remaining increase, increasing 1.7% from the prior year's levels to $187.5 million. However, as you may recall from our previous call, we did make a change in our health benefit provider early in the fourth quarter and are optimistic that our cost increases will moderate going into 2010.

For the fourth quarter of 2009, our same-store senior living operating margins before rent or EBITDAM as a percentage of revenues declined to 23.8% from 24.6% in 2008 due to increases in wages and benefits. EBITDAM and our new communities was $3.2 million or 28.9% of related revenues.

Turning to our ancillary businesses, the rehabilitation hospitals generated a fourth quarter EBITDAM of $100,000. Hospital revenues were up $125,000, or 0.5%, when compared to last year due mainly to 2.5% Medicare price increase that took affect October of 2009.

However, hospital expenses did decrease by 300 basis points during the quarter due to strong cost management. In our pharmacies achieved a $40,000 dollar EBITDAM margin in the quarter, which is an increase of $575,000 from the prior year.

Pharmacy revenues were up 5.3%, compared with last year due to impact of adding new customers, which was partially offset by lower average revenues per prescription due to higher sales of generic drugs.

Pharmacy expenses increased only 2% from the prior year because of higher costs associated with our rising customer base, but our revenue increase allowed us to capture efficient EBITDAM flow through.

During the fourth quarter, general and administrative expenses increase 5% or $650,000 dollars from last year, due to higher corporate and regional costs associated with communities we began to operate in 2008.

Our G&A cost as a percentage of revenue are even with last year at 4.5% and are within range of our expectations. Rent expense for the quarter increased $2.6 million or 5.9% compared to last year. Most of this increase was due to the new acquisitions having rent expense of $1.5 million. Taxes $122,000 in the fourth quarter and absent any unusual gains or losses, we expect next quarter a taxes to be approximately $400,000 in the first quarter.

And before concluding today, let me review liquidity, cash flows and selected balance sheet items. As of December 31, we had unrestricted cash and cash equivalence of $11.3 million and total current unrestricted cash and investments including our UBS put right and auction rate securities of $94.7 million.

At December 31 and as of today, we had nothing drawn on our $40 million revolving line of credit with Wells Fargo and $40 million drawn on our UBS line year end. Today our balances remain undrawn at Wells Fargo and by $44.7 million at UBS. There by netting us approximately $30.3 million of ARS proceeds today.

Consolidated EBITDA excluding certain items noted in our press release was $4.7 million during the quarter, compared to $6 million last year. And operating cash flow for the quarter was negative $4.3 million, due to a number of working capital considerations such as $6.1 million associated with the prepaid expense runoff and deposits associated with our healthcare provider change in the fourth quarter. And $6.5 million of payments in reduced accruals for year-end due to PTO vacation and property tax accruals and payments.

We made $16.6 million of capital investments during the period and sold $6.3 million of CapEx to Senior Housing. Our accounts receivable management remains strong as the number of days sales outstanding for consolidated operations was exceptional 20.4 days at the end of the December.

At the end of the year, we had $192.7 million of net property and equipment, which included 25 properties that are directly owned by Five Star, 22 of which are unencumbered by debt.

In addition to the debt on our UBS line previously mentioned we had $49.7 million of convertible Senior Notes and $12 million of HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note and mortgage agreements. I appreciate the opportunity to share this information with you today and do look forward to actively partnering with Bruce and the team at Five Star as we improve the performance and value of our company.

That concludes our prepared remarks for the day. We would now like to open it up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from line of Kevin Ellich from RBC Capital. Please go ahead, sir.

Kevin Ellich – RBC Capital

Good morning, guys. Thanks for taking my questions. Bruce, starting off with some of your commentary about average daily rate growth and some promotions that you are using, how much of the promotions impacted pricing growth this quarter?

Bruce Mackey

It has impacted it a little bit Kevin. Historically, if you look we averaged like I said in my prepared remarks over 4% over the last eight quarters up for the quarter on same-store basis were up about 2.3%. So you can see a little bit as some of that is a result of the Medicare rate decrease is well, but some that is a result of the year the pricing promotions that we have been doing?

Kevin Ellich – RBC Capital

And you said the sniff Medicare rate decrease was to that 1.1%?

Bruce Mackey

Correct.

Kevin Ellich – RBC Capital

Okay. Got it. And then have you guys always paid out the accrued vacation time. I guess I missed that previously?

Bruce Mackey

No. We have. I think what I was trying to do was talk a little bit sequentially between Q3 and Q4. I think the payments and Paul you can a little bit, which we are pretty sequential where we were last year.

Paul Hoagland

Yeah. I mean ultimately last year in the month of December, we paid out 8 million change in the vacation and PTO this year was 9 million in change primarily because of the increasing communities. And then in the actual fourth quarter last year, we paid out 12 million change this year we paid out 13 million. So as to why -- it wasn't mentioned in previous calls, I certainly can't speak to that. But I think he is doing some…

Bruce Mackey

There is a big thing come out. But Paul, we had additional payroll taxes and result of those payouts in the fourth quarter that went around in Q3.

Kevin Ellich – RBC Capital

Okay. That was 725,000.

Bruce Mackey

Yes.

Kevin Ellich – RBC Capital

That you mentioned?

Bruce Mackey

Yes.

Kevin Ellich – RBC Capital

Okay. And then did you see any issues with seasonality this quarter. I think last year you had some delay and just wondering if that had effect on occupancy?

Bruce Mackey

It did. Sure. Again the prepared remarks, I think a lot of our skilled nursing results or the decrease I talked about was clearly a result of seasonality. And when I look at the Medicare A patients, were up well over 10% so far in 2009 than where we were in the fourth quarter of 2009 down '10. Now moving on fourth quarter of 2009 definitely seasonality. And Traffic can be slow during the month of December. People aren't really looking for a place to move mom-into during that the holiday time or between end of thanksgiving and year-end.

Kevin Ellich – RBC Capital

Okay.

Bruce Mackey

We're definitely seeing traffic increase, traffic really picks up in January. And we are seeing that.

Kevin Ellich – RBC Capital

Okay. And then I did want to say, congratulations Paul and I look forward to a sitting down at some point. But just going back to comments on operating cash flow, it was negative this quarter I was just wondering what's your thoughts are on cash flow generation for 2010? Do you expect that to rebound and do you have any sort of color you can provide on that front for expectations?

Paul Hoagland

Yes. Well, obviously our fourth quarter is usually our lowest quarter but as you look even last year first quarter, we had a very strong cash generation quarter, which was over $20 million in the first quarter of 2009. So again, some of it is seasonality, some of it is the change in healthcare provider, which again in and of itself consumed over $6 million of cash.

Kevin Ellich – RBC Capital

Okay.

Paul Hoagland

And again, the early reading by the way, on the healthcare provider change. We're cautiously optimistic that we are going to be able to moderate healthcare costs as we enter 2010.

Kevin Ellich – RBC Capital

Okay. That's helpful. Then just one last question or can you talk about, Bruce you talked about the web traffic and kind of your new marketing strategies. Just wondering how you guys are going to measure that success rate and if you could give us any color behind the patient demographic of who is actually visiting your website? I mean I have a tough time seeing a lot of senior citizens going -- checking out Five Star's website, but maybe I might be wrong on that?

Bruce Mackey

No. Wrong, but the senior population is becoming more web savvy. I will say in almost every one of our communities where we have some type of Internet cafe, we have actually got wireless portals in a lot of our Senior Living communities and it's something our residents are demanding more and more. It's a great way to talk to grandkids, view pictures online of the family. But that's a resident retention tool, but in terms of actually doing research, et cetera. It's generally the oldest daughter doing research for mom finding a place for her. And in terms of tracking that, I think through our leads tracking data base that we put into place in late 2008. We will definitely have a lot of -- we are seeing more visibility than we had over years past.

Kevin Ellich – RBC Capital

Okay. That's all I have. Thanks, guys.

Bruce Mackey

Thank you, Kevin.

Paul Hoagland

Thank you.

Operator

(Operator Instructions) And we will take our next question from the line of Joel Ray from Davenport. Please go ahead.

Joel Ray – Davenport

Good morning, folks.

Bruce Mackey

Good morning, Joel.

Joel Ray – Davenport

I would really like to focus the discussion little bit more on the cost side of the equation. In your comments Bruce you pointed to variety of cost issues that cropped up in the fourth quarter, which equated to about $0.05 in earnings per share impact. My sense is that for the most part those are not one-time in nature. Yes, we did have a little bit more in the way of payout on vacation, but we have that year and year out, though it was up some this year.

Bruce Mackey

I think you're right, Joel. I think a little bit more -- it's more seasonality than anything else on those costs.

Joel Ray – Davenport

Right. And then I heard you and Paul mention how we are going to increasing our focus on cost control and again I'm hearing that health insurance hopefully that starts to abate a bit. What other areas can we attack or focus on to try to go and keep that under control because until we can go and really see some rebound in the real estate markets and occupancy really rebuild, to have much in the way of cash flow generation and earnings momentum. We really need to focus on the labor cost and particular, which was surged a bit in the fourth quarter?

Paul Hoagland

I think obviously, a good question, topic of major concern and focus here and certainly as I come into the company, I want to improve the visibility and metrics with regards to labor efficiency and certainly the benefit area perfect example, we did talk a little bit you mentioned health care, health care I do think will work to our advantage but ultimately it will be my intent to not only look at things like health care but workers compensation, professional liability from a stand point of the measurement, the tracking and our abilities to be able to not only evaluate what has taken place but equally as important to be able to put in programs and systems that will help us alleviate prevent and reduce it going forward where again I had good success in the past.

Things as simple as even looking at a consolidated program to help us evaluate the purchase of utilities and energy I think as the company has grown so dramatically, some of those finer details have not caught up with us. So again in the process of interviewing companies that will help us evaluate energy costs, college costs and be able to consolidate and hopefully find efficiencies that as occupancy grows our flow through will increase more dramatically.

Joel Ray – Davenport

Okay. Are there any new programs in particular Bruce, that you think have the potential to cause a little bit more of a surge in overall occupancy as we think about the next few quarters at Five Star.

Bruce Mackey

We had special marketing programs in the past. Seems like, it’s saying to pay off a bid. I didn't know if there was anything in particular we should be focusing on at this point.

Francis Murphy

Yeah. We’ve got nothing significant in the pipeline, my hope Joel is over the next of course that we can – we know our way off -- from the special program as the economy sort of rebound a little bit, I know it's been slow to get going but with the increased traffic that we are seeing, the very lack of new supply, the demographics in the industry, growing at 3% per year.

Several hundred thousand more people will want this type of service, I'm hopeful that there is been need for those special programs will await a little bit. We’ll selectively still do some discounting at those properties. I mean, all of our communities have a tool box essentially set by the original people so they can choose from.

It might be a half a month free rent to that of six months to some one on those line to may be include a little bit more again depending over their occupancies and what they are competing with in their local community, but I’m hopeful that we set back a little bit from this programs.

Joel Ray – Davenport

Okay. Thanks very much.

Francis Murphy

Right. Thanks, Joel.

Operator

And we’ll take our next question from the line of Michael Demaray from Elevated Capital. Please go ahead.

Michael Demaray – Elevated Capital

Good morning, guys.

Bruce Mackey

Good morning.

Michael Demaray – Elevated Capital

I was hoping you could give us a little bit of color on the returns on invested capital you guys are seeing on the Hospital side of the business?

Bruce Mackey

Yeah. That's a good question. In terms of return. The potential is significant. I realize we haven't really seen that yet, but if we can increase occupancy as a result of the capital improvements we have put into a place, the returns are going to be well over double digit.

In addition, I'm looking at the returns for the -- I mentioned that satellite, the fourth inpatient satellite unit, again the returns on that investment will be over double digit. But, these are tough to measure, we’ve been putting capital in, in a tough regulatory environment. We haven't seen that yet. We are expecting double digit. That's been the whole goal all along. We clearly haven't achieved that so far yet to date.

Michael Demaray – Elevated Capital

What's the time frame you are thinking there for those to ramp up?

Bruce Mackey

I know, I mentioned in repaired remarks the additional satellite unit is the fourth -- hopeful it's early 2011. I think that's realistic. The state of Mass can be difficult. Other states could be a lot quicker. But --

Michael Demaray – Elevated Capital

But in terms of the existing facilities ramping to the double digit return numbers. Are those – I mean, how many months does that take do you think?

Bruce Mackey

I think it's quarters, not months.

Michael Demaray – Elevated Capital

Quarters. Okay. Al right. Well, I think that's it. On the Pharmacy side of the business can you give us some color on what is going on there and what your thinking is?

Bruce Mackey

Sure. It's a piece of our business that's under our microscope. I have talked about that in the past. We did have some expenses. I really didn't highlight the numbers, but several hundred thousand dollars related to prior quarters. But, it's still even if you take those into account this quarter, the Pharmacy did not meet our expectations.

We have got about a thousand customer that we want to put on. We still think it's an efficiency to squeeze out on the operating expense side. If we don't hit those we will take a look that business in terms of whether we think it makes sense down the long run.

Michael Demaray – Elevated Capital

Okay. All right. Thanks very much.

Bruce Mackey

Thank you, Michael.

Operator

And we’ll take our next question from the line of George Walsh from Gilford Securities. Please go ahead.

George Walsh – Gilford Securities

How was the healthcare utilization by employees trends this quarter versus previous quarters?

Bruce Mackey

Well, from a standpoint of pure dollars and cents we do -- recognizing that we made the change in carriers on October 1, we do have a bit of what I'm going to call green data, but the green data was again optimistic from a standpoint of, from an actuarial standpoint what we view the trajectory to be. The utilization itself, I can't speak to the percentage coming out of Q3 into Q4. I can just tell you that the dollars did moderate in Q4 from the trajectory it had been peaking at.

I mean, when you look at the second and third quarter, the company had, second quarter in particular, a pretty difficult delta of expense year-on-year with healthcare. We did not see that in the fourth quarter.

George Walsh – Gilford Securities

Okay. And also the energy cost, the previous quarter, the third quarter, you itemized a $1.7 million increase because of the summer related heat costs, but we have had a rather cold fourth quarter and winter start, so what was the -- did those stay about the same at the elevated level or was there some mitigation there?

Bruce Mackey

No. There was some mitigation and I spoke to that a little bit George. The mitigation was -- several -- I wouldn't say several, a little over $1 million. I am expecting those costs to kind of go back up against seasonality. Those costs generally go up in the first quarter of 2010 and you're right. It has been a much colder first quarter so far in 2010 than we have historically seen. In addition, you have got all the snowfall removal. That's probably another significant cost that we will probably see in the first quarter of 2010 that I think is going to be high over even prior quarters.

Paul Hoagland

The dollars were down fourth quarter of ‘09 to third quarter of ‘09 and then versus fourth quarter of ‘08, they were up only 3% or 4%. So, it was pretty moderate.

George Walsh – Gilford Securities

Okay. The other -- just in general, it seems there are various factors that come up each quarter that have their impact and they could be itemized, but if the net at this point that with these occupancy levels it's pretty much a breakeven or is there really room to move on the cost side to make that much of a difference here?

Bruce Mackey

I think there is some room on the cost side. One of the questions that Paul took a stab at from Joel -- how much it is, is still something to figure out. I don't think it's a huge amount, but I do think there are opportunities on the cost side. But again, we are seeing right with the increased traffic hopeful that the bottom is where we are at and we are starting to move our way back up.

George Walsh – Gilford Securities

Okay. And once again, just to be clear for myself, the use of your 26 million in cash to previous quarter it's about 11 now, so that use of cash was primarily for those -- I'm looking at my notes again, what was that again?

Bruce Mackey

The biggest piece was accrued vacation.

George Walsh – Gilford Securities

Right.

Bruce Mackey

And if you started looking at us last year, again though fourth quarter is always our lowest cash flow quarter. And we usually look at our balance sheet last year we ended the quarter with about $16.2 million to 16.1 million of cash. Again, it's generally our lowest cash position.

Paul Hoagland

And then the other big item is we have mentioned was over $6 million in the transition of healthcare providers between deposits in run off payments that were a combination of expense and prepaid.

George Walsh – Gilford Securities

Okay. Now are each of those items expensed?

Paul Hoagland

No.

Bruce Mackey

Some of that is -- most of it is balance sheet and the other thing we really haven't talk about -- it is a much smaller amount, but it is still over seven figures, is we transferred a new carrier for workers compensation in June. So, again you have one being run off right now and run off from workers comp can take two to three years and you have one building up. So, I expect some cash out of that in next year or so.

George Walsh – Gilford Securities

Okay. So that’s vacation expense is not -- that vacation item is not expense.

Bruce Mackey

We expense it as -- it's an accrual method. It hits every month. In December you pay out significantly.

George Walsh – Gilford Securities

Okay. Very good. All right. Thanks a lot.

Bruce Mackey

Thank you, George.

Operator

Thank you. That does conclude today's question-and-answer session. I would like to turn the call back to Mr. Bruce Mackey. Please go ahead sir.

Bruce Mackey

Great. Thank you. And thank you all for joining us on today's call. I would like to remind everybody that we will be presenting at RBC Capital Market Healthcare Conference in New York on March 3. I hope to see many of you there. Bye, now.

Operator

This concludes today's conference. You may disconnect at this time.

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Source: Five Star Quality Care, Inc. Q4 2009 Earnings Call Transcript
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