Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Kindred Healthcare (NYSE:KND)

Q1 2014 Earnings Call

May 08, 2014 10:00 am ET

Executives

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

Benjamin A. Breier - President and Chief Operating Officer

Stephen D. Farber - Chief Financial Officer and Executive Vice President

Analysts

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Brandon Fazio - UBS Investment Bank, Research Division

Chad Vanacore - Stifel, Nicolaus & Company, Incorporated, Research Division

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Operator

Good day, everyone, and welcome to this Kindred Healthcare 1Q '14 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Eddie Jones with Corporate Communications. Please go ahead.

Unknown Executive

Good morning. Welcome to the Kindred Healthcare First Quarter Conference Call. This is Eddie Jones from Corporate Communications. Before the company's presentation, I would like to read a cautionary statement.

This conference call includes forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involves a number of risks and uncertainties. Such forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company and its management are unable to predict or control that may cause the company's actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements.

The company cautions participants that any forward-looking information is not a guarantee of future performance, and that actual results could differ materially from those contained in the forward-looking information. The company refers you to its reports filed with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K, the company's other reports filed periodically with the SEC and its press release regarding the first quarter operating results for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The company cautions investors that any forward-looking statements made by the company are not guarantees of future performance. The information being provided today is as of this date only, and the company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Certain references to operating income or EBITDAR and core free cash flows, as well as other non-GAAP disclosures, have been reconciled to the company's consolidated operating results and are available on the company's website, www.kindredhealthcare.com.

It is now my pleasure to introduce the participants in today's call: Paul Diaz, Chief Executive Officer; Ben Breier, President and Chief Operating Officer; and Stephen Farber, Executive Vice President and Chief Financial Officer. Mr. Diaz will begin the call.

Paul J. Diaz

Thank you, Eddie, and good morning, everyone. Last night, we announced a solid start to the year, with core diluted EPS of $0.32, in line with our expectations. In addition, we reaffirmed our core earnings and free cash flow guidance for 2014.

Like most providers of health care, some macro headwinds continued this quarter, with a challenging admission environment for hospitals and nursing center businesses and the final quarter of impacts of sequestration, broadly, and MPPR in our Rehab business. Despite these challenges -- and I guess we could also complain about the weather -- our clinicians and operators delivered improved outcomes for our patients, and we saw sequential margin improvement in each of our businesses. We are very excited about and very pleased with the start to our year.

Before commenting further on our results and our opportunities going forward, I'd like Ben to discuss our operations and for Stephen to make a few comments on our recent refinancing. Ben?

Benjamin A. Breier

Thanks, Paul, and good morning, everyone. Let me start as I usually do, by first thanking the more than 63,000 teammates that we have here at Kindred. Certainly, without their passion and their commitment for caring for our more than 0.5 million patients annually, nothing else for us would be possible.

As Paul noted, we're very pleased with how our year is starting out. Let me give some color on our -- on the performance of our operating divisions, each of which reported sequential improvement in operating income and margin as we move forward from the repositioning of our businesses that was completed in the fourth quarter of last year.

I'll start first in the RehabCare division, where we continue to see momentum from 2013 into this quarter. Despite the headwinds of sequestration, Part B CAHPS and MPPR that was thrown its way April 1 of last year, the team delivered both operating income and margin growth on a year-over-year basis. RehabCare's consistent ability to execute is a testament to Pat Henry, our division president, and their entire team of -- dedicated team of nearly 22,000 therapists throughout the country.

In addition to solid operating performance metrics around productivity and efficiency, RehabCare is off to a terrific start with respect to organic sales growth. The team drove significant new facility growth with 45 net new SRS or Nursing Center contracts and 7 new signed HRS or hospital rehab service agreements. We're very excited about RehabCare's continued growth going forward.

We've heard from most of the provider industry over the past quarter, that the tough macro environment for admissions continues. This downward pressure had a clear effect on our hospitals as well, as they too are feeling some downstream pressure on their census. Same-store admits were down a little more than 0.5% year-over-year for our Hospital division. We did see a sequential rebound we were expecting and that we spoke about on our last call to investors, and combined with a disciplined focus on costs, we were able to offset a good portion of the volume decline.

We experienced a little pressure in commercial rates, slightly lower overall length of stay as well. But we see this type of variability from time to time and we expect these indicators to normalize as the year progresses. Taking them all into account, we're very pleased with how our Hospital team started the year, and are pleased that April appears to be a strong start to the second quarter.

In particular, I want to note the performance of our Nursing Center division in Q1. This business for Kindred, as all of you know, has undergone tremendous structural change as we've reduced our presence in the industry by more than 1/2 over the last few years to a core group of 105 facilities.

Nursing Centers, like hospitals, have been challenged by lighter-than-expected volumes and pressures on shortening lengths of stay and a shift into Medicare Advantage from our fee-for-service business. But our team did a great job overcoming these challenges and delivering solid operating income growth and more than 130 basis point expansion in margin. We remain committed to returning this division to long-term profitability, and with the repositioning of the Nursing Center portfolio nearing its completion, we're on our way to achieving this goal.

Last, I'm very excited about our Care Management division. It's one of our core sources of growth going forward, an area of great activity and focus for us at Kindred. Over the last 6 months, in the last quarter in particular, the Care Management division has made excellent progress in terms of both our capabilities and performance in our 3 areas of focus: one, Kindred at Home; two, our developing home-based primary care business; and three, our Care Management programs that will enable us to better manage patients through their recovery and pursue new payment models.

The division's made significant investment to standardize our clinical and business processes, and we're moving quickly towards our goal of being a best-in-class Home Health and Hospice provider. We've now fully converted all of the division to the Homecare Homebase Clinical and Billing application, including the operations of our recent Senior Home Care acquisition in Florida and Louisiana.

We solidified our management team, established a new branch staffing model and implemented new reporting packages and business reviews. We're very pleased with the early progress we've made with the Senior Home Care acquisition. Volumes, revenue and operating margins are all exceeding our pro forma plan in its first full quarter of operations.

Sequentially, the division saw strong growth in revenue operating margin -- operating income, and in sum, we really couldn't be more pleased with the progress we've made and believe that we're well-positioned to harness these new strengths to drive significant future growth.

I'd like to close my remarks today, if I could, with a few comments on our recently announced agreement to become a strategic partner and owner in the Silver State Accountable Care Organization in Las Vegas, Nevada. It's a very exciting transaction for us at Kindred, and the partnership marks our first ownership of an ACO anywhere in the country. Kindred's Care Management division will be responsible for managing care utilization for more than 10,000 covered Medicare lives in partnership with approximately 150 primary care physicians based in Las Vegas.

We're always looking and identifying opportunities to learn and grow, and Silver State, along with our home-based primary care physician strategy and our care transitions programs that I mentioned earlier in many of our integrated markets, are all examples of efforts to develop, test and deploy new payment models across our platform. Our stated goal of advancing value-based payment models in multiple markets over the next few years remains right on track.

With that, let me turn it over to Stephen Farber, our CFO, for a few moments. Stephen?

Stephen D. Farber

Thanks, Ben, and good morning, everyone. I'm sure that most of you saw that in late March, we refinanced pretty much all of our debt. In total, we refinanced about $2.25 billion across our bonds, a term loan and our ABL. Rather than walk through all of the details which are available on our press releases from around that time and our 10-Q that's going to be filed tomorrow night, let me just give a few highlights.

First, we extended maturities across the board, and most of our debt is now due in 7 or 8 years. I think the weighted average is just a touch under 7 years. Second, the new debt has much more flexible covenants, but let me just focus for a moment on the capacity for dividends. We added some -- we added 2 features for this in this refinancing, where there is a base basket for restricted payments of $150 million plus a grower that tracks with earnings. There is also a special $30 million per year dividend basket with a 1-year rollover feature that is a material change from what we had in place previously. Third, with the refinancing, we added $400 million of incremental interest rate swaps, so now about 2/3 of our funded debt is either fixed or swapped.

And my last point on the refi, but an important one, is that our new debt costs meaningfully less, even net of the cost of the swaps and the incremental duration. Our average cost of debt is right around 5% all in. And in total, the refinancing is accretive by about $0.11 for full year and about $0.08 prorated for the remainder of 2014. And just to be clear, this was already built into our guidance that we've reaffirmed today.

I also just want to take a minute and give a quick update on our progress with transitioning the 59 Ventas nursing centers that we announced late last year. Year-to-date, we've transferred operations for 26 of these 59 facilities. Another 20 are set to move on June 1, and most of the remaining facilities will be out of our portfolio by August.

There's also a cash flow aspect to this. As we exit these sites, we are paid for our equipment and our supplies. We also retain and will liquidate the net working capital. All told, we anticipated a cash infusion over 2014 of approximately $45 million from these sources, and so we're on the same page; most of this cash flow also is already baked into our guidance.

With that, let me turn it back over to Paul.

Paul J. Diaz

Thanks, Stephen. Let me make a few concluding remarks before we open it up for questions. First, we are aggressively continuing to transform our company to be the leader in providing high-quality, integrated and patient-centered care for patients recovering from an illness or injury. We're also making great progress in advancing our strategic plan to provide a more complete offering of services across the post-acute continuum in our Integrated Care Markets.

More importantly, all of our service lines continue to outperform national benchmarks in key quality metrics, drive down rehospitalization rates and reduce length of stay. In short, we are providing better clinical outcomes to our patients and getting them home sooner.

Our solid performance this quarter and our ongoing progress in each of our divisions, particularly in our Care Management division, and standardizing and streamlining our operations are further evidence that we are pursuing the right strategy. Additional investments in our Integrated Care Markets will further distinguish Kindred as a partner of choice for large health care systems and commercial and managed care payers.

As we've discussed, we are reaffirming and have a higher level of confidence in our earnings and free cash flow guidance for 2014, reflecting the confidence we have with our performance and momentum. And with the repositioning of the company essentially complete, we are now aggressively moving into the growth phase of our strategic plan.

We are very excited about the active pipeline of acquisition opportunities to continue our growth, both in our existing businesses and in adjacent, complementary and synergistic businesses. As those of you that have followed the company are aware, we have a history of thoughtful, disciplined growth and a proven track record of successfully integrating acquisitions, achieving synergies and are excited to continue on this path.

Kindred has transformed dramatically over the last 4 years and continues to evolve in new and exciting ways, but our commitment to our patients, our mission and our team hasn't changed. And we are convinced that our strategy will create tremendous opportunities for our patients, our teammates and our shareholders going forward. That concludes our formal remarks and we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Kevin Fischbeck from Bank of America Merrill Lynch.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Just wanted to just go over to the guidance real quick. It does look like some of the pieces moved, that the operating income number was down but interest income -- sorry, interest expense was down. Could you talk a little bit about what, if anything, changed from Q4 to Q1 in the guidance?

Stephen D. Farber

Sure. It's Stephen. Yes, the really -- I think the movements between the lines was really, to some extent, just a rebalancing between near-term portfolio management-style M&A and the refinancing that we did. So, as Paul said earlier, we reaffirmed our guidance for today. So the EPS line didn't move but we did get $0.08 of accretion on the year from the refi. So we simply moved some of the performance from the EBITDAR line that was tied to prospective M&A and backfilled it with the proceed -- with the benefits of the refi.

Paul J. Diaz

A color commentary, Kevin, is that we took what was more speculative but -- acquisitions in our pipeline and more -- and moved it to more certain savings on the interest expense line, without -- and therefore, really more confidence in the number, more certainty in the number. But also, I would just note that it does not diminish our enthusiasm for some of the deals in our pipeline. We've just taken those out of the guidance at this point.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay, so does the guidance include any acquisition benefit or is it all added now?

Paul J. Diaz

There are no acquisitions in the guidance now, and -- but the certainty of the financing is complete.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. So you would kind of view this as the core businesses is kind of unchanged, it's really just related to the deals?

Paul J. Diaz

Correct.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. And speaking of deals, Paul, you mentioned adjacent businesses. it kind of feels to me like Kindred is doing almost everything it can do in post-acute care. Is there anything, specifically, that you would highlight around that?

Paul J. Diaz

Well, we've talked about, in a number of different forums, our excitement about expanding our Home Health and Hospice businesses. This quarter's performance and the success of the Senior Care acquisition and integration obviously gives us even more confidence to do that. We have some exciting pipeline joint ventures with hospital systems that we're working on. We've announced some of those and there are some more that we're working on. And we're going to be fairly aggressive there now, again given the traction and confidence and the success we've had. We're also very interested in adding in our Integrated Care Market, senior living capabilities and capacity. We have 6 assisted living facilities today, and we think that, that's an opportunity for patients and for our adjacent businesses as well, both at Kindred at Home and RehabCare. And we're doing a great job, quite frankly, of cross-selling some of those opportunities in markets like Florida and Texas. So, yes, I think that the -- Ben will speak about the primary care physician piece for the business, and we're excited about that too. But the senior living space is something that we're actively looking at also.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay, and just last question I guess. On the ACO that you announced, are you having the same kind of ACO economics or are you kind of like a subcontractor in here and that it's different payment, either capitated or fee-for-service? How are you getting paid within the ACO?

Benjamin A. Breier

It's a one-way risk contract, Kevin, so it's being paid on a fee-for-service basis and then we share in the upside. We don't have risk on the downside at the start of this. So the physicians essentially pool their Medicare lives, we look at a cost run rate, which the baseline was established in 2013. As we affect cost improvement in 2014, the physicians and the ACO will participate, pro rata, on the savings that come out of that. But each will be paid on a fee-for-service basis for the time being.

Paul J. Diaz

What's exciting about that though is that, now, as we lower lengths of stay and reduce rehospitalization, we can participate in that value creation.

Operator

And our next question is from Joshua Raskin from Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

First question, just in the past, now with patient criteria. I think you'd mentioned, previously, talking about setting up these beta hospitals and another methodology to test out some of the new rules, et cetera. Have you guys made any progress on that? Any additional thoughts on that?

Benjamin A. Breier

Josh, it's Ben. We are, we're making a lot of progress on it. We're thinking about it every day, and I think our team is attacking it with the vigor you might expect us to. We continue to feel bullish about patient criteria and about what it means for our hospitals. We think that, essentially, there are 3 core components to what our strategy will be. We will obviously continue to go after these high-acuity LTAC patients. We think that our Case Mix Index, our ability, proven over the last couple of years, to take care of the sickest kinds of the patients out there speaks for itself, and we think there'll be real opportunities to continue to go upstream on the LTAC side. We also think, on the downstream side, that our continued build-out of sub-acute businesses, of step-down units where we can utilize capacity in our hospitals to take care of patients at a lower level, will make a lot of sense as well. But the thing I think we're most excited about in the context of certification is this neutral site payment, that third bucket, if you will. And so in that regard we are trying a lot of things, to your question specifically, in pilot hospitals. We're working with Medicare Advantage plans on types of patients that -- now that we have -- we do not have the 25-day length-of-stay criteria that might make sense to go into that bucket. We are talking to lots of different service lines around -- whether it be dialysis or psych or wound care. All kinds of different ways that we can continue to fill capacity in that neutral site payment mode. And we're actively involved in, I would say, probably half a dozen of our hospitals that are trying these things today, so that we will be ready by the time certification comes into path in full effect. We'll be ready, we hope, to fill the beds of our facilities.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, perfect. And not to be picky on the guidance again. But $0.08 from the refinancing and guidance up $0.10. So that $0.02, is that -- and I know Paul mentioned a higher level of confidence. Is that $0.02 operational? And I think you said no more M&A, so were there other -- I can't imagine there's other refinancings or other income statement adjustments. Is this just sort of -- think of it as sort of rounding/more confidence or is there something else to come?

Paul J. Diaz

No, Josh. There's always a lot of moving parts, and we refined the guidance among the -- what's happening in the portfolio across the different operating segments. But what we had was a pro forma in our guidance, the revenue and EBITDAR and EPS associated with deploying capital and acquisitions, and knowing that we were going to work on our financing but we didn't want to get ahead of ourselves. And so we've replaced a higher quality of earnings, quite frankly, and without operation, their ability, and without deploying capital to get that EPS. So we have more in our war chest to do it to get to the same guidance number on a lower interest expense number. I think that's the key takeaway.

Joshua R. Raskin - Barclays Capital, Research Division

Yes, that makes a lot of sense. And then just a last question is, it feels like we're seeing an uptick in, what I call, sort of hospitalists that are specialized on readmissions, right? And so, post-discharge hospitals planning, et cetera. And I'm just curious, are you guys seeing an increase at the acute care hospitals around hospitals with hospitalists that are intervening in that sort of process? And how are you working with some of these groups that are now being tasked with managing the entire sort of post-acute episode? And how are you making sure that your LTACs and other facilities are sort of getting the appropriate patients from these discharges?

Paul J. Diaz

I'll just start and turn it over to Ben because Ben's really driving the physician strategy and -- look, I think this is a real positive for us. Whether it is working with hospitalists and developing a higher confidence level in them, of sending us the most medically complex patients to our LTACs or transitioning patients to our transitional care centers, and we've got relationships with companies like IPC and others, DaVita HealthCare Partners and our own primary physician strategy. So we -- this is a welcome development, and it's -- it all -- every time we add a physician component to the discharge planning process, that supports our organic growth and the ability to take more medically complex patients sooner, so -- but Ben, you can talk more specifically about what we're doing.

Benjamin A. Breier

I'll just add a couple more comments to what Paul said. One, we are involved with virtually all of the big hospitalist companies across the country. Paul mentioned a couple, but Sound and Cogent and some of the other local hospital-owned ones as well. Look, we think this is really a win-win for our facilities, for the patient and for the hospitals. Because I think you're right, there is becoming a more concrete focus on this, as it relates to hospitalists trying to manage hospital readmissions. And I'll give you a great example of how it works for us in a particular market. So, in Cleveland, with our relationship with the Cleveland Clinic. The Cleveland Clinic will only use their staff model physicians in someone else's facility. And we actually have their staff model hospitalists, their staff physicians who work in our post-acute settings, where we together jointly manage patients from being readmitted back into their hospital. And that's just an example. We do this in many, many different markets across the country where we actually employ the same hospitalist group that the hospital in town referring patients to us employs. And so there's this nice coordination of care, if you will, between the short-term acutes and our hospitals and nursing centers. So we're seeing it in a lot of markets. We're very interested in participating in it, and I think it's got a lot of opportunity for us in the future.

Joshua R. Raskin - Barclays Capital, Research Division

You're definitely seeing an increased level of activity on that front, Ben?

Benjamin A. Breier

We are.

Operator

Our next question is from Chris Rigg from Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

A follow-up to that a little bit. A number of states are really getting more proactive on moving their long-term care on the Medicaid side, long-term care beneficiaries, into managed care. I mean, has that -- have you guys seen any changing dynamic there, particularly over the last 3 or 4 quarters? Because things seem to be ramping up quite a bit.

Paul J. Diaz

Yes. I mean, I think we're seeing that across all payer types, whether it's hospitalists that we were just talking about or any increased focused on rehospitalizations. These are things that we started working on 3 or 4 years ago, which I think is important to know. So, clearly, that has affected length of stay and skilled nursing facilities. We've talked about in the context of repositioning our Nursing Center business that Medicaid rates have been under pressure tremendously since the Great Recession began and haven't really come back, and length of stay for Medicaid patients because of expansion of Medicaid Managed Care has also been negatively impacted. On the other side, as those patients are managed, the opportunity to do direct admit into some subacute skilled nursing, our transitional care centers, the opportunity to do direct admits into LTAC when a patient is really being followed, that's the next level of opportunity at Kindred Healthcare. So, right now, everything we're doing is focused on discharges coming out of hospitals. We have an intense focus on working with managed care. We've got some pretty exciting conversations just recently about what is our role when a patient is really managing the care of a patient to do more direct admits to our sites of service. And obviously, medical home and home care plays a huge role in that opportunity going forward, and we're seeing that in Kindred at Home and our Care Management division as well.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Got you. And then margins have been steadily getting better in the Nursing division. And I guess I'm just trying to think, when we think about the next year or 2, I mean, what's the right way to think about Nursing Center margins over 1 year or 2? Where do you think they sort of peak out? Or what's your goal if you could at least give us some sense?

Benjamin A. Breier

I'm not going to put a number, specifically, on it. But I do think you should expect, and we believe and feel good about seeing sort of an incremental sort of stair-step margin growth in this business. It's been through a lot. We've talked about it with investors many, many times. As the dust has finally settled on this business, they know who they're going to be. They've got their team in place for growth going forward. We feel good about sort of where that business is. And I guess I would -- I'll just answer you generally. I think you'll see stair-step incremental margin improvement, and you'll see a division that will start to drive profit at the EBITDA level really for -- on a consistent basis for the first time in its history.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just one last one. I know you didn't talk much about the weather but were you able to quantify that internally?

Paul J. Diaz

We just don't talk about the weather. It's just -- it's the goofiest conversation that I've heard all quarter. So, the answer's no.

Operator

Our next question is from A.J. Rice from UBS.

Brandon Fazio - UBS Investment Bank, Research Division

It's Brandon Fazio for A.J. Just a couple of questions. One, what were the reimbursement cuts in the quarter? I think you normally disclose sort of a quarterly impact. I guess you're finally done with most of them. And then second, the publisher recently published SNF and LTAC rules from CMS. Anything in there that's noteworthy? It seems like they're relatively benign. But just any comments there would be appreciated.

Stephen D. Farber

Sure. The only 2 that really matter were the incremental impact of sequestration was a little over $10 million for the quarter and MPPR was about $4.5 million. So you put the 2 of them together, roughly $15 million.

Paul J. Diaz

That's still a lot of money around here that we have to kind of work through. So the team did a great job. With respect to the proposed rules, we're still working through them. I think that they were generally as expected. But it's not our practice to sort of comment on proposed rules while we are in the comment period. And hopefully we'll continue to have a good dialogue with CMS, about areas that we want to understand better their goals and our responses to the proposed rules. So we'll have more to talk about that after they go final. But I'll just sort of make a macro comment. After 5 years of really difficult reimbursement and regulatory change, both payment and changes in rules and procedures, we have the best administrative and operational stability and visibility that we've had in a very, very long time. We're not -- we do not have a Congress that's dominating all its conversations by budgets. We are not sitting here talking about a doc fix that's going to be on the backs of providers. And so I think it is substantially better, the conversations and where we are in Washington right now. And so we're very pleased to be getting out of that dungeon and moving to a much more normal period where we can focus on our operations and growth.

Operator

Our next question is from Chad Vanacore from Stifel.

Chad Vanacore - Stifel, Nicolaus & Company, Incorporated, Research Division

Since you've changed your guidance on acquisitions, has anything changed in the pipeline there? And do you still anticipate most of that being Home Health?

Paul J. Diaz

It's a good question. In terms of what would impact the year, Home Health, acquisitions typically roll forward more. We do have some new transitional care centers opening that actually will be a drag on earnings, so those are factored into our guidance, and -- but at this point, it's just too early in the year to tell. And I guess, given that we've got the financing -- refinancing done, it's just a lot cleaner to take the M&A out of the guidance altogether. Obviously, we'll be in a better position to talk about M&A after Q2 and after Q3. But we're very pleased to be talking to you today about what's in our pipeline versus even when we gave the guidance initially. And we have a fairly large broad guidance range, and we'll be talking about the ability to tighten that as we get Q2 under our belts, just like we'll be able to talk about growing the dividend in Q3, et cetera.

Chad Vanacore - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then it looked like both maintenance and development CapEx were below average for this quarter for your guidance for the year. Is there anything that you can point to there? Is that seasonality or when are the development projects coming due that you plan on investing in?

Paul J. Diaz

We don't give quarterly guidance on CapEx maintenance or otherwise, so there's nothing going on there really.

Stephen D. Farber

It's timing and seasonality, I would say.

Chad Vanacore - Stifel, Nicolaus & Company, Incorporated, Research Division

And would we expect more timing of your CapEx spend to be in the second half?

Paul J. Diaz

Typically, yes, it ramps up a little bit in Q3 and we finished in Q4 like some of the renovation projects and that kind of thing, but again, I -- there's a lot of puts and takes there, whether it's taxes or, as Stephen was talking about, the inflows of working capital from our divestitures. So, the important point, I think, is on an annual basis we feel really good about our guidance, both our earnings and our cash flow guidance. And there's a lot of ins and outs in the quarters and so best is focus on the year.

Chad Vanacore - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then my last question. We saw significant pickup in STIP margins this quarter. Is there anything that you can apply to the other divisions that we can see a margin pickup there either?

Stephen D. Farber

Well, I mean, I think you saw sequential margin improvement in all of our divisions. So, across the board, I think our operating teams executed at a pretty high level in the first quarter when you see margins improve in each of our businesses. Look, the Nursing Centers, as we talked about, have come out of a really difficult time. It's not surprising but it is exciting that we saw their margins grow incrementally, a little bit faster than what the other divisions did. But look, we're very pleased that margins improved in all 4 businesses, and we'll take that every quarter for the rest of the year, that'll be fine with us.

Operator

Our next question is from Gary Lieberman from Wells Fargo.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

This is Ryan Halsted on for Gary. Just wanted to ask a question on the SNF reimbursement environment. I guess I was interested in any updated views on some of the proposed legislation that's out there regarding site-neutral payments in that segment.

Paul J. Diaz

Well, I think that there's going to be a lot more discussion and interest in Congress about post-acute reforms, writ large, and -- but there's no particular piece of legislation that, at this point, whether it's bundling or site-neutral payment, that has any traction. It's very early in that process. But I think both the House Ways and Means Committee and the Senate Finance Committee are very interested in looking at things like geographic variations in post-acute care. And the same thing that we're interested in, which is how do we get patients to the most clinically appropriate setting as quickly as possible and save the program money and get the best outcomes. That is what our whole strategy is geared around. And we do think, over the long term, that's where the delivery and payment systems will move to. You're welcome to get on our website. We published and submitted to Congress a series of post-acute reform proposals. And offline, we can -- we'll be happy to talk with you about that, but that's on our website, I believe, and lays out some ideas broadly about opportunities for reform post-acute care.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay, I'll take a look at that. And as far as the timing, I know you said it's really early and I know there's a lot of design around assessment tools and gathering data. I mean, do you have any idea what sort of timeframe you think we're looking at before any type of significant change might you consider?

Paul J. Diaz

2020.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

I'm sorry?

Paul J. Diaz

2020. Even the most ambitious ideas, including the president's proposal to advance post-acute bundling and others, there's -- you have the most fragmented part of health care with no health information technology. As we've talked about earlier, we're only now starting to get physicians really involved in managing patients across an episode of care. And so I think the fragmentation of the industry will mean that there's a lot of capability building that will have to happen. Assessment interest -- instruments are just the beginning of that. And again, let's talk offline. We laid out some of those precursors to moving forward on bundling other post-acute reforms in our proposal, and there'll be a lot we can chat about there.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Got it. And then one last one. Back to the patient criteria, I guess I just wanted to better understand the impact of the criteria. Did you guys suggest that as you're determining which patients meet criteria and which patients don't, that some of your other business lines might be able to care for those patients that do not meet criteria?

Paul J. Diaz

That's been our strategy for a decade. Even today, 37% of all LTAC discharges go to skilled nursing care to complete a recovery. 50% to 60% of discharges from inpatient post-acute sites, Continue the Care in Home Health agencies and branches. What we have right now is a fragmented silo-based payment system that will give way to more patient-centered delivery and payment models. And we're going to be on the front end of that, not the back end of that. Again, I'm happy to talk more about that with you offline.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay. I guess just to sneak one more in, how about where you think you might be able to gain patients from the new criteria?

Paul J. Diaz

As Ben talked about before, we think broadly about the opportunity of the new criteria. The site-neutral category gives us a whole new service line, if you will, particularly in the short term with managed care payers that have resisted sort of paying a second DRG, if you will, when they saw a hospital DRG short-term acute care hospital DRG patient. Ben and I will be happy to kind of drill into that with you more offline. But broadly, we think the criteria opens up our model and our free-standing model to a broader array of patients, whether they be LTAC, site-neutral patients or subacute patients.

Operator

And we have no further questions at this time.

Paul J. Diaz

Great. Well, we want to thank you, all, for participating today. Again, we are very pleased with the start of the year. We are very pleased with the start of the quarter and April as Ben mentioned. And a little volume goes a long way around here as you all know. And we appreciate each and every one of you supporting the company, and lastly, all of our teammates on the phone for all their hard work in the first quarter and last year. Thank you, all, very much, and have a great day.

Operator

This does conclude today's program. You may now disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kindred Healthcare's (KND) CEO Paul Diaz on Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts