Skilled Healthcare Group's (SKH) CEO Bob Fish on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Skilled Healthcare (SKH)

Skilled Healthcare Group, Inc. (NYSE:SKH)

Q2 2014 Results Earnings Conference Call

August 13, 2014 12:00 PM ET

Executives

Roland Rapp - General Counsel

Bob Fish - Chief Executive Officer

Chris Felfe - Chief Financial Officer

Analysts

Joanna Gajuk - Bank of America

Ralph Giacobbe - Crédit Suisse

Frank Morgan - RBC Capital Markets

Gary Taylor - Citi

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Skilled Healthcare Group Incorporated Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session after management's prepared remarks.

I would now like to turn the presentation over to your host for today, Mr. Roland Rapp, General Counsel. You may proceed.

Roland Rapp

Good morning. I'd like to welcome everybody to Skilled Healthcare's quarterly earnings conference call and introduce our presenters Bob Fish, Chief Executive Officer and Chris Felfe, our Chief Financial Officer.

Before we begin, I'd like to note that certain statements and information that we discuss may be deemed to be forward-looking statements. They include statements relating to our objectives, plans and strategies, as well as things we expect or anticipate will occur in the future. Forward-looking statements are not guarantees and they are subject to a number of risks and uncertainties as discussed in our filings with the SEC.

Any forward-looking statements discussed on this call made as of this date and we undertake no duty to update or revise any of them.

On the call today, we will refer to adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, EBITDAR and adjusted EBITDAR. We use these measures of performance, however they are not considered measures of financial performance under U.S. GAAP. Definitions of these terms, as well as reconciliations to the most comparable GAAP measurements are included in our earnings release that we issued yesterday. This report and our discussions today are otherwise presented on a consolidated basis under GAAP. Accordingly, references to the company, Skilled Healthcare Group, Skilled Healthcare, us, we and our, refer to Skilled Healthcare Group, Incorporate and each of its consolidated subsidiaries taken as a whole.

I'll now turn the call over to Bob Fish, Chief Executive Officer. Bob?

Bob Fish

Thanks Roland, and good morning, everyone. I appreciate you joining our call this morning to discuss Skilled Healthcare's second quarter results. I'd like to begin the earnings call by updating you on the continued progress we're making on our strategic plan and then Chris will provide you with a detailed review of our second quarter financial results.

I'd also like to welcome Paxton Wiffler our new Chief Operating Officer to the team. Paxton started in May and has made an immediate and positive impact. During our last call we spoke about one of our new initiatives or standing management function which aims to identify potential cost saving areas while ensuring we're able to provide the high level of quality care our patients have come to know.

Over the past few months we've focused on consolidating our pharmacy vendors into a single provider in an effort to leverage our volume and lower prescription costs. We've also started to implement new relationships and processes for food, equipment, supplies and telecom to take better advantage of our scale and drive further efficiencies. These initiatives have begun yielding results that will increase in the second half of 2014.

I’m also happy to report we’ve opened our state-of-the-art University of Kansas project during the second quarter. This is a 96 bed skill nursing facility consisting of 55,000 square feet. It’s co-located with University of Kansas, acute rehabilitation hospital and adjacent to the medical school. While this project is in its initial occupancy stage, it offers great potential for the future by selling in the area for short term post-acute rehabilitation services. We look forward to our expanding relationship with KU and the opportunity to serve patients in need of ongoing care.

Now to update you on some risk management efforts, this quarter we furthered our effort to mitigate risks in the workers’ compensation and general professional liability areas. We’ve reorganized and added new personnel to extend training and enhance our risk management team. In addition, we’ve continued our dialog on the legal and regulatory issues facing the company.

In summary, I’m pleased with the progress we’ve made in the quarter as we started to see improvements coming out of the restructuring. The long-term care business is starting to gain traction. During the second quarter, we were able to maintain our Medicare census as compared to last year and achieved a slight year-over-year increase in our skilled mix.

Our therapy division was on target for the quarter, but down slightly compared to last year, due to changes in reimbursement and manual medical reviews.

We've also devoted a great deal of time for hospice and home health businesses. While the operational changes we made in the quarter impacted the division’s financial results, these were expected and will better position us for the future.

With that, I’ll turn the call over to Chris to discuss the second quarter results in more detail. Chris?

Chris Felfe

Thanks Bob and good morning everyone. I first want to touch on some highlights from the second quarter and then I’ll walk through the financial results.

During the quarter, we were able to extend our revolver and amend the credit facility to allow us additional operating flexibility. The amendment was very beneficial is it not only increased our permissible leverage ratio and decreased our minimum required coverage ratio, it also offers us additional flexibility in working through and hopefully resolving our outstanding regulatory matters as we can add that to EBITDA amount such as the $6 million accrual we reported in the second quarter until such amounts are settled in cash.

In terms of details around the revolver, we extended maturity from April 2015 to April 2016, not all the revolving letters participated in the extension, $77.5 million of the $100 million total commitments did extend. As the extending commitments were reduced by 25%, the revolver capacity is $83.1 million until April 2015 and then $50.6 million until it matures on April 9, 2016. We feel that the reduced revolver capacity will meet our needs over that timeframe. For the extending revolver letters, the interest rate was changed from LIBOR plus 450 basis points to LIBOR plus 560 basis points. For the term-loan, the interest rate increased from LIBOR plus 525 basis points to LIBOR plus 550 basis points with the 150 basis point LIBOR floor. In return for these changes, we’re able to modify our maximum leverage, the fixed charge ratio limits for the next four quarters.

As I mentioned, we recorded a $6 million charge for an accrual relates to the government investigation that is ongoing at our [group] side hospice business. We have analyzed the exposure related to the investigation and felt that $6 million was an appropriate amount to record. We disclosed in our 10-Q that we filed yesterday, the government informed us that they intend to intervene in at least one of two qui tam suits that were the underlying basis for the investigation. As the investigation is ongoing and the two suits remain under seal, we will not be making additional comments related to the matter. Thank you for your understanding.

Now for our second quarter results, yesterday we reported a GAAP EPS loss of $0.07 compared to positive EPS from continuing operations of $0.04 for the same period in 2013. Our adjusted net income per diluted share was $0.07 a decrease of 30% from the second quarter of 2013. Revenue from continuing operations decreased 1.5% to $207 million in the second quarter of 2014. Adjusted EBITDA margin increased 10 basis points to 8.8% in the second quarter 2014 compared to the year ago quarter.

Turning to our reportable segments, in long-term care services revenue from continuing operations increased 3% from $158.3 million in the second quarter of 2013 to $163.1 million in the second quarter of 2014. Adjusted EBITDA for the long-term care segment increased to $18.8 million for the second quarter from $18.2 million a year ago.

Adjusted EBITDA margin remained constant at 11.5% for both quarters ended June 30, 2014 and 2013. Long-term care services represented approximately 78.8% of total revenue in the second quarter of 2014, up from 75.3% in the second quarter 2013, 0.1 million of the LTC increase in revenue was a result of our participation in Intergovernmental payment program in the State of Texas that provide supplemental Medicaid payments with Federal matching funds for still nursing facilities that are affiliated with County owned hospital. Our subsidiaries entered into transactions with County owned hospital districts to provide for the management of two skilled nursing facilities under this program beginning in June 2014. Since that time an additional 10 of our Texas facilities have begun participating in the program. We expect to add additional nursing centers during the remainder of 2014.

Moving on to the two other reportable segments, Hallmark Rehabilitation and Signature Hospice and Home Health. In the second quarter of 2014, third-party therapy revenue declined $3.6 million or 13.4% to $23.1 million. This revenue decrease was driven by exiting third-party contracts that no longer may include business centers. Signature revenues decreased 17.5% and represented 10.1% of total revenue for the quarter. We did record $0.9 million of Hospice cap reserves in the second quarter of 2014 due to the combined effect of long-staying patients and a decline in admissions.

Our interest coverage and leverage ratios are in compliance with our amended debt covenants. As of June 30, 2014, our fixed charge coverage ratio was approximately 2.2 compared to the minimum requirement of 1.85, and our leverage ratio was 4.7 compared to the maximum of 5 in the quarter. Our forecast has us meeting our debt covenants going forward.

DSO was 48 days at June 30th up from 47 last quarter.

With that I'll turn it back to Bob.

Bob Fish

Thanks Chris. On the call today besides Chris and me and available for questions are Roland Rapp our General Counsel and Paxton Wiffler, Chief Operating Officer. With that we're ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Kevin Fischbeck with Bank of America.

Joanna Gajuk - Bank of America

Good morning. This is actually Joanna Gajuk on for Kevin today. Thanks for call around initiatives that you already starting you already started, you already start seeing some benefits there. Are you now at the point where you can actually quantify the benefits that you have seen and then maybe what to expect the rest of the year or however you can quantify?

And then can you comment around because previously you were saying that you expect to see the revenue benefit to come first and then cost benefit which sounds like you sort of flashed out the benefit on the cost side. So can you talk about the revenue benefits that you have seen from your actions? Thank you.

Bob Fish

Sure. Let me start with the potential impact for the remainder of 2014. I think a number that you should consider in your modeling would be something in the $3 million range for the remainder of 2014 and you can annualize of that for '15 as well.

And so far as the breakout between costs and revenue we're seeing improvements in both. Revenue predominately in the long term care businesses. And I'm not at this point able to break that out in terms of exactly where that's coming from for you, although our initiatives in terms of managed care agreements would be one thing I would point to as well as the additional revenue receiving to our Medicaid efforts in Texas.

Joanna Gajuk - Bank of America

Great, thank you. And then on the new facility that opened, when do you expect this facility actually contribute to earnings and also can you comment about additional plans for similar, I guess facilities in other markets?

Chris Felfe

Sure. The ramp up in census we would expect that facility to be, I just call it having stable operations at the beginning of 2015. So, it will ramp up over the remainder of this year and then being contributing to earnings to EBITDA in 2015.

And what was the second part of your question?

Joanna Gajuk - Bank of America

Whether you have additional plans for similar facilities in other markets to open a small facility?

Chris Felfe

No, we don't at this time.

Joanna Gajuk - Bank of America

Alright. Thank you. That's all from me for now. Thank you, I'll go back to the line.

Operator

(Operator Instructions). Your next question comes from Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse

Thanks, morning. So, the revenue on the strip segment was sort of the best we have seen in sometime. I guess do you think we stabilize, would you expect sort of the improvement from the 2Q levels? And then I know you're not guiding, but can you just help frame how you think about long-term revenue growth maybe in the segment specifically?

Bob Fish

Yes. I think we can expect to see continuing build in revenue in long-term care segment for the remainder of the year. Obviously, seasonality will affect that but we’re feeling good about census efforts as well as some of the other revenue enhancements that we discussed earlier.

Ralph Giacobbe - Crédit Suisse

Okay. And then just your general view, maybe long-term of sort of ability to sort of grow top-line in that segment?

Bob Fish

Yes. I am sorry, you wanted my view; my view is yes. I think we can continue to grow top-line in that segment.

Ralph Giacobbe - Crédit Suisse

I guess off of a 3% base I mean do you view that as sort of the long-term goal, can you get that upto sort of a mid single-digit type of growth rate? What’s your general view of just that segment and how we should think about the growth from a longer term perspective?

Bob Fish

Well I don’t want to get too far ahead of myself but I think certainly that kind of mid single-digits growth rate is achievable and I also think that if certain things fall our way, might exceed that.

Ralph Giacobbe - Crédit Suisse

Okay, all right. That’s helpful. And then just to go back on the impact as it relates to the cost savings, just to make sure I understood. $3 million for the remainder of 2014, so $3 million out of the cost structure as it relates to -- is the way we should think about for the second half of the year and then think about sort of an incremental $3 million on top of that annualized for 2015?

Bob Fish

Yes, a $3 million six-month number and the $6 million 12-month number.

Ralph Giacobbe - Crédit Suisse

Okay, all right. That’s helpful. And then, and maybe can you give us a little bit of an update on how you are dealing with negotiating with payers maybe specifically as it relates to sort of the MA rates whether there is further opportunity to improve? And maybe what percentage of your sniff book is MA at this point?

Bob Fish

I think we’re continuing to leverage our relationships with key referral groups and our ability to take care of that clinically complex Medicaid patient is impacting positively our rate structure. With regards to our overall MA business, we’re approximately in that 66% area.

Ralph Giacobbe - Crédit Suisse

66% MA?

Bob Fish

Yes.

Ralph Giacobbe - Crédit Suisse

Okay. That’s helpful. And last one if I could, there has obviously been a lot in the market from both payers and providers on sort of providing a continuum of care. I guess are you having these discussions with your referral sources or payers? And maybe give us a sense of how you are positioning yourself as we move that way. Thanks.

Bob Fish

We’re looking at taking more of that clinically complex patient which in the managed Medicaid world, most notably in New Mexico and California seems to be the focus within the industry. As far as the entire continuum, we do have the ability to streamline folks through the system in our ALF segments in Kansas, California and Nevada. But the majority of our focus right now is in that managed Medicaid segment.

Ralph Giacobbe - Crédit Suisse

Okay, thank you.

Operator

Your next question comes from Frank Morgan with RBC Capital Markets.

Frank Morgan - RBC Capital Markets

Good morning. I was hoping if you could give a little color around Medicaid on the pricing outlook and as you kind of asses the stated outlook across your portfolio. And then secondarily, are you seeing any impact at all -- we’ve had some companies actually referenced the ACA impacting Medicaid volumes just curious are you seeing anything like that?

Bob Fish

As I said, I think our ability to take care of a clinically complex patient and provide solid outcomes is allowing us to leverage our relationship with key referral networks, managed care networks and in most notably California and New Mexico that does have a positive impact in our overall rates that we're experiencing in those markets.

Frank Morgan - RBC Capital Markets

But I’m talking about just basic Medicaid rate increases I guess, how do you feel like as we think about adjusting our models for the next -- for the balance of this year and next year. What kind of a rate environment are you seeing just on base rates across that states that you operate?

Bob Fish

We're experiencing increases in Texas, California, New Mexico and in Missouri. I don’t want to speculate what the final outcome will be as some of those are acuity base, but an average of 2% would be likely.

Frank Morgan - RBC Capital Markets

Okay. One other -- I know as Bob as you have evaluated the company and the portfolio of assets, you seem to have mentioned in the past that you thought therapy was kind of one other keepers that you would make the most sense to have as part of the company. But I was wondering if you could just go back and give us a little bit more color on what's going on in therapy today. I mean it seems like that's where we were the most off the mark and just any signs of how you see that business turning or playing out over the near-term?

Bob Fish

There has been a lot of headwind as it relates to the manual reviews and other issues in therapy which I am hopeful will be begin to mitigated over the next couple of quarters. So it's a very solid business for us. As Chris noted, we’ve exited some contracts that were -- been under market and we have some potential to grow in that segment as well. So, I am feeling positive that we're going to be able to get back on track in terms of what that segments look like for us in the past.

Frank Morgan - RBC Capital Markets

And is this fair to say now that you kind of been in the seat a little while your initial thoughts around different segments you might want to be in or not be in, has anything changed in that regard? Is it still like a lot of interest on the ancillary side with therapies that maybe less interested in those other areas. Thanks.

Bob Fish

Yeah. I think that's accurate. I mean we don't have any good to announce as it relates to any other segments. We’ve worked really hard in the hospice and home health areas, made lots of changes that's beginning to stabilize. It's been something a little longer slog than I'd expected but I am hopeful that it'll be more of a contributor in the second half.

Frank Morgan - RBC Capital Markets

Thank you.

Operator

(Operator Instructions). Your next question comes from Gary Taylor with Citi.

Gary Taylor - Citi

Hi. Good morning. A couple of questions, I heard your comments about the qui tams and you can't comment on those, understood. Are you willing to tell us total revenue, total Medicare revenue creek side for the years in question, can you share that?

Bob Fish

Oh gosh, I don't have Creek sized revenue, Medicare revenue right in front of me, it is our largest hospice operation that we have. Yeah I don't have the number right in front of me.

Gary Taylor - Citi

Okay. Maybe I can follow up. Secondly, just sticking with hospice and appreciating the comments Bob just made, just kind of looking at the trend last three quarters hospice revenue has been down 15% to 20% year-over-year for the last three quarters. As we get to the fourth quarter of this year and anniversary that first pretty sizable year-over-year decline. Is it reasonable to think that, those year-over-year growth at hospice revenue again or is the stabilization or turnaround not necessarily that visible?

Bob Fish

Yes, it's a little just to speculate in that. I think primarily the census numbers have been moving a little against what I had expected. But I do think that we have stabilized at a census level that we feel comfortable with in terms of the extra scrutiny as you might have imagine, we are giving to new admissions and continuing stay. So, I believe we are at a stable base we can build from, I also think we've made many changes in terms of personnel and management in that area. And I think that we've made some good choices and have some good people on board that will help us grow that business a bit.

So, I'm hopeful that second half will prove to as I said earlier that segment will come back and be a contributor.

Gary Taylor - Citi

Okay, good. Last question, historically prior management team had occasionally or often broken out numbers for us, where they say here is a sniff with an express recovery unit. This at the occupancy versus the rest of the portfolio, this is a more EBITDA margin versus the rest of the portfolio. Is it fair to say that, those assets are still outperforming the remainder of the sniff assets and is that dead conversion strategy, is that really maturing mature in the portfolio at this point?

Bob Fish

I think it’s safe to make that assessment and from a maturity aspect those product lines are performing as intended.

Gary Taylor - Citi

Okay. So when we think about…

Chris Felfe

Yes. The ones where we haven’t done it are more brutal in nature so it doesn’t make, we don’t have the Medicare referral sources to justify building units in those facilities so that’s why it’s premature at this point.

Gary Taylor - Citi

Okay, okay. Thank you.

Operator

There are no additional questions at this time. I would like to now turn the call back over to management for closing remarks.

Bob Fish

Well thanks everyone for joining us. We appreciate the time that you spend in looking at the company and we’ll be happy to receive other calls offline if there is more amplification that we can provide. So, thanks again for attending the call.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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