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

The Ensign Group, Inc. (NASDAQ:ENSG)

F3Q07 Earnings Call

December 26, 2007 5:00 pm ET

Executives

Gregory K. Stapley - Vice President, General Counsel, Secretary

Christopher R. Christensen - Chief Executive Officer, President, Director; President of The Flagstone Group, Inc.

Alan J. Norman - Chief Financial Officer

Analysts

Eric Gommel - Stifel Nicolaus

James Bellessa - D.A. Davidson & Company

Operator

Good day and welcome to The Ensign Group Inc. third quarter fiscal year 2007 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Stapley, General Counsel. Please go ahead, sir.

Gregory K. Stapley

Thanks, Robbie and good afternoon and thank you to everyone for joining us today as we discuss The Ensign Group’s financial results for the third quarter of 2007. A press release highlighting some of the key financial results for the third quarter ’07 was issued after the market closed on Friday, December 21st. Hopefully everyone’s had a chance to see and review the release. For those who have not seen the release, it’s available in the press release section of Ensign’s website at www.ensigngroup.net. In addition, our 10-Q for the third quarter was filed the same day and it’s also available for review in the investor section of the company website.

Additionally, a replay of this call will be available until 5:00 p.m. Pacific Time on January 9, 2008. The replay can also be accessed through our website by clicking on the events and presentations link.

Before we begin, I’d like to just take care of a few housekeeping items. First, I want to remind you that during today’s call we’ll be making forward-looking statements that relate to possible future events. These forward-looking statements are based on management’s current expectations, assumptions, and beliefs about our business, financial performance and operating results in the industry in which we operate. Such statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those expressed or implied on this call.

Participants are encouraged to review the company’s periodic filings with the SEC, including the 10-Q that was filed last Friday, for a more complete discussion of such risk factors and other factors that could impact any forward-looking statements. Participants should not place undue reliance on any forward-looking statements.

Also, except as required by federal securities laws, Ensign does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the date of this call.

Second, participants should note that each Ensign facility is operated by a separate, wholly-owned independent operating subsidiary that has its own management, employees, and assets. The use of we, us, our, and similar words in this call is not meant to imply that these facilities are operated by the same entity.

Third, we find it helpful to use EBITDA and EBITDAR, which are supplemental non-GAAP financial measures, in addition to and in conjunction with results presented in accordance with GAAP. They reflect an additional way of looking at aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. They should not be relied upon to the exclusion of GAAP financial measures. A more ample discussion of these non-GAAP financial measures and a reconciliation to GAAP are also available on the investor section of our website.

Finally, I’d like to say a word about the timing of this call and the filing of our 10-Q. Under applicable SEC regulations, newly public companies have 45 days following the offering to file their first quarterly report. Accordingly, our 10-Q is not actually due until today, December 26th. However, we originally planned to file our 10-Q and hold this call on December 18th, and we issued an announcement to that effect.

On December 17th, one day before the planned filing and call, our independent registered public accounting firm informed us that it had received a subpoena in connection with a government investigation which was discussed in Ensign’s recent S1 filing. The subpoena requests documents regarding the company and certain of its skilled nursing facilities. The filing and conference call were delayed to permit the performance of additional review work and allow the independent accounting firm time to complete their FAS-100 review of the third quarter results.

Although little is known regarding the investigation, it is believed to be focused on claims submitted to the Medicare program for rehabilitation services provided at one or more of our skilled nursing facilities. The subpoena reconfirms the company’s previously reported belief that the U.S. Attorney has been conducting such an investigation.

To our knowledge, however, neither The Ensign Group Inc. nor any of its operating subsidiaries or employees have been formally charged with any wrongdoing, served with any subpoenas or related requests, or directly notified of any concerns or investigations by the U.S. Attorney or any government agency.

Also to our knowledge, this is the second document request issued by the U.S. Attorney for records involving Ensign. The prior request and authorized investigative demand, which is similar to a subpoena, was issued in February 2007 and requested documents from the company’s bank. The U.S. Attorney voluntarily rescinded that demand before any records were delivered.

We’d like to apologize to our stockholders for the delay in holding this call and filing the Q and we will do our best to answer any questions you may have about this matter or anything else during the question-and-answer portion of this call.

I’d now like to turn the time over to Christopher Christensen, our President and Chief Executive Officer. Following Christopher’s comments, he’ll turn the call over to Alan Norman, our Chief Financial Officer, for an overview of the financials for the third quarter and first nine months of 2007. Following Alan’s comments, Christopher will provide a brief conclusion and then we’ll open up the call to questions from the audience. Christopher.

Christopher R. Christensen

Thanks, Greg. Hi, everyone. Before we discuss the third quarter, I wanted to note that this conference call is The Ensign Group’s first conference call as a public company. We completed our initial public offering on November 8th with the sale of 4 million shares at an IPO price of $16 per share for approximately net proceeds of $56.5 million after underwriting fees and operating expenses. In addition, the underwriters also exercised their option on the entire 600,000 share over-allotment in November.

I want to take this opportunity to welcome new stockholders to the company. As you know, the recent completion of our IPO adds strength to our already strong balance sheet. We believe that among other things, it enhances our ability to continue executing on our disciplined growth strategy, which I’ll discuss further in a moment.

A preview of Ensign’s third quarter 2007 operating results was included in free writing prospectus distributed during our recent IPO road show and included in the final prospectus for our offering. The final results for the third quarter were consistent with the guidance provided in that free writing prospectus.

Highlights from the quarter include an increase in overall occupancy from the second quarter to the third quarter of approximately 70 basis points and we expect to show an increase in skilled mix on the heals of that growth in Q4.

We continue to see occupancy trending upward. Sequential revenues were up 3.8% over Q2 as well. In addition, our revenues were up 12.7% over the prior year quarter to $104.1 million and total revenue year-to-date was up 15.8% to $302.3 million compared to the first nine months of last year. These revenue increases were primarily due to the revenue generated by acquired facilities and the growth rates mentioned were achieved in spite of generally lower occupancy rates and relatively lower skilled mix and quality mix in recently acquired facilities.

For purposes of these financial results, we have defined recently acquired facilities as those facilities that were acquired on or after January 1st of 2006, and same or same-store facilities as those facilities that were acquired prior to January 1st of 2006.

At our current 78% overall occupancy as of the end of September, we have excellent opportunities for organic growth within our existing portfolio. We are working to improve occupancy, especially in the facilities that we have most recently acquired.

Over roughly the last 18 months, we’ve added 15 new facilities, representing approximately 25% of our total portfolio. Nearly all of these facilities were underperforming in multiple key areas, both clinical and financial, at the time we commenced operations and the combined occupancy rate on these 15 facilities as of the end of third quarter of 2007 was only 64%. Aggressive renovation activities at several facilities have also adversely impacted overall occupancy.

Since incremental margins improve as we move toward the higher end of the occupancy scale, we believe that we have significant opportunities to grow both revenues and earnings by filling beds within our existing portfolio of facilities. We are currently working to increase [inaudible] across the entire organization.

We are also continuing our efforts to shift our overall patient mix to higher acuity and higher reimbursement patients. Our skilled revenue, or revenues from Medicare and managed care payers, is generally lower in new acquisitions and has usually improved over time as we have improved the clinical performance and reputation of those facilities. This ongoing improvement in clinical quality and payer mix can have a significant effect on revenues and earnings.

We are excited about the prospect for organic revenue and earnings growth through improved clinical performance, increased occupancy, and enhanced patient mix. That’s where we expect to focus much of our attention in 2008.

But beyond organic growth, we’re focusing on acquisitions as well. Of the 61 facilities in our portfolio as of September 30th, a total of 23 were owned and 38 were leased and we held purchase contracts or purchase options on 13 of the leased facilities.

I am pleased to report that Ensign subsidiaries have recently closed on one of those contracts using approximately $12.8 million of IPO proceeds to acquire two skilled nursing facilities in California and one assisted living facility in Arizona, bringing our total of owned facilities to 26, or about 43% of the portfolio. We expect to continue closing these contracts and exercising these options as they mature.

Our acquisition strategy is focused on identifying both opportunistic and strategic acquisitions within our target markets. We are pleased with the volume of opportunities that we are seeing in the target markets and we continue to search for underperforming assets that we believe we can improve and we’ll selectively acquire facilities as quickly as we can recruit and develop the necessary leadership talent to operate them.

With our IPO proceeds in hand and significant equity in our existing portfolio, we believe we are in a better position to take advantage of attractive acquisition opportunities than those of our competitors, who are dependent on the capital markets to fund their growth plans.

With that as an overview, I’ll turn the call over to Alan Norman, our CFO, to review the company’s third quarter financial results. Alan.

Alan J. Norman

Thanks, Christopher and good afternoon, everybody. As Greg mentioned previously, we released our third quarter 2007 financial results and filed our 10-Q after the markets closed on December 21, 2007. As also mentioned, a preview of the third quarter operating results was included in the free writing prospectus distributed during the IPO road show and included in the final prospectus for our offering.

The third quarter results for the metrics discussed in the free writing prospectus were consistent with the guidance provided. Specifically, for the quarter ended September 30, 2007, total revenue was $104.1 million, up 12.7%, compared to $92.3 million for the prior year quarter. For the nine months ended September 30, 2007, total revenue was $302.3 million, up 15.8% compared to $261.1 million for the first nine months last year. These revenue increases were primarily due to the revenue generated by acquired facilities and the growth rates mentioned were achieved in spite of generally lower occupancy rates and relatively lower skilled and quality mixes in the recently acquired facilities.

The company reported net income for the third quarter of 2007 of $4.5 million, or $0.26 per diluted share, compared to $6.4 million, or $0.38 per diluted share for the third quarter of 2006. Net income for the first nine months of 2007 was $14.3 million, or $0.85 per diluted share, compared to $17.2 million, or $0.13 per diluted share for the first nine months of 2006. These decreases were due in part to: expected costs associated with recent acquisitions; a higher provision for employee health insurance, primarily due to the number of unusually large claims submitted in the third quarter 2007; increased professional fees and wages, primarily associated with preparation for becoming a public company; increased depreciation expense related to the recently acquired facilities; and an increase in stock-based compensation expense, of which approximately $0.5 million related to a single set of transactions of a type that we do not expect to re-occur in the future.

Incidentally, I would like to note that because our option plans were unable to issue options to employees for several quarters prior to the IPO, we expect to make a relatively sizable set of grants to deserving employees in early 2008. We do not expect to make any grants to existing senior management at that time and we further anticipate that the flow of option grants will normalize in subsequent periods.

EBITDAR, or earnings before interest, taxes, depreciation, amortization and facility rent cost of services, was $13.9 million for the quarter, which was down from $15.7 million in the prior year quarter. EBITDAR for the nine months was $43.5 million compared to $44.5 million for the same period in the prior year.

Other key metrics for the third quarter include an overall occupancy rate of 78.0%, skilled revenue of 40.7%, quality revenue of 53.9%, and while revenue growth has continued to be solid, as we’ve previously indicated, margins have not been up to management’s expectations.

Among other things, margins have been impacted as we’ve layered in the 15 recently acquired underperforming facilities with their relatively low census level and other challenges in key metrics during the last 18 months.

In addition and as discussed in our road show presentation, our Flagstone Group, which is based in southern California, began to underperform in late 2006 and the underperformance continued into 2007. As we have previously discussed, Christopher took over temporary leadership of Flagstone during Q2 2007 and under the guidance of local facility leaders, Flagstone is making a strong recovery. In fact, we expect that the performance improvements are well underway and Flagstone is ready and will be transitioned to a new leader in Q1 2008. We expect solid contributions from both the recently acquired facilities and from Flagstone in 2008.

As of September 30, 2007, cash and cash equivalents were $6.4 million on a pro forma basis, after including net proceeds from the IPO, the company’s cash and cash equivalents were $62.9 million.

At this time, we are not providing financial guidance for 2008. Guidance for the 2008 year will be provided on our next quarterly conference call, which we expect to hold in March of 2008.

Also, before I turn the call back to Christopher, I’d like to mention that we’ve announced earlier today that our board of directors has declared a quarterly cash dividend of $0.04 per share of Ensign common stock, payable on or before January 31, 2008, to shareholders of record as of December 31, 2007.

Ensign paid annual cash dividends in 2002, 2003, and has paid quarterly cash dividends since the first quarter of 2004. We have historically paid roughly 10% of our pretax earnings out of dividends and retained the other 90% to invest in the business and we continue to expect to do so on a quarterly basis for the foreseeable future.

This concludes the financial comments and I’ll turn the call back to Christopher to wrap up.

Christopher R. Christensen

Thanks, Alan. We are very pleased to have the demands of the IPO behind us and we’re looking very much forward to focusing on our business in 2008. We believe the demographics and trends remain favorable for the industry in general and for Ensign in particular. We expect that 2008 will bring attractive acquisition opportunities at reasonable valuations and we believe that Ensign is poised to take advantage of compelling growth opportunities as they arise. We also fully expect to continue growing organically through higher occupancy rates and a shift in patient mix to higher reimbursement rates.

As a first-year filer, our next regular filing, our 2007 10-K, is due in March. We will look forward to updating all of you on our progress again at that time and quarterly thereafter.

Before I close, I would again like to welcome our new stockholders to the company. We’re especially appreciative of your support and confidence. I can assure you that we will strive to deliver against the objectives we set for ourselves for both our stockholders and our residents.

At this time, we’ll now turn the call back over to the Operator for your questions. Robbie, if you could instruct the audience on the Q&A procedure.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Eric Gommel with Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

Good afternoon. My first question really is related to your disclosure in the 10-Q. I’m curious if you could comment at all about what are the implications I guess of a grand jury investigation as opposed to other types of investigations that maybe are conducting by the DOJ? And I think -- it’s a two-part question. The other part is I think you said this at the start in your disclosures, but are there any criminal implications here that we should be concerned about?

Gregory K. Stapley

The fact that there is a grand jury subpoena out there is something we take very seriously. The Assistant U.S. Attorney that is issuing the subpoena, as we understand it, is involved on the criminal side primarily, and so we do expect questions that would involve some kind of criminal behavior to be asked. We’re looking forward to answering those questions. We have overtly -- or we have openly asked for opportunities to get in front of the U.S. Attorney and to find out what their concerns are and see if we can’t help them to allay those concerns.

We’ve also been very diligent I think internally in looking at our systems and processes to make sure that we don’t have any criminal activity going on. We’ve recently conducted an investigation, an internal investigation and it’s not quite complete but the evidence and progress thus far is suggesting that not only do we not -- are we are not able to find any evidence of criminal behavior within the organization or even systemic issues that would promote negligence or recklessness or fraud, but we are also very pleased that, as we have gone through our ongoing improvements and upgrades to our system over the past couple of years, we have put a number of new systems and things in place that we think will make our record keeping, which we expect that these concerns would be focused on, will make our record keeping more accurate and more reliable, more timely and easier to track when we have to go back and assemble those records.

So I hope -- does that answer your question?

Eric Gommel - Stifel Nicolaus

Yeah, and just a follow-up, because you mentioned the internal investigation that you’ve previously disclosed and were conducting, is that at all tied do you think to the stuff that the DOJ is looking at or -- I mean, is that --

Gregory K. Stapley

Well, that’s a good question and initially it was not, because we began that before we knew of the DOJ investigation. However, it did eventually become tied to it because as we started to do our investigation, we identified a number of facilities at random that we wanted to look at for the kind of issues that we though that we should be looking for. And we did bring in an outside investigator who is a professional, who is an attorney who has done these things for 20 years and who is very good at them, to assist us in that process.

When we got that first -- that first, for lack of -- I’ll just call it the subpoena that went to our bank back in February, when we found out about that in March, we looked at the list of facilities that the DOJ was then interested in and we added the facilities that they were interested in that were not already on our investigation list to the list, expanded that list.

And so we have looked hard at the facilities that were on that list and to date feel pretty good about the results of those reviews.

Eric Gommel - Stifel Nicolaus

I noticed you have I guess a contingent liability related to the internal investigation or accrued for some claims that you don’t have documentation for. At this point, do you have any -- I mean, is there any other -- do you have any idea what the potential exposure could be at this point to what the DOJ might be looking at?

Gregory K. Stapley

Well, since we know very, very little about what the DOJ might be looking at, I don’t think we could answer that question. The reserve that you saw on the Q was calculated based upon the files that we reviewed in the course of our investigation. As we opened those files, and they were all at least two years old, as we opened those files, we did not find much in the way of errors in them. There were a few math errors and things like that that you would expect to find, but we did have some trouble in some places assembling back-up documentation.

We have been through most of those files now and have found most of the back-up documentation. We have not finished those files but in order to get our Q out, we went ahead and took the ones where we knew that we were not going to find the back-up documentation, plus the ones that we had not finished yet finding the back-up documentation, we took a number off those and we put it on the books.

Eric Gommel - Stifel Nicolaus

Great, and I’ll -- just one more question and I’ll jump out of the queue here, or jump back into the queue; you’re comfortable that, as you look at it from the Ensign point of view, that there is no criminal issue or negligence on your part in how you are doing the billing and the things internally that are going on at Ensign?

Gregory K. Stapley

I can tell you that thus far, we have not been able to find anything regarding the way the services are rendered, the way the billing is done, the way the documentation is done, that concerns us, except that some of the documentation was a bit disorganized two years down the road and took some significant effort to assemble.

I think one of the things that we learned in the course of this process is that we need to do a better job of keeping our documentation together and we will work on that as we go forward.

Eric Gommel - Stifel Nicolaus

Great. Thank you.

Operator

Thank you. We’ll go next to James Bellessa with D.A. Davidson.

James Bellessa - D.A. Davidson & Company

Good afternoon. In your 10-Q, you talk about the possible, or allegations of possible reimbursement irregularities and I think you just discussed that and the charge that you took in the third quarter of $241,000. What is the potential additional charge that you might have seen since you’d taken the third quarter charge?

Gregory K. Stapley

We don’t anticipate, at this time, any additional charge. That $241,000 was comprised of roughly $157,000 of charges and then the rest of it was interest payable on those claims. And we do hope very much that when we finish scrubbing those files down, that the number will actually go down and go down significantly.

To the extent, as long as we don’t have any reason to open other old claims which have already been reviewed and put to bed, we would not expect any other charges.

James Bellessa - D.A. Davidson & Company

You in your Q, you talk about qui tam litigation. I’m not certain about the legal term there or the Latin, but I think it relates t whistle blowing. Can you elaborate?

Gregory K. Stapley

Sure. As you correctly recognized, a qui tam suit is a whistle blower suit and they usually get started when somebody goes to the government and says I think a company or a person is engaged in some kind of illegal activity. The beauty of it for the whistleblower is that if the government decides to pick up the case and run with it, and then eventually recovers anything as a result of the suit, that person can participate in the recovery.

The process as I understand, and we have very competent [and outside] counsel who are former U.S. Attorney and prosecutor who has given us some good guidance during this process, as we understand it, the process is that once the claim goes to the government, it starts out of the criminal division and the criminal division looks at it and determines whether there is a case there. And at some point, if they decide that they do not want to pursue the case, they kick it down to the civil division, which takes another look at it. They may simultaneously look at it with the criminal but has a chance after criminal is done to take a look at it and see if they want to pursue it as a civil matter with the lower standards burdens of proof associated with civil matters. If the civil division does not want to do it, then the qui tam relater, the original whistleblower, has the opportunity to pursue the thing on their own.

Most qui tam relaters do not have the financial wherewithal to pursue claims on their own and so it is important to them that the government pick that up and use government resources to explore the claim.

Does that answer your question?

James Bellessa - D.A. Davidson & Company

Yes, on the qui tam relater, at one point you tell us that a letter had been sent to a current employee requesting a meeting last June. Could they be one and the same?

Gregory K. Stapley

No, the letter that was sent to our current employee last June was sent by federal investigators who simply asked for a meeting to talk to that employee. The employee was a person who is intimately involved in the Medicare billing and reimbursement process and is somebody that we would love to have put in front of them because we think that person would have given some very good information about our systems and practices.

However, when they discovered -- when we called to make the appointment for the employee to go, the government investigator changed their mind and declined to follow through with the interview.

James Bellessa - D.A. Davidson & Company

Now the relater, you don’t know who that is or you aren’t told or you can perhaps guess but you don’t know?

Gregory K. Stapley

We do not know who the relater is. We would not be told who the relater is and in fact, the government has not directly told us anything about this investigation or what they are concerned about or what they might be looking at. We look forward to finding some of that stuff out some day.

James Bellessa - D.A. Davidson & Company

In the financials, in your first half, both for ’06 and ’07, you had tax rates very close to 40%. Then in the third quarter, they dipped to 35% and they did so on the same quarter this year. Can you explain what reason occurs, what happens to have the tax rate go down?

Alan J. Norman

Let me respond to you on that. The primary reason for the difference was differences between the provision that was done in December and the actual amount that was filed in September when the return was filed. And we did receive greater-than-anticipated California and federal hiring tax credits for 2006, and also there was some final Texas regulations and they have a new margin tax structure in Texas and we finally got the regulations and they allowed tax credits we hadn’t anticipated in December.

The other thing that we did have was that some of the uncertain tax positions that we had accrued and accrued interest against other FIN-48 actually closed with the statute of limitations closing on the tax year with the filing in September. And that was the reason for the reduction in Q3.

We do expect that Q4 and going forward, we are back to the approximately 40.2% tax rate, and we’re going to try and do -- to see what can be done to get a better fix on the employment tax credits that aren’t really determined until much later.

James Bellessa - D.A. Davidson & Company

In the most recent quarter, your occupancy percentage ticked up and I think on the road show, you said you had a goal for reach 84% occupancy rate in the fourth quarter of ’08 on a same facility basis. Is that correct, that that’s still a goal?

Alan J. Norman

Yes. As was stated on the road show, for our same-store in the fourth quarter, we -- our goal is to hit 84% occupancy.

James Bellessa - D.A. Davidson & Company

And the quarter is almost over. Do you see that the trend, that you had ticked up in the third quarter, will continue to tick up in the fourth and sequentially through the 2008 period?

Alan J. Norman

From the trends we’ve seen, we fully expect that, yes.

James Bellessa - D.A. Davidson & Company

Any view of the -- you aren’t telling us about ’08 guidance but any view on the ’07 period that is about to close and how your quarter is wrapping up?

Alan J. Norman

Well, Jim, we’re still in the wrapping stages and haven’t closed the month. At this point, we are still collecting the information to really go forward with the 2008 projection and would prefer to get the quarter closed. We are seeing improvement, there’s no question.

Christopher R. Christensen

Jim, as I said in my remarks, you’ll note that our skilled mix has increased, or I said in my presentation our skilled mix has increased in Q4 and our overall census has also continued to increase. So we feel comfortable with where we are headed in Q4. Obviously Q4 is almost done now but we feel comfortable with the results that we’ve produced in Q4.

James Bellessa - D.A. Davidson & Company

Good, and then on the narrative of the formal presentation, you talked about stock-based transactions. Can you go quickly over what you just said in that sentence? I was writing fast but didn’t catch it all.

Alan J. Norman

What I said, Jim, is one of the increases that we had that impacted the profitability was an increase in stock-based compensation of approximately $0.5 million related to a single set of transactions of the type that we do not expect to re-occur in the future.

James Bellessa - D.A. Davidson & Company

And then you indicated that you anticipate sizable grants in early ’08. Can you give us a magnitude of that? What might be the impact on EPS or something that might give us -- get our arms around it?

Gregory K. Stapley

We’re still in the process of formulating what those would be. We did want to give the market a little preview of the fact that we were going to have a spike there, but it should just be a one-time spike. And it’s simply because once the IPO train started rolling in late 2006 for us, we were not able to make any option grants. Anybody who knows our company knows how important the concept of shared ownership is to us and we have a lot of really good employees out there whom we’d like to recognize with ownership.

So it will be a one-time thing. We can’t at the moment give you a number.

James Bellessa - D.A. Davidson & Company

Could it be in the order of 1% or less, the increase in shares outstanding?

Gregory K. Stapley

We would expect it would be slightly higher than that.

James Bellessa - D.A. Davidson & Company

Okay. Thank you very much.

Operator

(Operator Instructions) We’ll go next to Ross [Hapermann] with [Hapermann] Fund. Mr. Hapermann, your line is open. Please check your mute switch. We’ll go next to Eric Gommel with Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

Thanks. Just a couple of follow-ups; I know you had to increase the investment on your G&A line for additional professional services and things. If I looked at third quarter, sort of a G&A percentage, as a percentage of total revenue, should we expect to see an up-tick in that as we go forward or is there like a target percentage that maybe you’re looking to get to as it relates to revenue? I’m just curious if you could give us some insight into that.

Alan J. Norman

Right now, Eric, I think that the G&A that we’ve seen through 2007 certainly has the component in there for the cost of preparing to go public, and I think on the go-forward basis, what we expect is that there will be additional costs in the G&A on both the accounting and the legal side but we should see an improvement overall in 2008.

And we have a lot of leverage in that G&A. As we continue to add facilities, that percentage will go down. There’s no question.

Eric Gommel - Stifel Nicolaus

So if I look back just over the last few quarters and things, it looks like it’s been around 3.8% to 4% of revenue. Is that something that we could look at as a way to model going forward, in that kind of range?

Alan J. Norman

Looking at coming into the public market, I guess I’d hesitate to say that. And I think especially in 2008 with our 404 undertaking, there will be additional costs that will be unique to 2008. And then once we get through that, we’ll be able to stabilize. We’ll be able to give better clarification on that in the fourth quarter when we present 2008 guidance.

Christopher R. Christensen

But Eric, if your question is do you expect it to go up or down significantly, I think the answer is no. We had a lot of one-time charges in ’07. However, we also recognize that we’ll have a lot of one-time charges in ’08 as we go through the 404 process. But I think that because of our increased costs in ’07, we don’t expect them -- we don’t anticipate them going up in any significant way in ’08.

Eric Gommel - Stifel Nicolaus

Great, and then this is my last question; on fourth quarter, do you feel like your -- sort of the gross margins are trending better than say third quarter? Just looking at what you have right now, I mean, you haven’t gone through -- I haven’t looked at the numbers completely at this point but do you think that some of the things you talked on the road show and stuff, I mean, trends are improving there on that end?

Gregory K. Stapley

Yes.

Alan J. Norman

Yeah, and I think as Christopher commented, one of the things we expected to see going into the fourth quarter was an improvement in the skilled side of the business, and we are seeing that.

Eric Gommel - Stifel Nicolaus

And then -- this is my last question -- so on the tax, from a tax perspective, this third quarter sort of lower tax rate appears to be a recurring item because you had it happen last year about this time, but you are going to try to find -- I mean, the issue is that on a go-forward basis, we should really be looking at 40% and you know, you are going to look at some way to smooth that tax rate out. Is that the way I understood your comment?

Alan J. Norman

Yeah, we are going to look at -- and most of that timing is driven by the employment tax credit and we are going to look at ways that we can get better visibility to those earlier and right now, we are using internally a 40.2% tax rate for Q4.

Eric Gommel - Stifel Nicolaus

Okay, great. Thank you.

Operator

(Operator Instructions) We’ll go back to James Bellessa with D.A. Davidson.

James Bellessa - D.A. Davidson & Company

I’m looking at my numbers and trying to discern what you’ve just told us and you’ve indicated that G&A had a number of unusual items in it this last year; you don’t expect in the next year, ’08, to have the SG&A line change much, up or down. Is that what the answer was to the previous question?

Alan J. Norman

Yeah, I think, Jim, at this point as we go forward and look for preparing for the 2008 guidance, we prefer to be specific at that point in time and then some of the additional costs that we had seen in 2007 with the public undertaking we do know will be replaced by additional costs related to, for example, implementation of Sarbanes and the 404 requirement. We haven’t at this point quantified that yet and are going through that process as we start the activity, so I’m a little reluctant to put a number out there right now at this point but we will do so with the fourth quarter results.

James Bellessa - D.A. Davidson & Company

Sequentially, in your -- from the second quarter to the third quarter, your average revenue per patient day didn’t change materially. Do you have any characterization how it might look fourth quarter and going forward into the next year?

Alan J. Norman

I think in fourth quarter, what we are seeing, as we’ve mentioned previously, an improvement in the skilled mix which will also end up with an improvement in our average daily revenue rates.

James Bellessa - D.A. Davidson & Company

Thank you very much.

Operator

Thank you. It appears at this time we have no further questions on the phone. I’d like to turn the call back over to Mr. Christensen, CEO, for any additional or closing comments.

Christopher R. Christensen

Thank you to everyone for taking the time to be on this call. As I mentioned earlier, we are pleased to have the demands of the IPO behind us and we are very excited about 2008 at The Ensign Group. Again, we are grateful for your confidence and your support and look forward to updating you on all of our progress again in March.

Operator

That does conclude today’s call. You may disconnect your lines at any time.

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: The Ensign Group F3Q07 (Qtr End 9/30/07) Earnings Call Transcript
This Transcript
All Transcripts