IPC The Hospitalist Company Q1 2008 Earnings Call Transcript

Jun. 3.08 | About: IPC The (IPCM)

IPC The Hospitalist Company (NASDAQ:IPCM)

Q1 2008 Earnings Call

May 14, 2008 5:00 pm ET

Executives

Adam D. Singer M.D. – Chairman and Chief Executive Officer

R. Jeffrey Taylor – President and Chief Operating Officer

Devra G. Shapiro – Chief Financial Officer

Analysts

Arthur Henderson – Jefferies & Co.

William Bonello – Wachovia Capital Markets, LLC

Ryan Daniels – William Blair & Company, LLC

Kenneth Weakley – Credit Suisse

Sudeep Singh – Deutsche Bank

Martin L. Yokosawa – Oberweis Asset Management

Operator

Ladies and gentlemen welcome to IPC The Hospitalist Company’s First Quarter 2008 Earnings Conference Call. At this time, all participation lines are in a listen-only mode. Later, there will be an opportunity for questions with instructions given at that time. Should you require assistance during the call, please press * followed by 0 and a conference specialist will assist you offline. I would now like to turn the call over to your host for today, Stephanie Carrington, of The Ruth Group.

Stephanie Carrington

Thank you operator. With us today for management are Adam Singer M.D., Chairman and Chief Executive Officer; Jeff Taylor, President and Chief Operating Officer; and Devra Shapiro, Chief Financial Officer. I hope you have seen the press release announcing the earnings of IPC The Hospitalist Company for the first quarter. If you have not yet received a copy, please call Jared Hoffman at 646-536-7013 and he will fax or e-mail you a copy or a copy may be obtained from IPC’s website at www.hospitalists.com. Certain statements and information in this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements in this conference call may include but are not limited to those statements regarding projected operating results, revenues, earnings, and IPC’s growth opportunities and strategy. Forward-looking statements are often characterized by terminologies such as may, anticipate, will, expect, estimate, project, positioned, strategy, and similar expressions. Although IPC believes that the expectations being reflected in any of its forward-looking statements are reasonable based on existing trends and information and IPC’s judgments as of today, actual results could differ materially from those projected or assumed based upon a number of factors including those factors set forth in its annual report on Form 10-K under the headings “Risk Factors,” and in IPC’s other filings with the SEC. IPC’s future financial condition and results of operations as well as any forward-looking statements are subjected to inherent known and unknown risks and uncertainties. IPC does not intend and undertakes no obligation to update any of its forward-looking statements to reflect future events or circumstances. With that, I will now turn the call over to Adam Singer, M.D., Chairman and Chief Executive Officer of IPC.

Adam D. Singer M.D.

Thank you Stephanie, and thank you everyone for joining us today. We reported our first quarter 2008 results today after the close of the market. I will start by reviewing our recent highlights and then Devra will review the financials, and at that point, we can open up the call for questions.

We are very pleased to again report record top-line results this quarter. For the first quarter of 2008, our hospitalist reported over 684,000 patient encounters. This generated net revenue of approximately $60.6 million which was 38% up from the same period of the prior year. This was driven largely by a 21% same market revenue growth. We are pleased with our ability to continue to grow top-line revenue through both same market revenue growth and the acquisitions while demonstrating significant operating leverage. Hospitalist Medicine is a high-growth business delivering prudent value in managing all aspects of inpatient care. As a newly public company, we are leading the way in educating about the high quality of care delivered by this new specialty of Hospitalist Medicine. At the end of the first quarter, IPC was added to the Russell 2000 Index, which was another important milestone for IPC just becoming a public utility company. The addition to the Russell 2000 Index reflects our position as a leader in providing hospitalist services and provide greater awareness and visibility for our stock among institutional investors. With that, I would like to now turn the call over to Devra Shapiro, who will review our financial results.

Devra G. Shapiro

Thank you Adam, and good afternoon everyone. Total patient encounters increased 36% to 694,000 compared to 504,000 in the same period last year. We recorded first quarter 2008 net revenue of $60.6 million, an increase of 36% from the same period last year. In line with the historical pattern, the first quarter of each year is typically a strong quarter for us. Of the $15.9 million revenue increase, $9.3 million or 58% was attributable to same market area growth giving us a 21% revenue increase over the same quarter of the prior year. The increase in the same market revenue is primarily the result of the addition of new hospitalist, either hired or added through market acquisitions and higher physician productivity for existing hospitalists. Overall revenue per encounter decreased slightly, two-tenth of 1% due to offsetting factors. The CMS Physician’s Fees Schedule Update effective as of January 1, 2008, resulted in a net decrease of 0.75% in Medicare reimbursement for the inpatient codes we bill which resulted in an approximate four-tenth of 1% decrease in revenue per encounter. Improvements in our billing processes and collections offset this reduction resulting in an overall increase of seven-tenth of 1% in revenue per encounter for the same market areas. In addition, recent acquisition in New England had a downward effect on the overall revenue per encounter as these hospitalists had not yet been core transition into IPC’s progress. Physician practice salaries, benefits, and other expenses for the first quarter 2008 were $43.9 million or 72.6% of net revenue compared to $32.4 million or 72.6% of net revenue for the same period last year. Physician expenses as a percentage of revenue remained constant for the comparable period with no significant changes in the percent of revenue in the various direct physician cost component. General administrative expenses increased $2.5 million or 31% to $10.7 million for the first quarter of 2008 compared to $8.2 million for the same period of last year. The dollar increase was attributable to the increased expenses and support of the continued growth in the same market areas, added costs related to new regions opened by acquisitions, and increased cost of being a public company. Included in the increase in public company expenses were approximately $300,000 in non-recurring IPO management bonuses primarily and IPO bonus for the company’s CEO that we disclosed in our proxy statement filed on April 24, 2008. However, as a percentage of revenue, G&A expenses decreased to 17.7% of revenue in the first quarter 2008 compared to 18.4% for the same period of last year, which demonstrates the continued leverage of cost structure on a larger revenue base even after factoring on the higher costs associated with being a public utility company.

First quarter 2008 income from operations increased $1.7 million or 46% to $5.4 million as compared to $3.7 million for the same period of the prior year, which is net of depreciation and amortization of $500,000 and $300,000 for 2008 and 2007 respectively. Our operating margin increased to 9% for the first quarter of 2008 compared to 8.3% for the same period last year. The increase in operating margin was directly attributable to the reduction in G&A expense as a percentage of revenue, again demonstrating the operating leverage we had [built in accordance with structure as required of the] top-line revenue. First quarter 2008 net income was $3 million or 21 cents per pro-forma fully diluted share compared to $2 million or 19 cents per pro-forma fully diluted share for the first quarter of 2007. Excluding non-recurring IPO costs incurred in the first quarter 2008, adjusted pro-forma fully diluted EPS was 22 cents. However, we recognized that adjusted pro-forma fully diluted earnings per share is a non-GAAP measure and thus should not be used as a substitute for pro-forma fully diluted earnings per share. Turning to our balance sheet, we ended the first quarter of 2008 with $39.5 million in cash and cash equivalents. In connection with our initial public offering at the end of January, the company sold 3.3 million shares and received net proceeds of approximately $46.2 million. A portion of the proceeds was used to pay down the outstanding balance of our revolving line of credit of $14.1 million. On March 31, 2008, our [90% of] balance on the credit facility was $9.3 million. Combined with our variable borrowings, the credit facility of $30 million, and positive cash flow from operations, we have approximately $50 to $60 million to fund our growth and our acquisition strategy within the highly fragmented hospitalist industry. Our day sales outstanding had decreased to 64 as of March 31, 2008, compared to 69 as of December 31, 2007, year end. This decrease reflected continued improvements in our growing processes and collection results. Cash flow from operations was a positive $2.6 million which allowed for net income post depreciation and stock based compensation expense by approximately 900,000 reflecting the growth of the accounts receivable related to revenue growth for the quarter and offsetting decreases in prepaid expenses, accounts payable, and accrued compensation. At our earnings press release this afternoon, we reiterated our 2008 guidance. We are reaffirming our guidance for the full 2008 revenue to be in the range of $239 million to $245 million and full year 2008 earnings per adjusted pro-forma fully diluted share to be in the range of 87 to 94, and refer you to the assumptions from our 2007 year end earnings release.

In addition, we will continue to experience our historical pattern of seasonality with higher net revenues and earnings in the first and fourth quarters of the year and softness in the second and third quarters due to lower patient census in hospitals during those quarters and tradition of physician hiring pattern where we generally increase the number of physicians in the fourth quarter. Additionally, quarter results may be affected by the timing of acquisition and hiring and terminations of our physicians. We anticipate that the wider the average, pro-forma fully dilute shares outstanding for each of the second, third, and fourth quarters in 2008 will be $15.1 million and for the full year will be $14.9 million. Adam?

Adam D. Singer M.D.

Thank you Devra, and we now would like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll take our first question from Arthur Henderson with Jefferies & Co.

Arthur Henderson – Jefferies & Co.

Hi, good afternoon. Just a couple of quick questions for you. Devra, could you give us what the physician turn-over rate was in the quarter and the number of hospitalists you guys currently have full time and part time?

R. Jeffrey Taylor

Art, this is Jeff Tylor.

Arthur Henderson – Jefferies & Co.

Hey Jeff.

R. Jeffrey Taylor

Art, we’re not going to be giving our head count on a quarterly basis nor are we going to be updating quarterly on the attrition rate, but what we can say is that all of our core metrics in terms of number of doctors – we’ve already started – the number of doctors signed the contracts to start later in the year, the number of doctors who have left us to date this year are all in order and consistent with historical trends.

Arthur Henderson – Jefferies & Co.

Are you having more success today sort of – as I recall a while back when the number out there was roughly 20% I guess and I’m just wondering, is the trends – we’re staying at that level or is it getting better – could you comment to that extent?

R. Jeffrey Taylor

It’s essentially staying at that level Art.

Arthur Henderson – Jefferies & Co.

Okay, that’s helpful. And then, I guess this is a question either for Adam or for Jeff – in sort of thinking about the model, I know you guys take advantage of a lot of physicians who might come your way to open up, get practicing in hospitals – but I’m just curious, how you feel about that particular model versus sort of the exclusivity model that’s out there, and as you look at acquisitions, what are you targeting or what kind of practices are you targeting? Thanks.

R. Jeffrey Taylor

Well Art, we’re continuing to target the full range of practices. The exclusivity question that you raised is maybe a little bit more complex. When a hospital can exclusively contract for, is only the unassigned patients coming through the hospital ER. We do love to have those contracts, and as you know, we have many, but we will also explore practice opportunities in facilities where we don’t have that contract and somebody else may have it. When we look at acquisitions, sometimes they have contract, sometimes they don’t – we do the same analysis to try to determine what the opportunity is within that facility to build practices and then make our decisions accordingly.

Arthur Henderson – Jefferies & Co.

Jeff, do the multiples differ any between those kind of practices you have, exclusive relationships?

R. Jeffrey Taylor

Not really. We look at it as being similar – in one sense a contracted group has some certainty for a period of time; on the other hand, they have complete uncertainty at the point the contract expires. So, it’s a balance and we look at the entire picture. Again, we don’t live solely on even though we’re contracted – the unassigned patients we pursue all areas that may refer patients to us within the hospital.

Arthur Henderson – Jefferies & Co.

And then one last question and I’ll jump back in the queue – has the level of competition out there for acquisitions increased any extent.

R. Jeffrey Taylor

We have not seen any change in that dynamic at all – we’re not aware of any transactions that anyone else has completed nor are we running into other people as we pursue our pipeline opportunities.

Arthur Henderson – Jefferies & Co.

Okay great. Thanks a lot.

Operator

And we’ll take our next question from William Bonello with Wachovia Capital Markets, LLC.

William Bonello – Wachovia Capital Markets, LLC

Hey guys. Just a question on the seasonality – I’m just wondering if there’s any way you can give us a little bit more guidance on that item – it’s a little hard to go back and look at historicals given acquisitions and what your normal seasonality is – I mean for instance, should we be thinking that revenue would be down sequentially probably in Q2 and Q3 from where it was in Q1?

R. Jeffrey Taylor

Historically, absent acquisitions Bill, we see revenues in Q2 and Q3 anywhere from flat to down slightly, and then a step gain again in the fourth quarter.

William Bonello – Wachovia Capital Markets, LLC

Okay, and is Q3 typically weaker than Q2?

R. Jeffrey Taylor

It can be, but I don’t think there’s a clear trend between those two quarters.

William Bonello – Wachovia Capital Markets, LLC

And then, would the pace of acquisitions though that you’ve been on probably in this particular year be enough to sort of offset that normal – sequential flat to downtrend – given that you did a pretty big announcement on the 29th.

R. Jeffrey Taylor

Yes, conceivably one can always hope if you look at last year’s number, you will see that that historic trend was somewhat masked by acquisitions done in Q2 and Q3 where we actually saw revenue growth in those quarters sequentially. The absent acquisitions which were not forecasting going forward – we would expect a bit of softness in those two quarters.

William Bonello – Wachovia Capital Markets, LLC

Okay, and then just a followup on that line – the [IASS] deal that you announced, can you just give us any more color on that sort of timing around it, etc.?

R. Jeffrey Taylor

Yes, we assumed responsibility for those contracts in April, although it is important to understand that they were all in existing markets for us where we already had operations, and in the majority of the cases, we were already seeing patients in those particular hospitals, and in fact, in some subset, we were already doing that work under subcontract from the other group because they didn’t have staffing. So, you shouldn’t expect an immediate huge increase in encounters from those contracts, but we were very happy with that relationship because it formalizes that piece of business and we are progressing to staff it fully so that we can fully exploit those contracts over time – so those should be incremental encounter growth opportunities for us as we go forward, but it was not as large a day 1 bump as you might otherwise expect because the group that was trying to handle it didn’t have it fully staffed yet in some cases – as I mentioned was having us already do the work.

William Bonello – Wachovia Capital Markets, LLC

Is there anything – you are just one of the many hospitalists practice in those hospitals – is there any sort of exclusivity or anything?

R. Jeffrey Taylor

We have exclusivity on all of the unassigned call. We have the right to take 100% of the unassigned patients coming to the emergency rooms in those facilities. There may be one or two small competing hospitalists groups in a subset of those buildings, but we do have the right to take all the unassigned patients in each of those facilities.

William Bonello – Wachovia Capital Markets, LLC

Great, thanks.

Operator

And we’ll take our next question from Ryan Daniels with William Blair & Company, LLC.

Ryan Daniels – William Blair & Company, LLC

Hi, good afternoon guys. A couple of quick questions on the guidance just to be sure I’m clear – is that 87 to 94 cent guidance predicated on using the 22 cent figure from Q1 – so adjusted X at a onetime IPO costs?

Devra G. Shapiro

Yes.

Ryan Daniels – William Blair & Company, LLC

And then 42% tax rate is still good.

Devra G. Shapiro

Yes, the 42% tax rate is still good.

Ryan Daniels – William Blair & Company, LLC

Okay, and then another one – not to be beat a dead horse here on the revenue but just to make sure we’re thinking this correctly – was there any unusual strength in the first quarter given that it was a leap year and you guys were paid kind of on a per encounter/per day type basis – I would assume that gave you an abnormal boost from having an extra day and maybe a bit of a boost in Q1 from the stronger flu season, it could actually exacerbate the sequential decline in revenue quarter over quarter going into Q2 or is that not a fair way to look at it.

R. Jeffrey Taylor

It’s a fair way to look at it but I think you’re overstating it a bit Ryan – clearly, there was an extra day, so we had patient encounters of one more day in this quarter than in last year’s or next year’s Q1, and the hospitals were relatively full in the first quarter this year, but frankly we see that every year – that’s a normal seasonal pattern for us. So, I don’t think it would exacerbate the trends we’re talking about one day in a quarter.

Ryan Daniels – William Blair & Company, LLC

Okay, perfect. And then, can you give us the – I don’t know if you have this on hand or might be in the queue and if it is just tell me – [looked at the] payer mix during the period?

Devra G. Shapiro

We do not publish that in the queue, but the payer mix hasn’t changed substantially. We’re seeing a small downward trend in the percentage of private pay – and the percentage of private pay is going down and conversely a little higher in the Medicare, but it’s really too early to say that’s the trend for the year.

Ryan Daniels – William Blair & Company, LLC

Okay, and did that have anything to do on the DSO side with that kind of payer shift – if you have Medicare license I know they require to pay you pretty quickly – is that part of the decline in the DSOs quarter over quarter?

Devra G. Shapiro

Yes it is. I think that we talked last year, at the end of the year, about the fact the we had some provider numbers that we were still in the process of obtaining through the acquisitions for last year – those provider numbers largely came in in the first quarter and also improved our processes with getting those provider numbers – so the combination of getting the provider numbers [sooner] improving our process and the decline in self-pay; I would say private pay [before the percent of the] self-pay.

Ryan Daniels – William Blair & Company, LLC

Okay, and then the last question I have – a little bit broader one – we talked about the competitive environment – I know you have a pretty weak position on the M&A front, but are you seeing anymore competition maybe in other avenues, is the practice of hospitalist medicine continues to gain so much attraction as a huge value-add for hospitals and what I mean by that is maybe more difficulty hiring hospitalists because the hospitalists are trying to do it on their own or seeing any trends towards hospitals who may have outsourced the coverage for ED, trying to bring that in-house and manage that, or any significant things you’ve seen there over the past 6 months or a year that you could comment on?

R. Jeffrey Taylor

I don’t think we’ve seen any significant change in any of those trends – they are anecdotal, examples of all of those things, but in terms of our overall portfolio, we’re not seeing any major changes to the business. I already commented on our hiring metrics – we’re completely in line with where we expected to be on that front. We’re not seeing the emergence of major competitors in terms of national or regional in scope, but there are always small emerging, the two or three guys in one hospital can be a competitor.

Ryan Daniels – William Blair & Company, LLC

Okay, great, thanks for the color.

Operator

We’ll take our next question from Kenneth Weakley with Credit Suisse.

Kenneth Weakley – Credit Suisse

Thanks. I guess I just have one question on the physician [pay pattern, and] I think you commented on it, but Adam what are your thoughts on where things are going in terms of reimbursement as we get into that second quarter year.

Adam D. Singer M.D.

Well we know that there has been [legislation] submitted under the name of the Save Medicare Act of 2008 by a democratic congresswoman [inaudible] and we fully expect that we’re going to act upon that at this point it’s really a clean legislation to continue to stay if you will for this year and then give a 1.8% or 1.9% on adjustment increase for ’09.

Kenneth Weakley – Credit Suisse

And that would be effective for the first of the year – is that what we’re saying?

Adam D. Singer M.D.

That update would exist into ’09.

Kenneth Weakley – Credit Suisse

Okay.

Adam D. Singer M.D.

And we expect that to pass and waiting to hear more.

Kenneth Weakley – Credit Suisse

Okay, thanks so much.

Operator

[Operator Instructions]. And we’ll go next to Sudeep Singh with Deutsche Bank.

Sudeep Singh – Deutsche Bank

Hi, thanks for taking my call. On the top-line again, maybe I’ll try to ask the question differently, but was this quarter perhaps better or in line than what you guys were internally budgeting – for revenues?

Adam D. Singer M.D.

It was essentially in line, we had a good quarter, it was maybe a little stronger – we’re always hopeful, but it was not a major upside surprise to us.

Sudeep Singh – Deutsche Bank

Okay, great. And then just may be a broader question – I was just curious to see or hear your comments on whether you guys are encountering IPAs in some of your markets and whether you foresee that as a trend of IPAs perhaps being more of a source as an employer of hospitalists going forward in your market?

Adam D. Singer M.D.

This is Adam answering. We don’t see any real – I am not sure we see anecdotally problems from IPAs or independent practice association in terms of competition for hospitalists, but clearly there is competition for hospitalists, there is a significant physician shortage that we’re facing in increments across the board in all specialties in healthcare, but we particularly feel that in hospitalist medicine – and we see hospitals that are employing hospitalists we have other private groups, we have other management companies; there is clearly a flutter of job opportunities which create competition for our physicians. I think what Jeff was answering is if none of that is really changed over the last year or two, there’s always been a lot of competition for the best physicians and when we look at our internal metrics, we continue to source as many if not more – we continue to sign as many or more than the [volume] we had before, and therefore, we continue as we have always for this very precious resource which is our physicians.

Sudeep Singh – Deutsche Bank

And then just last question from me – I know you guys are not disclosing numbers here, but just wondering if you could give us a sense for at least what markets have you been most active in with recruitment or in market acquisition activity – if you could just give us a sense for what states or what markets have you been active there?

Adam D. Singer M.D.

I’m not sure how to exactly answer that – from a recruiting standpoint, any market type we’re in, our foot is to floor on the accelerator pedal for recruiting all the time – so we’re very active and there is no differentiation – we’re looking for people in every one of our markets all the time whether it be because we want to grow those markets or because we know there’s going to be a built-in turnover for those doctors that we’d like to – we know that we need to make changes. I don’t think there’s any way I could tell you which markets – we don’t really recruit necessarily for markets that we’re not in, so I don’t think there’s a way to answer that question.

Sudeep Singh – Deutsche Bank

Yeah, I was just curious that there was – if you look at all your practices on a portfolio basis, are there some areas within the portfolio where you’re seeing more activity than others?

R. Jeffrey Taylor

Sudeep this is Jeff now. Obviously, in any portfolio you will have some areas that get a little more of a spike than others, but we’ve reported 21% same-store growth and I can tell you that growth is fairly well across the board in our same-store markets and that they’re essentially all growing now – obviously, in a portfolio they are not all growing at exactly the same rate, but there’s nothing that stands out that all of our growth is coming from one or two markets.

Sudeep Singh – Deutsche Bank

Okay great, thanks guys.

Operator

And we’ll take our next question from Martin Yokosawa with Oberweis Asset Management.

Martin L. Yokosawa – Oberweis Asset Management

Hi. I am just following up to make sure I didn’t miss something – did you make a comment on the second quarter – guidance or sequential or something like that?

R. Jeffrey Taylor

We were responding Martin to a question about seasonality and whether absent acquisitions that there may be historically some revenue softness sequentially in Q2 and Q3 compared to strong first quarters and we affirmed that that impact does normally occur as hospital census dwindles in the summer months. Our second and third quarters are often softened somewhat from the first quarter.

Martin L. Yokosawa – Oberweis Asset Management

Okay great, thank you.

Operator

We’ll return to Ryan Daniels with William Blair & Company, LLC.

Ryan Daniels – William Blair & Company, LLC

Hey guys. Just a quick followup to Ken’s question on the [doctor fee fix] – I think you went through this for us on the last call, but can you remind us what the EBITDA hit would be kind of worse case if it didn’t happen, the rate cuts took place – was that a little over a million if memory serves me correctly?

Adam D. Singer M.D.

This Adam answering – it was about a $1.5 million to EBITDA, Ryan. If it doesn’t [get put in from second] half of this year we don’t have [inaudible] what we’ll do next year.

Ryan Daniels – William Blair & Company, LLC

And then one other more broad question – I know you put on the study on fragmentation and kind of its impact on the average length of stay and in quality outcomes – have you been able to do and I’m sure you’ve done this internally, but have you looked at publishing any of them showing the way you can manage that with IPC link – I’m sure that your coordination of care is much stronger even with different physicians managing a patient because of your proprietary technology and I assume the outcomes are going to be stronger – have you published data on that to kind of indicate that and may be make yourself a preferred choice for hospitals accordingly?

Adam D. Singer M.D.

I’d say yes, we’re working on that and no to the question, have we published anything. The first step was to get out that information and then internally we’ve been working on strategies to reduce the impact of fragmentation – our systems aren’t going to allow us to have less doctors seeing the patient – the question is given there are so many doctors on an individual patient case, how do you improve the hand-off, how do you improve the process, and we do use our technology to do patient hand-offs or communicate the salient clinical features doctor to doctor which should improve or reduce the impact of fragmentation. We are working on a second phase of the article that we published to kind of further understand the phenomena which we’ll publish and I’m not sure if we’ll publish it – the solutions – or whether we just use it as part of our sales pitch and what we’re going to do about it, but that’s ongoing.

Ryan Daniels – William Blair & Company, LLC

Great, that’s helpful. Thanks.

Operator

That concludes our question and answer session. At this time, I would like to turn the call back over to management for any additional or closing remarks.

Adam D. Singer M.D.

Thank you everybody for joining our call today and we look forward to another great quarter coming up.

Operator

That concludes today’s conference, thank you for your participation, you may disconnect at this time.

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