Q2 2019 Earnings Call
Excuse me, they listen gentlemen, because the operator todays conference is scheduled to begin momentarily.
Until that time your line will again be placed on hold thank you for your patience.
Again, ladies and gentlemen, who is the operator todays conference is scheduled to begin momentarily until that time. Your line will again be placement note. Thank you for your patience.
At this time I would like to welcome everyone did todays second quarter 2018 earnings call.
Lines have been placed on mute to prevent any back I would really.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question simply press Star then the number one on your telephone keypad.
If you would like to draw. Your question you meet that Sczepanski. Thank you.
With that it is now my pleasure to turn today's program over given the remaining vice President of Investor Relations Laurie you may begin.
Good morning, and thank you for joining US today, we issued our earnings press release earlier. This morning. This announcement is available in the Investor Relations section of our website at Genesis HCC Dotcom a replay of this call will also be available on our website for one year.
Before we begin I would like to quickly review a few housekeeping matters first any forward looking statements made today are based on management's current expectations assumptions and beliefs about our business and the environment in which we operate these statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call Mr. should not place undue reliance on forward looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results, except as required by federal Securities Law Genesis healthcare and its affiliates do not undertake to publicly update or revise any forward looking statements or changes veteran arise as a result of new information future events changing circumstances or for any other reason. In addition, any operation we mention today is operated.
Hi, separate independent operating subsidiary that has its own management employees and assets references to the consolidated company and its assets and activities as well as the use of the terms, we asked our and similar verbiage are not meant to imply that Genesis healthcare has direct operating assets employees or revenue or that any of the various operations are operated by the same entity our discussion today and the information in our earnings release in our public filings include references to adjusted EBITDAR EBITDA adjusted EBITDA, which are non-GAAP financial measures. We believe the presentation of non-GAAP financial measures provide useful information to investors regarding our results because these financial measures are useful for trending analyzing and benchmarking the performance and value of our business, but such non-GAAP financial measures should not be relied upon at the exclusion of GAAP financial measures. Please refer to the company's reasons for non-GAAP financial disclosures and its GAAP to non-GAAP reconciliations contained in today's earnings release.
And with that I'll turn the call over George Hager CEO of Genesis healthcare.
Thank you Laurie.
Good morning, and thank you for joining us today.
I will focus my comments this morning.
On our continued strong operating performance this quarter.
As well as progress in our efforts to optimize our portfolio of facilities.
Increase our real estate ownership.
And improve our overall capital structure.
I will then conclude my comments with an update.
On our HCR has gained share a reconciliation.
And our view our current view of the impact of P. D. P M.
Tom do you Vittorio Genesis is Chief Financial Officer will then provide more details on the quarterly results and other updates before opening the line for questions.
First I'm pleased to report we had another strong quarter.
With continued improvements in same store occupancy.
Earnings growth.
And the execution of our portfolio optimization strategy.
This is the third consecutive quarter, we've seen favorable trends with respect to many of the key performance indicators that drive our business.
And the second quarter of 2019.
We saw strong same store occupancy growth of 80 basis points.
Same store adjusted EBITDAR growth of 4.1%.
As well as adjusted EBITDAR margin expansion of 80 basis points versus the prior year.
These results continue to reflect a more stable census, and reimbursement environment.
Effective cost management.
And the continued success of our portfolio optimization activities.
Moving onto those portfolio optimization activities, we had another very active quarter.
During the second quarter of 2019.
Genesis divested exited or close the operations of nine facilities.
Year to date through June Thirtyth 2019.
We exited a total of 19 facilities.
With approximate annual revenue.
Of 179 million.
Adjusted EBITDA.
14 point.
Hubs of 4.4 million and a pre tax loss of 5.1 million.
These transactions resulted in a reduction of approximately 4.3 million of annual cash lease payments.
Subsequent to June Thirtyth.
2019.
We've also divested an additional 11 leased facilities and one owned assisted living facility.
In aggregate these 12 facilities generate approximate annual net revenue of 73.5 million.
Adjusted EBITDA of 2.4 million and a pre tax net loss of 2.4 million.
These divestitures resulted in a reduction of 1.9 million of annual cash lease payments.
Over the past three years.
Our portfolio optimization initiatives.
Have been a key ingredient in our strategy.
To improve the overall financial health of Genesis.
Over that period of time.
We have successfully and significantly reduced the scale and footprint of facilities operated by Genesis.
Today, we operate a 136 fewer facilities than we did at the beginning of 2016.
A 25% reduction in beds.
And a complete exit from the states of Kansas, Missouri, Iowa, Nebraska, Texas and Ohio.
These actions and others planned.
Our returning Genesis to its original strategic model.
Of local market density.
Allowing us to focus our resources in those markets, where we have strong acute care and payer relationships solid demographics.
Availability of clinical skill and responsible reimbursement systems.
This focused approach has and we expect will continue to result in more consistent clinical.
Operating and financial outcomes.
For the remainder of 2019.
We expect to continue to divest or exit we're close underperforming facilities.
Four facilities in non strategic markets.
However.
We will also look to deliver transactions that set the stage for greater facility ownership in the future.
Increased real estate ownership will lessen the burden of lease escalators.
Allow us to participate in future real estate appreciation.
And reduce our overall cost of capital.
We are working we are currently working on a number of creative transactions that emphasize facility ownership.
I am optimistic that we will be able to announce some of these transactions by year end.
It is our goal to own.
Or obtain fixed price purchase options on at least 30% of our portfolio by the end of 2000 by the end of 2020.
Moving on to our accountable care organization.
For those of you who are not familiar.
The Genesis FCO participated in the Medicare shared savings program for EM as SP.
In an upside only gain share track in 2018 and through June Thirtyth 2019.
Under this program.
CMS provides a retrospective reconciliation of performance on an annual basis.
The annual MSP reconciliation for 2018 is expected later this month.
We are cautiously optimistic that we will see positive results.
If we do experience.
Gainshare, we will recognize that in that income in the third quarter of 2019.
Effective July one 2019, our AC entered into a new MSP risk track.
Going forward the ratio can achieve 75% of the gainshare.
But is also subject to downside risk.
With increasing confidence in our performance analytics.
We believe we are managing per member per month cost well relative to our new CMS benchmark.
We expect today to receive a favorable reconciliation for the 2019 performance period as well.
Overall.
Ari CEO .
He is a unique.
And critically important strategic asset for the company.
As we continue to capitalize on the evolution to a value based healthcare system.
We believe that the membership in our CEO .
Can be significantly expanded not only inside Genesis.
But also more broadly throughout the sniff industry.
As we achieve positive patient outcomes as well as positive financial results.
Our ability to manage risk.
With a focus on patient outcomes and cost.
Will be increasingly important in the future.
Lastly, I will discuss our current views around our new reimbursement system patient driven payment model or pdps.
As you know CMS is set to implement this new reimbursement system effective October Onest 2019.
We have been working diligently to prepare our centers and our rehab business for Pdps.
We remain optimistic that the new model is a net positive for Genesis and for our patients.
Let's take a brief look at the estimated impact to our business.
On the skilled nursing side, there are two areas of financial impact first.
We will what our revenues will be impacted by any changes to our average Medicare payment rate.
And second the cost.
Providing service will be impacted by any changes in the cost of operating our reimbursed rehabilitation therapy function.
We currently estimate that PDP.
Will be flat to slightly positive to our Medicare rate per day.
And that is before taking into account.
The 2.4% market basket update set for October Onest 2019.
On the cost side with respect to the cost of providing therapy and our skilled nursing facilities.
While we do not expect there to be any change in the amount for the quality.
Of therapy provided.
We do expect that the cost of providing therapy to our patients will drop by about 10% to 12%.
As more cost efficient modalities.
Such as group and concurrent therapy.
We'll be utilized as clinically appropriate.
We expect the same level of therapy cost reduction will also be passed along to our third party skilled nursing customers in our rehab segment.
Moving on to our rehab segment.
We do expect that PD pm will be dilutive to revenue.
As we pass on those cost efficiencies to our rehab customers.
However, we believe that through the utilization of more cost effective modalities.
We will be able to reduce our cost of providing services to match the decline in revenue.
We're also aggressively working to revised contracts with our third party customers.
And we have received very positive feedback to date.
So in overall.
Overall.
Our conclusion is that PD PM will be a net positive for the company.
Tom will provide a little more detail on the impact of PDP.
In a few minutes.
Looking forward to the back half of 2019, we are projecting stable operating trends for the business.
That should be enhanced by the positive results of our CEO .
The expected positive impact of PDP.
As well as continued portfolio optimization transactions that will improve our capital structure.
And reduced our overall cost of capital.
As always I would like to thank.
Our leadership team and the tens of thousands of caregivers.
Nurses see an Asian therapist across the country.
That are providing incredibly compassionate care.
To the for sale list of our elders.
With that I'd like to turn the call over to Tom the inventory on top.
Thanks, George Good morning, everyone.
I will start with the operating results and trends for the quarter and then touch again on PDP and before we take questions.
Starting with the top line.
Revenue in Twoq, you 19 of $1.15 billion declined $127.3 million were 10% from Two Q1 8.
Of this $127 million decline in revenue $116 million is attributed to the impact of divestitures net of acquisitions and $26 million is attributed to lower revenue in our rehab services segment. Following the cancellation of low margin therapy contracts.
These revenue declines were offset by approximately $15 million were 160 basis points of same store revenue growth in our inpatient services segment.
The third consecutive quarter of such growth and the greatest level of growth over the three quarter period.
Adjusted EBITDAR of $156 million in Twoq, you 19 decreased $7.3 million were 4.5% from Twoq to 18.
$13.5 million of this decline in adjusted EBITDAR is from the impact of divestitures net of acquisitions, implying same store adjusted EBITDAR growth of $6.2 million were 4.1%.
This is the fourth consecutive quarter of same store adjusted EBITDAR growth.
This growth was driven by our inpatient segment offset by modest earnings contraction in our ancillary businesses principally related to the exit of low margin third party contracts and the ongoing divestiture of Genesis facilities.
With respect to earnings margins are leaner cost structure improved labor efficiency and successful divestiture strategy expanded EBITDAR margins 80 basis points in to Q, 19% to 13.6%.
Adjusted EBITDAR less total cash lease payments equaled $50.1 million. This measure exceeded consensus consensus estimates by approximately $8 million.
With respect to patient mix and occupancy skilled days mix into Q1 9 of 18.2% declined 70 basis points from the prior year quarter.
Of the 70 basis point decline in skilled mix approximately 30 basis points is due to growth in our long term care census, with the remainder due to lower skilled patient admissions.
Regarding skilled patient admissions during the quarter of to the second quarter of 2019, we experienced a 2.3% decline in skilled patient admissions as compared to the second quarter of 2018.
This is the lowest rate of year over year decline since the first quarter of 2017 and compares to an average skilled patient admission decline of 4.3% over the prior four quarters.
The average length of stay of Medicare and Medicare advantage skilled patients discharged to home remains flat for the sixth consecutive quarter.
Operating occupancy into Q1 9 of 86.6% increased 250 basis points from the prior year quarter.
We estimate that 80 basis points of this increase represents same store occupancy growth and the remainder represents the impact of divesting properties, having below average occupancy.
On the topic of wage inflation versus reimbursement rate growth.
Two q. 19 wage inflation for non overtime hours worked by our employed nursing staff grew 2.9% over two to 18.
Including overtime hours and agency costs are all in nursing wage wage cost per worked our grew 3.8% into Q1 9 over Two Q2 18.
This is a 50 basis point increase in the all in nursing wage inflation report as well as compared to what was reported last quarter.
This rate of wage inflation is specific to our nursing function, where today, we see the greatest wage pressure.
The nursing function represents about 50% of our workforce.
Wage inflation and the other half of our Labor force approximated 2%.
So in the aggregate Genesis is wage and wage inflation rate in Twoq, you 19 was about 2.9%.
By comparison, the weighted average reimbursement rate growth, we received from our payers over the same period was about 3% were 10 basis points higher than wage inflation. This is the third consecutive quarter, where reimbursement rate growth outpaced wage inflation.
Staying with the topic of reimbursement rates as we look ahead over the next six to 12 months, the 2.4% net Medicare market basket increase set for October one.
Along with the positive with a positive Medicaid outlook in many of our states should support weighted average reimbursement rate growth for Genesis of between two and 3%.
To summarize our operating performance and trends this quarter. We remained very pleased with the steady performance of both our inpatient and rehab segments and we remain very encouraged by the improving business landscape that content that we continue to see.
A landscape that shows inpatient occupancy and revenue growth.
Flat lengths of stay and reimbursement rate growth that approximate approximate wage inflation.
Before we move to Q1, I would like to add to George's comments on PD pm.
We continue to make excellent progress in our evaluation planning and readiness for the October one transition.
Our education and training and communication activities have been in full swing for months and we'll continue up to and beyond October one.
With less than two months to go there is still much work to do but we are on track with all of our project plans.
We are very fortunate to have tremendous depth among our in house clinical operations finance regulatory and systems professionals.
They have positioned us to be as ready as any provider in the country.
Clinically speaking ppm will in no way impact the types of patients Genesis admits where the care that is provided to them.
Where clinically appropriate some Medicare part a patients may benefit from participating in group and or concurrent therapy sessions similar to the treatment protocols for our managed Medicare advantage plan patients and commercial insurance patients.
As George mentioned financially speaking, we continue to see ppm as flat to a slight positive to our sniff average Medicare payment rate, even before taking into account the 2.4% market basket update.
We also believe we will be able to offset dollar for dollar any lost revenue related to amended contract terms with our third party rehab customers.
So for Genesis the most significant financial impact from ppm comes from the 10%, 12% reduction we anticipate in the cost of providing therapy services to the patients in our captive skilled nursing facilities.
This 10% to 12% cost reduction, which again is driven by the use of more cost efficient modalities equates to approximately $30 million of reduced operating costs annually.
As we think about the near term impact of transitioning from rugs to ppm. It is reasonable to expect some learning curve and implementation bumps over the first quarter or so.
But at this time, we do not expect any material near term adverse financial impact caused by the ppm transition.
Net net we continue to see PD pdps as good for our patients and accretive to Genesis.
With that Myron, we're ready for questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Our first question comes from the line of AJ Rice from Credit Suisse. Your line is open you may ask your question.
Hi, everybody.
First of all just maybe to pick up on Tom's comments, there so you're thinking as you transition PDP.
You really take about a quarter or two.
To make that switch per year at least captive facilities and.
Immediate sense that I'm sure. There's an aspect of into CMS has to have systems ready to go and everything like that.
Do you feel like all of that is on track and then.
You said, you're looking at contracts for your third party customers how.
Is that also probably a quarter or two of transition or how long do you think that will be before you transition that book.
Hey, Jay this is Tom So I'll take the first part of the question I think George will cover the rehab question.
As far as we'll be very ready as ready as we can be October one we fully expect that CMS on the system side, we'll be ready.
We'll be ready from a technology point of view.
Look this is such a monumental change you know this is a 20 year change in how you code and and.
You know and score your patients ultimately for clinical documentation and for billing. So it's a big switch and there is a there is a learning curve. There. So it's tough to say I think the.
The analysis that we've done where we're talking about flat to slightly up on the rate and the annual impact to our ability to reduce costs.
In the front from providing therapy services in our own facilities. So thats, certainly a sort of a run rate.
Basis, it's tough to tell will it take a quarter or a quarter and a half for us to really get our momentum there and you know how much friction, we'll see but you know the upside opportunity here. So big that we just don't see.
Any real situation, where where it has a negative effect even in the transition period I just think we'll work up toward.
So that run rate level of opportunity that we described.
Okay I'll address the the rehab side, we've been working with our third party rehab customers for the same length of time that we've been.
Dealing with the transition and planning.
For our own internal facilities things one of the advantages we have is a contract therapy provider.
As we have the benefit of all the learnings from our brother and on the skilled nursing side.
Which is a great advantage to our through our rehab customers, but we think we're going to come out of the gate running I don't think we'll necessarily have all the cost.
Our effective 10, one we've already started.
You know streamlining the cost structure.
We are also already started educating and training.
You know our therapy staff.
No, especially on the.
The appropriate clinical aspects of of utilizing more cost efficient modalities.
We also have the benefit A.J. on two other fronts.
When we went into the bundled payment program for those two or three years.
There was tremendous learning and we use the same techniques.
No much more aggressively in those bundled payment facilities.
And you know that the great outcome from that was we did we did effective research and we found that the use of group concurrent therapy was actually equal if not more efficacious to the outcome of the patient then providing one on one therapy. So our therapists.
Good experience that we will actually spread throughout our entire portfolio from our participation in bundled payment and as Tom said in his comments. We also have been using these techniques in providing services to our Medicare advantage and commercial insurance pain patients for some time. So we do that will also ease in the.
The disruption of any transition.
To to the service model from the therapy perspective so.
Those cost reductions that Tom mentioned are real.
And they will happen very quickly.
Many of them are already in progress.
You have a next question comes from the line of Chad Vanacore from Stifel. Your line is open you may ask your question.
Thanks, Good morning.
Good morning, good morning, Chuck.
Alright.
Tom and George you had said on PDP and you expect net improvement, but alluded to cost mitigations on the rehab therapy side.
Are those primarily labor or are there other major savings there that we should consider.
It's primarily labor Chad I mean, when you look at the labor.
In our rehab business, we have over 200 ft ease that are that are agency therapist that we're paying premiums for.
And.
You know so obviously you have opportunities to reduce our cost structure, but it's virtually all all labor.
Once again, if you are providing therapy in group concurrent sessions, where clinically appropriate and individual therapist can obviously touch and treat more patients at the same time.
Therefore, requiring a reduction in the number of.
Therapy hours required to operate the gym versus you know.
Current modes of operation.
Got it.
And then just thinking about your your exiting Ohio can you give us some more details about how you view the marketplace, there and why the agent.
Yeah, you know.
Chad, Ohio for US you know all those assets were acquired in the Sun transaction 2011 and quite frankly.
You know the the quality of the asset.
That we inherited was but below below average.
And as we looked at the market place, we did not have any real density in any of the major markets in Ohio.
Cleveland date, and you can you can pick your eurs, you're cities, but no real real density and as we looked at the market, even though the reimbursement system. You know is okay in Ohio, we just not a market that we thought with with.
Limited amounts of capital to invest that we want to go after and expand.
And really grow our density or really put a flag.
In the ground and in water or several of the major markets.
Pretty crowded state there are a lot of strong operations in Ohio.
And we thought it was but we are best to exit.
Recycle our capital and reduce our leverage.
Alright, and then just thinking about the new JV that you have with next healthcare can you give us an update there how is performance going.
So that JV is working great.
For US obviously, you know we are taking advantage of reduced.
We did reduce lease rates on that and ultimately looking forward to when we can exercise.
The purchase option on those facilities.
And that is you know.
We have actually two next partnerships.
I believe those those purchase options are exercisable in 2022 and 2023.
And upon exercise of those purchase options, we will achieve significant reductions in the cost of capital operating that facility. So.
We are.
Very very optimistic about our ability to replicate that type of transaction as a means by which we can re acquire a significant amounts of our real estate and you.
You heard our goal our goal for 2020 is to own at least or have a purchase of fixed price purchase option on at least 30% of our beds.
Okay with that when you say you can replicate the transaction are you talking about with next door with other other owners.
With next and or other owners.
Okay.
The model.
The model is Rob Global mean next provided you know the equity capital that we partnered with.
But I think that as we've looked at the market. There is significant demand for the ownership of real estate. So I think sourcing equity capital tied to real estate transactions.
It has been.
Not problematic there is there is it still a good deal of capital in demand.
Related to the ownership of real estate.
All right one more from me just on the cash flows.
It looks like you had a $162 million use of cash for investing and your cash balance down 45 million and a and that looks like it's up 60 million or so.
Two I can give you help me out with what's going on there absent the 10-Q.
No Chad I'll have to go back in and take and take a look at the specifics there it off the top my head I don't have an answer for you. So I will follow up with you Tom I think maybe the increase in debt is a function of credit wrong. The consolidation of the next JV.
So we're actually consolidating the debt.
Of that partnership Chad.
Yeah that was in last quarters.
Balance sheet, though but Chad you're focused on the cash flow statement and cash outflows in the investing section right.
That's right.
Okay, Yeah, well I'll follow up with you can get you the details on that.
All right I'll hop back in queue. Thanks.
Our next question comes from the line of Frank Morgan from RBC Capital markets. Your line is open you may ask your question.
Good morning, first a clarification is the 30% ownership number that you're talking about is that incremental or is that what would that be the total once you do exercise that.
That would be the total Frank we're probably with the with the transactions that we've announced to date somewhere in the 20% range.
Gotcha and I'm, just curious that the occupancy improvement you've seen I mean, clearly if that looks like a lot of that's coming in the non skill part business, but beyond that are there any geographic regions, where you're seeing this or would you characterize that is broad based and just any color there on what's where you're seeing that.
Frank I would say that it's relatively widespread you know some markets, maybe a little bit stronger than others. You know with the you know that some of our western markets bit showing some some good occupancy growth this period.
And maybe our new England states some of our markets and our new England States, maybe being on the on the other end of that scale, but but overall it's fairly widespread.
And I'm just curious because it seems like in the last few quarters. This phenomenon of more Medicaid has started to happen is that conscious.
A conscious strategic decision or is it just a function that that's the part of the market that's growing to bolster like it just seemed like it sort of happened all of us in the last couple of quarters, So any color about that.
Yeah, Frank it's absolutely intended and conscious Yep. We you look at the the continued pressure in the industry you know around admission volumes.
As as well as you know some length of stay pressure, even though that's somewhat moderate.
You know our view was that that.
Incremental bed, even if it's a long term care patient funded by state Medicaid program the incremental margin on that patient is still very very substantive.
So we have approached you know you know a different philosophy then what this industry you know employed.
Over the last couple of decades and that is too.
Develop clinical specialties grow clinical specialties that are focused on the long term care patient.
Those specialties that are focused on patients with with chronic illness chronic disease, especially you know diseases like dementia, Alzheimers, where your principally.
Looking.
Who care for a long term care patient so absolutely intentional.
And we will look to continue to grow total occupancy and once again that incremental patient from a financial perspective.
The incremental margin is very very significant.
Got you my last one as you think about all the changes from PDP on your contract business or does this change your strategy in any way of maybe trying to accelerate or grow your part D business. Thanks.
You know good that's it that's a good question Frank I mean, I'd I'd like to think that.
No one of the benefits of having.
You know the industry, leading contract therapy company as as as a captive subsidiary in in Genesis.
Is that I think we've had you know an ability to staff, our our gym's adequately for both ourselves and our third party customers.
And you know we have we have tried closely to make sure that those gyms have adequate resources. So that those patients those long term care patients that can benefit by therapy services that are that are funded under the part B program are delivered as clinically appropriate to that patient population. So.
I don't know.
I've heard comments as you have around possibly you know.
The opportunities to increase part B part B therapy.
It's not something that we are really really focused on we're focused on with our.
Customers, both internal and external trying to operate the gym ads as as efficiently as effectively as we can but hopefully with a focus on outcomes when he patients achieving the same level of improvement in on it and our modified Bartow index RMB scores, though that that will allow us to discharge patients more quickly without risk of readmission.
Thank you.
There are no questions at this time you may continue.
I appreciate everyone's continued interest in Genesis and.
Tom and I and the team.
I am very optimistic as we look forward into the back end of 2019, I think we've all been looking for the bottom I think our three consecutive quarters of growth Telesat, we hopefully have bounced off the bottom.
[noise] here and looking for a lot of our strategic investments.
Around day C O around the C O our physician service practice.
GPRS.
As well as the impact of PD pm to be.
Provide a little tailwind to the business going forward into the back end of 19 and into 2020.
It will be available for any questions throughout the day. Thank you again.
Thank you again for joining US today. This concludes today's conference call and you may now disconnect have a good day everyone.