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Article Excerpt
PARTICIPANTS
. Gordon McCoun, RehabCare Group, Inc., Financial Dynamics . Dr. John Short, RehabCare Group, Inc., President and CEO . Jay Schreiner, RehabCare Group, Inc., EVP, CFO . Pito Chickering, Deutsche Bank, Analyst . Robert Hawkins, Stifel Nicolaus, Analyst . Sheryl Skolnick, CRT Capital Group, Analyst . Rob Mains, Morgan Keegan, Analyst . Kevin Gross, RehabCare Group, Inc., SVP of Operations, Hospitals
OVERVIEW
Co. announced 4Q08 consolidated revenues of $194.2m, resulting in consolidated net earnings of $5.7m, and diluted EPS of $0.32.
FINANCIAL DATA
A. Key Data From Call 1. 4Q08 consolidated revenues = $194.2m. 2. 4Q08 consolidated net earnings = $5.7m. 3. 4Q08 diluted EPS = $0.32. 4. 4Q08 consolidated revenues were up 13.1% from 4Q07. 5. 2008 Capex = $18.5m. 6. DSO at 2008-end = 66. 7. Cash and equivalents on hand at 2008-end = approx. $27.4m. 8. Total debt outstanding at 2008-end = $57m. 9. Net debt (outstanding debt less cash and cash equivalents) at 2008-end = $29.6m.
PRESENTATION SUMMARY
S1. 2008 Business Results (J.S.) 1. 2008 Objectives: 1. 2007 was a year in which RHB was focused on integrating the Symphony acquisition and raising profitability. 2. In 2008, shifted focus to returning to growth in each business unit while continuing to improve operating earnings. 1. Accomplished that objective. 3. Three core operating divisions achieved topline growth over 2007, driven by: 1. Higher same-store revenue. 2. Opening of three new hospitals in hospital division. 4. During 2008, Contract Therapy and Hospital Rehabilitation Services divisions posted solid gains. 1. Their consistent performance helped deliver a gain of $0.32 consolidated diluted EPS over 2007. 2. Represents 43.8% increase over FY07. 3. Excluding changes in both periods, the increase was 26.7%. 5. Permanent resolution of the 60% rule cleared the landscape for increased patient volume in inpatient rehabilitation facilities and unit growth in HRS division. 6. For Hospital Division, it was a year spent: 1. Re-evaluating growth strategy. 2. Centralizing business functions. 3. Ramping up census development efforts. 4. Securing the right leadership. 7. 4Q08 results indicate that RHB is moving in the right direction. 1. Healthy cash flow and continued reduction of debt in 2008 has given Co. an enviable liquidity position in a difficult credit environment. 2. Financial strength will be key to continuing growth strategy and reinvesting in business in 2009. 2. Contract Therapy: 1. Operating revenues in Contract Therapy division in 4Q08 improved by 11.4% over 4Q07 to $110.7m. 1. Result of a 13.8% same-store revenue increase. 2. Division had a net gain of four units over 2007. 3. Signed 37 new client locations in 4Q08. 1. At 4Q08-end, the number of signed, but unopened contracts stood at 20. 4. Expect continued topline revenue growth in Contract Therapy division in 2009, with 4-6% YoverY same-store growth. 1. Believe the division will experience stable to modest unit growth for the year. 2. New business will be offset by lost clients due to client ownership changes and consolidation in response to current economic climate. 5. YoverY operating earnings increased by 3.1 percentage points to 7.1% in 4Q08. 1. Above targeted range of 5.5-6.5%. 2. 4Q08 was favorably impacted by a 3.4% market basket increase for skilled nursing facilities (SNF), which RHB was able to pass on to some degree to approx. half of clients. 3. For planning purposes, assuming no market basket increase in 4Q09. 6. Maintaining targeted range for Contract Therapy operating earnings margin in 2009. 3. Hospital Rehabilitation Services: 1. 4Q08 operating revenues in hospital rehabilitation services division increased 12.6% over 4Q07 to $43.7m. 2. Had 4.7% YoverY increase in acute same-store discharges. 3. For 2009, expect growth in same-store discharges to remain in the 3-5% range. 4. In 2008, the Hospital Rehabilitation Services division experienced its first year of unit growth in three years. 1. Improved performance in both unit openings and closings. 2. At 12/31/2008, operated 157 programs vs. 154 at 2007-end. 5. During 2008, IRF contracts increased from 107 to 113. 1. In 4Q08, the Co. signed five new IRF contracts and had seven openings. 6. For 2008, opened 16 IRFs compared to seven in 2007. 1. Experienced 10 closures, five of which ceased operations. 2. Vs. 15 in 2007. 7. Number of signed, but unopened IRF contracts at year end stood at three. 1. All of which are expected to open in 2009. 8. Division expects a continued modest net increase in units in 2009. 9. Hospital Rehabilitation Services operating margins in 4Q08 were 13.3%. 1. Down from 15.5% in 4Q07. 2. 4Q08 included a $1.2m pretax charge resulting from a bad debt writedown related to an outpatient transaction. 3. Excluding above charge, the division would have reported a 16.2% operating earnings margin in 4Q08. 4. Outlook for operating earnings margins during 2009 is 14-16%. 4. Hospital: 1. Revenue in hospital division in 4Q08 increased 27.5% over the 4Q07 to $30.3m, reflecting: 1. 3.2% same-store revenue increase. 2. Opening of three new hospitals during 2008. 2. At 2008-end, was operating a total of 11 hospitals. 1. 6 IRFs. 2. 5 long-term acute care hospitals or LTACHs. 3. In April 2008, the Co. opened Northland LTAC Hospital. 1. 35-bed facility in North Kansas City. 1. Completed its Medicare demonstration period on 12/01/2008. 4. On 06/01/2008, completed JV with Floyd Healthcare Resources, which gave RHB 80% ownership of The Specialty Hospital, a 24-bed LTACH in Rome, Georgia. 1. Now in the process of developing a 45-bed replacement hospital in Rome. 1. Scheduled for completion in 2Q10. 5. St. Luke's Rehabilitation Hospital: new 35-bed IRF. 1. Admitted first patient on 11/04/2008. 2. Hospital is JV with St. Luke's hospital in St. Louis, MO. 6. Also contributing to revenue in 2008 was Central Texas Rehab Hospital. 1. Opened in late 2007 with partner, the Seton Family of Hospitals in Austin, TX. 2. Together, have begun an expansion and relocation of this hospital, which it expects to complete in 3Q10. 7. In 2008, re-evaluated the risks and opportunities associated with growth strategy for this division. 1. Determined that it was in best interest to exit three scheduled projects in 4Q08, including: 1. Planned JVs in Kokomo, IN and Reading, PA. 2. Acquisition of Rehab Hospital of Rhode Island. 3. Decisions were a necessary part of refined strategy for future of hospital division. 8. On track to open Greater Peoria Specialty Hospital. 1. 50-bed LTACH RHB is developing in Peoria with Methodist Medical Center early in 3Q09. 9. $700,000 improvement in operating earnings experienced over 3Q08, which was impacted by the hurricanes, includes a negative impact of $1.5m charge related to the cancellation of planned project in Kokomo and the acquisition in Rhode Island. 10. In 2009, expect sequential improvement in operating earnings performance with total year operating losses reduced by $3-4m vs. 2008. 11. For 2009, expect revenue between $140-150m driven by strong growth in mature and de novo hospitals. 1. Is assuming no market basket increase for either LTACHs or IRFs for FY10. 12. Including announced expansion projects, expects break-even operating earnings in 2010. 5. Legislative and Regulatory Landscape: 1. 2008 brought relief to Contract Therapy programs with the extension of the Medicare Part B Therapy Caps exception process and physician fee schedule. 1. Both provisions are scheduled to expire on 12/31/2009. 2. While RHB enjoys a favorable regulatory landscape in the near term, continue to be focused on securing a permanent solution to both issues. 1. Believes congress will take action later this year in the form of Medicare or healthcare reform legislation. 3. While the economic stimulus plan contained very little on Medicare payment issues, RHB supports the investments in health IT and comparative effectiveness research. 4. Will be addressing the impact of the 2010 healthcare budget proposal from the Obama Administration released on 02/26/2009. 1. While details of the plan are pending, the section covering bundled payments to post acute providers will likely create much discussion. 2. A bundled or episodic payment could result in significant cost savings and improved...
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