Chad Keetch - EVP & Secretary Christopher Christensen - President & CEO Suzanne Snapper - CFO

Ryan Halsted - Wells Fargo Chad Vanacore - Stifel Dana Hambly - Stephens

Welcome to The Ensign Group Fourth Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to our host of today's call, Mr. Chad Keetch. You may begin.

Thank you, LaTanya. Welcome everyone and thank you for joining us today. We filed our earnings press release earlier today. This announcement will be available on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available on our website until 5 P.M. Pacific on Friday, March 27, 2015. As always, before we begin I have 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. Listeners 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 laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, any operation we may mention today is operated by a 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 terms we, us, our and similar verbiage, are not meant to imply that The Ensign Group Inc. has direct operating assets, employees or revenue or that any of the various operations, the Service Center, the real estate subsidiaries or our captive insurance subsidiaries are operated by the same entity. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in today's press release and will be available in our Form 10-K which we will be filing later today. And with that, I'll turn the call over to Christopher Christensen, our President and CEO. Christopher Christensen, our President and Chief Executive Officer?

Thanks, Chad and good morning, everyone. We are proud to report that we saw improvements across our same store, transitioning and newly acquired buckets, all during an historic year in which we successfully completed a significant spinoff of CareTrust REIT and experienced one of our most active acquisition years ever. These achievements were made possible by the local operational leadership teams and all their field-based and service center partners who remain relentless in their focus on clinical and financial performance in their own operations while also supporting the transition of the newly acquired operations in several markets. This extraordinary year has been another true test of our flexibility, responsiveness and resilience. And even though there were some pockets that need improvement, overall the strength inherent in Ensign's business model shown through demonstrating again the scalability of Ensign's unique approach to growth. We are pleased to report that operating results met our annual earnings guidance with adjusted earnings per share of $2.18 for the year which was right at the midpoint of our guidance. We also met analyst consensus for the year. As we've noticed many times in the past, our results were not symmetrical on a quarter-by-quarter basis which is why we do not provide quarterly guidance. Our focus continues to be on the fundamentals of our business and driving improvements in performance throughout the year and over the long term. We are pleased with the progress we have made on many fronts in the fourth quarter and look forward to continuing that progress in 2015. As we discussed in this morning's press release, our consolidated adjusted EBITDAR increased by 8.5% over the prior-year quarter to $44 million. Our same-store skilled occupancy grew by 137 basis points over the prior-year quarter to 82.3%, as we continued our focus on our high acuity business strategy. In addition, our same-store skilled mix days increased by 179 basis points over the prior-year quarter to 29.3% over the prior-year quarter and we still have a significant amount of room for organic growth in both occupancy and skilled mix in our same-store operations. While our more mature operations improved, we were also glad to see transitioning skilled occupancy increase by a 121 basis points over the prior-year quarter to 71.8%, showing the continued progress on some of our more recent transitions. In addition, our transitioning skilled mix days increased by 118 basis points over the prior-year quarter to 19.8% over the prior year's quarter which when compared to the same-store skilled mix shows how much room we have for organic growth. Beginning in the fourth quarter of 2014, we realigned our operating segments to include a transitional, skilled and assisted-living services segment, a home health and hospice segment and an all other segment. We are anxious to share more detail on the performance of these operations and believe that this increased visibility will demonstrate the expanding influence these service offerings are having on our entire organization. Cornerstone Healthcare Inc., our home health and hospice subsidiary grew its adjusted EBITDA by 97.8% over the prior year to $10.2 million. But even more important than the financial contribution, our home health, hospice and our other operations continue to strengthen our skilled nursing and assisted-living operations in many ways that don't show up in the financial statements including helping us to seamlessly transition many of our residents into their homes and improving our organization's reputation of quality in the healthcare community. Suzanne will discuss the numbers in more detail in a moment, but first I would like to have Chad briefly discuss our growth last year and going forward. Chad?

Thank you, Christopher. During the quarter and since the company announced the acquisition of 13 skilled nursing operations, four assisted living operations, two independent living operations, two home health agencies, two hospice agencies, one private home care business and two urgent care businesses. In December, we acquired eight skilled nursing operations, one assisted living operation and a home health agency and private home care business from Shea Family Care, the largest provider of a complete continuum of post-acute healthcare services in the San Diego market and one of our largest acquisitions to-date, Guardian Angel Hospice, a Medicare and Medi-Cal certified hospice agency also located in San Diego, as a complement to our new and existing operations there and Alarys Home Health, a Medicare and Medicaid-certified home health agency located in Scottsdale, Arizona. In January, we acquired Riverwalk Post-acute and Rehabilitation, a 60-bed skilled nursing operation; Rock Canyon Respiratory and Rehabilitation center, an 81-bed skilled nursing operation with a subacute unit and the Villas at Rock Canyon, a 17-bed independent living and assisted-living operation, all located on the same post-acute care campus in Pueblo, Colorado. We also acquired the Mildred and Shirley L Garrison Geriatric Education and Care Center, a 103 bed skilled nursing operation located in Lubbock, Texas which we acquired as part of a bankruptcy process of a well-known nonprofit operator. We also acquired the Hospice of the South Plains, a hospice agency located in Lubbock, Texas, serving patients throughout the South Plains area of Northwest Texas which we expect to be a great complement to our new operations in that market. And Integrity Urgent Care, consisting of two urgent care clinics and our first acquisition of an urgent care clinic in the state of Colorado where we expect to follow the similar growth model that we've taken in the Seattle, Washington, market. And just a few days ago, we acquired a few more facilities in the bankruptcy process both from well-known nonprofit providers including Mesa Springs Healthcare, a 44-acre post-acute care campus located in Abilene, Texas and comprised of a 75-bed skilled nursing operation and 60 independent living homes. And Skyline Nursing and Rehabilitation, a 100-bed skilled nursing operation and Skyline Assisted and Independent Living, an independent living, assisted living and seniors apartment operation with 209 units both of which are located in Omaha, Nebraska. These acquisitions brought Ensign's growing portfolio to 143 facilities, 18 of which are owned, 11 hospice agencies, 13 home health agencies, two home care businesses and 16 urgent care clinics spread over 12 states. We continue to see a very healthy pipeline for growth across all states in which we operate and are considering additional opportunities in a few new markets as well. Due to the unique combination of our reputation as one of the best post-acute operators in the industry and our healthy balance sheet, we are often the preferred buyer for smaller owner-operators, regional operators with small to midsize portfolios, real estate investment trusts and larger national operations that are looking to divest of a handful of facilities that are geographical or operational outliers. As a result, we continue to have the ability to be very selective in our evaluation of the many deal opportunities that are presented to us. In the near term, we’re making progress on several opportunities to acquire both real estate and operations that we expect to complete early in the second quarter after certain closing conditions have been satisfied. We are also actively negotiating several other transactions to acquire real estate or to lease, both well performing and struggling skilled nursing, assisted living and other healthcare-related businesses within our existing footprint, that we expect to complete this spring and early summer. As Christopher mentioned, 2014 was one of the largest acquisition years in our history. Our ability to absorb these new operations and to continue our growth is a direct result of a unique, locally centered business model. As we have mentioned many times before, we do not have a traditional acquisitions department that is tasked with executing annual growth goals determined by a corporate office, instead our operational leaders are the acquisition team. They not only are heavily involved in sourcing acquisition opportunities, but they are also the key in using their knowledge of the local market to carefully sift through the many opportunities we see and ultimately selecting the most attractive of those opportunities. Lastly and most importantly, the local leaders and their clusters are responsible for transitioning each of these new operations into our existing operations. As a result, company by company and market by market, dozens and dozens of leaders allow us to continue to expand without overburdening any particular corner of the organization. And with that, I'll hand it back to Christopher.

Thanks, Chad. Before Suzanne runs through the numbers, I would like to offer a few examples of how our frontline leaders and their teams continue to produce record results in a dynamic operating environment. As I have often noted, even more than a strong balance sheet and solid operating history, it's our talented local leaders who make such results possible quarter after quarter. By pushing to constantly provide outstanding clinical outcomes and mind the bottom line and all of the other moving parts of these complex operations at the same time, these leaders and their teams strive daily to make their operations the community of choice in the markets they serve. As one example, Willow Bend Nursing and Rehab, a skilled nursing facility located in Mesquite, Texas has been completely transformed by CEO Kevin Niccum and COO [inaudible] and a world-class staff of seasoned and dedicated department heads, physicians and care staff into one of the premier facilities in the Dallas-Fort Worth healthcare market. When we purchased this facility, it was broken culturally, financially and physically. After a major construction project which involved tearing down and rebuilding a substantial part of the structure and transforming it into a state-of-the-art healthcare facility, the team there earned the respect of the healthcare community by matching the clinical performance with the quality of the physical plant. Their efforts have resulted in more residents returning to home in a shorter amount of time while also lowering the readmission rates. As a result, Willow Bend has become a preferred partner with several of the key managed-care plans in the Dallas-Fort Worth market, as evidenced by their HMO days which were up 32.8% over last year. Additionally, total revenues were up an impressive 11.5%, skilled revenues were up 8.6% and occupancy was up 816 basis points to 88%. Willow Bend has truly become an innovator in post-acute rehab services. In addition to the recognition that they received from their local community, they were also recently awarded our highest award, the Ensign Flag, for recognition of excellence in almost every aspect of operations reserved for only a select few operations. Similarly, we also saw inspiring performance from the team at the CMS five-star rated Arbor Glen Care Center in Glendora, California. Arbor Glen's leadership team led by Stephen Powell and Vangie Carrozza has worked closely with local hospitals and physicians to become a strategic solution for post-acute therapy and nursing services for the Medicare and managed care population in the market they serve. In a coordinated effort with their physician team, therapists, nurses, dietitians, aides and many others, they work collaboratively to provide a world-class experience and outcome for every single patient. This outcomes based approach has afforded them the great trust of the medical community and it has shown in their financial results. Accordingly, skilled mix revenue has improved an incredible 24.8% to 67.6% with total occupancy growing by 674 basis points to 92.12%. In addition, total revenues grew by 32.4% and EBITDAR nearly doubled, all compared to last year and all of this in one of our most mature operations proving that we have tremendous organic growth opportunities even in our same-store bucket. In addition, we also saw breakthrough performance from the team at Puget Sound Home Health in Tacoma, Washington, a key contributor to Cornerstone's strong 2014 performance. Led by administrator Devon Christensen and Director of Clinical Services Trish Siegal, the team at Puget Sound has grown top-line revenue by 16%, improved EBITDAR performance by 47% and EBITDA performance by 51% over the prior-year quarter. Puget Sound's team of caregivers have become a provider of choice for many referral sources and community partners including being selected as one of a small number of home health providers for the Franciscan Health System ACO in Pierce County, Washington. The Puget Sound team has steadily improved clinical outcomes including reducing re-hospitalization rates by focusing on response times and referral sources which has led to significant improvements in financial results. There are many more such examples across the organization and we appreciate you allowing us to share them, since to us there is no more important information that we share on these calls. Ensign is literally full of extraordinary leaders with stories like these. These few examples show what makes us different and they illustrate that the opportunities for organic growth in all parts of the company's expanding portfolio remain more compelling than ever. With that, I'll turn the time over to Suzanne to provide more detail on the company specific financial performance and our updated guidance and then we will open up for questions. Suzanne?

Thank you, Christopher and good morning, everyone. Detailed financials for the fourth quarter and the year are contained in our press release filed this morning. Highlights for the year ended December 31 [Technical Difficulty] record annual revenues of $1.3 billion on a GAAP basis or 13.6% increase. Same-store skilled revenues increased $24.7 million or 7.1% for the year. Same-store skilled days increased 141 basis points to 29.3 for the year. Same-store occupancy increased 152 basis points to 81.9% for the year which resulted in an overall diluted earnings per share on a non-GAAP basis of $2.18 for the year. We are pleased that we hit the midpoint of our annual 2014 earnings guidance with adjusted earnings per diluted share of $2.18 for the year and our annual 2014 revenue guidance with adjusted 2014 revenue of $1.013 billion. At the time of the spin, we released our 2015 revenue guidance of $1.2 billion to $1.25 billion with net income of $58.1 million to $60.2 million and $2.44 to $2.53 per diluted share which we are reaffirming at this time. The 2015 guidance is based on diluted weighted average common shares outstanding of approximately $23.8 million, the exclusion of acquisition-related costs and amortization costs related to intangible assets acquired, the exclusion of start-up losses at newly created operations, the inclusion of anticipated Medicare and Medicaid reimbursement rate increases net of provider taxes, the tax rate of approximately 38.5%, exclusion of stock-based compensation and including acquisitions anticipated to be closed in the first quarter of 2015. In giving you these numbers, I would like to remind you that our business is not symmetrical from quarter-to-quarter. This is largely attributable to variations in reimbursement systems, delays and changes in state budgets; seasonality in occupancy and skilled mix, the influence of our general economy on census and staffing, the short-term impact of our acquisition activity, variations in our insurance accruals related to our self-insurance program and other factors. We would be happy to answer any specific questions you might have later in the call. And I will now turn it back over to Christopher. Christopher?

Thanks, Suzanne and thanks to all of you that joined us today. We hope this discussion is helpful. As always, I want to conclude by thanking our outstanding partners in each of our communities at the service center and across the entire organization for their continued efforts to make Ensign a better organization that’s constantly improving. We would also like to thank our shareholders again for their support and for your confidence. LaTanya, can you instruct the audience on the Q&A?

[Operator Instructions]. Our first question comes from Ryan Halsted, Wells Fargo. Your line is open.

First question on the pace of your acquisitions. I'm just curious, you mentioned that it's the local operators that are really in charge of sourcing the deals as well as operating and transitioning them. So I'm just curious -- at what point -- or is there a point that you might need to refocus your operators on transitioning what you've closed and what you've required to-date?

Yes, that's a great question. It's something that we ask ourselves all the time and work with our folks a lot. Remember that because our organization is broken down into several portfolio companies, we can make acquisitions in one company and focus on the transition of those facilities for a little while, while also making acquisitions in other parts of the organization and another portfolio company. We've gotten to that size I think and to that place where we can do both at the same time, because we are broken it down into several different organizations. One doesn't necessarily strain another. But listen, you are also -- in your question, you're right. It is something that we are constantly looking at. We don't just -- I should tell you that we don't -- for every acquisition we take, we probably pass on another 20 to 25. So it isn't that we're just taking whatever comes our way that makes economic sense. If it doesn't make sense for our organization, there are parts of our organization that aren't healthy enough to take on a lot of acquisitions and we are passing on several acquisitions in those parts of the company. But I think we’re at that stage where we can consistently -- as the pricing makes sense and as we have the talent and as the geography makes sense, I think we can constantly have acquisitions again assuming those things are what they ought to be. We're not going to take them just take them.

Okay. How about where are you in terms of financing some of the growth opportunity that's out there? I mean have about a third remaining on your revolving line of credit, you still have the shelf out there as well as obviously you've been able to buy real estate. I'm just curious how you are still weighing those options.

We are obviously constantly evaluating all of the different sources that we have and the different avenues that we have to consider. We feel good about our position right now. We feel good about the debt load that we have in light of the opportunities that are before us, but we -- yes we are constantly evaluating this. Is that helpful at all?

Sure. And then so you acquired a CCRC as well as other campuses. I'm just curious as far as your pipeline, how much of a component will those types of CCRCs be going forward?

We have always liked those campuses. The pricing has been a little challenging for us in the recent past and we have seen some pretty good deals. Things that we feel like are underappreciated for what they can be. So this isn't the end of that and we see some others that we're looking at currently, but it's another lever that you will see us continue to pull when it makes economic sense.

Okay, one last one. Just to clarify on the guidance, the deals that you have announced to-date, are they all expected to close in the first quarter or are some of them expected to close beyond the first quarter?

Yes, so all of the transactions that we've announced have actually closed. We don't have any outstanding that have been announced.

Our next question comes from Chad Vanacore of Stifel. Your line is open.

So staying with the incredibly active acquisition pace you guys have been doing, would you attribute this to you being more aggressive or just general consolidation in the industry?

I think it's more -- these guys can correct me if I'm wrong. This is Christopher again. I think it's more the latter than the former. I think that there are a lot of things happening in the industry that I haven't seen for several years and I don't think we are being any more aggressive than we have been in the past.

I think that's kind of consistent with what you've seen us do historically. You see spikes in acquisitions when the marketplace is right for us and we take advantage of that.

All right. Then also on your statements, you mentioned looking at new markets. What kinds of new markets are you attracted to and what do you see in those markets that would make you drawn to starting up there?

I think as you look at the map, of course there is a lot of states that we are not currently in and I think the number one thing that we're going to look at is our leadership and to see who is available and interested in taking Ensign into a new market. So that's always kind of the first thing that we look at and so as we are evaluating many opportunities across our desk, we have identified specific states where we have leaders that would like to -- maybe they grew up there and want to move home, but that's kind of how we prioritize the opportunities as they come in in markets that we're not in. I can say that strategically, as we look at new states, one thing that's really important to us is that when we go into a new state we would probably look at a facility that is not as distressed as maybe some stuff that we would look at in our existing operations. We've found from experience that introducing ourselves to a new market the right way is really important. And so as we look into those new opportunities, we probably would characterize those as more of a strategic opportunity than the distressed type of assets that we would buy.

And then one more for me, so urgent care, this is a new business. What's the opportunity there? Help us think about that.

The opportunity is tremendous. As you know, some of the pricing is not necessarily to our liking which is why we've done most of our growth through creating our own urgent care operations out of empty space. But I think first and foremost, it's a great opportunity for us to save on our self-funded health care plan for our existing employees. We also think it gives us an advantage in some of these ACO models. It gives us an additional line of business or an additional avenue that hospitals don't necessarily want to be in where we can help them with folks that ought not to be in emergency rooms and save some of that overload. But we think in and of itself, it's a business that makes sense when you buy right, as long as you don't have to pay too much to get into the business. And we like what's happened in Washington. Obviously, when we get to a certain size, I'm sure we will report those results separately, but we like what's happened in Washington in our operations. We really like the people that we just joined forces with in Colorado and are very excited about the business in and of itself. I don't want to act like it's just an ancillary business to skilled nursing even though all of those benefits do come out of it. We are excited. Again, I want to emphasize, when you buy right it's a great business in and of itself.

Your next question comes from Dana Hambly of Stephens. Your line is open.

Christopher, I thought you said, maybe I misheard you, that you're seeing some things that you've never seen before. You haven't seen in the industry in years?

Yes, I think I said in years. I don't know if it's consolidation, but more opportunities even in some mildly performing assets than we've seen in our recent past. We probably saw this 10 - 12 years ago, but it does seem like there are more opportunities. I don't know how long the window will be open, but it does -- I'm surprised how many appropriately priced acquisition opportunities there are out there even though we still see some stuff, Dana, that's not appropriately priced all over the place.

Okay, all right. In this environment, do you think this could be one of the biggest acquisition years you guys have ever had?

You know, listen based on -- we never make predictions about our and nor do we make any promises and I know you are not asking for that, Dana, but listen based on what we see so far, there is no reason that that shouldn't happen. The pipeline is just as full this year, if not more full this year than it was last year. Certainly at this time of the year it's more full than it was at this time last year. So I guess that's sort of the answer to your question.

Yes. And Suzanne, what is the capacity if you needed to expand that line? Do you think that would be fairly easy in this environment?

Yes, there is a capacity to expand the line by an additional -- we have an accordion feature on the line of an additional $75 million that we can utilize, but as always, we are always at looking all the different forces out there.

Okay, last one for me. Christopher, the company is becoming sizable. You do have a unique culture and I just wonder how much bigger -- can you maintain the culture and still get a lot bigger, I guess is my main question.

Dana, that's a great question and something we focus on all the time. I think that we want to not only act small, but be small which may mean that we continue to find ways to operate in much smaller sub-companies or portfolio companies without losing the desire that all of us have to work together with Ensign people. But listen, it's something that keeps us up at night all the time and something that we are addressing every day, but I have to tell you if we become purely what we're supposed to become which we are not yet, but when we become purely what we're supposed to become, size really shouldn't detract us from being what we say we are which is a field-driven organization and not a corporate-driven organization. So if the field is driving the service center versus the other way around, size really shouldn't matter. We just have to make sure we are doing what we say we’re going to do in our operational structuring and in our behaviors, I guess.

I'm showing no further questions at this time. I would like to turn the conference back over to management.

Okay, well, thank you everyone, for your time. We know your time is valuable. We appreciate your attention. And LaTanya thank you for coordinating this call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.