National HealthCare Corporation (NHC) Earnings Call Transcript & Summary

Thank you.

Thank you, Ms. McCarthy. It is now approximately 4:10 p.m. Central Daylight Time on Thursday, May 7, 2020, and the polls are now open to vote on the 4 proposals presented before this meeting. Any stockholder wishing to vote or change their vote may do so now by clicking on the voting button found on the virtual stockholders meeting website. We will now allow a time for voting. If you have already completed your proxy card or voted via proxyvote.com, your shares will be voted in the manner you specified, and unless you wish to change your vote, it is not necessary for you to revote your shares at this meeting or to take any further action. While we allow time for the voting to complete, I'd like to remind you that some of the statements made at this meeting could be considered forward-looking. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the information contained in our filings with the Securities and Exchange Commission including our annual report, our Form 10-K for fiscal year 2019, which are available online through the company's website and through the SEC's website. We'll keep the polls open for another 10 seconds. [Voting]

Now that everyone has had an opportunity to vote, I declare the polls closed. All right. In light of the preliminary vote totals voted by the proxy holder, I can report that the preliminary results show that all 4 proposals have been approved by the requisite vote of the company's stockholders. A full tally of these votes with the final official results will be published in an appropriate filing with the Securities and Exchange Commission. I will now adjourn the business portion of the meeting and ask our CEO, Steve Flatt, to speak on the COVID-19 pandemic.

Thank you, Josh. Normally, at this shareholder meeting, we would focus almost exclusively in this presentation section on the finances and accomplishments of the preceding year. But obviously, this is not a normal year. As Chairman Robert -- Chairman Adams has already stated, we are living in unprecedented times, and we thought it would be in the best interest of the shareholders to give you a COVID-19 update from a very high level about how this pandemic is affecting our company and how we are responding to it. So with that in mind, I would like to give you, first of all, an update from the clinical and operational perspective. NHC has carefully and extensively followed CDC, CMS and state and local health departments' guidance for infection control since the very beginning of this outbreak. All confirmed cases of COVID-19 are reported to the local and state departments of health, and effective, this says May 8, we've learned last night that, that date has been extended 1 week, so May 15, to the Center for Disease Control. And again, we've done that since the very beginning of the outbreak. If a patient or a partner, the way we refer to our employees, in a skilled nursing center or assisted living community test positive for COVID-19, notification that a case of the coronavirus in the facility has been confirmed is given to the partners, patients or residents and to the families associated with that center as soon as it's reasonably possible. Any active positive COVID-19 patients and each of our centers are cared for in identified transitional areas in the centers by partners who are equipped with proper personal protective equipment, commonly known as PPE, and those partners are working exclusively in that area to help prevent the spread of the virus. Each center's website has a daily update about positive COVID patients associated with that center. The center-specific information includes, among other bits of data, the number of historical cases at that center, the number of active cases of patients or partners who are in the center, the number who have been transferred to the hospital, the number of patients who have recovered and the number of COVID-related deaths; again, updated daily center-by-center on center-specific information. NHC is taking aggressive action to support and protect our frontline partners. That action includes personal protective equipment, though, as you've seen in the media, that has been very scarce and hard to come by; incentive compensation to help our partners through this difficult time; 1-month insurance premium holiday; and for our partners and their families, free telehealth services. From a financial perspective, here are some of the ramifications and impacts of the COVID virus. With restrictions on elective surgeries and hospitals, our census has declined as the stream of new patients has decreased significantly. The expenses have increased. And now those expenses have primarily dealt on this, the incentive compensation for our frontline partners, the personal protective equipment, nursing and cleaning supplies, and food and dietary costs have gone up since communal dining has been restricted, and each patient is served individually. NHC has received federal stimulus funds, all of these are virtually all of them in the second quarter. In April 2020, we received $19.468 million from the CARES Act. We also were notified that from May through December, there will be the elimination of the 2% sequestration that has been imposed on our Medicare per diems for the past several years. The benefit to the company for 2020 will be approximately $2.7 million. In addition to the federal stimulus funds, there have been some temporary increases in various state Medicaid per diems. And we project that total for 2020 to be approximately $7 million. All of the things that I've listed for stimulus funds and the Medicaid per diem increases should have a positive offset to some of the expenses and the declining revenue for earnings. We also have had some cash flow infusion. Now this will not affect earnings but simply from a cash flow perspective, the CARES Act allowed for a temporary payroll tax deferral on the part of the employer from March 27 through December 31 of this year. And those funds will be paid back after that over a 2-year period of time. And then CMS announced the COVID-19 accelerated payment program, which allowed NHC to receive roughly 3 months of advanced Medicare payments, an amount totaling some $50 million that we could have interest-free for a period of 120 days. And at that point, there would be a 90-day period to repay those advanced Medicare payments. So that's just a high-level overview from the clinical, operational and financial perspectives on COVID with NHC to date. I'm now going to turn the program over to Mike Ussery, our President and Chief Operating Officer and Mike will cover our 2019 year.

Thank you, Steve. Appreciate the introduction. And as always, appreciate the opportunity to share a little bit of news with our shareholders, talk just a little bit about where NHC is today in terms of our operational footprint and our service component. First of all, our service component, our range of services, we continue to be positioned and feel it's important to be positioned as a senior care company. Our services include where we began our skilled nursing operations. Additionally, we provide assisted living and independent living on top of those services, accounting and financial services, rehabilitation, home care, hospice, pharmacy and management services for third parties. It used to be an important part of our structure and our philosophy to be diversified and to provide those services, those variety of services. Additionally, we believe that being geographically diverse is important to us as various states, particularly their economies, have various opportunities to support their Medicaid program. So our geographic diversity is important. This depicts our locations, 75 health care centers in United States, 25 assisted living facilities in 6 states, 5 independent living centers in 2 states, 1 geriatric psych hospital in the state of Missouri, 35 home care agencies in 3 states, 27 hospice programs in 5 states. So a total of 168 operating locations in 10 states. In addition, we do provide accounting and financial services for 20 different clients. So again, that is very similar to where we were positioned last year at this time for the shareholder meeting. An important, again, part of our philosophy all along has been our philosophy given to us by our founder, Dr. Carl Adams, and this slide, as we share, routinely expresses that, I think, better than I can. To quote Dr. Adams, "You have -- keep a balance between quality and earnings. Either one without the other leads to failure. You can't spend money you don't have. And if you don't put money back to improve the services then the business will fail." Certainly, there is no more important audience to being able to continue that mission than our shareholders. And we're so appreciative of the trust that you show in us through your investments in the NHC. Our mission statement reflects much of that balance that Dr. Adams refers to. NHC is committed to being the senior care leader in customer and investor satisfaction. Everything we do, I think we try to reflect the importance of that balance. And that balance begins and ends with -- began and ended that way with Dr. Adams in providing quality Services. And without getting into tremendous detail, I want to take just a couple of seconds and show some of the quality ratings and something that reflects the quality work that happens in all of our locations, whether it be home care, assisted living, hospice or in our skilled nursing centers. Specifically in the skilled nursing centers, one of the things that we look at as a metric for how are we doing compared to the industry is to look at CMS 5-star ratings. And this slide depicts where we compare to the American Health Care Association, which is the trade organization for skilled nursing. In that comparison, you can see that 44% of the American Health Care Association centers were 4- or 5-star rated. We have 71% of ours as of the end of 2019. Similarly, the average 5-star rating for AHCA was 3.13 versus our 3.95. We think that's an excellent representation of the work that our people do. Additionally, AHCA tracks a number of other metrics, and I won't spend a lot of time on these, but they compare the companies that have 4,000 or more beds in a number of categories. First of all, 5-star, you can see from this ranking, I hope you can see, that we are -- this says third. I would contend that we're tied for second based on that chart. But anyway, we rank near the top. Rank near the top in the readmission percentage at 4. Rank near the top, again, very close to second -- second or third, in discharges to the community. But when AHCA, the American Health Care Association, takes all of its ratings and combines them, we rank head and shoulders above our competition, an average of 3.6 on a scale of 5, the next nearest at 3. So we're nearly 20% higher than the next highest ranked company. Something we're very proud of, and it reflects very well on the quality of our people. Second leg of the stool, if you will, is the financial performance or the other side of that balance. We're very proud of our financial results. You can see our net revenues in 2019 increased 2.4%. This has increased slightly less than that in dollars, up about 2.5%. Our income before income taxes increased 17.5%. I won't go through every one of these numbers, but our earnings per share, basic earnings per share increased 15.5%. Other key performance indicators. Our accounts receivable was that we were able to drop that from 35 days to 33 days. Cash provided by operating activities, for the first time we exceeded $100 million. Very proud of that. And the dividend of $2.06 declared last year. And then finally, our debt. Our debt is at a level unequaled by any certainly public company, $10 million in debt as of the end of 2019, equity of $778 million. Debt-to-equity ratio, and the lower, the better there, of 1.3%, which is, again, we are very proud of and believe it's very difficult to find others as well. I mentioned a moment ago, Steve spent a decent amount of time talking about the COVID environment. Let me take just a minute. And again, our shareholders are key to us. Our financial performance is critical to be able to provide the quality of service we want. But we don't have any of that without the types of and the quality of people that we have. And Steve mentioned earlier, partners, that's what we refer, how we refer to our employees. And our employees at this time, our partners are going through extraordinary situations. And we hear lots about the heroes in health care out there. Make no mistake, the heroes in our centers, in our home cares, in our assisted livings are unrivaled than any other health care setting. They truly provide a loving environment for our patients and residents every day. And just to give you a little sample of some of the things they're involved in. This is just a neat little picture of one of our patients in one of our centers, and don't know if you can tell what she's holding, but she's holding an iPad where she's doing a FaceTime Easter visit with her family. And we have partners out there every day creating the opportunity for patients to be able to communicate with their families because, as you know, visitation is prohibited in our centers right now. So families can't visit their loved ones. There's another good example of families visiting as close to -- it's better than virtual, but it's not in-person. The other example of some patients being taken out, not only for sunlight, not only for some fresh air, but to participate in an Easter Parade that just happened in Pulaski, Tennessee. With Mother's Day fast approaching, we just all want to be sensitive to and supportive of providing, and we have partners doing things every day to be able to provide connection between their family members and their loved ones. Just 2 last things. This partner is Sherry Stoneking and Sherry is a partner at AdamsPlace. And I'm going to get 2 examples of partners that AdamsPlace in Murfreesboro, but to give you an idea, these types of things are going on every day. Sherry became aware that she had a patient who's unable to speak and that patient regularly had visitors that came in and said the rosary with her. Well, obviously, visitors are not allowed now. And now Sherry took it upon herself to come in to say the rosary with this particular patient, who, again, was unable to speak. Well, that might not be as extraordinary, but Sherry is not catholic. Sherry had to get online to learn how to say the rosary, came and brought it to this patient who was in tears once she saw Sherry come into her room. And then one other partner also, again, from AdamsPlace, Sherry Coonley. Sherry became aware that one of her patients had cabin fever, as many of them do right now. And in a one-on-one visit, her son often visited and her son had been given by her a thing of -- a list of things to bring to her that she wanted. Well, Michelle called the son and the son had not been able to pick them up yet. And she knew that it was going to cause a delay in what this lady wanted. And they were simple items, and so she told the son that she could find these items, they are close. So 6 wooden pencils, sharpened by the way; Ziploc bags and the date of her niece's birthday. And the son was going to have to get those things, and we were going to have to hold them for a while to make sure they were virus-free. Michelle took it upon herself to get those things and take them to the patient. And the patient, again, was cheerful when she found out. Of course, Michelle told her that the son had provided those. And she was in tears about that, and is quoted to say, "And my son is so good to me." And Michelle was able to give that patient that wonderful experience. So we've got people doing magical things out there. And I just felt like it was important for our shareholders to hear some of those stories. It's now my pleasure to turn the program back over to Steve.

Thank you, Mike. Appreciate that excellent report and particularly appreciate that spotlight on our wonderful partners. They really are. They are what we did. And we appreciate each and every one of them, particularly through this trying time. I'll close out this part of the presentation with just some significant events that occurred during 2019 that I think would be of interest to all shareholders. Probably the biggest single thing that happened in '19 that added to our profitability was not the opening of a new building, but on January 1, 2019, we launched NHC Advantage in Tennessee. Some of you may remember that NHC Advantage is an insurance company owned by NHC and our partner, AllyAlign. It's called an I-SNP, an institutional special needs plan, which is basically a Medicare Part C, a Medicare Advantage program available to long-term care residents in our facilities. We launched NHC Advantage in 2017 in Missouri, and it had an enrollment of about 140. But working through CMS and our state department of insurance, we expanded it to Tennessee in 2019 and enrollment quickly grew to over 1,000. It has been a very profitable venture, and on top of that, we believe it has provided even better care for the planned participants as they're regularly seen by the planned nurse practitioners. So all in all, a tremendous venture moving into Tennessee. On January 8 of last year, we opened Cavette Hill Memory Care, 60-unit memory care community that's a part of the campus of NHC Place Farragut in Farragut, Tennessee. And here are just some pictures of that lovely facility. Exterior shots, some interior shots. It has filled up nicely over the last 15 months and a wonderful addition to that campus. On April 30 of last year, we purchased the building that houses our network pharmacy in Franklin, Tennessee. It was immediately accretive to cash flow and earnings. And over the next 2 years, we're going to be able to move 3 or 4 different service lines related to NHC into that building. On June 1 of last year, we acquired full ownership interest in the Villages of St. Peters Memory Care in St. Peters, Missouri. Prior to that time, we were a 25% owner, and we were the manager of this facility that opened in 2016. So we were grateful for the opportunity to assume full ownership the middle of last year. On July 15 of last year, we began construction on 20 units of assisted living to NHC Place Sumner, where we had 60 units already in place, and those apartments should be opening soon. I've already referred to this, but on December 4 of last year, we lowered our long-term debt in 2019 by $45 million. We started the beginning of the year with $55 million in long-term debt. And at the end of the year, that balance was $10 million. And then we're always proud of the fact that NHC is a major national contributor to The Walk to End Alzheimer's. In 2019, we, as a company, raised over $205,000 and we were a national silver team. So those were a few of our 2019 significant events. I'll mention a couple of first quarter 2020. At the end of February, February 27, we acquired full interest in NHC HealthCare Fort Sanders in Knoxville, Tennessee. For many years, we had been a 25% owner in that partnership and also the manager. And now we own the entire facility and continue to operate it. And a few days later, on March 2, we began construction of the 30-bed addition to NHC HealthCare Kingsport in Kingsport, Tennessee. That will take that center from 60 beds to 90 beds and should be complete in about a year. It's my pleasure now to turn the program back over to Chairman Adams.

Okay. Thank you, Steve. Yes. The question portal is still open. We'll leave it open for just a second longer to see if any questions come in. I certainly, Steve, appreciate you and Mike and Josh, all that you do for the company, as I'm sure all the shareholders do. Okay. I'm going to close the portal for questions. No questions have been submitted. At this time, I think the Board and management would like to express our appreciation to each of the shareholders for your support and for our efforts to achieve highest standards of quality for our patients and financial results for our shareholders. As Mike mentioned, all of our employees, our partners, as we call them, please keep them in your thoughts and prayers. With no other business, I declare the NHC 2020 Shareholder Meeting adjourned. Thank you.

This now concludes the meeting. Thank you for joining, and have a pleasant day.