Q2 2004 Apria Healthcare Group Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, and welcome to the Apria Healthcare second quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. [Caller Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Larry Higby, President and Chief Executive Officer of Apria; and Mr. Amin Khalifa, Chief Financial Officer. Gentlemen, you may begin.

LARRY HIGBY, PRESIDENT AND CEO, APRIA HEALTHCARE GROUP: Good morning, everyone and thanks once again for joining us this morning. I'd also like to add our Chief Operating Officer, Larry Mastrovich, is also with us this morning. I'd like to start out by saying that this conference call may include statements regarding anticipated future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Results may differ materially as a result of the risk factors included in the company's filings with the Securities and Exchange Commission and other factors over which the company has no control. Having got that out of the way, I'd like to make a few comments before we get to your questions. First of all Apria's been in the news a couple of times this week.

And before discussing our solid second quarter results, I'd like to briefly reiterate our press releases concerning the New York Post article yesterday and the CMS report from earlier this week. As I think most of you know, our response to the New York Post article is that, at this time, there is no transaction pending and Apria is not engaged in any effort to, or negotiations with any party concerning its sale of the company. I think that statement in the press release was clear and, frankly, that's all we intend to say this morning on that subject. We also commented earlier this week on the proposed 2005 reimbursement levels that were included in the Center for Medicare and Medicaid Services publication of the notice of proposed rule making for the 2005 Medicare physician fee schedule. Although the proposed reimbursement levels for respiratory drugs were inadequate to cover Apria's patient and service costs, we are encouraged by the discussion of a potential service fee in that document which would cover those costs. We believe that the Muse and the associated study commissioned by American Association of Home Care and the GAO study, that are both ongoing, will shed light on the cost of these services and will quantify an appropriate service fee level. Frankly, without that fee, we would regrettably have to discontinue providing respiratory medications and all other ancillary services that go with them, in the future to our patients.

Now, let's get a discussion going here of what was a pretty darn good quarter. As you know, revenues grew by 4.7% over the prior--second quarter. Excluding effects of the Medicare cuts and the decline in the Gentiva contract revenues, growth was 10% for the quarter. Gross profit was 72.5% in the second quarter, down some, about 0.3 of that was just a result of the Medicare pricing. Our SD&A costs and expenses continue to improve over 2003 levels. They were 54.1% of revenues in the second quarter, versus 54.6 last year. Our productivity initiatives and controls placed on labor expenses continue to drive these improvements. Our UPS initiative is on track, and will be 90% installed by late September. Our expectation is that we'll realize somewhere in the area of a 10% reduction in related labor and complementary savings in vehicle and mileage costs.

We were very busy this quarter on the acquisition front. We purchased 14 businesses for approximately $67 million. Adding this to the first quarter acquisitions, we clearly are in line to meet our target of $130 million for the year. The market has been in sync with our acquisition strategy, and we've been able to buy these businesses at, frankly, optimal pricing. Also, we've become very effective in our field operations in folding these businesses in quickly to our overall existing operations for much improved capacity. We are seeing some further progress in the Keytam case. We continue to exchange information and physician papers with the government and are hopeful that we will reach an agreement on what would be an appropriate settlement. As for timing of a potential settlement, I was wrong once in trying to predict that date, so I've learned my lesson and I think we'll just stay away from that for now. With that let me turn it over to Amin to provide a few additional details.

AMIN KHALIFA, CFO, APRIA HEALTHCARE GROUP: Thanks, Larry and good morning, ladies and gentlemen. We're very pleased with our second quarter results. Revenue growth was very solid at 10% when the Medicare cut and Gentiva reductions are factored out. Acquisitions accounted for 6% of the second quarter growth. Organic growth of between 4 and 5%, was also led by higher respiratory growth. Growth by product line excluding the Medicare and Gentiva effects were as follows: Respiratory, 13.3%; HME, up 5.8%; and infusion, up a very modest 0.2%. The main factors contributing to the healthy growth in the respiratory line were both acquisitions and continued oxygen penetration. The gross margin of 72.5% increased 0.7 points from the first quarter. The combination of a higher respiratory product mix, and lower cost of supplies has helped steady margins. The provision for doubtful accounts was 3.6% in the second quarter, down from 3.8% in the same period last year.

DSO was 53 versus 52 at the end of June, 2003. The increase can be attributed to the recent acquisition activity and the delays in billing that we experience as we convert patients onto our systems and apply for new Medicare provider numbers. The pre-tax margin was 13%, down 0.8 points from last year, the main cause of that decline -- I mean the main cause was the gross margin decline. The SD&A improvements was largely offset by the increase in interest expense which was due to the convertible notes that we issued last summer. Net income for the quarter was 29.1 …