Amedisys Inc (AMED) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Amedisys second-quarter 2004 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to our host, Mr. Brian Ritchie, from Euro RSCG Life NRP. Sir, the floor is yours.

Good morning, and thank you for joining us today for our Amedisys investor conference call to discuss recent corporate developments relative to this morning's second-quarter 2004 earnings announcement. By now, you should have received the press release. If for some reason you have not received the press release or are unable to log onto the webcast, please call me, Brian Ritchie, of Euro RSCG Life NRP at 212-845-4269, and I will be happy to assist you.

Speaking today, we have the Company's President and Chief Executive Officer, Bill Borne, the Company's Chief Financial Officer, Greg Browne, and the Company's Chief Operating Officer, Larry Graham. Management will give you an overview of the quarter highlights, and then open the call for questions and answers.

Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the Company, including, without limitation, statements regarding operating results in calendar 2004, earnings per share in 2004, growth opportunities and other statements that refer to Amedisys' plans, prospects, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to Amedisys today and the Company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included in Amedisys' most recent Form 10-Q or other public filings filed with the Securities and Exchange Commission. At this time, I will turn the conference call over to Bill Borne. Please go ahead, Mr. Borne.

Thanks, Brian. Good morning. I want to welcome and thank everyone for your participation in our second-quarter conference call. We appreciate your enthusiasm and continued support for Amedisys. The Company continues to focus on our core strategic initiatives, of which we have outlined in previous calls. Primarily, our efforts are focused on internal growth, supplemented with acquisitions that meet our stated criteria. We have seen a substantial increase in our internal growth rate of admissions to 34 percent in the second quarter as compared to 22 percent in the first quarter and 8 percent in the second quarter of 2003. There are several factors behind this strong internal growth, including a more effective overall sales force, with an increased emphasis on education of our referral sources and our uncompromised focus on marketing and developing our specialty disease programs. Larry will comment in greater detail on this extraordinary rate of internal growth. But I would like to give my thanks to the hard work of our entire staff that have made this possible.

As mentioned in previous calls, CMS has now initiated the process of requesting disease management proposals for the Medicare population from third parties. It is our expectation to formally respond to this RFP within the next week. We're excited about the possibility to participate in this pilot program, which is expected to develop into a more significant opportunity in the next few years. Our hope is that Amedisys will ultimately be selected as a chronic care improvement organization.

The acquisition of 10 home health agencies and 2 associated hospices from Tenet Healthcare is now complete. We are pleased with the progress made so far in integrating these locations. And most importantly, we are excited about the enthusiasm shown by the employees for this transition.

We also welcome the employees from our most recent acquisition in Vicksburg, Mississippi to the Amedisys family. Although these acquisitions are expected to be accretive in 2004, they have not contributed materially to our second-quarter results.

Our balance sheet continues to improve, which includes over $22.3 million in cash, even after paying for the Tenet and Vicksburg acquisitions. In addition, the GE facility will add to our financial flexibility, allowing the Company to take advantage of future acquisition opportunities.

Our previously communicated guidance indicates that our revenue for 2004 would be 200 to $210 million. We're pleased to revise this number as well as our EPS upward. Greg will expand on our guidance shortly.

Again, as mentioned in previous conference calls, our aggressive internal growth plan, coupled with recent significant acquisitions, as well as our ongoing consideration of additional acquisitions, will require further expansion of our operational and management infrastructure. Please keep in mind that our guidance reflects consideration of increased administrative costs. A significant portion of this added cost is primarily attributable to our enhanced focus on employee retention and education. We've spent significant resources on an aggressive orientation strategy, which includes activities that allows selected senior management and myself to meet each new employee within 6 weeks of higher. While the initial cost of this program is high, we believe the long-term benefits of employee retention and reducing recruiting costs will create measurable leverage in the future. Our turnover rates are falling, while surveys indicate that over 70 percent of our new employees are being recruited by word-of-mouth. We believe this growing enthusiasm and engaging culture has contributed significantly to our dramatic growth and success.

We have also added many resources corporately to enhance our human resources, accounting, clinical and compliance oversight. We believe this added overhead is a imperative to support our rapidly growing organization. The ongoing focus of our stated growth strategy combined with a more stable reimbursement environment for Medicare, well positions Amedisys to be the nation's leading Medicare home nursing provider.

I would like to conclude my remarks by extending my heartfelt thanks to all of our Amedisys staff, whose dedicated efforts help us every day to carry out our mission.

I will now pass this call to Greg so he can provide his financial overview, which will then be followed by Larry with a brief operational update. Following Larry's update, we will then open the call to the Q&A session. Thank you.

Thanks, Bill. I will now discuss financial highlights for the 3 and the 6 months ended June 30th, as with respect to the income statement and the balance sheet, as well as comment on both reimbursement and guidance. I also intend to address the significant sequential improvement in revenue. Our revenues are 56.9 million, representing an increase of 77 percent on 2003, and reflected the strong internal growth mentioned in the press release, as well as the acquisitions of Metro, Houston, Tenet, and to a lesser extent, Vicksburg. These acquisitions accounted for approximately 12.1 million of the $24.7 million increase in revenue as in comparable period 2003. Revenues of 104.2 million for the 6 months ended June 30th represented an increase of 40.9 million or 64.6 percent on the previous year, where the gain and increase (ph) accounted both by acquisitions and internal growth.

For the quarter, our reported gross margin of 33.3 million reflected a percentage of approximately 58.5 percent of revenue, slightly below the first-quarter number of 58.9 percent and the second-quarter number from 2003 of 59.3 percent. This number exceeded our overall expectations, given that our acquisitions generally take up to 12 (ph) months to reach the level of existing operations. For the 6 months, our gross margin percentage was 58.7 percent, marginally below the 58.9 percent reported for the first 6 months of 2003.

General and administrative expenses, at 25.2 million, were higher by 4.3 million than the first quarter of 2004. Of this increase, approximately 2 million is directly attributable to the Tenet acquisition and 700,000, approximately, to the growth in existing locations and startups, with the balance of 1.6 million due to additions at our corporate office to deal with the strong growth, including the significant amounts of timing (ph) in RN patient activity that Bill mentioned. Our general and administrative expenses remain materially unchanged from the first quarter on a percentage-of-revenue basis at 44.3 percent, although significantly lower than the 51.4 percent reported for the second quarter of 2003.

Our operating income for the quarter of 8.1 million was substantially above the 2.6 million reported in the second quarter of 2003; and for the 6 months, totaled 15 million, over 3 times the 4.7 million reported for the comparable period of 2003.

For the quarter ended June 30th, our net income of 5 million or 39 cents per diluted share is after a tax provision of 38.2 percent, and compares with 1.5 million or 16 cents per diluted share in the second quarter of 2003. And for the 6 months ended June 30th, our net income was 9.2 million or 72 cents per diluted share when compared with 2.7 million or 28 cents per share in the comparable period of 2003.

The sequential increase in revenues from the first quarter of 9.6 million is attributable, approximately, to the following factors -- 4.2 million due to internal growth in Medicare completed episodes (indiscernible) of over 11 percent; 4.6 million due to the Tenet acquisition and the first month of Vicksburg. And please bear in mind that this does not represent a full quarter of Tenet. Approximately $500,000 from the net of the 2 price changes which were effective April the first; and a further 300,000 due to an increase in revenue per episode over and above the reimbursement increase. The Company recorded an increase in total revenue per episode in the second quarter, taking the total to approximately $2586, which represents an increase of 130 basis points over the first quarter, and is due to both the net impact of reimbursement changes, which went into effect April the first, the small improvements in the overall placements.

As Amedisys now completes over 18,000 episodes of care each quarter, relatively small variations in revenue per episode and caused significant changes to revenue, these numbers will therefore vary from quarter to quarter and should not be taken as an indication that this sort of improvement can be achieved in subsequent quarters.

With reference to the balance sheet, as Bill mentioned, our cash balance totaled 22.3 million, after making all payments with respect to the Tenet acquisition, and 1.65 million in cash for the Vicksburg acquisition. The Company made scheduled debt payments of 1.5 million during the second quarter and to reiterate, no longer has any interest-bearing debt to CMS. We expect to pay down principal of approximately 2.1 million during the balance of 2004. And total debt, including Medicare liability, totaled 15.1 million at June 30th, a net reduction of 1.3 million during the quarter, reflecting our ongoing commitment to deleveraging the Company.

Days sales outstanding increased to 37.5 days from the 35 days, approximately, we reported at March, primarily as a result of the Tenet acquisition. The change of ownership paperwork is now substantially complete. But we would expect this number to revert to approximately 35 days by December 31st. We saw a similar phenomenon last year following the acquisition of Metro, when their days of outstanding went from 35 days at September to almost 40 days at December before reverting to 35 days again at March.

I would like to add that the Company now expects to be paying between 1 to 2 million in cash taxes quarterly for at least the next 2 quarters, with the expectation that payments thereafter would approximate the (indiscernible) expense.

Our capital expenditure for the quarter totaled 1.6 million, considerably more than our previous run rate. Of this amount, approximately $500,000 related to rehousing and equipping the new Tenet locations; 200,000 related to a pilot study of telemarketing equipment; and a further 100,000 for our recent payroll conversion, which was effective July 1st. We would now expect the number for fiscal 2004 of approximately 3.6 million as compared with the 3 million previously advised. Cash flow was clearly very strong with EBITDA at 9 million and cash flow from operations for the quarter of 6.3 million. The difference here could be attributed to the increase in receivables arising from the Tenet acquisition, as I mentioned earlier.

As previously stated, the Company has as an agreement with GE Healthcare Financial Services in relation to a $25 million revolving credit facility, which starters (ph) provide the Company with resources in the case of potential acquisitions candidates, and may also be utilized for general corporate purposes.

Reimbursement -- to recap the current reimbursement environment, effective October the first last year, legislation for a market basket (ph) increase went into effect. This amounted to approximately 3 percent increase in the Medicare revenue per episode when specifically applied to Amedisys. The Prescription Drug Act passed in December enacted 2 changes to Medicare reimbursement. First, a 12-month 5 percent increase in reimbursement for patients in rural areas, approximately 27 percent of our total patient census. And secondly, a 0.8 percent reduction in the base episode rate, extending for 33 months to December 2006. Both these changes were effective for Medicare episodes ending on or after April the 1st, 2004, and represent a net increase of approximately 0.6 percent through December 31st of this year. And effective January 1st, 2005, Amedisys will receive the market basket increase, currently estimated to be approximately 2 percent. Although to reiterate, MedPAC has recommended that this number be reduced to zero. Although our industry association believes in more likely that Congress will address reimbursement issues this year, it is still possible and (indiscernible) also has regulatory names to impact reimbursement.

Guidance -- we are raising our EPS guidance for 2004 to $1.43 to $1.49 per share on revenues in excess of $215 million. And our guidance for the third quarter of 2004 is an earnings per share will total between 34 and 38 cents per diluted share. Our guidance is that diluted shares will total approximately 12.9 million for the third quarter and 12.8 million for the full 2004 year. Larry will now comment on operations.

Thank you, Greg. Our operational strategic plan continues to center around our internal and external growth strategies. Due in part to our strict adherence to these strategies, our second-quarter internal growth rate over last year in Medicare admissions is 34 percent. Our total growth rate over the second quarter of last year in Medicare admissions is 59 percent. These results surpassed the first quarter's internal Medicare admissions number of 22 percent and the total growth rate in Medicare admissions of 36 percent, both of which have been record growth rates for Amedisys.

In addition to the factors listed in the press release, our strong internal growth and that of others in our industry is partly attributable to a market growing at least 7 to 9 percent annually. We see this industry growth trend continuing due largely to the increase in Medicare enrollees, the increase in home-health spending and the aging population. Also, 7 percent of our second-quarter growth rate was due to startups. We guarantee to focus on growing our business through the implementation of a dual strategy, centered on internal growth initiatives via same-store sales and an accelerated slate of startups, in addition to external growth opportunities via acquisitions, that meet our strategic criteria. Startups continue to play a role in our expansion. For the full year 2003, we opened 9 branch locations. Through the first 2 quarters of 2004, we have opened 5 new locations and anticipate the opening of 7 additional branches by year end. For 2005, we are already identified a number of potential startups. Our plan is to continue with our strategic branch expansion based upon local market opportunities.

On the acquisition front, year to date, all Tenet acquisition locations have completed the installation of our IT system. Tenet site directors, sales force and clinical education has been completed. All new sites have received the core transition competency and we are in Phase II integration with focused education and on-site leadership. In addition to the multi-state Tenet locations, we acquired Vicksburg Home Health on July 1st. This acquisition has also completed the IT systems installation, and is at the same integration phase as the Tenet locations. As previously stated, we will continue to evaluate new acquisitions that meet our strategic goals on a go-forward basis. Those acquisition candidates are ideally hospital-based and/or multi-site operations residing typically within the Southeast region that do not have quantifiable risk factors as identified through the due diligence process.

I would like to end my comments with a brief discussion on developments in our disease management program. In the first part of the year, we rolled out 2 disease management programs system-wide. Behavioral Health at Home, which is our psychiatric program, and the Geriatric Surgical Home Recovery program, which focuses on the elderly patient recovering from a recent surgery. We have recently rolled out a company-wide initiative identifying all top 10 local hospital discharge diagnosis volumes in the markets we serve. We believe this will further enhance the focus of market-specific disease management implementation and improve local opportunities for growth. In addition, we continue to be on track to complete our congestive heart failure program by the fourth quarter of this year.

In summary, we are pleased with the second-quarter results. We estimate that our third-quarter growth rate will be at least 15 percent. We continue to focus on being the premier, low-cost high-quality provider in home health. We believe that focus, our execution and commitment to clinical excellence will separate us from our competition.

I would like to express our appreciation for the continued support of our shareholders, customers, employees and vendors. At this time, we will open the call to your questions. Please limit yourself to 2 questions so that we may allow everyone who wishes to ask a question. Time permitting, we will allow for follow-up questions. Thank you.

(Operator Instructions). Art Henderson, Jefferies & Co.

Hi, good morning, very nice work this quarter. Could you first comment about trends you expect to see in gross margins over the next few quarters?

Yes. We would expect to see roughly consistent margins, maybe slightly better, and just marginally, marginally better in the next 2 quarters, only because (indiscernible) bringing these Tenet locations up to a level which is consistent with our other operations. Although of course, we continue to see some cost pressures in our cost of revenue. For example, we include their modest reimbursement again, effective July 1st. And as I mentioned starting on January the 1st, we will get a slight bump in reimbursement of approximately 2 percent. And as we have seen a little bit this year is our first quarter next year will probably be a little higher, then the cost pressures start to build again during the year. So I don't expect to see dramatic changes in that number.

Okay. Okay. And just 2 other questions. I'm sorry, the internal admissions growth was great this quarter. You're sort of highlighting 15 percent next quarter. But longer-term, I mean surely that's got to come down. And I was wondering if you might be able to comment on that?

This is Larry. In the guidance, we put at least 15 percent in quarter three. We're very pleased with 34 percent then we did 22 percent in the first quarter. But we do not believe, articulating that we continue at 34 percent is prudent. So I agree with you that long-term, 30 plus percent internal growth rate would not be sustainable. But we're also very pleased to be able to articulate that we believe we can sustain a 15 percent internal growth rate going into quarter three. And we think that's more reasonable -- 15 to 20 percent is more reasonable long term.

Okay, and then last question. Could you talk a little bit about your compliance issue -- compliance is it relates to billing and clinical management? Could you just kind of address that, what you have in place and how you monitor things?

I will try to put it in layman's terms, and I will use the Tenet acquisition as a perfect example. Because these were new employees that were not used to the Amedisys way, if you will. We do a lot of upfront coding education. We hired a home care coding expert that discusses and goes through training with all of the people responsible for coding in our organization. On top of that, once they begin coding, our wide area network, or our information system, sweeps all the oasis data sets for the admissions out there and looks for clinical inconsistencies in the way that a code may have answered a specific question, and then calls them specifically on the phone in all of our regions and educates them on what they're doing right or what they're doing that they can improve upon. And then beyond that, after an episode is completed, we're really focused on the outcome of an episode, and make sure that the outcome agrees with the way we answer the oasis data set. So we do education on the front end, then we do what we call global sweeps, ongoing education at the end of the episode and then we closely monitor the outcome.

Okay. So the checks and balances are pretty significant beyond when someone codes it in at the branch location?

Absolutely. We have a centralized episode management department that looks from a compliance perspective, and the specific issue you're talking about, on the revenue per episode. It's also important to note that we're in the South region, Arthur. And if you look at our averages compared to national averages, we're going to be higher. But if you look at our averages compared to the South region, we're more in line. Just based on the lifestyle in the South, the demographics of the aging population and the migration of the elderly population to the South, you will find that we are taking care of a sicker population than the nation, if you will.

Yes, okay. That's very helpful. Thanks so much.

John Ranson, Raymond James.

Good morning. Relative to Tenet -- and I may have missed this, I apologize -- is there an EPS accretion estimate for that acquisition this quarter versus the first quarter?

We originally gave guidance that we believe the Tenet acquisition would add between 7 and 10 cents for the whole of 2004. And we still believe that to be approximately correct. But we have not specifically ascribed anything -- a particular number, rather, to the third quarter. But Bill did mention in his remarks that it did not add materially to our earnings in Q2.

So it added nothing this quarter, okay.

Correct.

All right. And just kind of staying on this acquisition topic, obviously between you and Gentiva, you're less than 5 percent of the Medicare industry. What are you seeing -- could you just describe -- according to CMS, about a third of the remaining agencies are with hospitals and two-thirds are freestanding. As you guys look at opportunities to add to your base, what do you see or how would you characterize the market out there to purchase home health agencies, and how it may have changed and where valuations are going? And just what the quality of the pipeline looks like out there?

John, this is Bill. Thanks for your question. Our focus from Amedisys' perspective is the certificate of need states and the multi-site providers that Larry mentioned as well as the hospital-based. In the non-CON states such as Texas and now Florida, we like the strategy of startups; we think it's a better return on our investment. There are a lot of deals to be done, but there are only certain deals that meet our selection criteria. So we think our pipeline is pretty full. And as you will continue to see smart deals through the next several years.

Bill, what are you seeing out there in terms of EBITDA multiples currently, and where that might have been a year ago? Have prices creeped up a little bit?

Well, you know, they have. We typically, in the past, were looking at deals in the 3 to 3.5 range. The smaller deals are now probably between the 4 and 5 range. Some of the bigger deals that are being used to create platforms typically might go above that range even. But right now, we are kind of looking at the sweet spot being a 4 to 5 range, especially if it is a CON state.

Got you. Okay, thanks a lot.

(Operator Instructions). Josh Stewart, Sidoti & Co.

Hi, guys. Hey, Larry, if you could go over one more time the expectations for startups this year, and if you could maybe give more insight as to when you are going to be starting up new agencies?

I will go into the remainder of the year. We've opened 5 thus far this year; we had 7 potential startups. We're looking at some in the areas of Tennessee, some in Georgia; I won't go into specific markets, just for strategic purposes. But those two states in particular, and we're looking at Florida also for the 7 branches next year. And as Bill mentioned, long-term, we will be looking aggressively in the states of Texas and Florida in '05 and beyond, just because they are not-CON states; and as you know, a CON state, you can't just start up unless they open it up to apply for additional coverage.

And then once you get in like say through the Vicksburg, like you're here in Mississippi now, can you open up a startup now? Or are you still restricted?

Vicksburg is a single-site location that covers several counties. Each state is a little different, whether or not you can open a startup and how far out you can go. We can open a branch in Vicksburg, and which we're going to look at probably in the next 6, 9 months. But we want to focus on that location and getting it operating efficiently before we branch out and open a new one. But it's something we're looking at.

Okay, thanks Larry.

Thank you. At this time, I'd like to turn the floor back over to management for any closing remarks.

Thanks, Anthony. We certainly appreciate everybody's interest and thank everyone for calling in this morning. We are excited about our perspectives in the Company and our growth for the future. We look forward to reporting on the third quarter and we wish everybody a good day. Thanks, you all, for calling.

Thank you. This does conclude this morning's conference. You may disconnect your lines at this time and have a wonderful day.