Amedisys Inc (AMED) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Amedisys third quarter 2004 conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mr. Brian Ritchie from Euro RSCG Life NRP. Sir, you may begin.

Good morning and thank you for joining us for today's Amedisys investor conference call to discuss recent corporate developments relative to this morning's third 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 on to the Web-cast 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 Amedisys' President and Chief Executive Officer, Bill Borne; the Company's Chief Financial Officer, Greg Browne; and the Company's President and 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 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 would like to thank everybody for calling in this morning. This conference call reflects a milestone in the developmental history of Amedisys. It is our first investor conference call following our first public offering as a Company.

We want to welcome our new shareholders, and we appreciate the opportunity to share the Amedisys vision with an expanded group of investors. Management is committed to ensuring and maintaining its strategic direction and generating appropriate returns for all of our investors.

The future of home nursing is very bright and Amedisys intends to take full advantage of new growth opportunities. 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.

Our intention is to use a significant portion of the proceeds raised in our recent offering for acquisitions.

We have seen a continued substantial increase in our internal growth rate of admissions to 30 percent in the third quarter, as compared to 10 percent in the third quarter of 2003. Larry will comment in greater detail on our strong rate of internal growth. But I would like to give my thanks to the hard work of our entire staff that have made this growth possible.

We're pleased to welcome to the employees of Freedom Home Health to Amedisys. This acquisition represents our continued expansion into Virginia, which includes the Richmond market.

In addition, we would like to welcome the employees of Winyah Home Health and Augusta, Georgia. This acquisition also marked our entry into that market.

Our balance sheet has improved significantly over the past quarter, benefiting from both strong cash-flow and approximately $68 million raised from our recent offering. Our current cash position is in excess of $93 million.

In preparation for continued dynamic growth, we're increasing operational and administrative costs to build an appropriate infrastructure. A significant portion of this added cost is primarily attributable to our enhanced focus on employee retention and education, as mentioned in our previous conference call.

We've spent significant resources on an aggressive orientation strategy, which includes activities that allow selective senior management and myself to meet each new employee within 6 weeks of hire. In addition, we have implemented the initiatives for the fourth quarter that includes a modified corporate orientation for over 1700 employees that have been with Amedisys longer than 18 months. This means that senior management and myself will have met with each and every Amedisys employee to share our vision and mission by year-end.

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. We believe it is these efforts that have resulted in a growing enthusiasm and increasingly engaging culture which has contributed significantly to our dynamic growth and success.

We have and continue to add many resources corporately to enhance our human resources, accounting, clinical and compliance oversight. We believe this added overhead is imperative to support our rapidly growing organization. The ongoing focus of our stated growth strategy, combined with the 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 who have dedicated efforts that have helped 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 open the call to the Q&A session. Thank you.

Thanks Bill. I will now discuss financial highlights for the 3 and the 9 months ended September 30, both with respect to the income statement and the balance sheet as well as comments on both reimbursement and guidance.

For the quarter, our revenues of 58.5 million represent an increase of 58 percent on the same quarter of 2003, and reflected the strong internal growth mentioned in the press release as well as the acquisitions of Tenet, Houston, and to a lesser extent, metro Vicksburg and Richmond. These acquisitions accounted for approximately 9.4 million of the 21.4 million increase in total revenue over last year.

For the 9 months, our revenues of 162.7 million represented an increase of 62.3 million or 62 percent on the previous year, which again is accounted for both by acquisitions and internal growth.

Our reported gross margin was 32.8 million, reflecting a percentage of approximately 56.1 percent of revenue, below the Q2 number of 58.5 and the Q3 number from last year of 59 percent. The decline in gross margin percentage is in general attributable to the fact that the aggregate gross margin percentage for all the acquisitions, particularly the larger ones, Tenet and Metro, are running at approximately 49 percent.

We believe the gross margin percentage will improve into the fourth quarter, and that this represents an opportunity for the Company over the next 6 to 9 months as we bring the acquisitions number more in line with our more mature locations.

The company reported a small decrease in total revenue per episode in Q3, taking the title to approximately $2550. Amedisys now completes over 20,000 episodes of care each quarter, and relatively small variations in revenue per episode can cause significant changes to revenue. These numbers will therefore vary from quarter-to-quarter.

For the 9 months, our gross margin percentage was 57.8 percent below the 58.9 percent reported for the first 9 months of 2003. But again, the reasons for the decline were described earlier.

For the quarter, our general and administrative expenses at 24.4 million were lower by 800,000 than the second quarter of 2004. This reduction is due to both lower employee benefit costs and lower training costs than in the second quarter, offset in part by higher amortization with respect to the various acquisitions intangibles.

Our G&A expenses were lower than the second quarter on a percentage of revenue basis at 41.7 percent as compared with 44.3 percent in Q2, and significantly lower than the 48.5 percent reported for the third quarter of 2003.

For the 9 months, general administrative expenses to continue to move lower on a percentage of revenue basis at 43.4 percent when compared with the 50.3 percent reported for the comparable period of 2003, demonstrating the operating leverage discussed previously.

Operating income for the quarter of 8.4 million was substantially above the 3.9 million reported in the third quarter last year. And for the 9 months, operating income totaled 23.4 million, over 2.5 times the 8.6 million reported for the comparable period of 2003.

For the quarter, our net income was 5.2 million or 39 cents per diluted share, and is after a tax provision of 38 percent. It compares with 2.4 million or 24 cents per share in the third quarter of 2003.

For the 9 months, our net income was 14.4 million or $1.12 per diluted share when compared with 5 million or 52 cents per share in the comparable period of 2003.

With reference to the balance sheet, as Bill mentioned, our cash balances totaled 93.2 million after receipt of approximately 67.6 million in net proceeds from the equity offering, and after making 4.6 million in cash payments for the Richmond acquisition.

The Company made scheduled debt payments of 1.1 million during the quarter. This rate will continue through approximately mid-2005. Debt totaled 6.4 million at September 30, a net increase of 600,000 during the quarter, primarily due to new debt for the Richmond acquisition.

Our Medicare liabilities remained unchanged from June 30. And our days-sales-outstanding decreased to approximately 34 days from the 37.5 days that I reported on the last call. I indicated on that call that the change of ownership paperwork for the Tenet acquisition was substantially complete, and that we would expect it the DSO to revert to approximately 35 days as it has in fact done.

The Company paid approximately 1.6 million in cash taxes during the September quarter, and expects to be paying between 1 and 2 million for the current. Quarter and the expectation is that payments will approximate the (technical difficulty) tax (ph) expense thereof.

Capital expenditure for the quarter totaled 1.75 million, somewhat more than the previous quarter. Of this amount, approximately 500,000 related to upgrading computers for the field offices; 350,000 related to purchase of copiers rather than our previous policy of leasing; and a further 250,000 related to software for an imaging project.

The number of startups also impacts this number, with approximately 50,000 required for each new location. We would now expect the number for fiscal 2004 of approximately 4.75 million as compared with 3.6 million previously advised (ph) (technical difficulty).

Our preliminary amount for fiscal 2005 is approximately 7 million, which includes amounts for startups, acquisitions, and particularly IT spending, and an increase in productivity.

Our cash flow was clearly very strong with EBITDA at 9.75 million and cash flow from operations for the quarter at 8.5 million.

Reimbursement -- to recap the current reimbursement environment, with the impact of all changes that have taken place over the last 12 months, our core Medicare reimbursement for Q3 is running approximately 3.6 percent ahead of the third quarter last year. This includes last year's market basket impact and the changes enacted in the Prescription Drug Act. Now that the market basket has been finalized for next year, Amedisys expects that our weighted average reimbursement for 2005 will be approximately 1.95 percent higher than for 2004.

Guidance -- we are reiterating our earnings per share guidance for 2004 to between $1.43 to $1.49 per share on revenues of approximately 224 million. And the number of diluted shares will total approximately 13.6 million for the full 2004 year.

We have issued preliminary guidance for 2005 as between $1.63 and $1.73 per share, excluding the impact of any future acquisitions, with the number of shares expected to be approximately 16 million. Revenue is expected to be between $280 and $290 million. Larry will now comment on operations.

Thank you Greg. Our operational strategic plan continues to center around our internal and external growth strategy (ph). (technical difficulty)

Due in part to our strict adherence to these strategies, our third quarter internal growth rate over last year in Medicare admissions is 30 percent. We're certainly pleased with this number, and based on a market growing at least 7 to 9 percent annually, are confident in our long-term abilities to deliver 15 to 20 percent growth in Medicare admissions.

Our total growth rate over the third quarter of last year in Medicare admissions is 52 percent. This strong internal growth rate is also partly attributable to a market growing 7 to 9 percent annually, as well as those factors listed in the press release. We see this industry growth trend continuing, due largely to the increase in Medicare enrollees and the relative increase in home health spending.

Also, 7 percent of our third quarter growth rate was due to startups. We continue 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 critical role in our expansion. For the full year 2003, we opened 9 branch locations. Year-to-date, we have opened 11 branches. We plan to open 1 more in the fourth quarter, totaling 12 for fiscal year 2004. This is in line with what was previously projected on last quarter's earnings call.

For 2005 we plan on opening approximately 15 new offices (ph) (technical difficulty). Our plan is to continue with our strategic branch expansion based upon local market opportunities.

On the acquisition front, (technical difficulty) we acquired Freedom Home Health of Richmond, Virginia on September 1. This 3-site operation has completed system installation, and all initial education of site directors, sales force and commission (ph) (technical difficulty) has been completed. All locations have received the core transition competencies, and we are integrating them with focused education and on-site leadership.

As previously stated, we will continue to evaluate new acquisitions that meet our strategic goals on a go forward basis.

I would like to end my comments with a brief discussion on development in our quality infrastructure and disease management program. This quarter, Outcome Concept Systems, a company that provides health-care organizations, including Amedisys, with comparative information solutions, awarded a National Quality Award to Amedisys.

Approximately 200 agencies nationwide submitted data validating their organizational improvement and patient outcome. As a Company, we were recognized for our overall quality infrastructure and delivering positive patient outcomes quarter-over-quarter and year-over-year.

I would like to extend my gratitude to every local nurse site manager who has worked hard to implement our quality system. Your efforts are much appreciated.

On the disease management side, we continue to be on track to complete our chronic obstructive pulmonary disease program by the fourth quarter of this year. We will additionally roll out a new Better Strength program in the fourth quarter. This program focuses on patients who have been discharged after extended hospital stays, and are debilitated in their recovery period.

The goal of this program is to assist patients in regaining their strength and mobility upon discharge from a hospital.

In summary, we're pleased with the third quarter results. We continue to focus on being the premier low-cost, high-quality provider in home health. We believe that focus and 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. Brian -- or Ian.

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

I was wondering, Larry, if you could talk about the new branch locations -- are these going to be in new markets or existing markets where you're just trying to saturate your presence there?

I would say a majority of them are (technical difficulty) expansions of existing markets and maybe a territory that we have serviced a little bit with a current site. And then we'll open a branch and be able to expand our geographic territory.

But there are also other markets that we do a brand-new startup where we previously had no business in. And we're taking on a new market (technical difficulty) so it's a combination of both, Art.

And how long does it take you to ramp that up so that it's operating at capacity?

Sure, I will give you kind of the lay of the land for startups. It costs us about $250,000 to fully fund a startup. That includes the $50,000 of capital items that Greg mentioned, as well as any startup losses. Roundabout 9 months into the startup, they're at breakeven. About 18 months they are performing similar to an Amedisys operation. So 6 to 9 months to breakeven, 15 to 18 months to start producing on the bottom line.

All right, that's helpful. Greg, a question for you. Your guidance that you provide for the remainder of the year -- obviously, a pretty wide range for this year. Could you explain why it is wide? And then what is it going to take to get you to the high-end of that guidance, not only for '04 but also for '05? In other words, what are your assumptions to get to that -- those high-end?

(technical difficulty) The guidance does have a slightly wider range, I think for a couple of reasons. Obviously, suggest (ph) that the operating -- the range was wondering (ph) -- see our Medicare admissions growth, internal growth numbers continue to be strong. We would expect to see some improvement in the gross margin -- percentages are (ph) indicated, and hopefully, eventually, of course, get back next year to where we were with the acquisitions performing to the level of our existing operations and continued expense control.

So I think that the reason for the wide range -- I think was really -- as we're going -- we're coming off at a quarter which is seasonally a little weaker. And we're going into a stronger quarter. But we do have significant acquisitions out there which we're bringing up to speed and they continue to show improvement. So it was really to demonstrate our caution at the rate at which the improvement in operations from our acquisitions would flow through to the bottom line.

Okay. So, sort of following on that acquisition, and I will jump in the -- back in the queue, you have mentioned the past a South Carolina acquisition, a bigger one there and a North Carolina acquisition. Could you give us a little bit of an update on how those negotiations are going?

You know, we have (ph) stated (ph) in the past that our acquisitions pipeline is strong. We have -- in our recent roadshow, we did say that our acquisitions would be generally more focused -- not exclusively, but much generally more focused on those facts that still retain the certificate of need system, which clearly includes both North and South Carolina.

I don't think that at this point we have any further information to impart, other than to say we continue to have discussions with possible acquisition candidates. And at the appropriate time, we will bring that to the attention of the market when we are able to close something. But it's clearly an important part of our contingent plan going forward.

Eric Gommel, Legg Mason.

I was wondering if you could give me a sense of -- how long do you think it's going to take for your gross margin to kind of kick back up or recover from sort of the seasonal low, given the acquisitions?

Eric, welcome to our call. We continue to work on that. The Tenet ones continue to show some improvement. And we believe that if you look over the first 6 -- sometime in the first 6 months of next year, we would expect that acquisition to be performing at the level consistent with our more mature locations.

And that is generally the case with our acquisitions -- is that by the third quarter and maybe the fourth quarter after the acquisition is complete, they tend to get to the level of our existing operations. Sometimes it's a little slow. Sometimes it's a little faster. So that's generally the case.

Great. And then you commented on additional costs in fourth quarter related to training and stuff. Can you quantify that? Or is there something we could expect there dollar-wise compared this quarter?

Of course it is built into the guidance that we've given for the year, which we were reiterated $1.43 to $1.49 for this year. But that -- we will have a better feel for the type of costs after it's completed. And the anticipation is that it will be of the order of about $0.5 million in out-of-pocket costs, something like that.

And then one last question and I will get out. As a percentage of revenue, your Medicare this quarter in terms of total revenue, what was that about?

93 approximately (multiple speakers) times.

John Ransom, Raymond James.

I wanted to just talk a little bit about the 49 percent gross margin on the acquisitions. First of all, could you quantify the dollar of revenue associated with that 49 percent? Was it the $9 million number you mentioned previously?

Yes, John.

So you had $9 million at a 49 percent gross margin. Was that mostly Tenet? Or I guess that was Tenet and Metro.

Let me restate that for a minute. When I mentioned that number of 9 million (ph), (technical difficulty) that was the amount by which acquisitions sort of contributed to the growth in revenue.

I see.

The total amount of acquisitions -- and the difference here is really whether you include all of Metro or just 2 months of Metro from last year. But it's a little bit higher than that. It's probably about 10.5 to 11 million of total revenue. It's running at about 40 -- 49 percent.

And maybe Larry could jump in here. Could we just understand a little bit what the color is of where they are lacking vis-à-vis your metrics and what the game plan is to get them there? And just -- what went on this quarter that may have -- I assume this may have caught you a little bit by surprise. And what sort of action items might be in place to bring these -- bring this revenue stream back to Company margins?

And I want to reiterate what Greg said for acquisitions. Typically 3 or 4 quarters out is when you start seeing some improvement. Also, I want to reiterate it is my belief and feeling that this represents a very good opportunity for Amedisys to continue showing improvement with both of those large acquisitions.

And to answer your question on -- (technical difficulty) a little bit more specifically, there are several parameters that obviously impact gross margin. I would say the growth in Medicare admissions typically is not as strong with a (sic) acquisition as it is with our existing agencies, mainly because most of our acquisitions don't have a seasoned or -- sales force, certainly with hospital-based. Private ones do.

So on the Tenet side, we have now hired salespeople across the board. And I expect, going into the fourth quarter and first quarter, you will see some improvement in Medicare admissions on the Tenet side, which will obviously help gross margins.

The other thing is, with Tenet it's a hospital-based. So they paid all their employees basically salary dollars. And there were some productivity issues which we had begun to address. But that's not something you want to do right out of the gate with an acquisition, which are slowing doing market by market.

So you will see some improvement in productivity as well as our ability to assist them to monitor episodes in progress, both from a clinical quality standpoint and utilization standpoint. Those systems are now in place.

On the Metro side, it just took us with -- it was the first large private acquisition we had done. It took us longer than expected to convert them to our computer system. They had their own computer system. We allowed them to stay on that for little while to get acclimated to our culture. So that took 6 to 9 months to do. So now we're on the back end of that, and we'll start seeing some improvements in that area also.

And Larry, was Tenet re-certifying anybody? Or were there -- were they basically just charging their patients after 1 episode of care?

(technical difficulty) in locations and all of them are different. Some of them -- research were (sic) low and some of them were about average. But on average, again, I want to point out that our system, a couple of weeks prior to discharge, we will pull an admission. And if we have had a change in doctors' orders, a change in medication, or a varying from a clinical track (ph), then there is a high probability that we need to re-certify a patient. I will tell you that Tenet did not have that system in place (multiple speakers) which we now put in place.

And if you were to -- and I will jump off after this. But let's say you were to bring that -- Tenet is about 25 or 30 million of revenue. If you were to bring that re-certification ratio to your average based on your clinical milestones, what kind of incremental revenue do you think they were leaving on the table because of that?

We'd have to get back to you specifically on it, John. With that we require a little calculation, I think.

Is a bigger than a breadbox? Is it material or is it just incidental?

It could be material. It could be material.

Thanks a lot. I will jump back in.

Sheryl Skolnick, Fulcrum Global Partners.

Forgive me for asking you to do this, but I am a little bit confused. You said that with respect to your expense reductions, the dollars actually declined sequentially, which obviously was very good and very helpful given that the gross margins were little down sequentially.

So can you walk me through what exactly happened between the second quarter and third quarter that you had a dollar decline? You said something about benefits. You said something about training. But I guess my concern is that if the training is then going to pop back up, sort of what weren't you doing in the third quarter? And then I have another question.

Sheryl, thank you. There are a couple of things going on in the third quarter. First of all with respect to health insurance, we're fundamentally self-insured every quarter, in fact every month. But we make adjustments on a quarterly basis to whatever reserves are in place. So that's what we've been doing each (multiple speakers)

So you had a positive prior period development?

Some (ph) of it prior period, most of it was current period. But some of what was left over from last year that was a little bit (multiple speakers) but that's normally the case at this time of the year, because claims have runoff from last year. And whatever you have let go. (multiple speakers)

We also saw -- specific to your question on training, we had a couple of large company meetings in the second quarter for our corporate leadership team and as well as for our sales activities. And those expenses were not repeated in the current quarter. There was about $600,000 related to those -- travel and training which was not repeated in the third quarter, although of course as we mentioned earlier, some of that will reappear in the fourth quarter. So it's just a coincidence of events.

Okay. So in terms of the health insurance and the reduction in the reserves, is that something that is sustainable going forward? Or should we should go back up to the second quarter run rate as we think about the benefits expense, and then make the appropriate adjustments to the other G&A?

My feeling about as we go forward is that when we look forward to the fourth quarter and into next year, that -- particularly the fourth quarter, that our gross margin will improve as I mentioned in my comments. And I would expect the pass-through (ph) as a result of benefits, and particularly the training exercise, that our G&A expenses as a percentage revenue will tick back up. (multiple speakers) Our operating income will probably remain substantially unchanged or similar on a percentage of revenue basis.

Got it. Okay that's very helpful. And you're the only health-care company I know of who didn't mention Charlie, Frances, Jeanne, Ivan and a few other things going on. Were you materially affected by that this quarter at all?

We had 3 sites in South Florida that were affected. And we have a very small operation in Alabama that was affected. But it's not quantifiable. And we felt like since we couldn't quantify the exact impact, and it was certainly not material to our earnings -- our earnings per share guidance, and that's the reason we didn't mention it.

That's good. And if I may just get a sense of your growth rate in the projection of revenue from the -- and this is sort of a follow-up to a question asked earlier. Can you give us a sense of what the assumptions are in a little bit more detail in getting from the 2004 revenue projection to the 2005? And in particular, how much might be -- the maturation of acquisitions from this year, how much might be attributable to startup, given that you have already said you're comfortable kind of in the mid-teens to 20 percent Medicare unit volume growth rate?

Right Sheryl, you will see implicit in the revenue guidance that I gave to Q4 that it's going to be north of 60 million (multiple speakers) expectations for Q4. And so we've expected to be on a run rate of around close to 250 million (multiple speakers) by -- with the fourth quarter.

Overall, we would expect that our -- as Larry mentioned, our sort of outlook for internal growth in admissions, and given better guidance is based -- without acquisitions, our internal growth of admissions is in the 15 to 20 percent range for next year, which includes startups. And I think I mentioned that the reimbursement increases going to be just shy of 2 percent (multiple speakers) -- 1.55 percent. So that's how we build up to that revenue number of next year.

Okay. So it's down off the revenue run rate. And if I did the math correctly, if you get the acquisitions up to the 58, 59 percent gross margin level between now and then, it's about a nickel a quarter. Is that about right?

I would put it slightly less. But it could be as much as that, yeah.

And I'm sorry, just one final thing. How do we think about the -- you've obviously got a lot of cash. You're not going to sit on it. The return on the investment in putting that to work and growing the business is significant, so -- big opportunity costs for the cash on the balance sheet to stay there.

So what do we think about in terms of timing? Are there things that you could actually get done, perhaps, in the first quarter and get the benefit of for the balance of the year?

Sheryl, listen; this is Larry. We have a pipeline of acquisitions that we're looking at without saying exactly when we think certain ones will close, because I don't believe we can predict that when we're negotiating acquisitions. But using our model that it takes 3 or 4 quarters to get to in line with the Amedisys ratio, if we were complete an acquisition in the first quarter, you can kind of model it out, which I think is what you're asking for. So it could have an impact in '05 if we do some early acquisitions. But we don't believe that it will have a very significant impact. But it all counts on when the timing of an acquisition would be.

Good. And that's why I asked the question. Okay.

But I'm not giving you the timing of it.

Okay. Fair enough, thanks a lot.

(Operator Instructions). Van Brady, Presidio Management.

I would like to see if we can clarify the revenue amounts in both the second and third quarter that operated at 49 percent gross margin. Your gross margin went down a couple of points quarter-over-quarter. You had answered one other question saying that I guess in the third quarter it was about 10.5 to 11 million. Some of that was also there in the second quarter as well, wasn't it?

That's correct Van; that's right. It was somewhat less (multiple speakers)

How much was in the second quarter?

I'll have to go back and double-check that. I don't have that number with me. I'm sorry.

Well, to understand why the gross margins went down as much as they did, if --?

Right. It certainly would have been somewhat less.

It would be increment that would be -- that had penalized earnings per share. And if you had done 9 -- 58 plus percent on 11 million, that's about a 9 percent differential -- about $1 million, which would be roughly 5 cents a share. But all that -- some of that penalty would have occurred in the second quarter. So I'm just trying to see what the delta would be (multiple speakers)

Look -- maybe -- let me state this. We don't attribute all of the decline in gross margin to the change in performance of our acquisitions over the quarter and the increased amount. If I gave that impression, I didn't mean to. We substantially (technical difficulty) -- applicable to that. But we also saw a smaller decline in the revenue per episode from our core business, if you like, or the business excluding acquisitions. And that was due to a lower case mix.

And there were other factors at work during the quarter as well. And for example, we increased the rate at which we reimburse nurses for mileage costs due to the increased gas prices and so on. And so all of those had an impact on the gross margin, including what Larry alluded to earlier, the impact of the hurricane, which had some impact. But it is very difficult for us to quantify that. So there are number of factors. We talked primarily about the acquisitions. But that's not the only factor.

Well, Greg?

Yes.

Greg, this gets me to the other question I wanted to ask, and that is what was the revenue per episode? You gave it for the last quarter and made the comment that it would not necessarily stay there. It was definitely a function of case mix and it has shown quite a jump Q2 over Q1. Could you give us what it was this quarter, and also remind us what was in Q1 and Q2?

I think in my comments I've mentioned $2550 approximately, which says if (technical difficulty) the overall Company was approximately $30 lower than what I had mentioned on my second quarter conference call. And as you can see from what I mentioned, we have over 20,000 episodes of care during the quarter. And multiplying that out, that comes to the $600,000.

Okay. Now, I think you've answered this question. But just to make sure, you said that you're confident of 15 to 20 percent admission growth for the market growing at 7 percent -- 7 to 9. But that would also include startups. Is that correct?

That's correct.

Can you give us a feel for how much of that 15 to 20 might be startups and how much might be same-store and existing units?

I can tell you in quarter three, 7 percent of our internal growth rate was due to startups. So that might -- 5 to 7 percent might be a good number for you to use going forward.

Well, so if 5 to 7 percent is startups then the internal growth would be -- well -- what, it could be 8 to 13 percent? Is that right?

That's correct.

(multiple speakers) John Ransom, Raymond James.

Just one other follow-up. On your 2005 -- and I'm sorry if I missed this. What should we be thinking about in terms of gross margin and SG&A? And also, you had mentioned earlier that the Tenet deal was 7 to 10 cents accretive for the back half of '04. Should we think of that pre-dilution from the offering being something like a 10 cent number -- a Delta maybe 20 cents versus 10 cents? Should we be thinking about that kind of help? Or has the margin erosion diminished that a tad? Thanks.

Two comments -- two questions there, John. In terms of our gross margin next year, we would expect to see operating income as a percentage of revenue roughly in line with where we are on a go for basis. The mix between gross margin and G&A expenses will continue. I think we will see gross margin north of 57 next year, as I expect we will see in the fourth quarter. But to be more precise, we will just have to see how our costs develop.

The Tenet accretion (technical difficulty)

Yeah, I wanted to mention on the Tenet accretions -- I think on the last call that I made on a -- 3 months ago, on this call I made an error when I suggested that the accretion for Tenet would be 7 to 10 cents. Prior to that, we had mentioned 5 to 7 cents. And I think I misspoke on the call last time.

Having said that, it would be decreased somewhat. And at this point, I haven't -- I wouldn't necessarily change from that 5 to 7 cent number, although it hasn't developed quite as fast as we would like and it might may end up being a penny or 2 less. But we'll just have to see how the final quarter develops.

At this time, I would like to hand it back over to the management team for any closing remarks.

Okay. Thanks. We certainly appreciate everyone's call. Despite the fact that we've had some minor variances in the revenue and the gross margin, we're very confident about our go forward potential in the organization in reference to growth, and also being able to take advantage of external opportunities, which will be our focus.

We certainly do appreciate everyone's call this morning. And we look forward to our next conference call and hope everybody has a good year end. Thank you.

Thank you. This does conclude this morning's teleconference. Please disconnect your lines at this time, and have a great day.