Amedisys Inc (AMED) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Nia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amedisys second-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. It is now my pleasure to turn the floor over to your host, Tom Dolan. Sir, you may begin your conference.

Thank you. Good morning, and thank you for joining us today for the Amedisys investor conference call to discuss recent corporate developments relative to this morning's second-quarter 2007 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 webcast, please contact me at 225-292-2031, and I will be happy to assist you.

Speaking today, we have the company Chairman and Chief Executive Officer, Bill Borne; the Company's President and Chief Operating Officer, Larry Graham; and the Company's Chief Financial Officer, Dale Redman. Management will give you an overview of the quarter's highlights, and then we will 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 2007; earnings per share in 2007; growth opportunities and other statements that refer to refer to Amedisys's 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's 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.

Thank you, Tom, and good morning. I want to welcome the participants on this call. And I appreciate the opportunity to share the Amedisys spirit and vision with the investing public.

Clearly, the second quarter was another exceptional quarter for Amedisys, with record revenues of $169 million and record earnings of $0.57 per diluted share. In addition, we ended the quarter with total cash and cash equivalents of $97 million.

Our results for the second quarter continue to support our strategic objective of being the leading provider of high-quality, low-cost home health services in the market.

In the year of 2011, the baby boomer population totaling over 77 million will begin to enter the Medicare system. CMS will need to search for lower-cost alternatives to lessen the strain on our already-fragile health care system.

We strongly believe that Amedisys is very well positioned to provide lower cost of care alternatives to our aging population. We believe we can leverage our home health care core competency foundation to take full advantage of the growth opportunities offered to us by aging Americans. We intend to continue to use a balance between both internal and external growth to drive returns to our investors.

In addition to same-store admissions growth, our internal growth in the second quarter included the opening of 10 new home health agencies. Each of these new agencies helped us further expand our footprint in the states in which we currently operate.

We had a busy quarter with respect to external growth, completing five acquisitions with 15 locations. As a result of these acquisitions, we entered three new states, which are Michigan, Illinois, and Pennsylvania. Our acquisition effort targets opportunities that will fill in our existing footprint, as well as expand our footprint in new states, providing the basis for de novo growth opportunities. We will continue to evaluate potential acquisition candidates, and have a healthy pipeline of opportunities that fit our profile and strategic direction.

As a result of acquisitions and de novo growth, we ended the quarter with 296 home health locations, 61 more agencies than the second quarter of 2006. During the quarter, we also continued to roll out our Point of Care system with 235 agencies now converted. This investment is providing us with real-time management and monitoring capabilities, and is allowing us to standardize the assessment and the delivery of care throughout our markets. We believe that our proprietary technologies, inclusive of our Point of Care system, coupled with our Encore nurse call center and our evidence-based best practice clinical algorithms, is the right prescription for providing complete care management to the chronic comorbid population. This infrastructure uniquely positions us to continue our transition into being recognized as a successful complex care coordination and disease management provider.

We continue to monitor developments associated with the reimbursement changes [that our] home health industry proposed by CMS on April 27 of '07. These proposals include changes to the base rate calculations, refinements to the payment system, and new quality of care data collection requirements, among others, which would have an effective date of January 1 of '08. Until the proposed ruling is finalized and more definitive information is provided by CMS, management will not be able to complete its evaluation of the net impact of the new rules on its consolidated results of operations and cash flows.

Additionally, I am pleased to announce that we have appointed Dale Redman as our Chief Financial Officer. Dale has served as our interim Chief Financial Officer since February of this year.

During the quarter, our market capitalization pierced the $1 billion threshold. Over these last few months, working closely with Dale, it has become obvious to us that he has the financial knowledge and the executive leadership required of a Company of our size and growth potential. So again, I want to welcome Dale.

I would also like to welcome all the new employees of the agencies we acquired during the quarter. We're very excited to have you in the Amedisys family.

In conclusion, I am reminded that our greatest competitive strength lies in our employees, who individually and collectively make it possible for us to carry out our mission of providing cost-effective, quality health care services to the patients who have trusted in our care. We believe our culture of hard work, passion for service, and commitment to our core values is an intangible that truly differentiates us from our competition.

I would now like to pass this call to Dale for his financial overview. Thank you.

Thank you, Bill. As Bill stated, we followed the first quarter of '07 with another excellent quarter for Amedisys. Our second-quarter revenues grew 27% over the second quarter of '06 to $169 million. Acquisitions accounted for approximately $6 million of the increase over '06. Our first six months' revenue of $323 million represents an increase of 24% over the previous year.

Net income of $14.9 million or $0.57 per share topped our record of $13.3 million for the first quarter of this year. This brings our earnings per share through June to $1.08, plus -- versus the $0.75 last year.

Operating income increased 53% to $24 million or 14.2% of revenue in the quarter, compared to $15.7 million or 11.8% of revenue for the second quarter of '06. We continue to see a decrease in our G&A expense as a percent of revenue, from 45.6% for the second quarter of '06 to 41.8% for the second quarter of 2007. For the six-month period, our G&A expenses were 42.3% of revenue compared to 45.8% for the same period in '06.

Our gross margin was 55.9% of revenue for the second quarter, which is down from 57.4% for the same period in '06. Acquisitions and startups are the primary factor for the reduction in gross margin. Excluding those acquisitions and startups, our home health agencies had a gross margin of 58% for the second quarter.

EBITDA for the quarter was $26 million, 15.5% of revenue versus $18 million or 13.7% of revenue during the second quarter of '06.

Bad debt expense for the quarter was $2.8 million or 1.7% of revenue compared to 2 million or 1.5% of revenue in the second quarter of last year.

The increase in other income when compared to the second quarter of '06 is due to the reduction in outstanding debt and an increase in interest income from approximately $100 million in short-term investments.

Our cash generation for the six-month period of 2007 was very strong, with cash flow from operations totaling $55 million. We spent $16 million on capital expenditures and $32 million on acquisitions, leaving us with a net increase in cash of $7 million.

The $55 million in cash flow from operations is up 40 million from last year. About half of the increase can be attributed to last year's first-quarter payment of $19 million in payroll taxes from 2005, which were deferred because of Hurricane Katrina.

Our cash position at the end of the quarter totaled $97 million, including $6 million in restricted cash. As you know, we have very little debt on our balance sheet, totaling about $15 million, mainly associated with notes payable related to our acquisitions.

Two other statistics of note -- DSO declined from last year, and was relatively stable with our first quarter at 47 days. We also set a record in passing 1 million visits during the second quarter of this year.

With our second quarter -- with our strong balance sheet and our Point of Care platform, we continue to believe we're very well positioned to capitalize on the consolidation opportunities in the home health sector.

This morning, we're raising our 2007 revenue guidance to the range of 650 to $675 million, and earnings per share guidance to the range of $2.10 to $2.20 per share. Both of these exclude future acquisitions.

Now, I would like to turn it over to Larry for operational comments.

Thank you, Dale. I too am very pleased with our results in the second quarter. Our strategic focus on growing the business both internally and through acquisitions, becoming as efficient as possible, and delivering high-quality home health care continues to generate strong results for the Company.

This focus generated a second-quarter internal growth rate over last year in episodic-based admissions of 13%. Our total growth rate over the second quarter of last year in episodic admissions 19%.

Longer-term, our internal growth rate of episodic-based admissions was expected to remain in the 10 to 15% range. To achieve this level of internal growth, we will maintain our focus on same-store sales growth and startups.

As Bill mentioned, during the second quarter, we opened 10 new home health locations. Our plan is to continue with our strategic branch expansion based upon local market opportunities. Specifically, we're targeting approximately 40 home health and 5 hospice startups in 2007. Year-to-date, we have opened 22 home health agencies and one hospice agency.

Regarding acquisitions, in addition to the Dyna Care and Tallahassee, Florida transactions we discussed in the first-quarter conference call, we completed another three acquisitions in the quarter.

We acquired a large agency in Oak Park, Illinois, a suburb of Chicago, with approximately $10 million in annualized revenue. We now have seven agencies in the Chicago metropolitan market, the fourth-largest nation wide in terms of elderly population.

We also acquired an agency in Lancaster, Pennsylvania, with annualized revenue in the $3 million range, making our first entrance into that state. Finally, we acquired a Certificate of Need in the Baltimore, Maryland area, expanding our presence in that area to three new counties.

All of these acquisitions were completed on June 1. We now have locations in 22 states versus 17 states at the end of last year's second quarter.

In an effort to allow investors to more easily gauge our progress and operational strength, we have broken our quarterly revenue and contribution margin down as follows -- contribution margin is pretax and pre-corporate overhead -- $146 million in home-health-related revenue related to agencies we have owned longer than 12 months, with a contribution margin of 33%; $8 million in home health startup revenue related to startups opened since the first quarter of '06, with a breakeven contribution margin -- also in the quarter, we incurred approximately $1 million in additional costs associated with agencies we plan to open in the future; $6 million in home health acquisition revenue that we have acquired since the second quarter of '06, with a contribution margin of negative 9% -- costs associated with our second-quarter acquisitions negatively impacted this group's performance in the quarter; $10 million in hospice revenue, with a contribution margin of 12%.

As Bill mentioned, we continued to roll out our Point of Care system. We believe the Point of Care system had a positive impact on our results for the quarter of approximately $1.3 million on a pretax basis, and expect to achieve savings in the range of $1.5 million quarterly after it is rolled out to all of our agencies.

As discussed previously, our Point of Care system consists of tablet PCs that are used by our visiting staff to document vivid information which is then electronically uploaded into our operating system. We expect this system to improve the quality and documentation compliance of our visiting staff and eliminate numerous back office functions at the agency level.

We had a team of operational and clinical specialists design -- are designated to rolling out Point of Care to our agencies. During an individual agency rollout, they are on-site to help the agency handle the transition. These same teams are responsible for integrating our acquired agencies, which includes deploying Point of Care to those agencies in the first week or two that we own them.

As a result of the number of acquisitions we completed in second quarter, we rescheduled the planned Point of Care conversion of our remaining agencies. We now expect that Point of Care will be rolled out to all of our agencies by the end of the year. This is inclusive of the branches we have opened and all 2007 acquisitions.

Again, we're very pleased with our performance during the quarter. And I certainly want to thank all of the operations management and staff for their efforts in achieving these results. We remain focused on being the premiere low-cost, high-quality provider in home health. We believe that focus, execution, and commitment to clinical outcomes will continue to separate us from our competition. I would like to expresses our appreciation for the support of our shareholders, customers, employees, and vendors.

At this time, we will open the call to your questions. Please limit yourself to two questions so that we may allow question time for everyone. Time permitting, we will allow for follow-up questions. Thank you.

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

Very nice quarter. A couple of questions for you -- as I look at your guidance, and I take the performance that you had in the first and second quarter, I'm just wondering -- is there anything in the back half of the year, either you are being conservative or the back half of the year looks like it might keep your EPS kind of in line with this quarter or a little bit lower?

This is Dale Redman. We appreciate your confidence in thinking about the rest of the year. And we think that -- based on what we know, we think our guidance is appropriate at this point. Obviously, we will look at that again at the end of the third quarter when we have a similar conversation.

Okay, well, I guess sort of tied to that question, is your SG&A -- sort of as a percentage of revenue, should we expect that to continue to taper off? Or is kind of the level that you are doing this quarter the way we should look at it for the remainder of the year?

I think that the G&A will probably, at least for the remainder of this year, stay in the 42, 43% range.

And then one last on, and I will jump in the queue. As far as acquisitions out in the market, obviously, you've gotten some real headway in some of these new states that you are in.

But are the targets that are coming to the table talking to you -- are you seeing more coming to the table now, with sort of the case mix reform being out there? And are they willing to talk more about reducing their price looking forward a bit? I mean, I guess that's a question for Bill and Larry.

This is Larry. Our pipeline is still very full. I would not say that the targets are discussing reducing their purchase price expectations on the proposal. I guess that's just human nature.

Obviously, we are calculating the impact of the proposed rule and taking that into consideration when we look at acquisitions. But we have plenty of acquisition targets to continue to look at, and we will keep doing acquisitions for the remainder of this year.

John Ransom, Raymond James.

I have one two-part question on acquisitions, and a follow-up. Larry, maybe you could tell us the multiple of the revenue that you paid either quarter to date or year to date for these acquisitions? Then I have a follow-up on that.

Yes. It's been about one times. And again, if it's a Certificate of Need state, or larger geography, it goes north of that. But all-in, it's been about one time.

And I'm sorry, I know you said this -- what was the revenue contribution from acquisitions this quarter? $6 million?

Yes, it was $6 million for acquisitions we've done in the last year. But the large acquisitions that we just completed, we didn't complete until June 1. So there's only one month of revenue in there.

Okay. And there's a 9% negative margin, so that would have been about a $500,000 hit to your pretax, is that right?

That's correct.

Okay. And then my follow-up question -- as you guys think about these new rules, how did you feel about your ability to model out the impact on these rules vis-a-vis potential acquisition targets? And do you think your acquisitions will remain fairly modest size until you get the final rules out?

We're confident in our ability to model out based on data that we get from the acquisitions what we think the impact of the proposed rule will be. And the size of the acquisition is dependent on our confidence level in analyzing that impact.

So no, we would not steer away as a rule from larger acquisitions. But obviously, we would not do a larger acquisition unless we felt comfortable with the impact of the proposed rule.

Okay. And as you guys look at your impact, is it plus or minus the 4% that CMS put out there? Or can you at least give us a box around that?

That's a great (multiple speakers) question, you know, and John, we've just taking the stance that we're not going to comment on it until the proposed rule. We certainly don't want to be in a position of reconciling the stance on the proposed rule to the final rule. So we're just waiting on the final rule.

Greg Williams, Sidoti & Company.

Can you talk about the continued patient movement toward Medicare Advantage plans? Did you see any of this this quarter, and how it's going to affect -- I guess I'm looking at a revenue per episode -- if any impact all?

Yes, the Medicare Advantage plans -- in the first quarter, we changed our internal growth assumption to include episodic-based admissions, which is Medicare patients that have switched to a Medicare Advantage plan, with those Medicare Advantage plans paying just like Medicare.

Our episodic-based census of revenue is still in the 93 to 94% range. Our Medicare only is in the 89 to 90% range, and there's another 3 or 4% of episodic-based admissions.

The admissions that we did in the quarter related to episodic-based -- was in the 2,000 range, which was about what was in the first quarter. So we didn't see a significant shift quarter-to-quarter. But that's something we will continue to monitor.

Okay, thanks. And switching gears, can we talk a little bit about CapEx? It looks like you said $16 million, a little over that. And you mentioned last quarter -- about $3 million would be in Point of Care, another $1 million in headquarters. Did you spend this?

Yes, John, we spent about $4 million -- we spent $4 million year-to-date on Point of Care. And that's about $2 million in the second quarter. Some of the acquisitions added probably another couple of million in the quarter. And that's basically it.

Bill Bonello, Wachovia.

Just a couple of questions. You had virtually no growth in other G&A year-over-year. I'm just curious -- two things -- one, how long you can continue to leverage that existing infrastructure before you [laid out the] -- step up the spend; and then two, was there any kind of reclassification of where the expenses fall on the income statement?

No -- if you're looking at the relationship of G&A to revenue, there's basically two things going on there. We have been able to grow revenue without significantly increasing our home office G&A. And in addition, as you may recall, Housecall was beginning to be fully integrated in the spring of 2006 but not completed. And that ramping down of expenses related to that acquisition has also helped us bring down that revenue number.

We think at least for the rest of this year, as I mentioned earlier, that the G&A number will probably stay in the 42 to 43% range.

Okay, I'm just -- sorry; not to be (technical difficulty) here -- but at least on the other G&A, I'm not quite sure I'm tracking the 42, 43%. I see that as the cost of service. But isn't the other G&A more like 14%?

Yes. But we're looking at it as a total number when we say 42 or 43.

Okay, so what are you combining to get to that 42 and 43?

Well, it's all of the G&A expenses that are listed there. I'd be glad to go through it with you in detail. Perhaps we could talk about it off-line?

That's absolutely fine. But the bottom line is you think you can continue to leverage through the year.

And then I guess in light of that, I wanted to revisit Art's question about the back half -- not about it being conservative, but just -- is there something you see in the back half expense-wise that you expect to increase in terms of maybe start-up expense or acquisition losses, or is there any other expense that you think is going to be more intense in the back half of the year than in the first half of the year?

The only expense on a high level -- we have more holidays in the back half of the year than the front half of the year. Like in the fourth quarter, you have four paid holidays, and you only have eight in the entire year.

But on a high level, that's the only expense that I see that's substantially different, unless Dale has any other comments.

No, we don't see anything at this point that's extraordinary in the last half of the year.

David MacDonald, SunTrust.

Just a couple left -- one, Larry, can you talk -- you talked about the handheld and the savings that you're getting. Can you talk about the feedback from the clinicians and the goodwill and the potential retention benefits that you're going to see there? And then I've just got one follow-up.

Sure, David. Bill mentioned we have 235 of our 296 agencies that are fully converted. The ones that were converted earlier in the process are much further along in their comfort level. And we're getting positive feedback from some of the things that it's doing for the clinicians.

We're not far enough along in the continuum for me to state that it is a retention tool, although I do believe that being able to use an electronic device and not carrying paper around with you or to your home eventually is going to lead to increased satisfaction of the clinicians and help us with recruitment going forward.

And Larry, am I thinking about it right that maybe there's a modest efficiency benefit out in the field, but the real benefit is the time that the clinicians are spending at home entering this data or not entering the data?

Well, it's twofold. From a satisfaction standpoint, you're correct in -- the clinicians that get comfortable with the system not having to carry the paperwork.

From an expense or cost reduction standpoint, it has reduced -- it is mainly efficiencies inside the agencies -- i.e., less key strokes and less time having to put that data into the systems. So you save on clinical management and clerical people. And that's where the $1.3 million is mainly coming from.

Okay, and then just one more housekeeping question. In the P&L, you had about $800,000 that rolled through the miscellaneous expense line. Bill, can you just give us a sense of what is in that number?

Yes, that's basically -- we wrote off -- as we moved into the new building, we wrote off some old fixed assets, and some other minor issues, but nothing significant in there.

And nothing that you would expect to recur.

No. They were all essentially non-recurring.

Darren Lehrich, Deutsche Bank.

I do want to revisit this question with regard to your G&A expense. If my numbers are right here, it was 40.0% in the second quarter. And you're saying it might be 42 to 43% for the balance of the year.

I guess with the efficiency that you might expect from Point of Care continuing a little bit incrementally, I just want to clarify what you are saying, because that extra 200 basis points is very meaningful from an earnings standpoint.

We're looking at a number -- I'm looking at a number of about 41.7% for the second quarter, if we add up all of the expenses. And basically, we are expecting it to be roughly in that range as we go forward. You should not anticipate a significant increase in that relationship, at least for the rest of this year.

All right, so I'm backing out D&A -- that's the difference. So I believe that would be the difference. I will take it up off-line with you then.

Then the other question I had was related to your comments to CMS -- if you could maybe just give us a flavor for that, and what the message is at this point with regard to the rule. I know you are not providing any impact at this point. But I would like to know where you take issue with the rule, and where you think CMS can make improvements.

Darren, this is Bill Borne. The only thing we really know is that we're kind of expecting the final rule to come out maybe in the month of August towards the end. That's just hearsay.

CMS is maintaining a very quiet position on any changes. We're hearing that they're looking at the case mix (inaudible) and the kind of looking at that versus the market [basket] adjustments, which obviously they have no control of.

So right now we don't have any further information. And that's why we're very reluctant to comment, because we would just rather the final rule come out. We certainly understand clearly the proposed rule. And as soon as we hear something, we will probably let the market know one way or the other on our full position on that.

But for right now, we have no other information that is conclusive that would cause us to comment either way.

But you did comment to CMS, is that correct? Or did you let the industry do that?

We went through our lobbying effort. We went through our national association, and fed our comments through our national association versus the direct route.

Very good. Thanks. Nice quarter, guys.

Kirk Streckfus, Stifel Nicolaus.

You have already answered my question. Thank you.

(Operator Instructions). Newton Juhng, BB&T Capital Markets.

I just was wondering about -- if you could give us a breakout of what was hospice versus home health in the acquisition front in Q2? And also, did you have any hospice de novos in the quarter?

We did not have a hospice de novo in the quarter. I think in the first quarter, we opened one new hospice location. And in my narrative, I broke down the revenue, and stated that there was $10 million of hospice revenue in the quarter.

I do not have it broken down between startup and acquisition. It's relatively insignificant. Off-line, Dale can certainly give you that breakout.

And also I articulated that there was $6 million of home health acquisitions revenue in the quarter, (multiple speakers) and $8 million of home health startup in the quarter.

Okay. And then just on the salary and benefits line, it looked like that part of the G&A did uptick a bit, understandably so. I'm just kind of curious as to how we're looking at that going forward if you might want to give a little more detail there.

I'm sorry, tell me what again what piece of the G&A are you looking at?

Dale, I was looking at the salary and benefits line -- just as a percentage of revenue, that seemed to uptick, and I was wondering if that going forward is kind of going to remain consistent with where you saw it this quarter?

Well, I think we're really talking about the total of G&A, but I think we will see salaries continue to run in roughly the same range. That's going to vary from quarter-to-quarter, particularly in the six-month numbers because of bonus payments and that sort of thing.

And obviously, acquisitions affect that number somewhat, because we are inheriting how they are paying their people, where whether the pay salaried or per visit -- those kind of factors.

So, Larry, is there an adjustment that's made I guess in a reasonable time frame after the acquisition is done, or is that something that takes a little while to evaluate and flow through (multiple speakers) the P&L?

It takes a little while. But usually within the first six months or so, we make adjustments -- not to cut people's pay, but maybe to go from salary to per visit.

Balaji Gandhi, Oppenheimer.

Maybe Larry you could help me with this one. On the operating statistics, I have 36,998 admissions for the first quarter of 2007 from the 10-Q. And then it looks like -- maybe this is not apples-to-apples -- but 31,599 for the first quarter in today's press release.

In today's press release, if you look under home health admissions you have 31,376 for the second quarter. And for the six-month period, you have 62,975. So the difference is right around 31,000. So in home health admissions, it's relatively the same.

Right, but if I went back to -- maybe this is a different way of defining it. But if you had taken the way you guys break out in the 10-Q admissions -- if I had summed those up, I would have had pretty close to 37,000. I think it's 36,998. Is that maybe just a different way of defining what an admission is or --?

You're looking at all admissions, private -- I think you're looking at an all-in number. We break out home health admissions that we use to calculate internal growth on number [five] -- on the breakout of the press release. So you are just looking at the 10-Q and you're seeing the total number.

Yes, so you know, base startups plus acquisitions, and then looking at all the different payers that you have. That would be -- I would have understood that to be a total home health admission number. Is that including something else, like hospice or something?

Including private admissions. It's not (multiple speakers)

Oh, okay -- got it. So the numbers in the press release don't include private.

That's correct. It just includes home health admissions so you can get a true flavor of our internal growth.

So when you say -- sorry, just to be clear; private would be including commercial pay? Or you're saying -- is that out-of-pocket?

It's non-Medicare, which would be commercial, managed care, those type of payers.

Thank you. I would now like to turn the call back over to Bill Borne for any closing remarks.

Thanks, operator. We certainly appreciate everyone's interest in taking the time to call in this morning so we could share our quarter. We certainly look forward to sharing the third and year-end with all of our investors and all of our employees that may be listening. And we hope everybody has a great day. Thank you all very much for your interest.

Thank you. This concludes today's teleconference. You may now disconnect.