Amedisys Inc (AMED) 2007 Q4 法說會逐字稿

Thank you for joining us today for today's Amedisys announcement of the acquisition of TLC Health Care Services Inc. Speaking on the call will be the management team of Amedysus. We will have a question and answer session after management concludes their statements. As a reminder, today's call is being recorded. I would now like to turn the call over to Kevin LeBlanc, Director of investor relations.

And today we're going to be talking about our fourth-quarter and year-end earnings. Good morning and thank you for joining us today for Amedisys investor conference call to discuss this morning fourth-quarter and full-year 2007 earnings announcement and related matters. By now you should've received a copy of our earnings press release. If you have not received the press release you may access it on the investor relations page on our website at www.amedisys.com. Joining me on today's call from Amedisys are Bill Borne, Chairman and Chief Executive Officer; Larry Graham, President and Chief Operating Officer; and Dale Redman, Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation or intent as well as those that are not historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today and the Company assumes no obligation to update these statements as circumstances change.

These forward-looking statements may involve a number of risks and uncertainties which may cause the Company's results to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings including our Forms 10-K and 10-Q.

In addition as required by SEC Regulation G a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website at www.amedisys.com on the investor relations page under the link press releases. Thank you and now I'll turn the call over to Bill Borne. Please go ahead, Mr. Borne.

First let me welcome each of you to this call. We appreciate being given the opportunity to update you regarding the Company's performance and share the Amedisys vision with the investing public. Our results for the fourth quarter and full year were outstanding.

For the fourth quarter we recorded net revenues of $194 million and earnings per share of $0.63, growth of 35% and 31% specific respectively over the fourth quarter of 2006. For the full year we recorded net revenue of $698 million and earnings per share of $2.32, growth of 29% and 35% respectively.

In addition to these financial results numerous other accomplishments in 2007 helped make Amedisys (inaudible) further progress towards our objective of becoming the leading provider of high-quality, low-cost home health services to the chronic, comorbid, aging population. We completed the rollout of our point of care systems. We completed 10 acquisitions adding 38 home health locations and 11 hospice locations and over $100 million in an annualized revenue. We started 32 new home health agencies and four new hospice agencies over the course of the year.

We have updated our clinical care coordination platform to prepare for the new payment system. Finally, we prepared ourselves for future acquisition opportunities through prudent balance sheet management.

On that note, we have significantly increased our acquisition pace since the end of the year. On January 1, we acquired a Puerto Rico agency which is a CON territory. On February 8, we announced the signing of a definitive agreement to acquire a home health business with 21 locations in Kentucky and three locations in Tennessee. Both of these states require (inaudible) to operate.

On February 19, we announced the signing of a definitive agreement to acquire TLC Health Care Services which has 92 home health and 11 hospice agencies located in 22 states and in the District of Columbia. The the combination with TLC is a significant and exciting milestone and a transaction we believe will be transformative for Amedisys.

The three acquisitions expand our geographic footprint, have highly complementary lines of business and strong cultures focused on high-quality, cost-effective patient care. They strengthen our penetration in some existing markets, extend our geographic reach, provide us with operations and regions with solid population growth and operate in markets we consider very attractive.

In total, the acquisitions we have announced so far in 2008 will add 117 home health and 11 hospice agencies to our footprint and increase our annualized revenue by almost 50%. With these acquisitions, Amedisys becomes a national company with a footprint that extends from coast to coast.

We believe the future of Amedisys is promising. In just three years the first baby boomers will turn 65 and become eligible for Medicare. That generation represents the silver tsunami that will place tremendous additional pressure on the nation's health-care system. Our collective need to find lower-cost alternatives to provide care for the nation's elderly is driving many health-care professionals and lawmakers to focus on coordinating care management instead of the more prevalent symptom-based care that is today provided in higher-call settings such as emergency rooms and hospitals.

Our national footprint, highly trained and compassionate caregivers and best-of-class technology platform positions us perfectly to support our care management approach to health care. We can coordinate communication between care providers and patients, manage and monitor comprehensive plans of care and interact with caregivers. As the pressure on the health-care system evolves, we will continue to monitor these changes and strengthen our business model. Our goal is not only to strengthen our position as the leading provider of high-quality, low-cost home health services but also to play lead role in the management of care for the chronic comorbid aging population that we serve so well.

As I have done on previous conference calls, I would like to extend a warm welcome to all the new employees of the agencies we have acquired since our last earnings call including the West Virginia agencies of Integracare, Estacia Home Health in Puerto Rico and Memorial One in Savannah Georgia. We look forward to welcoming even more new employees on future calls from Comprehensive Home Health Services, Family Home Health Care Inc., the businesses we are acquiring in Kentucky and Tennessee and TLC Health Care Services. We're very excited that the employees of these great companies will soon be in the Amedisys family.

I continue to marvel at the transformation of this Company we started over 25 years ago. Amedisys has grown because of the great employees who individually and collectively make it possible for us to carry out our mission each and every day of providing cost effective, quality healthcare services to the patients entrusted in our care. We have (inaudible) hard work, a passion for service and a commitment to core values that intangible separates us from our competition. I will now pass this call onto Dale for his financial overview. Thank you.

Thank you, Bill. As Bill stated we have completed our exceptional 2007 performance with another strong quarter for Amedisys. Our fourth-quarter revenue grew 35% over the fourth quarter of 2006 to $194 million. Our record revenue for 2007 of $698 million represents a 29% increase over the prior year. Our net income of $16.7 million or $0.63 per share surpassed the $11.4 million for the fourth quarter of 2006. Our 2007 earnings per share increased 35% to $2.32 from $1.72 last year.

The 2007 amounts are exclusive of the Alliance matter finalized in the third quarter which added $4.2 million or $0.68 per share. In the rest my comments related to 2007 I have excluded the impact of Alliance.

Operating income increased 37% to $26 million or 13.5% of revenue for the quarter compared to $19 million or 13.3% of revenue for the fourth quarter of 2006. Our G&A expense including depreciation and amortization as a percentage of revenue decreased from 43% for the fourth quarter 2006 to 41% for the fourth quarter 2007.

For the full year our G&A expenses decreased from 44% of revenue in 2006 to 42%. The significant decrease is due to the revenue growth associated with our acquisition and startup activity during 2007 combined with the successful integration of our [housecall] acquisition.

Our gross margin was [58.48]% of revenue for the fourth quarter compared to 56.2% for the same quarter in 2006. This decrease is due to the increase in acquisition activity during the last two quarters of 2007.

EBITDA for the quarter was $30.4 million 15.7% of revenue versus $21.9 million or 15.2% of revenue during the fourth quarter of 2006. Bad debt expense for the quarter was $2.9 million or 1.5% of revenue compared to $3.6 million or 2.5% of revenue in the fourth quarter of last year.

The increase in other income compared to the fourth quarter 2006 is due to the reduction in outstanding debt and increased interest income. We generated cash flow from operations of $93 million during 2007 and we spent $29 million on capital expenditures and $102 million on acquisitions. Therefore, our cash decreased approximately $28 million.

Cash flow from operations was up $50 million from the prior year and our cash position at the end of 2007 is $56 million. We continue to have minimal debt on the balance sheet which totaled about $24 million at quarter end consisting mainly of acquisition notes payable. Days revenue outstanding at quarter end was 51 days compared to 53 days at the end of '06.

This morning we are providing our guidance for 2008. We anticipate that revenue will be in the range of $1.025 billion to $1.075 billion and earnings per share will be in the range of $2.50 to $2.60 based on estimated 26.9 million shares outstanding.

This guidance includes the anticipated results of our two recently announced definitive agreements and does not included the anticipated onetime costs associated with those acquisitions. It also does not included any other future acquisitions. As we discussed last week, we anticipate that the TLC acquisition will have a materially positive impact on earnings per share in 2009. Now I'd like to turn it over to Larry for some operational comments.

Thank you, Dale. I'm very pleased with our results in the fourth quarter and for the full year of 2007. 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 fourth quarter internal growth rate over last year and episodic base admissions up 10%. Our total growth rate over the fourth quarter of last year and episodic admissions was 21%.

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

During the fourth quarter, we opened four new home health agencies and two new hospice agencies. During 2007, we opened 32 home health agencies and four hospice agencies. These figures came in short of our projections of 40 home health and five hospice openings. We're staffed up to accomplish these projections but we have seen a delay by CMS in the approval process.

Our plan in 2008 is to continue with our strategic branch expansion based upon local market opportunities and we will again target opening approximately 40 home health and five hospice startup locations. However, the timing of these openings is contingent upon the approval of CMS.

Regarding acquisitions, we signed an agreement to acquire six home health agencies in Georgia and South Carolina at the end of the fourth quarter. With the transactions completed during 2007 we now have locations in 30 states.

Since the end of 2007, we have made three announcements that we have signed agreements to purchase 117 home health agencies and 11 hospice agencies located in 23 states, Puerto Rico and the District of Columbia. The companies that we are acquiring have annualized revenue of approximately $340 million. Once closed we will have locations in 35 states.

As we stated on our conference call last week, we anticipate that all locations will be fully integrated into Amedisys within six months after the close of the transactions. 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. Again contribution margin is pretax and pre-corporate overhead.

$158 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 31%; $10 million in home health and hospice startup revenue related to startups opened less than 12 months with a 15% contribution margin. Also in the quarter, we incurred approximately $3 million in additional costs associated with agencies we plan to open in the future; 9 million in hospice revenue related to agencies we have owned longer than twelve months with a contribution margin of 23%; $17 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 2%.

Technology is key reason why Amedisys is the leader in the home health industry. Our point of care systems significantly expanded our care coordination platform. This strategic programming saved countless hours of staff training and accelerated our speed to market corporation in the new payment environment.

Again, we are very pleased with the performance during the quarter and the full year of 2007. 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 premier 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 express 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.

(OPERATOR INSTRUCTIONS) Art Henderson, Jefferies & Co.

Larry, could you remind us how many agencies now have point of care systems in place?

All of the agencies that we had at the end of 2007 short of thse -- the Savannah, Georgia have been fully converted. So it's about 350-ish.

Can you give us your latest thoughts on your -- the way in which you're going to integrate TLC, the steps you are going to take? Have you given some more thought as to how you're going to do that and is there anything you can share with us on that?

Sure, not knowing exactly when the transaction would close before this discussion assuming it closes on or around April 1, we're prepared that month to convert up to 25 agencies of TLC and continue that process month after month until we're completed which puts us in the four to six-month timeframe.

In the month of March, we will convert the 22 agencies we acquired in Kentucky and we have teams fully deployed and trained. And I want to remind everybody that these are the same teams that converted our agencies to the point of care all of last year as well as converted any acquisitions or startups that we did. And we now have about 8000 clinicians that have the laptop point of care.

So when you do those 25 per month I guess, that includes putting the point of care system into those locations?

That's correct.

John Ransom, Raymond James.

I was wondering if Bill could expand a little bit on the ONcore program and some of the statistical differences you see in the patients that you're following post-discharge versus the one that you don't follow.

Sure, John, thank you. The ONcore program is in development and will allow us to provide care extension services to follow the patient post-discharge for a very short period of time. And it's really a care management program and it allows us to track all the critical issues for a patient to help to coordinate their services to prevent exacerbation of the illnesses that we treated them for.

So with periodic follow-up we help the patient to become more compliant with medication as well as the education we provide to them and their family during the episode of care. And the results in the reduction of emergency rooms and hospitalization in our follow-up period has been statistically significant. So we are excited about that.

We think it's actually a platform. If you look at a lot of legislative issues, physician groups as well as many other special interest groups, our focusing in on care management and we think Amedisys is caring for that exact population and our existing benefit and through the development of this care infrastructure we will be perfectly positioned for where the health care industry has to go.

Do you have a number for what the kind of apples-to-apples cost difference is between the once you are following and the ones you're not following?

Well the reduction in emergency room visits post-discharge from home care and hospitalization is as I mentioned significant. I really don't want to get into specifics at this time, John. But in the near future we will be giving more and more information to the public in reference to the achievements.

My other question is for Larry and I'll get back in the queue. I think you mentioned on the conference call relative to TLC that their branch contribution margin was in the low 20s? As you delve further into this transaction is there any structural reason why the contribution margin can't approach your 31% that you have now from mature agencies?

I think it will over time. It may not get all the way to 31% and that's part of the point of care conversion. I think we also articulated that their raw negative case mix was around 4% negative and they are going through paper-based training and hopefully we will eat into that. But obviously after they go into our point of care we feel confident that we will bring that more closely aligned with our agencies. That's part of the potential '09 upside.

And John, I want to take this opportunity to further expand on Art Henderson's question to give you guys a sense of what we have done in the last week. We have visited their corporate headquarters in (inaudible) as well as their four regional billing centers in person to talk about what the next six months looks like for their corporate headquarters.

We have visited 22 sites in person in ten different states. I personally have visited seven. By the end of March we will have visited all 100 sites in person and had staff meetings to educate them. So we feel pretty good about out-of-the-gate progress and obviously our IS team is well along in being able to help transfer data over to our systems so we will be able to start the point of care conversions beginning April.

Darren Lehrich, Deutsche Bank.

I have two questions. One is regarding the guidance, the others just with regard to cash flow. As far as the guidance question goes, I know you're not providing any quarterly guidance for 2008 but just hoping you could give us a sense for how you would expect TLC to impact second quarter and third quarter and really just would you anticipate second quarter to be lower than the first quarter EPS and then not pick up again sequentially until we get into the fourth quarter? Just want to get your ideas on last.

And then as far as fourth quarter or first quarter goes rather do you have a rough guide for us on how you think EBITDA margins will shake out with the case mix refinement? I think most read estimates are pointing to below 14%. You just did mid-15% so do you think the street is thinking about that the right way?

Let's start with your first issue which I think was related to the case mix issue?

The second question was really the case mix impact on margins in first quarter and just thinking of putting that in the context versus what you just did, I guess starting there.

On the guidance issue, you know we put out guidance today. We know there's a lot of moving parts going on with us for 2008 when we close TLC. As we move into 2008 we will also get better information related to the case mix impact and that will give us a better view of where that is.

We told you last fall that we thought it was a negative one approximately. Our current view is given all of the things that are going on and the fact that we will develop better information in 2008 the impact is no worse than negative one. We don't see major impacts on our EBITDA going forward given the caveat that we believe the case mix is no worse than negative one.

I want to get a little more color on TLC and what the first couple of quarters which for our discussions will be our quarter two and quarter three. Clearly we're having to unwind their corporate headquarters which has about 210 people and we're having to wind up, if you will, here -- higher up here. The net of that we have articulated is their corporate overhead is around 31 million and we think when all the dust settles it will only be 15 million, an accretion of 15 million but that's going to be occurring quarter two, quarter three and quarter four.

Also we have articulated how they have north of a minus four raw case mix looking at 2007 episodes. As we convert that point of care 25 agencies or so a month, we believe that will come more in line to what we've articulated our anticipation of the case mix which is no more than a minus one. We will have that negative trend we see in there. Also you will have interest expense related to the debt. We haven't finalized what that number is going to be but when we will we will clear that up.

So you have a lot -- also I have a lot of severance that I will be giving out and that we we will articulate as onetime costs. When that happens let's try to pinpoint that number on the front-end. It's a moving number and it's a little difficult. We have learned some lessons from some prior large acquisitions and one is to clearly articulate that the first couple of quarters are transition quarters which we have done. Two is to quantify as we know them the onetime costs which we will.

But if you look past that and go into '09 and you look at $300 million in revenue and you look at John's statement about their contribution margins already being in the low 20s and my statement about eventually trying to improve that, you get quite an accretion story. It's just not going to happen six months out of the gate is what we are trying to say.

That's helpful. And then just my cash flow question here. We have heard that (inaudible) have been a little bit slower with the changeover in the case mix refinement in early '08. Have things returned to normal there? Can you just give us some comments on your AR days picking up a little bit also in the fourth quarter?

I want to talk about the CMS transition and not to get too granular but to remember that every patient (inaudible) service December 31 are considered '07 to '08 straddle patients. They have their own set of reimbursement guidelines. It's not the '08 guideline, it's not fully the '07. It's less than the '07 guidelines. I tell you that story because you are asking first quarter, second quarter, third quarter, fourth quarter.

I think it will continually get better as we move into '08 episodes if that makes sense. So that's one thing that might have been missed that's going to be true for the entire industry. We're now beginning to see cash payment on not only those straddle episodes but some episodes that have begun in '08 and ended in '08. So as they have gone along they have had bumps in the road but they have been relatively good about making those corrections as we point them out to them. And then I can't remember the follow-up, Darren.

Well then I mean I guess about the fourth quarter DSOs, I think that's M&A related. But should we expect first quarter cash flow from operations to just be a little lighter given what you just said about CMS's implementation of this?

I don't really see any impact because of the mechanical operations of CMS but remember what Larry was talking to you about in terms of the straddle payments which obviously from a GAAP standpoint could affect cash flow from operations. Mechanically we think we are in pretty good shape at this point. That was not true in early January when there were some issues. Those appear to have been resolved at this point.

Ralph Giacobbe, Credit Suisse.

I just wanted to follow up a little bit more on Art's question. Could you maybe talk about some of the specific things you need to do when you go in to integrate the acquisition I guess aside from just installing a supply of care in terms of referral sources if there's retention efforts, along those lines?

Certainly and can keep in mind we have a long track record of acquiring individual agencies. It starts with an employee meeting which we do in person and we answer all their questions about transitioning to our benefits, that their pay is not going to change, that eventually they may go to cost pay per visit be we will go over that individually.

Also we have a countdown the month prior to acquiring an agency educating on steps they need to take inside the agencies, preparing their agency for the point of care. We have online training where they get to see the laptop. We send at least a minimum of two people -- one operations, one critical -- to be on-site at full month, their month of conversion to both train the office staff and the clinicians. We try to partner their directors with directors within our agencies to become a mentor if you will someone they can answer questions to.

We have a multitude of conference calls to go over benefits, payroll, transition, all the things that you would normally think of. I feel pretty solid about our process. I mean it's obviously still disruptive and a difficult time but we get plenty of resources to the acquisition agencies and we have known about this obviously for several months and have staffed up appropriately and we have a rollout plan defined by month that I feel solid we will maintain and adhere to.

That's helpful and then can you maybe talk about operating some of these agencies across some new states? Is there any differences between sort of operations that we should think about sort of state to state as you enter new territories?

(inaudible) California is totally separate. Those of you that done business in California knows that their HR laws are a little different. Workers comp is a little different. Obviously the pay scale is going to be different across the country depending on rural, urban or where they're at.

We have always and are now in 30 states prior to this transaction have done pay scales differently based on the geographic individual markets. But as far as the nuts and bolts of operating the agencies and what the salespeople do which you had mentioned that as a previous question, obviously we send the salespeople out to educate the referral sources on transaction, let them know the same people answer the phones, same people providing the service.

So we spend a lot of efforts on making sure we articulate to the market what's going on. But as far as the nuts and bolts, it's still Home Care who they call on. The procedures inside the agencies are still the same. Keep in mind TLC is 85% Medicare. We're a little over 90% so that's very comparable to us.

(OPERATOR INSTRUCTIONS) Donald Hooker, UBS.

First question and I have one follow-up. In terms of you all were talking about delays in approvals for new de novos. Can you elaborate on that a bit and talk about are there risks that those delays might sort of expand?

Yes, I will elaborate on it. We have probably about 25 startups that we have done everything on our end meaning got the location, got the lease, hired (inaudible) where we needed to hire, and we're waiting on someone to come out to the agency and to a site survey. They have started doing some more frequently here recently. It's not -- in our minds is not a matter of it, it's a matter of when. So it becomes difficult for me to articulate which quarter those will be opening.

If you look at my calls I gave you a $3 million cost number associated with agencies we have yet to open. And the reason I want you guys fully aware of that is because I believe the startups are going to happen between now and year-end. I just can't tell you exactly when.

Okay, thank you. And then in terms of the balance sheet now that we are into 2008 with the new reimbursement structure and you have some acquisitions coming on, do you have a different target debt ratio perhaps as you look into '09 and beyond strategically as you look at the Company?

Well we first of all have a conservative approach to the balance sheet to begin with but obviously when we do to TLC transaction we will be taking on additional debt probably in the neighborhood of $400 million. That's not a final may number but it is in that neighborhood. And we anticipated on a pro forma basis that our leverage ratios are going to be around 2.5 times and coming down relatively rapidly.

As you are well aware this business and Amedisys in particular are high cash flow generators so we anticipate using a significant portion of that at least in the short run to bring the debt levels down. We are obviously going to be focused in 2008 on the integration of TLC. As Larry mentioned the next two quarters, our second third quarters will be transition quarters for us and integration quarter focus for us.

So we are going to have a continuing conservative approach to balance sheet leverage. But we think there is a good opportunity for us to have some amount of debt on the balance sheet and ultimately to better serve our shareholders because of that issue.

Bill Bonello, Wachovia Securities.

Just two questions if I can. Just, Larry, you gave a lot of commentary on the impact of TLC in '08 and the time it takes to integrate it. I just want to be crystal clear, does your guidance for '08 assume that TLC will be dilutive to earnings in '08?

The guidance was 250 to 260 prior to announcing it and it's 250 to 260 after announcing it but it does exclude the onetime transition costs.

Bill, this is Dale. We believe that the onetime transition costs which would be legacy costs leases, severance, those kind of things have no long-term impact at all on the intrinsic earnings power of Amedisys.

Okay, I guess what I'm trying to sort of get a better feel from then is if we simply annualize the Q4 results we would be a little bit above the low end of your guidance. You're saying that Medicare change isn't really going to end up being all that significantly negative. I'm not quite sure what it is you're seeing that sort of suggests you wouldn't have any growth over run rate.

I think the negative is my 1% on the case mix that we have articulated in the past. I talked about how the straddle episodes on the front end converted to the first quarter and they are reimbursed at a lower rate. I don't know if that further clarifies your question.

I think it's a back end '09 story as we grow and transition TLC. But with all of the transition costs and the things I talked about of them having a 4% negative and having to roll out the point of care to get them down to our level is probably why you are seeing the conservativism in our estimates.

And then you kind of lowered your internal growth rate target. In the past you'd always talked about 10 to 15% range and now you're saying about 10% which is consistent with where you have been the past couple of quarters. Is that just -- did you do that just because of the experience you have been having or is there something that you see out there that's causing you to have a more conservative view on how fast you can grow internally?

That's a good question. If you followed Amedisys over the years when we were real small, I used to say 20% plus and then I would say 15 to 20 and then I would say least 15 and then 10 to 15. With (inaudible) of large numbers and the size we are I think 10% and stating that if you're projecting out is more reasonable.

I do think the the delay in startups has caused my internal growth to slow down a little bit. I think that it will pick back up as they come on board. But I think longer-term the 10% is still a healthy growth rate and mainly about you guys modeling and keeping you all in check.

Eric Gommel, Stifel Nicolaus.

You have a small hospice business but it is growing. I'm curious what you think of this business. It's not really core to your home health and given some of the talk about adjusting wage indexes and maybe scaling back cost of living updates, is this a business you still are interested in growing or is it just sort of an adjunct to existing home health operations for you?

It's definitely a business we are interested in growing. We have kind of backed into the size of our hospice. Through the acquisitions we bought a lot of home care agencies that have hospice associated with it. We have rewritten their software and rolled it out. We have internally talked about continuing to upgrade their technology and I believe that if there is a change in reimbursement in the next two to three years that may be an inflection point for Amedisys to take advantage of.

So we will continue to do some startups, acquisitions. I think we're going to be real busy over the next six months transitioning this. In some of our markets that we do extremely well in home care it might make sense to add a hospice agency down the road. Keep in mind the average patient age of Amedisys is currently is 82. So hospice is a service while separate and distinct and separate reimbursement is very complementary to what we're doing in home care.

Newton Juhng, BB&T Capital Markets.

Gentleman, I was wondering about the gross margin level being down, understanding the add-ons that you have brought on board. But I'm thinking about it more in terms of kind of as we look out into '08 and exiting '08. Can you give us an idea as to what you're really targeting for the combined entity to [produce] on the gross margin side?

I think over time the numbers are not going to be anything different than what we have seen historically at least in the short run. You're going to have these kinds of changes from quarter to quarter basis as we saw in the fourth quarter. We do significant acquisition transactions. In the short run our cost per visit sometimes goes up. Our revenue numbers are sometimes impacted and largely what you're seeing in the fourth quarter is the impact of those things. But I don't see any material differences going forward than what we have seen in the past.

And then I guess in terms of the de novos you staff up in anticipation of and these approvals taking a little bit longer, is there anything you can do to kind of mitigate that extra cost at least in the near-term?

We have talked about that a lot internally. I'm not willing to broaden my future and slow down on the startup process because there's some delays. And if you follow the startup accretion story, very accretive, very wise move for us to continue on. So we have gotten some things as far as the timing of when we sign a lease or when we hire personnel and looked at squeezing that number a little bit. But we are willing to carry that burden if you will because we know it's going to have a huge return in the future.

Thanks for that, Larry. Last question here is just around the tax rate. It's been bouncing around a little bit and I was wondering from a modeling perspective how we should look at that going forward.

You probably ought to be looking at about 39%. It was lower last year particularly because of the Alliance matter in the fourth quarter which is a non-taxable event. So looking forward probably something in the 39 range is where you need to be.

John Ransom, Raymond James.

I wanted to get a little more detail on the straddle reimbursement. What is the apples-to-apple's difference between fourth quarter and straddle reimbursement?

I don't have a specific dollar amount. It varies by episode but I can tell you it's lower than our average revenue per episode for '07. And obviously in the first quarter we're (inaudible) on the revenue per episode. But I just wanted to point that out. Again that affects everybody in the industry equally.

Is it 5%, 10%, 2%? I'm just trying to get an order of magnitude. I know it's lower but is it --?

I love you, John.

No (multiple speakers)

I don't know the exact answer right now. I'm scared to speculate and then you guys use that speculation. But we will give you clarity in the first quarter.

And then my other question is the timing of the overhead wind-down for TLC when does that number drop to zero if you will?

I think the last legacy cost will probably be in the fourth quarter but substantial in the second quarter, maybe a little less substantial in the third quarter, probably a bigger drop-off third and fourth quarter and by the end of the fourth quarter it will be zero.

You're obviously aware, John, there's -- our wind-up of some of the expenses we believe we're going to have to incur and their wind-down may not have absolutely coincide.

I understand but when you say substantial in the second quarter -- so let's say the run rate is $31 million so that would be almost $8 million a quarter, you're saying by the second quarter the run rate would be less than $8 million? Or should we model kind of a full $8 million and then dropping from there?

I will say the onetime costs will be big because that's when a lot of the severance packages and those type of things -- as far as modeling when you're going to get to the net $15 million, that's going to be more towards the fourth quarter and going into the first quarter of next year.

Right, so we should ASSUME in the second quarter A wind-up in the (inaudible) overhead AND probably some number between $8 million and zero for the TLC overhead. I mean -- we're netting out the severance of course. But just the ongoing cost would be -- you think it would be less than $5 million or so by the second quarter?

I don't know if I can give you a specific answer at this point, John, but you're on the right track in terms of their costs coming down and our cost going up. And until we get there and are able to talk about that a little more it's going be difficult for us to tell you precisely what those numbers are going to look like.

When would your wind-up process be completed? Is that also kind of linear to the fourth quarter or is that more of a front-end hiring process?

It's probably more front loaded. But linear probably by the end of the third quarter being in the fourth we will be fully staffed.

Okay so just based on your comments and looking through the severance, this transaction should be accretive beginning in the fourth quarter just given what you're saying?

We don't give quarterly guidance but it is back-end loaded as far as us making progress.

Okay, thanks a lot.

Operator, we will just take one more question.

Darren Lehrich, Deutsche Bank.

I know you filed an SEC filing with regard to the pricing grid and I just wanted to confirm, Dale, you said you'd start out around 2.5 tons leverage. So if I am looking at this right, should we assume that your spread over LIBOR starting out would be roughly 150 basis points on the TLC debt you're taking on? Is that correct?

Darren, we can't really comment on that at this point because what we have right now in hand is a commitment on a part of (inaudible), JPMorgan, UBS and CIBC to fund the transaction. We are in the process of syndicating the various portions of the transaction at this point and we're not going to know what the interest rates are until that syndication process is complete.

Okay but that grid is a rough way to think about the pricing I guess?

The grid is one place that we may end up. But we're not sure of that and I want to caution you that we're just not in a position where we can comment on that at this point.

My last question here. The cash balances that you have, I just wanted to get some commentary from you about the kinds of short-term securities that you hold with cash and can you just confirm whether you have any option rate securities in that cash balance? Thanks.

We absolutely do not have any option rate securities. We came out of those. We had some last year but we came out of those about six months ago and have not re-entered that market.

I want to thank everybody for calling in this morning. We had a wonderful '07 and we're looking forward to a great '08. I want to give special thanks to all of the Amedisys employees and all the help that we received throughout the year from the investment market as well. And I look forward to our first quarter conference call and share any update on Amedisys activity. I hope everybody has a great day. Thank you all for calling.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.