Amedisys Inc (AMED) 2009 Q1 法說會逐字稿

Good day and welcome to the Amedisys first-quarter 2009 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Mr. Kevin LeBlanc. Please go ahead, sir.

Good morning and welcome to the Amedisys investor conference call this morning to discuss the first-quarter 2009 earnings announcement and related matters. If you have not received a copy of our press release, you may access it on the Investor Relations page on our Web site at www.Amedisys.com.

Speaking on today's call from Amedisys will be 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.

Also, the Company urges caution in considering any current trends or guidance that may be discussed on this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks and influences which are described in the Company's reports and registration statements filed with the SEC. The Company disclaims any obligations to update information on trends or targets other than in its periodic filings with the SEC.

Our company Web site address is www.Amedisys.com. We use our Web site as a channel of distribution for important company information. Important information including press releases, analyst presentations and financial information regarding the Company is routinely posted on and accessible on the Investor Relations sub page of our Web site, which is accessible by clicking on the tab labeled "Investors" on our Web site home page.

We also use our Web site to expedite public access to time-critical information regarding the Company in advance of or in lieu of distributing a press release or a filing with the Securities and Exchange Commission discussing -- disclosing the same information. Therefore, investors should look to the Investor Relations sub page of our Web site for important and time-critical information. Visitors to our Web site can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the Investor Relations sub page of our website.

In addition, as required by the 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 Web site, on the Investor Relations page under the link "Press Releases".

Thank you. Now I will turn the call over to Bill Borne. Please go ahead, Mr. Borne.

Thank you, Kevin. Good morning and welcome to everyone who has joined us on the call this morning. We appreciate the opportunity to update you regarding the Company's performance and share our vision for Amedisys.

We had excellent results for the first quarter, recording net revenue of $341 million and earnings per share of $0.99. This represents growth of 60% and 59%, respectively, over the first quarter of '08.

During the quarter, we opened nine new home health agencies. As a result of de novo growth and acquisitions in previous quarters, we ended the quarter with 490 home health locations, 48 more agencies than the first quarter of '08. In addition, we opened one hospice location during the quarter. At the end of the first quarter of '09, we owned 50 hospice agencies, 12 more hospice agencies than the previous year. On April 1, we closed on the previously announced acquisition in Chesapeake, Maryland that added one home health and one hospice agency.

Last quarter, I encouraged everyone to visit our Web site where, on a regular basis, we posted information relevant to our company. In the spirit of full transparency, we will continue to post on our Web site relevant information about our clinical profile, quality controls, financial information, compliance procedures, and IT infrastructure. We will also post additional white papers prepared by independent consultants and organizations as they become available. As an ongoing process, we will continue to update this site with relevant facts and information that hopefully will help investors in their decision-making process. So we would encourage you to routinely visit this selection to learn more about our company.

Now, turning to recent developments related to future Medicare payments and the new administration, since the beginning of the year, there have been several discussions, both by the President and Congress, as to how Medicare payments would play into the budget for the 2010 federal fiscal year. Based on the most recent data we have, we believe that a joint 2010 budget resolution will be passed by Congress shortly and as currently drafted, it will not include additional cuts to Medicare home health payments.

Additionally, we are proactively educating members of Congress on the benefits that home health can have on reducing overall healthcare costs to treat our senior citizen population, both now and in the future. As a reminder to our shareholders, the government ultimately wants providers to reduce excessive waste, provide efficient healthcare delivery, and improve patient outcomes. We will continue to focus our efforts on providing a diversity of offerings to our patients in the most efficient manner possible so that we remain competitive in the home health industry.

As I have stated on previous calls, our focus is to care for the most complex patients in our nation, providing appropriate care for their conditions. This is where we believe the best long-term opportunities lie for Amedisys. Delivering care to elderly individuals with chronic conditions will disproportionately dominate our nation's healthcare expenditures and must be considered carefully as our whole healthcare delivery system is re-examined by the new administration.

We are positioning our organization to be a solution to the problems identified by this re-examination as a scalable, high quality, evidence-based chronic-care provider for an ever-growing, chronically ill elderly population. The Amedisys system is designed to deliver cost-effective care to this (technical difficulty) population in the comfort of their home.

The models (technical difficulty) our existing home care infrastructure, which includes comprehensive in-home assessments, patient-centric care plan development, multidisciplinary in-home care delivery, coordinated chronic-care management, and in-home end-of-life care. This infrastructure, combined with our clinical capabilities and advanced information and communication technology, will allow us to provide a robust, intensive home-based healthcare alternative to more expensive facility-based care.

Amedisys is well positioned to take advantage of the emerging demographic and economic trends. There are several initiatives currently underway that will allow us to capitalize on our market position. Our care-management expertise and information technology infrastructure can facilitate and improve physician-directed care coordination, resulting in improved outcomes and decreased costs for elderly Americans.

As you may be aware, the New England Journal of Medicine published an article in April referencing re-hospitalizations of Medicare patients (technical difficulty) discharge and the financial toll it was taking on the Medicare benefit. In addition, there were several editorials published by various major newspapers emphasizing the challenge of managing this population. We are actively working with three QIOs, Quality Improvement Organizations, in Louisiana, Georgia and Alabama, to reduce re-hospitalizations.

We believe both the political and administrative environment is ready for the critical changes needed to address our nation's healthcare problem, and that these changes could position us as a leader in care management for our target populations. I view our care capabilities, from the perspective of clinical design and scale, as one that is unmatched in the market today.

I am excited about what the future holds for Amedisys. I would like to extend a warm welcome to all of our new employees of the agencies that have been acquired since our last earnings call. We are very excited that you are part of the Amedisys family.

In conclusion, we are grateful to the talented employees of Amedisys who provide our competitive advantage of cost-effective, quality healthcare services to the patients entrusted to our care. Our passion for servicing our patients, our commitment to our core values, and the culture of hard work are the intangibles that separate us from our competition.

I will now pass this call to Dale for his financial review. Thank you.

Thank you, Bill.

The first quarter of 2009 was another outstanding quarter for Amedisys with record revenue and earnings. Our growth strategy continued to play an important role as we saw growth in our internal episodic-based revenue and our 2008 acquired agencies continued the process of improving their operational and financial efficiencies. As you know, such agencies typically take 18 to 24 months to reach the labor efficiencies of our existing operations.

I will begin with a comparison of our first-quarter 2008 and first-quarter 2009 performance. Our earnings per share increased from $0.62 to $0.99 as revenue grew $129 million, or 60%, to $342 million. This growth was generated from $83 million in acquisition revenue and $46 million from our base and startup agencies.

Gross margin decreased from 52.7% to 51.7%, primarily due to acquisitions as our base and startup margin was relatively flat.

EBITDA was $54 million or 15.8% of revenue for the first quarter of 2009, compared to $32 million or 15.2% of revenue for the first quarter of 2008.

Our cash flow from operations more than doubled to $55 million compared to $26 million during 2008.

Looking briefly at the first quarter of 2009 compared to the fourth quarter of 2008, EPS increased from $0.97 to $0.99 on a revenue increase of $1.7 million. We saw a decrease in gross margin which was offset by a decrease in G&A expenses. Interest expense decreased $1.6 million due to lower interest rates and debt levels from the previous quarter.

Additionally, during the quarter, we adopted Statement of Financial Accounting Standards board # 141-R which requires, among other things, for us to immediately expense certain acquisition-related transaction costs that have been historically included as a part of goodwill.

As a result of this change, we expensed $300,000 during the quarter that would have been previously capitalized. This amount compares to $2.3 million in acquisition-related transaction costs that were included in goodwill during the same period in 2008. This accounting change could impact reported earnings in future quarters depending upon the magnitude of our acquisition activity.

In our Q3 and year-end calls, we stated that our days revenue outstanding had been impacted during recent quarters because of our significant 2008 acquisition activity and that we anticipated significant improvement in this metric. Our net DSO peaked at 51 days in Q3 of 2008; it was 47.2 days at year-end; and 40.4 days at the end of March. To put this in perspective, our revenue increased $20 million from the third quarter of 2008 and over the same period, our Accounts Receivable decreased $17 million and our DSO decreased 10.6 days. We are most appreciative of the efforts of our home office staff and particularly our field operations in producing this positive result.

As we've previously discussed, there are two components of our receivable reserving process. We adjust our Medicare home health and hospice revenue for amounts we do not expect to collect from Medicare through an estimated revenue adjustment that reduces both revenue and Accounts Receivable. For our non-Medicare receivables, we record an expense for our doubtful accounts that reduces Accounts Receivable. Together, these amounts totaled $8.2 million or 2.4% of revenue for the quarter, compared to $10.8 million or 3.2% of revenue for Q4 of 2008.

When we estimate our Accounts Receivable reserves, we evaluate both the collection history of our revenues and the aging of our Accounts Receivable. Effective during the fourth quarter of 2008, we fully reserved all accounts older than 360 days. Our allowance for doubtful accounts at quarter end was $28.7 million or 41.7% of our private and Medicaid Accounts Receivable, versus $27.1 million or 37% of our private and Medicaid Accounts Receivable at year-end. Our estimated revenue adjustments were $7.6 million or 6.2% of Medicare Accounts Receivable at quarter end, compared to $7.2 million or 5.3% at year-end 2008.

We continue to pay down our outstanding debt associated with our TLC acquisition. Accordingly, our outstanding debt decreased $18 million to $311 million. We also reduced our leverage from 1.6 times at December 31, 2008 to 1.4 times at quarter end. This will result in a 25 basis point reduction in our interest rates on our variable rate debt.

Our weighted average interest rate on our TLC debt was 3.3% at quarter end. We ended the first quarter with $26 million in cash on the balance sheet, which is up from $3 million at the end of the fourth quarter. The primary components of this change are $54 million generated from cash flow from operations, $7 million in capital expenditures, $7 million in acquisitions, and debt repayments of $19 million.

From a liquidity standpoint, we have $166 million available under our revolving credit facility at quarter end, in addition to the $26 million in cash on our balance sheet. We continue to generate strong cash flow from operations which, after deducting required debt payments and CapEx, was approximately $40 million for the quarter, and we continue to anticipate $140 million for the year.

We are today confirming our revenue and earnings guidance for 2009. Net service revenue is anticipated to be in the range of $1.425 billion to $1.475 billion, excluding the effects of any future acquisitions, if they are made.

Diluted earnings per share is expected to be in the range of $4.10 to $4.30, based on an estimated 27.5 million shares outstanding, also excluding the effects of future acquisitions, if made.

Now, I will turn the call over to Larry for his operational comments.

Thank you, Dale. I will begin my comments by focusing on our internal, episodic-based revenue growth rate. This growth rate consists of both the dollar impact of increases in the volume of patient admissions and re-certifications for the period and the dollar impact of the rate we are paid for our services applied to the volume of patients we serve.

For the quarter, our internal episodic-based revenue growth rate was 23% with 10% related to volume and 13% related to rates. The volume increase during the quarter related to increases in the total number of admissions and re-certifications with internal episodic-based admissions growing 8%, and internal episodic-based recertifications growing 15% in the first quarter. The rate increase was primarily due to our continued deployment of our specialty programs to more of our home health agencies.

For 2009, we are projecting that our episodic-based internal revenue growth will be in the 15% range, primarily due to our TLC agencies converting to base agencies beginning in April. It is not unusual for our acquired agencies to experience a slower same-store revenue growth, even in the second year after an acquisition, as they are just solidifying their new agency processes.

This year now marks the second year for our specialty program, Balanced For Life. Currently, we have 234 BFL locations launched throughout the Company and we are continuing to roll out an additional 40 locations each quarter throughout 2009. Our Balanced For Life program focuses on reducing all risk in the elderly population by applying advanced treatment modalities related to the rebalancing of sensory, visual, muscular, and the vestibular system, which involves the inner ear. This program is critical for our patients in that it addresses the leading cause of injury deaths and hospitalizations for trauma in the elderly. Balanced For Life as one of our 14, evidence-based clinical programs aimed at improving the health of our senior population.

Shifting to startups, during the first quarter, we opened nine new home health locations. We currently have approximately 160 startups in various stages in the pipeline. Of these, approximately 70 are incurring expenses but have not yet opened, and our 2009 target is 40 new home health locations.

Regarding hospice, we opened one new agency during the quarter and we are targeting five hospice startups for 2009.

Moving to external growth, we acquired two home health agencies located in Yuma, Arizona. We closed a second acquisition during the quarter from White River Health System in Arkansas, which has one hospice and three home health agencies. After the end of the quarter, on April 1, we closed the previously announced acquisition located in Chesapeake, Maryland, which consisted of one home health and one hospice agency. I would like to welcome to Amedisys all of the new employees who have just joined us from Yuma, White River, and Chesapeake.

We had a healthy pipeline of acquisition candidates and we continue to analyze potential opportunities as they become available. However, given the reimbursement changes being discussed in Washington, we are being more selective in our acquisition targets and more conservative in our pricing.

Turning to the results from operations, our quarterly revenue and contribution margin are broken down as follows -- contribution margin is pretax and pre-corporate overhead; $238 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 31%; $7 million in home health and hospice start-up revenue related to startups open less than 12 months with a negative 6% contribution margin. Also in the quarter, we incurred approximately $3 million in costs associated with home health and hospice agencies we plan to open in the future.

$14 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 16%, $83 million in home health and hospice acquisition revenue, associated with acquisitions completed during the last 12 months with a contribution margin of 21%.

On a quarterly basis, CMS publishes information on how home health agencies compare on 12 measured patient outcomes. This information is presented on a rolling 12-month basis. The latest data published shows that Amedisys exceeded or met 10 out of the 12 outcomes when compared to the national averages. The organization improved or met its scores in 11 out of the 12 outcomes when compared to the previous quarterly reporting.

Amedisys currently delivers care in 37 states. However, our growth originated in the southeastern region. 75% of all of our care is currently still provided in the South. The Southern footprint's hospitalization rate is 33%. Our hospitalization rate is 31% in that same region.

Amedisys is in the implementation phase of a multiyear plan to improve patient outcomes. Irrespective of our regional saturation, the results of our initiatives are beginning to be seen in the data. Over the last three reporting periods, our hospitalization rate to the national benchmark spread has reduced from 400 basis points to 150 basis points.

Our number one priority is our patients. Our primary responsibility is to deliver positive clinical outcomes to the patients entrusted to our care. To that end, we've spent a lot of time and resources developing innovative clinical programs such as Balanced For Life, Partners in Wound Care, and Heart at Home. These programs increase the level of care being provided to our patients and help them avoid unnecessary hospitalizations and emergent care. Over the next 12 to 24 months, you'll continue to see Amedisys improve its clinical outcomes as we refine and implement new clinical delivery models.

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. Operator, please go ahead.

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

Thank you very much. Good morning, gentlemen.

One of the things I was just kind of curious about was if you could give me a little bit more detail on the D&A expense. You know, that definitely jumped a little bit higher than we were expecting on a quarter-over-quarter basis. Understanding that the last quarter had a portion of it that was due to the true-up of purchase accounting for TLC, but I was just wondering what the remainder might be due to that caused the jump this particular quarter, and how we should be looking at that number going forward.

This is Dale Redman. In the fourth quarter, as you have pointed out, we did some true-up on our TLC acquisition property and equipment, and we made an adjustment not only to the balance of those accounts but to the depreciation expense. So that number was lower in the fourth quarter than it will be going forward, and the number in the first quarter of this year is more indicative of what things will look like going forward.

Okay, Dale, so that should be a baseline to work off of. Then the other thing I was wondering, and Larry, you might be a better person to ask on this front -- was just regarding your internal growth rate, 23% this quarter, obviously a lot higher than what you originally were projecting for the year. How should we be looking at that number? Should we expect a pretty precipitous fall-off beginning next quarter, or should it be more gradual over the course of the year?

As you know, it is made up of three components -- admission growth rate, recertification growth rate, and the growth rate in your revenue per episode. As you also know, TLC will be included in that calculation beginning on April 1.

What I stated was for the entirety of the year. It will be in at least the 15% range, so using that logic, it should fall off slightly from 23% quarter one to quarter two. But again, it is made up of three different components.

Okay, so -- but you don't want to break out how it's going to look amongst those components right now, or --?

No, I don't want to get into projecting revenue per episode or recertifications or admissions. A lot of that has to do with the acuity level of our patients and the mix of our patients, so we just kind of want to lump them all together and talk about it in terms of a double-digit, at least 15% internal revenue growth rate.

Okay. I have a number of other questions, but I will take them off-line. Thank you very much.

Art Henderson, Jefferies & Co.

Good morning. On the SG&A, you guys did a really good job of keeping that actually flat to slightly down. I am wondering. What sort of initiatives were going on there during the quarter and how should we think about SG&A throughout the remainder of the year?

First of all, the SG&A we've seen and the improvements we've seen there were what we anticipated when we made the acquisition of TLC and some of the other acquisitions that we did last year. We are beginning to see the positive benefit of that sort of across the board in all of our expense categories.

Larry, maybe do you want to mention any of the specific initiatives? We always have ongoing, large initiatives that are unrelated specifically to acquisitions.

As a reminder, TLC was running about $30 million of corporate overhead when we bought them. We actually consolidated and ended up with less than $15 million in net corporate overhead. So that is part of the corporate savings. As well as TLC in the field, we are beginning to see improvement in SG&A in the field level as a result of putting in our point of care and efficiencies we are getting there. I would expect to see continued improvement and efficiencies throughout 2009.

Okay, that is helpful. My follow-up question on the cash flow, first of all, in terms of DSOs, it looks like you are at a pretty optimal level. As we look ahead, should we be thinking about that, kind of in this 40-day level, or is it going to bounce -- I assume it will bounce with acquisitions a bit, but 40 days, is that kind of where we need to be?

Then secondarily, just on uses of cash flow, as you think about deploying capital, is the idea of a buyback back on the table again, just given where the stock is and the attractiveness of the Company's valuation probably, relative to what you could get acquisition-wise? Thanks.

Okay, all right, thanks. That is 2 1/2 questions.

Sorry, I had to slip it in.

No worries. DSO, we are pleased with where the DSO number is. We continue to make improvement -- we saw improvements across the board, not only in DSO but in the aging of our receivables. The area that we probably can have continued positive impact is in our private and non-Medicaid. We see some positive possibilities in Medicare -- not Medicaid, excuse me, Medicare. We see some positive improvement in Medicare but probably the biggest move from this point on would be in the non-Medicare receivable. So we see some possibility of continued improvement.

On the uses of cash, we always look at all of the finance opportunities that the Company has across the board, and we will continue to do that. In the short run, you will see us continue to pay down debt and look for acquisitions that are appropriately priced.

This is Larry. Dale went over how we have $160 million available on our line of credit. We have $25 million cash on the balance sheet, and we expect to generate about $140 million of free cash flow during the year. We certainly internally run the calculations of what a stock buyback would look like and compare that to using them on acquisitions.

We are a growth company. We think the best use of our cash is to continue to look at acquisitions, but we monitor the stock price and we look at where we are at in relation to a stock buyback. We also have to take into account, in this credit market as we use capital, going out and replacing it may not be something you can do in the short-term. So we've got to take that into consideration when we look at the use of capital.

Thanks, guys. Nice quarter.

David MacDonald, SunTrust.

Just a couple of questions -- one, Larry, is the 21% for kind of the entire acquisition revenue number pretty much where the TLC margins are right now? Again, there's no real reason structurally that those couldn't reach mature agency margins at some point, is that correct?

That is correct. You are talking about the contribution margin of 21% compared to the mature agency margins of 31%?

But that 21% is a good number for where TLC is sitting right now?

Yes, that is about where TLC is running. Most of that revenue that I articulated was TLC revenue in the acquisition.

Okay. And then just one kind of anecdotal question, more on the pipeline. When you look at what is on the table reimbursement-wise and a potential rebasing in 2011, can you guys just kind of walk us through the thought process and frankly how you value something? Should we expect maybe some of the more material potential acquisitions maybe to be pushed out a little bit until there is some visibility on exactly whether that is going to happen or what it means?

I think your last comment is a fair comment. We obviously want some clarity on reimbursements before we pursue larger acquisitions. That does not mean we are not in discussions with various-sized acquisitions, but we would wait to see what happened with pricing.

The other thing is we constantly refine our pricing model in comparison to what we think might happen best case and worst-case scenario with pricing. Historically, we've paid four to six times trailing EBITDA adjusted for what we think we can do with it. We will probably be on the lower end of that going forward as a result of future pricing changes.

Okay, thank you.

Whit Mayo, Robert W. Baird.

Thanks, good morning. Dale, do all of the 92 TLC agencies roll into the same store count in the second quarter, or do those West Virginia agencies that were delayed, do those push out?

I think we are probably going to do all of those in the second quarter, even if some of them technically weren't owned by us until later in the year. But the practical impact of that is that we owned those agencies when we closed the transaction. Legally, there were some issues that had to be worked out later in the year, but I think, from a practical standpoint, it makes more sense for us to do that in the second quarter.

Okay. What other -- I mean, do the HMA -- the HMA agencies, are those rolling into the same store count? What is still out aside from TLC at this point?

There's a number of acquisitions that we did later in the year that are smaller. I don't know that I have a list in front of me, but there is a number of them I can give you off-line that happened later in the year -- second, third and fourth quarter -- that we can give you.

Okay, but those Kentucky and Tennessee, the 21 agencies, those are in the same store count, though, as of this quarter, right, the first quarter?

Yes, the HMA agencies occurred in the first quarter.

Okay. Well, we'll talk off-line about all of that. But are you guys -- are you fully done with the TLC integration at this point? I mean, have you bought out their IT vendor at this point in time? I am just wondering if there is anything left to be done at this point.

We are done with the IT integration. We are done with the agency point of care integration. Now we are beginning to roll out our clinical programs to include choosing some Balanced for Life agencies that will roll out and really focusing on growing those agencies from this point forward.

Okay, thanks, guys.

John Ransom, Raymond James.

Good morning. One question is it looks like your $6 million loss from de novos was higher than you've been running. Where do you expect that to trend for the rest of the year, and what was behind the bigger number this quarter?

A couple of things -- it was a negative 6% contribution margin on the agencies that we've owned -- started up less than 12 months. We lost $3 million during the fourth --

Oh, I'm sorry. I got the number wrong.

Yes, and that is consistent with fourth quarter. It is going to be in that range. It may tick slightly because you notice I am talking about 160 agencies in the pipeline, and 70 are incurring expenses. So it would not be unreasonable for that $3 million to tick up slightly, but not dramatically.

Okay, yes, that's right; I just checked. Then, it looks like TLC has been running in the low 20s. Larry, how long do you think it will take to close that gap between TLC and AMED?

I think over the next year to 18 months; I'm hoping a little sooner. But we had put them through a radical change by putting them on the point of care, putting them with our staffing model. Now, we are beginning to deploy the clinical resources, so the last thing to come would be the growth. When that comes, you'll start to see improvements in that contribution margin.

So just by putting them in the base next quarter, that is going to dilute your -- I assume there's not a lot of organic growth with those agencies at the moment, so just by putting them in the base that will dilute your same-store numbers a little bit?

That is correct.

Okay. Then last question is, Dale, I missed the number on the reserve for the 1Q versus 4Q on your non-Medicare receivables.

The reserve balance is $28.7 million or 41% of private and Medicaid. And fourth quarter was $27.1 million and 37%.

Okay, thank you.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everyone. I wanted to just ask one question here about the hospice business, if you could just update us on your progress there, what the census levels are. I think, in your prepared remarks, you mentioned that your base and startup were running a little bit below even the ones that you've acquired, so maybe just talk about that disparity.

On hospice, we are now up to 50 hospice locations. We have had good census growth over the last six or seven months. In totality in hospice, we are approaching a census of around 1800 all in -- various stages obviously with some startups mixed in with some acquisitions. In the second quarter, a lot of the hospice acquisitions will roll into internal. I am anticipating that will help my contribution margin because some of the agencies we've acquired are more larger, and as you know in hospice, as the census grows, the contribution margin increases. So we are feeling pretty positive about hospice, still looking at smaller hospice acquisitions and looking to continue to ramp up startups over the next year to two years in the hospice arena.

Okay, thank you for that. Then my second question just relates to your expectations I guess for the upcoming rulemaking process in home health for Medicare. Any indications you have? What do you think the industry would be looking for in terms of the 2010 update?

On 2010, you're talking about -- you know, there's two things. Bill talked about the budget process which right now in the drafts of the budget proposals, there's actually no cuts related to home care, but as we all know, they are going to be bringing up Medicare reform and talking about universal coverage. I think that's when all providers will be on the table, and there will be much discussion.

I do feel good about our lobbying efforts, both on the grassroots effort and with the key committees. I think we are getting our message across that we actually help reduce hospitalizations, which was one of the major concerns.

But there's a lot on the table to be discussed in the upcoming months. In my personal opinion, it's going to be in the fall or later this year before there is real clarity. But the first indication we might get is in the June or July timeframe, as we start seeing the first drafts that come out of Congress.

I didn't know if Bill wanted to add anything to the legislative process.

Yes, I was actually asking more about the regulatory framework with regard to proposed rules and ultimately final rules. We've seen lower market baskets in general, and I don't know if there is any sense that you guys are getting with regard to what they might do with the case mix creep adjustment in '10 any differently than they've laid out before. So that's really the question.

Darren, we don't have anything that tells us that it's going to be anything different. Obviously, legislation has to happen to eliminate the market basket. Right now, the market basket is scheduled in for '10/'11.

We are looking at a lot of issues there, as Larry mentioned. Right now, it would be challenging for us to comment because you know it is a very brittle environment and we think that there's going to be a lot of changes in healthcare legislation this year. Hopefully, if it is all focused on managing the chronic population, it will position us well for the future.

Okay, thanks a lot.

Kevin Ellich, RBC Capital Markets.

Good morning. Thanks for taking the question. Larry, going back to the start-up delays, it seems like the costs that you guys are incurring keeps getting bigger. Last quarter, I think you had about 45 centers that you were incurring expenses on; that was about 30% of the 150 you had in the pipeline. Now the 70; I think that's roughly 44%. What is going on with the delays, and how do you think about proceeding from here?

Well, one of the reasons you are seeing increased costs is we are actually increasing the number of agencies we have in our pipeline. There have been delays in opening. We feel like the number of agencies we open will start to increase in the upcoming quarters simply with the large numbers. As a reminder, they are extraordinarily accretive; they are the right thing for us to do. So we are investing in the startup process. We do not have ultimate control over the intermediary doing all of the regulatory things they need to do to open up, but you'll continue to see us with a large number of startups in the pipeline. I think the cost we've been incurring is about $3 million per quarter, and I mentioned to John Ransom, around that number, it might uptick slightly going forward. But we are managing that process and you manage it by the number you put into the pipeline.

So are the delays still primarily administrative on the FI's part? Are there any states that are worse than others, like Texas?

There are states that are worse than others. We are now in 37, and we are also looking at entering some new states over time. So every state is different, and it is mainly the regulatory delays that -- it hasn't been a high priority for them to push through on the surveys, although we are doing everything we can on our end. I am pretty pleased that we opened up 10 in the first quarter, and hopefully we can do at least that in the second quarter, if not a few more.

Okay. Then just real quickly on the acquisition environment, you mentioned that you hope to see multiples at the lower end. Is that what you guys are seeing in this environment with the uncertainty with reimbursement?

That is what we are pushing for as we negotiate pricing. It is all over the board as far as CON, non-CON states, but to give you an IE, CON states prior -- before were in the 1.3, 1.4 times revenue. They are pushing down closer 2-to-1, 1.1 times revenue. Non-CON was the 1 to 1.1 revenues; they are pushing down to the 0.8, 0.9 parameter. But again, it depends on the demographics in CON/non-CON. But we are really driving that process. We are not going to wait for -- if we wait for the parties to lower their pricing, I think we would be waiting forever. So we are driving that on the front end.

Okay, thank you.

Kevin Campbell, Avondale Partners.

Thanks, just a few quick questions. Could you guys talk a little bit about your clinical programs, and are there any plans to roll out? I know you still have some room to grow with your current program that you are rolling out, but are there any plans to roll out any new ones here and when might we see that, if so?

Yes. Currently, we have 14 programs. A lot of our emphasis is on implementing some of those in some of the new markets that we've incurred. What we do is we evaluate all of the diagnoses that are coming into our home care system, and we make sure we have clinical programs to address the major diagnoses, which we currently do, but we currently always evaluate whether there should be new ones. A couple of years ago, that's where Balanced For Life came from. But what you might see is the rollout of our Partners in Wound Care or Heart at Home, Diabetes at Home in some agencies that we've acquired over the last couple of years.

Okay. Then lastly, just real quick on the DSOs, was there any one-time benefit that led to any of the reductions, or was that all expected to be ongoing and, I think as you said earlier, potentially improve?

No, there wasn't any one-time issues. Just you saw our reserves have increased modestly from the fourth quarter. In terms of the balance and the expense numbers, weren't materially different.

The aging, as you'll see when you get the 10-Q, improved across the board with the exception of our non-Medicare receivables that were over 365 days, all of which were fully reserved,. and that was a modest increase. Everything else improved sequentially from the fourth quarter to the first quarter, so there was nothing out there that was a one-time issue. This was an across-the-board issue and as we talked about last fall, it was primarily a result of getting the full integration of all of our acquisitions for last year and working through the regulatory issues and basically getting to a point where things were back to normal. That's where we are today. We do see the possibility of some further improvement in DSO as we go forward, primarily in the area of private and Medicaid.

Great, thank you.

Donald Hooker, UBS.

Thank you. Just a clarification -- somebody else asked this question earlier about the recent acquisition revenues. I think it was $83 million and that carries a little bit of a lower margin, I think 21% you all said. I mean, do you have any sense -- can that get to the 31%? Or do you have any target there on those revenues?

The short answer is yes, because you've got to keep in mind the 31% is cumulative of every agency we've either started up or bought over the years, so that is our cumulative average. So we have no reason to believe that our new acquisition revenue won't eventually reach those levels.

Okay, got you. Then just a quick definition on, just again, another clear-up kind of question. You mentioned $140 million of free cash flow you estimate for '09. Is that inclusive of scheduled debt paydowns or anything like that?

It is exclusive of scheduled debt payments.

Okay, got you. Just wanted to make sure. Thank you, sirs.

Eric Gommel, Stifel Nicolaus.

Thanks for taking my question. You know, the hospice business is still a small piece but it is a growing piece and it is getting larger. The proposed rule that came out, relative to hospice reimbursement, can you give us any kind of color as to what the delta is between sort of the proposed budget neutrality adjustment or I guess the elimination of that, and sort of what you are actually thinking about relative to 2010 on the market basket and how that might differ?

Yes, a couple of things -- the expected market basket increase in October of 2010 for hospice is in the 2.1% range. If the elimination of the budget neutrality factor goes into play, that will be a negative 3.1% for an overall negative 1% reduction in hospice reimbursement.

Now, there's a lot of discussion about not doing the budget neutrality factor. It got delayed last year, but if it goes into effect the way they are currently discussing it, you can think of it as a 1% reduction in hospice reimbursement.

I understand that, but relative to your business, can you give us any idea how much in dollars that would be?

Yes, we are currently running about $80 million annually in hospice revenue.

Okay. Then just my follow-up question, really on the wage rate side. I mean, I know you pay per visit, but how is this year relative to labor compared maybe to last year or prior years, when you talk about nurses and therapists? What are you seeing out there relative to wage rates and competition for nurses and things?

Our salaries and wages each of the last two or three years have increased between 3% and 4%. We are not seeing anything out of the ordinary currently. We do a very good job of recruiting therapists. We've grown tremendously in the number of therapists in our organization as a result of our Balanced For Life and the modalities we are offering. So, currently we have not seen any significant changes in the wages we are paying for nurses. You may see that in the years to come, but currently we are not.

Okay. Great. Thank you.

Thank you, Eric, for your questions.

We thank everyone for calling in this morning. We are very pleased with our first-quarter results. We are looking forward to sharing our second-quarter results when they are available.

We are as excited about the opportunities that we think new legislation will bring our industry in referencing to manage the chronic complex population and reducing re-hospitalization. We look forward to chatting with everybody in the near term. Everybody have a great day.

Thank you, everyone. That concludes today's conference. We thank you for your participation.