Amedisys Inc (AMED) 2009 Q2 法說會逐字稿

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

Thank you, Patrick. Good morning, and welcome to the Amedisys conference call this morning to discuss the second quarter 2009 earnings announcement and related matters. If you've not received a copy of our press release, you may access it on the Investor Relations page on our website 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 a Company's results to differ materially from such statements. These results 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, risk 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 its periodic filings with the SEC.

Our Company website address is www.Amedisys.com. We use our website 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 subpage of our website, which is accessible by clicking on the tab labeled Investors on our website home page.

We also use our website 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 SEC disclosing the same information. Therefore, investors should look to the Investor Relations subpage of our website for important and time-critical information. Visitors to our website can also register to receive automatic email and other notifications alerting them when new information is made available on the Investor Relations subpage of our website.

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 on the Investor Relations page under link Press Releases.

Thank you, and now I'll turn the call over to Bill Borne. Please go ahead, Mr. Borne.

Thank you, Kevin, and good morning. I would like to welcome 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 outstanding results for the second quarter, recording net revenue of $378 million and earnings per share of $1.27. This represents growth of 21% and 67%, respectively, over the second 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 entered the quarter with 498 home health locations, 44 more agencies than the second quarter of '08. In addition, we own 51 hospice agencies, seven more hospice agencies than the prior year.

I continue to encourage everyone to visit our website, where, on a regular basis, we post information relative to the Company. We will continue to update this website with relevant facts and information helpful to investors in their decision-making process. We encourage you to routinely visit the section to learn more about Amedisys.

Turning our attention to Medicare reimbursement. As you are well aware, our government in Washington has been working on major healthcare legislation. We have been following the progress of this legislation closely, and we are supporting our industry trade groups in their efforts to help craft legislation that will be most beneficial to our patients, our employees, and our country as a whole.

With the legislation process being so fluid, with so many different proposals being discussed, and with the process expected to continue into fall or later, we're going to refrain from speculating as to likely reimbursement changes or how we might address those changes.

No matter what happens in Washington, we will continue our three-prong strategy of focusing on growth, efficiency, and providing high quality care to our patients. If significant cuts are legislated for the industry, we expect it will lead to considerable consolidation opportunities. We believe we are very well-positioned, given our size, capital capacity, efficiency, technological infrastructure, and care capabilities, to manage through any negative legislative changes and to take advantage of opportunities the changes may provide.

We are encouraged by some of the non-reimbursement-related proposals being discussed in Washington, focusing on keeping the elderly in their home longer, and providing better care management and care transition opportunities. We support the general concept of these proposals, as we know there are significant opportunities to more efficiently manage our nation's costly elderly population with chronic conditions.

Amedisys's focus is to care for the most complex patients in a home setting by providing appropriate care for their condition. Long-term, this is where we believe the best opportunities lie for Amedisys -- delivering care to elderly individuals with chronic conditions who disproportionately dominate our nation's healthcare expenditures, and must be considered carefully, as our whole healthcare delivery system is re-examined.

Recently, the National Quality Forum gathered 28 multi-stakeholder experts, creating the National Priorities Partnership. This partnership has developed and endorsed six major domains for quality improvement and cost reductions, which are -- patient and family engagement; palliative and end-of-life care; coordination of care; population-based healthcare; safe care practices; and overuse of care.

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 encompasses each of these six domains to deliver high quality, cost-effective care to this targeted population in the comfort of their home. The model combines 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 technologies, will also allow us to both provide a robust, intensive, home-based healthcare alternative to more expensive facility-based care.

I stated last quarter that I was excited about what the future holds for Amedisys, and that excitement has not diminished, as we are well-positioned to take advantage of the emerging demographic and economic trends. While there may be some reimbursement headwinds that we will be required to navigate, we believe the change in reimbursement will allow us to capitalize on our market position.

Our care and management expertise and information technology infrastructure can facilitate and improve physician-directed care coordination, resulting in improved outcomes and decreased health care costs for elderly Americans. We believe that critical changes are needed to address our nation's healthcare problems, and that these changes can position us as a leader in care management and care transitions for our target population in the post-acute care sector.

I view our care capabilities from the perspective of clinical design and scale as one that is unmatched in the market today. Additionally, we are very well-positioned to be opportunistic acquirers in the home health and hospice arena. To all of our new employees of the agencies that have been acquired since our last earning call, I would like to extend a warm welcome. We're very excited about you as being part of the Amedisys family.

In conclusion, our competitive advantage of cost-effective, quality healthcare services to the patients entrusted to our care is due to the talented employees of Amedisys. These employees bring a passion for servicing our patients, a commitment to our core values, and a culture of hard work that are the heart of what Amedisys -- that separates us from our competition.

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

Thank you, Bill, and good morning. The second quarter of 2009 was an excellent quarter for Amedisys, as evidenced by our strong earnings and cash flow performance. We remain focused on maximizing operational efficiencies, pursuing our startup strategy, and continuing the process of improvement of the operating and financial efficiencies of our acquisitions, while providing quality care to the patients that we serve.

I'll begin by making a comparison of our performance for the second quarter of 2008 and 2009.

Our earnings per share increased 67% from $0.76 to $1.27, as revenue grew $65 million or 21% to $378 million. This growth was generated from $11 million in acquisition revenue and $54 million from our base in startup agencies.

Gross margin increased from 52.4% to 52.8%. EBITDA was $67 million or 18% of revenue for the second quarter of 2009 compared to $44 million or 15% of revenue for the second quarter of 2008.

Year-to-date, our earnings per share increased from $1.38 to $2.26, as revenue grew $194 million or 37% to $720 million from 2008 to 2009. This growth is generated from $94 million in acquisition revenue and $100 million from our base and startup agencies, with gross margins decreasing slightly from 52.5% in 2008 to 52.3% in 2009. EBITDA was $121 million or 17% of revenue in 2009 compared to $77 million or 15% in 2008.

Our cash flow from operations increased from $54 million in the first quarter of 2009 to $76 million this quarter. Cash flow from operations more than doubled from $58 million for the six months of 2008 to $130 million for the six months of 2009.

Looking briefly at the second quarter of 2009 compared to the first quarter of 2009, EPS increased from $0.99 to $1.27 on a revenue increase of $36 million. These results were driven largely by growth in volume, revenue per episode, and the improvement in the performance of our recent large acquisitions.

We also saw an increase in gross margin coupled with a decrease in G&A expenses as a percent of revenue. Interest expense decreased $500,000 due to lower interest rates and debt levels from the previous quarter.

As we discussed over the last several quarters, our days revenue outstanding had been impacted because of our significant 2008 acquisition activity, and we anticipated significant improvement in this metric. As a reminder, our DSO peaked at 51 days in Q3 of 2008; was 47 days at year-end, 40 at the end of the first quarter; and we are once again pleased to report that this metric has continued to show improvement, as we entered the second quarter with a net DSO of 37 days.

To put this in perspective, our revenue increased $56 million from the [first] third quarter of 2008, and our cash collections increased by $77 million over the third quarter of 2008. Over the same period, our accounts receivable decreased $25 million and our DSO decreased 14 days. We are most appreciative of the efforts of our home office staff, and particularly, our field operations in producing this positive result.

Our estimated revenue adjustment and our provision for doubtful accounts totaled $7.6 million or 2% of revenue for the quarter and $15.9 million or 2.2% year-to-date, compared to $7.1 million or 2.3% of revenue for Q2 of 2008 and $11.5 million or 2.2% for the six-month period of 2008.

We've also continued to aggressively pay down our outstanding debt, as it decreased $69 million during the second quarter and $87 million during the six months of 2009. The current balance is $242 million. We have also reduced our leverage ratio from 1.6 times at year-end to 1.0 times at quarter-end, and our weighted average interest rate on our debt was 3.6% at quarter-end.

We ended the quarter with $900,000 in cash on our balance sheet, which is down from $3 million at the end of the fourth quarter. The primary components of the change are $130 million generated from cash flow from operations; $15 million in capital expenditures; $19 million in acquisitions; and debt repayments of $87 million.

From a liquidity standpoint, we have $228 million available under our revolving credit facility at quarter-end, and we continue to generate strong cash flow from operations, which, after deducting required debt payments and CapEx, was approximately $60 million for the quarter and $100 million for the six months.

We are today increasing our revenue and earnings guidance -- earnings per share guidance for 2009. Revenue is anticipated to be in the range of $1.475 billion to $1.5 billion, excluding the effects of future acquisitions, if they're made. Earnings per share is expected to be in the range of $4.75 to $4.90, based on an estimated 27.8 million shares outstanding -- also excluding the effects of future acquisitions, if made.

Now I'll turn the call over to Larry for his operational comments.

Thank you, Dale. I will start 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 face admissions and recertifications for the periods, 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 19%, with 7% related to volume and 12% related to rates. For the six months, our internal episodic-based revenue growth rate was 21%.

The volume increase during the second quarter related to increases in the total number of admissions and recertifications, with the internal episodic-based admissions growing 4% and internal episodic-based recertifications growing 10% in the second quarter. The rate increase was primarily due to our continued deployment of our specialty programs to more of our home health agencies, which resulted in an increase in our average episodic-based revenue per episode of $325.

For 2009, we are projecting that our episodic-based, internal revenue growth rate will be in the 15% range, primarily due to our TLC agencies having converted to base agencies in the second quarter. 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 operational process.

Currently, we have 278 Balanced for Life locations launched throughout the Company, and we are continuing to roll out an additional 40 locations each quarter throughout 2009. This program is critical for our patients, in that it addresses the leading cause of injury, deaths and hospitalizations for trauma in the elderly.

Our Balanced for Life program focuses on reducing fall risk in the elderly population by applying advanced treatment modalities related to the rebalancing of sensory, visual, and muscular system, and also addresses problems in the vestibular system, which involve the inner ear. Balanced For Life is one of our 14 evidence-based, clinical programs aimed at improving the health of our senior population.

Turning to startups. During the second quarter, we opened nine new home health locations, including opening a new agency in Maine, which marks the 38th state that we provide care in.

During the first two quarters, we have opened 18 new home health locations. We currently have approximately 150 startups in various stages in the pipeline. Of these, approximately 80 are incurring expenses but have not yet opened, and our 2009 target is 40 new home health locations. Regarding hospice, while we did not open any new agencies during the quarter, we have opened one so far this year, and our target is five startups for 2009.

Shifting to external growth. We acquired one home health and one hospice agency located in Chesapeake, Maryland in April. We also acquired an operation that possesses a Certificate of Need in Jackson, Mississippi. We have a healthy pipeline of acquisition candidates and we continue to analyze potential opportunities as they become available. As I stated last quarter, given the changes to reimbursement being discussed in Washington, we are continuing to be more selective in our acquisition targets and more conservative in our pricing.

Moving to results from operations. Our quarterly revenue and contribution margin are broken down as follows -- contribution margin is pretax and pre-corporate overhead, $335 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 30%; $10 million in home health and hospice startup revenue related to startups open less than 12 months, with a 9% contribution margin.

Also in the quarter, we incurred approximately $4 million in costs associated with home health and hospice agencies we plan to open in the future; $22 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 28%; $11 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months, with a contribution margin of 16%.

Our mature home health agency margin of 30% [to see slightly] lower than this has tracked historically, driven largely by the inclusion of TLC in this bucket of agencies, and is an indication of further accretion possible from this acquisition. That said, we did see improvement in TLC's operating margins quarter-over-quarter, as well as improvement in the margins of some of the larger acquisitions we did prior to TLC.

As Dale mentioned in his comments, margin improvement at our acquired agencies had a meaningful impact to our Q2 versus Q1 EPS improvement.

With respect to outcomes, 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 average. The organization improved or met its scores in 12 out of 12 outcomes when compared to the previously quarterly reporting.

Amedisys is in the process of implementing a multi-year plan to improve these outcomes. The results of our initiatives are being seen in the data. Over the last four reporting periods, our hospitalization rate to national benchmark spread, has reduced from 400 basis points to 130 basis points. Most notably, from the last outcome reporting period, 236 of our 498 homecare locations reduced their hospitalization rate.

I would like to thank our locations for their continued clinical emphasis on reducing hospitalization. Our number one priority of our patients, our primary responsibility, is to deliver positive clinical outcomes to the patients entrusted to our care. To that end, we have 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 increase the level of care being provided to the patient and help them avoid unnecessary hospitalizations and emergent care events.

Over the next 15 to 24 months, you will continue to see Amedisys improve its clinical outcomes, as we refine and implement new innovative clinical delivery models focused on our chronic, comorbid patient base. I would like to express our appreciation for the continued support of our shareholders, customers, employees, and vendors.

At this time, we will open the call to your questions. Please limit yourself to two questions so that we may allow question time for everyone. Operator, please go ahead.

(Operator Instructions). Brian Tanquilut, Jefferies & Company.

Hey, guys, congratulations on the good [Q3] results. I just want to ask -- in terms of industry admission trends, just wanted to see if you guys can comment on what you're seeing now as an industry, where the volume or admission trends are. And then your trends, whether that reflects any incremental market share gains or what you're expecting as it relate to that going forward.

Brian, this is Larry. I appreciate your question. Historically, we've stated that the industry is growing in terms of dollars around the 6% to 8% trend. We just articulated that we grew in the quarter 19%. So we feel like, through acquisitions and internal growth in our clinical programs over time, we have been taking market share. And we look for that trend to continue, as we articulated that we're expecting at least a 15% growth rate this year. So that's kind of how we compare to the industry.

Larry, is there a number that we should be thinking of in terms of admissions? Just with the senior population growing and all that stuff?

Well, we projected that our internal growth rate in total is around 15%, made up of admissions, recertifications and revenue-per-episode. While we do not forecast admissions, or recertifications, or revenue-per-episode, we do forecast the 15%.

Okay, and then second question, what's your expectation for cost inflation for 2010, whether it's nursing wages, fuel, and everything else that goes into the cost bucket?

Historically, over the last two to three years, our inflationary cost has been in the 3% to 3.5% range. We see that continuing. Obviously, we had a spike-up in fuel costs a year ago, and that's come down; it's coming back up a little bit now. We think that's probably a fair assumption.

Okay, thank you. Congratulations again.

Kevin Ellich, RBC Capital Markets.

[I'm] going forward -- with your proposed cuts in 2010 and maybe 2011, do you plan to be more aggressive to gain share? Or will you just let some of the smaller providers maybe go away and then pick up that business?

Kevin, we missed the first part of your question, but I believe it was as we face reimbursement pressure going forward, are we planning on just gaining market share by other providers struggling or are we going to be acquisitive?

Exactly.

Hopefully, we're going to be doing both. We're definitely going to be acquisitive. And in certain markets that we're already there, hopefully, we will gain from the difficulties that some smaller providers may have. So we plan to grow aggressively.

And our strategy, no matter what happens with reimbursement, is the same -- we grow aggressively through acquisitions; we grow aggressively internally through our clinical programs; we figure out ways to become more efficient, and you've seen that in both our gross margin line and our A&G lines in this quarter; and we strive to deliver high quality care, and you've seen that in the improvement in our reduction in hospitalization and how we measure on the national benchmarks.

Have you seen any changes yet on the valuation multiples for the acquisitions?

We have seen slight changes, and we're driving those changes, meaning the price that we're giving the acquirer is a little bit lower than we historically have. Obviously, there's a lot of buyers that are out there interested in selling, but waiting to see what the reimbursement impact is going to be before they give too much on price.

Okay, sounds good. And then as a question for Dale, going to the expenses, gross margins shows nice improvement. Just wondering what's driving that. And also, what else was included in the other operating expense? You guys continue to do a good job in managing costs and keeping that low, but besides the net interest expense, was there anything else fluctuating there?

Yes, in other operating expense?

Yes.

That's just the other -- that's both field, generally -- general op management expenses, as well as home office.

Okay. And then on the gross -- on the cost of service on the gross margin improvement, was that really driven by more recertifications and higher acuity patients, or --?

It's a combination of the cost efficiencies that we're trying to drive through the operation. As we talked about, the improvement in our general operations was because of volume as well as revenue-per-episode and the improvement in the operating margins of our acquisitions that we did last year.

Kevin, this is Larry, let me add to that. About half of our EPS improvement quarter-over-quarter was due to acquisitions, being more efficient and increasing their revenue; and the other half was volume-related. We had about a 1% improvement in gross margins and about a 1% improvement in A&G expenses. And as we've articulated in the past, that those are two of the areas that you will see operating leverage as our volume increases.

Specifically related to TLC, I know this question will come up -- historically, in the first quarter, our contribution margin was around 21%. It improved 4% to around 25%, and has further room for accretion. That number is now baked into the 30% contribution margin on mature agencies. Historically, that 30% has gotten to 32% to 33% on a macro basis. And we look forward to, over the next year, continuing to improve our TLC operating margins.

Two other comments on that issue. One, the G&A improvement over time is what we expect to see, as Larry mentioned, and that's a combination of the efficiencies we're trying to drive through the operation and the improvement in our acquisition operating margins.

On your original question on other income and expense, the lion's share of that is interest expense. There are other minor things that flow through there, but it's almost all interest expense.

Got it. Thanks, guys.

Newton Juhng, BB&T Capital Markets.

Thank you very much. One of the things, guys, I was wondering about was, last quarter, you talked about the de novos in the pipeline and the amount that were incurring expenses. The amount that are incurring expense has gone up, but it looks like the actual number that were projected there was -- I think you said 150 this quarter. It was 170 last, and you had 9 that kind of went live here.

So I'm wondering, do you have some in the pipeline that just never make it out because of various factors and you just feel like, while you put a little bit of money in it, it just doesn't seem worthwhile to kind of keep moving down the pipe there?

Actually, it's -- this is Larry -- it's more in relation to the acquisitions we do. Sometimes we acquire in a market that we were planning to do a startup, so that number shuffles around, if you will. So -- because we evaluate the market potential and we come with that 150 or 170 based on the market potential.

But sometimes we will acquire in a market and that number will shuffle around as we get further in. And there are times where we're looking at doing a branch and we kind of hold off, based on availability of staff or how the parent is performing. But again, 150 agencies in the pipeline, 80 are incurring costs. We had about $4 million of expense related to the 80 that are incurring costs.

Got you, Larry. Okay, that's helpful. The only other thing I was wondering about was, was there any thoughts given to maybe pre-announcing this quarter? You beat by so much. Wondering whether or not there was any thought given to getting us this information a little bit sooner, considering the size of the beat that you posted.

Well, I think that the real answer here is that we plan to be transparent as we go along and we saw really no benefit to pre-announcing the results.

Okay, Dale. Thanks for your response there.

John Ransom, Raymond James & Associates.

I had one question for Bill and one question for Larry.

Bill, the rumor mill, if you will, is that the talks with Senate finance are pretty good with the industry, whereas we're not hearing a lot of progress in either the White House or the House of Representatives. So I just wondered -- I know you don't want to speculate on what's going to happen in Washington, but could you at least comment on the tone of conversations the industry is having with the three branches of the government, and kind of where you think you're doing well and where you think you have some work to do?

Thanks, John. And really I don't want to speculate, because it could injure some opportunities for negotiations. But if you just take a look at the House and how they position themselves and then some of the deals, for lack of a better term, that it's been cut by, such as the pharma industry or the hospital industry, historically, looking at it, it's about 25% reduction in reference to what the House has done.

I think that the Senate is more of a friendly domain. I think that there are a lot of things that the industry can offer up that will be benign to efficient operators; like, for instance, looking at things like outliers that are out there in certain markets.

So, without getting too deep into detail and injuring anything that could be on the table, I will tell you that our hopes and our efforts are all oriented around a more friendly result than what the House currently has out there.

Great. And Larry, I guess that the 4% internal episodic admission growth, how much of that was a factor of having TLC in for the second quarter?

I think we were at 6% for the first quarter and 4% for the -- no, we were at 8% for the first quarter and 4% for the second quarter. And most of that reduction was due to TLC.

TLC is doing very well in operationalizing the Amedisys protocols, both clinically and back office. They've got some room to go in growth and I see that as a future opportunity, as we continue to improve and start selling our clinical programs in those markets. But very pleased with the 21% to 25% improvement in their contribution margin.

And is that a -- so, if we go back to the original TLC metrics, clearly, there was a big opportunity on the overhead side, the SG&A side, but should we think about that deal now in terms of maybe the same revenue opportunity that you had, but probably higher contribution margins and lower G&A? So the accretion is probably looking better than it even was six months ago?

Well, two things. We have fully operationalized on the corporate side and realized the savings. And at the time, we were estimating $30 million of corporate overhead, we would only need $15 million. So we've recognized that savings.

And then the second thing, you're right on point -- is continued improvement in the home health locations of TLC, improving their operation margin, understanding that now that those agencies are included in our mature contribution margin. Our mature contribution margin is 30% and it's been as high as 32% to 33%. And that was $335 million in revenue.

So you can do the math on the future potential accretion opportunities. You're not going to get that all in one quarter; you're going to get that over time. And, again, you'll see, hopefully, growth in our admissions over time.

Yes, I think our initial estimate was that it was over $1 accretive and that number may even move up. So, congratulations on that. Thank you very much. I'm done.

Kevin Campbell, Avondale Partners.

I wanted to ask you real quickly about the hospice business. It looks like you saw a pretty big improvement from contribution margins from 1Q to 2Q. If I recall, it was around 16% in 1Q, and that was on a lower revenue base of around $14 million. And then this quarter was significantly better, around 28% and $22 million.

So, how much of that was just shifting some of the revenues from other categories, say, the acquired to those that have been in there for more than 12 months? And then how much of that was actual improvement in margins in the business?

I am very pleased that you have pointed out the improvement in our hospice operations. A couple of things in the second quarter. We acquired some very strong hospice locations related to TLC. So you are correct -- in the first quarter, our contribution margin on hospice was 16%. And in the second quarter, which now includes TLC operations, our contribution margin is 28%.

We are beginning to see operational traction and growth traction in hospice. You will see that our census grew a couple hundred from 1,700; we're approaching 2,000 census now in hospice. So we're seeing growth in those markets. We've got good operational and sales management, and again, TLC actually added to our hospice strength.

Okay, great. Thank you. And wanted to follow up also on the proposed rule that should be coming from CMS here in the near future -- do you have any comments on what your expectations are for that rule?

The proposed rule is delayed as we look at it. We don't really have any expectations that would be wise in sharing at this point. We're hopeful it's got some benefits to us, and we're just looking forward to getting it so we can put it to bed -- remembering that there's a comment period of 60 days; I think there's another 30 days. So, an issue is usually concluded in October. So we think it will be right around the corner when we see something.

And are they required to put it out by law by August 1, is that correct?

You know, again, I know towards the end of October is the final date to have it completed. And to answer that specific question, I think it is, but I'd have to doublecheck and get back with you on that.

Okay, thank you.

Darren Lehrich, Deutsche Bank.

Thanks for taking my questions. Two things. I guess, first, a question for Bill with regard to the outlier topic. You guys have put up some very useful information on your website with regard to outliers. I think you reflect 2008 data at about 2% of your completed episodes are outliers.

I'm just wondering if you could talk a little bit more about the revenue exposure to outliers, if that might be much different from what you're disclosing on a volume basis.

And Bill, I'd love to just get your comments on the outlier topic, why you think Amedisys is running so much below the industry? It would seem that the outliers have pushed up nationally in a lot of places. Thanks.

Darren, I'm going to answer the first part and then I'm going to pass it over to Bill. Our outlier percentage in the second quarter was actually right around 1.4%, and it was about that in the first quarter. So all our provider numbers combined, we have an outlier percentage of about 1.4%. And now I'll pass it over to Bill.

Thanks, Larry. The bottom line, Darren, if you look at the use of outliers, it's targeted geographically in specific markets like South Florida. And depending on what year you look at, the outliers go up into the 55%, 56%. We think that there needs to be better review of those type of agencies in those markets. If you look at Amedisys' use and its broad services over large geography, outliers more than a 2% are probably more reasonable.

So, we think that CMS and, hopefully, something legislated through Congress will help us to focus on outlier caps and put something across the board that's more reasonable. And hopefully, because of the caps when they are placed, it will probably allow us to continue to provide services as is with effect to us, and then trend down some of the overuse that may be happening in higher outlier markets.

And Larry, the 1.4% that you're referencing, would that tie about the same to revenue percent? Just so I'm clear on what the disclosure is and how it might differ from what the total revenues are.

It's probably going to be pretty comparable. It's 1.4% of the episodes -- or outlier episodes, but it's probably in that range. It's not very material to our overall picture.

Okay. And then my second question here -- I guess, just wanted to discuss the guidance a little bit more. At the midpoint, it's up about 15% on the year, and obviously, the magnitude of the guidance separate is pretty surprising.

I guess I just wanted to get your high-level comments on what's really changed relative to overall performance? Is it the TLC margins have moved up a little more quickly? If you could just broadbrush a couple of things at a high level, I'd be interested in just getting your comments on what's really changed, relative to the guidance. Thanks.

Thanks, Darren. This is Dale. A couple of quick comments and I'll pass it to Larry.

Obviously, our revenue-per-episode is up from the first quarter. The TLC performance that we saw in the first quarter was significantly better than the comparison of the first and fourth quarter of last year. So, given all of that and given what we believe was a very solid quarter in the second quarter, we anticipate that the rest of the year will be at least on par with what we saw in the second quarter.

So, Larry, I don't know if you have any other comments.

Yes, I just -- Darren, I wanted to add that there were actually three acquisitions that had substantial improvement in quarter one and quarter two. One was TLC. The other one was the Kentucky acquisition that we did. And actually, IntegraCare that we did in late 2007 has gotten traction.

So, this quarter, I guess the unusual is all of them got traction and had significant improvement in their contribution margins. And that's why the combination of those three actually represents over half of our EPS improvement quarter one to quarter two.

And the revenue-per-episode that you're highlighting to us here, it sounds like it's running a little bit better than expectations. Is it fair to say that the specialty programs are going a little bit better? I know the rollout is more or less in line, in terms of number of agencies, based on what you're telling us. But can you just comment a little bit more there? And that's my last question. Thanks.

I think the revenue-per-episode of quarter one to quarter two was only up 3% or so in totality. We don't have a revenue-per-episode expectation and we are on track with our rollout.

There's a lot of enthusiasm with the clinical outcomes we are garnishing from applying those modalities to our patients, which, when I talk about Balanced for Life, actually, for risk of fall, if any of you have an older parent, you know one of the things that happens to them as they develop chronicity or get sicker, is they're scared to death of falling. And they start doing things that they think is going to protect them from falling, and in actuality, it increases the chance of them falling.

So doing a diagnostic test of that particular person, and understanding why they may be having balance issues and addressing them, is critical to patient care. And we're very proud of those outcomes, and we posted them on our website, and we continue to see positive clinical outcomes in relation to that -- which, by the way, is one of the reasons why our hospitalization rate is reducing.

And one last comment. We've also seen improvements, relatively significant improvements, over the last year and in this quarter, on our expense ratios in relation to revenue. So we are continuing to push the operational efficiencies that we've discussed with you on a number of occasions through the operation. And that's, obviously, part of our strategic plan. And we're beginning to see some of the benefits of that.

Great. Thanks a lot. Nice job.

Ralph Giacobbe, Credit Suisse.

I was wondering if you can give us the length of stay in the quarter. I think in the past, you've given us a breakdown of the percentage of patients within each of the episode buckets. Could you do that as well?

We do that on an annual basis; we don't do that on a quarterly basis. So if you've seen it -- and we are committed to giving you that data on an annual basis, but no significant trend changes is what I can tell you.

Okay. And I did want to go back to TLC as well, and just make sure I understood exactly what was going on; not so much from the cost side, on the margin side, but the top line. Because I think you had said that -- not that it was tracking a little bit below, but there was sort of the opportunity there to get to corporate average as it relates to the top line. So I just want to understand those comments, what exactly you can do to help out the top line with that [affirmation].

On the top line, as we migrate our clinical programs and the 14 evidence-based programs that we have, and we educate the clinicians and the sales force, I believe you'll see some traction in TLC and growth in their admissions over time.

And you mentioned the revenue per episode -- keeping in mind that a lot of the revenue was in the Northeast and they have a higher wage index, and their revenue-per- episode actually is a little higher than we originally projected.

Okay. And then just a last question -- I guess, I mean, are you guys at all concerned with showing this type of [B and Ray] sort of ahead of this CMS proposal and all the reform debate? I mean, how should we think about that?

I'll answer that, and I'm not being facetious here, but we added up the numbers and that's what it came out to. So we didn't really have much of a choice.

I think the issue here, to make it clear, and as Bill and a number of our industry representatives have been doing is, we're part of the solution; we're not a part of the problem. And it's difficult for us to apologize for being what we think is one of the most efficient operators in the industry. We get paid the same as everybody else, and we happen to be very efficient, very technologically advanced as far as the industry is concerned. So, to a large extent, the numbers are what they are.

Right. And Operator, we've got time for one more question, but let me just add, Ralph, to the comment -- in addition to the home care benefit, obviously, we're going to see some changes. You have to understand that the home care industry is best positioned for care transitions. You're hearing a lot about hospital readmissions. And home care in the post-acute care segment is well positioned for care transitions.

There's legislation, as you may be aware, that's out there with the Senate on that. We're also looking at independent home legislation, which allows us to focus on the sickest and the most home-bound that's out there. And then there's chronic care management legislation, like the Realignment Care Act.

So we think that what we're doing in home care and the excellence of that gives us extraordinary opportunities to evolve as a leader in healthcare, managing the very complex population and environment that's most cost-effective. So, as Dale said, when people use our patients/physicians direct care to the home setting, we find that the cost is a lot less and the risk is a lot less. So, hopefully, when it's all said and done, however its position, the industry will have an opportunity to care for even more patients.

We have time for one more call.

Yes, sir. We'll take our last question from David MacDonald with SunTrust.

Two questions. Larry, first, on the hospice margin, our thinking was kind of low 20s was a very good margin in that business. Is this kind of upper 20s number sustainable, as we think over the next 12 to 24 months?

You know, the hospice margin -- it depends on the hospice census. We had substantial growth in census. And again, TLC had some strong hospice locations that rolled up into that number this quarter. And we are -- we don't project margins on an individual basis like that, but we are optimistic that we can continue our strength in hospice.

Sure. But I guess a different way to ask it was -- is there anything that -- I mean, I don't know if one time is the right way -- but anything that was disproportionately strong in terms of the census, that you wouldn't expect to recur, when we think about it on a go-forward basis?

No.

Okay.

And there's obviously -- this is Dale -- and there's obviously operational efficiencies as you grow the census in each of the agencies.

Okay. And then just one follow-up on the TLC, just ask it a little different. Is there any reason for us to think that the TLC admits, in terms of admission growth, couldn't eventually be in line with the rest of the mature base?

That is certainly our plan and we do not forecast admissions. We forecast a 15% growth, but obviously, our plan is to grow admissions in all of our markets.

Okay. Thanks, guys.

Thanks, David. I would like to thank everyone for calling in and taking the time to hear the results of our second quarter. We are excited and passionate about our Company and the prospects for the future. We look forward to speaking with you again in a few months.

Thanks, everybody. Have a great day.

That does conclude today's conference. We thank everyone for their participation.