Amedisys Inc (AMED) 2010 Q2 法說會逐字稿

Good day and welcome to the Amedisys second quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Kevin LeBlanc, Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to the Amedisys second quarter conference call to discuss second quarter, ended June 30, 2010, announcement and related matters. If you have not received a copy of our press release you may access it on the investor relations sub page on our website.

Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer; Mike Snow, Chief Operating Officer; and Dale Redman, Chief Financial Officer; and, with us for questions is Tim Barfield, our Chief Information 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, estimation, projection, expectation, anticipation, intent or similar expressions, as well as those that are not limited to 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 or actual outcome to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q and 8-K. The Company disclaims any obligation to update information provided during this call other than as required under applicable securities laws.

Our Company website 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 sub page of our website. We may 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 of a filing with the Securities and Exchange Commission in disclosing the same information. Therefore, investors should look to the investor relations sub-page of our website for this information. Visitors to our website 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 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 the link press releases.

Thank you, and now I will turn the call over to Bill Borne.

Thanks, Kevin; good morning, everyone, and thanks for calling in. On this call, we will discuss additional color regarding our second-quarter results, an update regarding the Senate Finance Committee inquiry and SEC investigation, details on our go-forward growth strategy and our outlook for the second half of the year.

As we discussed on July 13, our results for the second quarter were below expectations. We delivered revenue growth of 12%, recording net revenue of $422 million, net income of $32 million, which represents a decline of 8% over the second quarter of 2009. Normally, 12% revenue growth would be a good story, but our cost structure was built on our expectations of 20% growth, creating a higher expense-to-revenue ratio. Moving forward, it is our expectation to bring our expenses more in line with revenue. In addition, we are implementing a targeted growth strategy which we believe will yield positive results in 2011. Amedisys is focusing on its fundamentals.

As always, our blueprint for success is smart growth, organizational efficiency and, most of all, high quality of care. We are identifying underperforming assets in our portfolio, closing underperforming sites and reallocating those resources towards strategic smart growth opportunities. And, we are also leveraging our network of therapists to assist us with business development for all orthopedic programs in order to retain and gain efficiencies from this important group of talent.

We are continuously improving our position in the market and the scope of our services. We are proud of the patient outcomes we have achieved, which are among the best in the industry. Our views are validated by Home Health Compare, data which is collected and reported by CMS on 12 quality measures, indicating that we met or exceeded the average in 11 of the 12 measurement categories in the geographical footprint we serve. The only quality metric where we do not exceed the average as of today is hospital admissions. We are committed to reducing our hospital admission rate. Our belief is that if we differentiate ourselves on this metric we will be an attractive partner for hospitals, accountable care organizations, medical homes and many others.

One of the many initiatives to accomplish this goal is our Continuum of Care Initiative, which builds upon several of our ongoing, established initiatives such as Point of Care, Encore and Mercury Doc. With other innovative care strategies such as leveraging our weekly care team conferences at each of our care centers, formerly known as agencies, across the country with multi-disciplinary clinical teams we will work together under the direction of our medical directors to ensure our patients are receiving the best care. , our national rollout of our care transition platform which supports and empowers patients and caregivers as they transfer from facility-based care into the home care and hospice setting.

, our centrally-based advanced chronic care program, which identifies the patients of highest risk of being admitted to hospitals, and puts them under the care oversight of advanced certified nurses and nurse practitioners; our local-market, care-center-based, nurse practitioner pilot, where we are providing advanced nurses in five markets to support our care teams and physicians, which is receiving solid reviews from the local medical community and patients alike; and the continued roll-out of our tele-health program in selected markets.

All of these efforts will improve the quality of outcome for our patients, and these investments will also lead to growth. Alternately, if we provide better care for patients and we become a more attractive home care and hospice service provider to (inaudible) [sources] and payers.

Now let's turn to the regulatory environment. On July 16, CMS issued new proposed rules for home health. Many of these proposals are focused on cost reduction and ensuring patients receive quality care. We applaud CMS's effort in this area as we strive for the same goals every day. We will respond vigorously in the comment period as it relates to the additional case mix creep adjustment in 2011 and the newly imposed case mix creep adjustment in 2012.

Another area where we believe we can propose some compelling alternatives is around the compressed time frame that CMS has added to the face-to-face encounters with patients. We believe the spirit of CMS's face-to-face rule has merit. We support any initiative that increases physician involvement in home care.

However, this rule as proposed presents practical problems that could impede the ability of patients to receive necessary care in a timely manner. Amedisys, along with the home health industry, is proactively proposing solutions that we believe will help CMS achieve its intended goal.

Now let's turn to the Senate Finance Committee inquiry and SEC investigation of the home health industry. We proactively addressed this on July 15 when we issued an open letter to shareholders sharing data we submitted to the Senate Finance Committee. We appreciate the resulting letters and e-mails of support we have received during the past few weeks.

In it's inquiry, the Senate Finance Committee focused on our Balance for Life falls program, which we addressed in our shareholder letter. As a reminder, in 2006 our internal research and CMS's data identified that falls was one of the leading factors causing a hospital admission during an episode of home care. Our Balance for Life falls management program was developed in 2006 and applied in 2007 in response to this challenge.

Ironically, the CDC just recently reported that falls are the second leading cause of injury in hospital admissions amongst the elderly. This issue of falls is being widely discussed. [Thus], OASIS-C, CMS's new assessment document implemented in 2010, which all home health agencies are required to utilize to evaluate patients upon admission now for the first time incorporates elements related to fall prevention. In July, CMS's own Home Health Quality Improvement national campaign, HHQI, issued its best practice intervention package targeting fall preventions. And again in July, the joint commission just launched a national campaign, called Speak Up, to help prevent falls in the elderly population.

Amedisys has been leading the way in falls prevention with our Balance for Life program for three years. It is the only multidisciplinary program of its kind that uses leading-edge vestibular balance intervention and has proven to produce excellent clinical outcomes, which again are highlighted in our shareholder letter. We hope our stakeholders and the committee see clearly Amedisys's commitment to doing the right thing at the right time for every patient. Our comprehensive quality and compliance controls enable us to confidently share compliance and clinical information with the committee. We have provided the committee with all of the information it has requested, including data around therapy utilization and patient outcomes.

We have also shared the Senate Finance Committee's submission with the SEC and are preparing additional information that the SEC has requested. Our management team looks forward to bringing to closure these inquiries as expeditiously as possible. We are working to minimize the impact of these external distractions, and we are focused on growing our core business.

Amedisys continues to lead the way in terms of innovation. We are proactively investing in proven healthcare programs that are currently not reimbursed by but the requisite improvements for our patients' quality of care. For example, our care transition initiative -- this will be completed with a full nationwide rollout by September of this year. We have been working with academic thought leaders to define a new patient-centered continuum of care, and it is becoming a reality. We are engaged with several innovative hospitals and health systems, including a leading academic hospital on delivering a patient-centered continuum of care through our care transition platform. This is the only network of its kind with national reach and coordination of care capabilities that exists today. We're beginning to measure tangible results including improved patient outcomes, satisfaction and reduced hospitalization rates.

Also we are pleased to announce that, as part of our commitment to growing hospice services, we have forged a strategic alliance with Duke University's Institute on Care at the End of Life. We believe this alliance will deliver groundbreaking clinical research, studies to identify and quantify the elements that drive a quality end-of-life experience, both in terms of medical care and service delivery as well as advanced continuing education for the medical community, patients and caregivers on the value of end-of-life care.

In addition, this effort will serve as the basis for our Briggs program between home health and hospice, creating a best-in-class model for palliative care in a patient-centered continuum of care. I am very excited about our growth strategy and the new opportunities that will allow us to reestablish our growth trends.

Irrespective of the fact that we are the leading home health and hospice company with best-in-class technology, talent and the strongest infrastructure in the industry and despite evidence we are improving patients' lives and providing balance due to the overall health care system, our stock price simply does not reflect the underlying value and potential of our business. Therefore, our Board of Directors have authorized a stock repurchase program for up to $60 million of our common stock. The Board and senior management team believe that the stock repurchase program represents a sound and strategic use of the Company's cash while reflecting a well-balanced -- a well-placed confidence in our business. Dale will discuss additional details around this in a few moments.

I will now turn the call over

Hi, everyone. I'm going to talk about many of the points Bill highlighted earlier and that I laid out in our July call with a little more color; but, first, I'd like to provide some context. I joined Amedisys because I was so impressed with its innovation, growth and market potential. The Company has grown very quickly, which I see as a huge advantage because our scale enables us to withstand and even prosper in the face of regulatory pressures.

I received several questions after our July call about what I meant by a wake-up call. Let me clarify. What Amedisys experienced right now is not inconsistent with a company that has grown this quickly. Remember, in the past 2.5 years as Amedisys has gone from 9000 employees to 17,000, 355 sites to more than 600 and $700 million in revenues to over $1.6 billion today. Any organization that grows this quickly needs to, at some point, take a moment to evaluate its infrastructure and operating model to ensure that it is built for sustainable growth and it is providing its customers and employees with the tools and resources they need at this new size and scale.

That point in time for Amedisys is now. We are enhancing our operating culture, processes and management infrastructure required for an organization this size. The infrastructure and discipline we need to build now will also position us for our next phase of growth. The demographic and economic factors impacting our business are undeniable. We are building the business to meet current and future demand.

So what's the plan? Our solution, very simply, comes down to three primary areas. The first is around management philosophy and infrastructure. As I said in our July call, the intent here is to push corporate support closer to the field and create a service culture. I had several questions after our July call about this decentralized management model, so let me be clear. The Company will continue to take advantage of its scale in areas such as compliance oversight, revenue cycle, procurement and IT. What I'm really focused on is ownership of the results -- local, regional and divisional leaders will own their results, but they will also on the resources required to deliver the results. This is a fundamentally different management model that has been there in the past.

I think this model represents the best way to drive results but also create an environment where local operators can more effectively respond to local market needs.

The second area is around portfolio management. Again, as I said July, we are undertaking a deep dive on site-by-site reviews of operating results. I expect the results of these reviews will be a pruning of the portfolio impacting the home health division. As our numbers reflect, we have already closed 16 sites, and I expect we will exit more locations where results are poor. We have also included our start-up pipeline in this process. Our reviews are deliberate and comprehensive. We don't want to exit the single market or location if there is a compelling business case for a turnaround. We're taking the time to get it right and will provide an update in the third quarter. I will say that I expect this initiative will yield significant earnings improvement.

But as a byproduct of expected portfolio changes, beginning in the third quarter we will be reporting volumes on a more classic same-store basis, which we believe will more accurately reflect the performance of our portfolio.

And then, of course, the third area is growth. But before I move to the growth initiatives, let me take a few minutes to discuss our recertification results in Q2. As I mentioned in our July call, the primary drag on volume growth in the second quarter was the deterioration of recertification, particularly late in the quarter. From what we've seen of others in the industry, this is not unique to Amedisys, but the re-cert rate in June was so pronounced that it significantly reduced our active census leading into third quarter, which will require a number of months to rebuild. As we dug deeper into the clinical data we discovered three primary influences for the drop in re-certs. The first area was, as I described in July, we had a material change in patient mix in the clinical diagnoses of our patients, primarily an uptick in orthopedics. This is a continuation of the trend we outlined in our open letter to shareholders explaining why therapy utilization had changed from prior years.

The second thing we found was a high correlation between multidisciplinary treatment plans, including therapy and lower re-certs. So our initial review of the clinical data suggests that as therapy and other multidisciplinary care plans have penetrated our portfolio, we are actually driving fewer episodes with better patient outcomes. This is a factor that we continue to evaluate, and we have engaged external resources to help us confirm.

And third, finally, we can't ignore the impact of external factors. These distractions contributed to our volume weakness, particularly in the utilization of therapy. And of course, if therapy utilization declines, our revenue per episode will be negatively impacted. And it's unclear whether these factors will abate in the near-term.

An early view into current volumes is more positive. July was generally in line with our internal expectations, but the overall results are still below our historical growth rates. We also saw some stabilization in the rates at which our completed episodes are recertified. But recertification will continue to be below prior year in the second half of the year. This will have a continuing negative impact on our internal re-cert growth rate in the third and fourth quarter.

Now returning to the other growth initiatives, our focus comes down to three things -- sales and marketing, expansion of clinical programs and new business lines. In sales and marketing, really for the first time, we are strategically aligning sales with marketing because this business, like all of healthcare, is driven by clinical competence at the local level. So our efforts are focused on providing the local sales teams with the information they need to engage our nearly 45,000 referring physicians. We're using our shareholder letter, our CMS P4P results and national and local and clinical outcomes to drive home our value proposition. And, as Bill highlighted, we are engaging our medical directors in new ways to enhance our clinical oversight.

We believe that now more than ever we have to be both visible and transparent to maintain the confidence of our referring physicians.

Around expansion of clinical programs, as I mentioned in our first quarter call, we believe there is an unmet need in the many markets for specialty programs related to behavioral health and advanced wound care. We're implementing these programs in selected markets and expect to broaden their use in coming months.

Finally, around new business lines, we have several pilots underway in selected markets that we believe have promise for future development and will distance us from the competition, as Bill has already highlighted. Our Home Health Division, led by Patti Waller, has done a great job of keeping pace with all the new initiatives and realignment of our division while continuing to serve the more than 35,000 patients we care for each day.

Turning now to hospice (technical difficulty) division achieved record ADC levels and contribution to revenue growth. Since Jim Robinson arrived in April, he has energized the leadership team and largely completed his alignment of the management structure. As a result, the hospice division is largely unaffected by the restructuring efforts discussed earlier. We have had an expansion of our length of stay and had minimal cap exposure across the portfolio. We opened three new hospice locations during the quarter and expects three additional hospice locations by the end of the year. So all in all, I believe the hospice division is performing very well and is poised for expansion.

Next, here is a review of our business unit performance for the quarter. Our quarterly revenue and contribution margin are broken down as follows. But as a reminder, contribution margin is pre-tax and pre-corporate overhead. We produced $374 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 28%. We had $9 million in home health and hospice startup revenue related to startups open less than 12 months with a corresponding negative 32% contribution margin. Also in the quarter we incurred approximately $6 million in costs associated with home health and hospice agencies we plan to open in the future. We had $29 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 28%, and we have $11 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 18%.

So at this time I will turn the call over to Dale to discuss our financial results in more detail.

Thank you, Mike, and good morning. Comparing our performance for the second quarter of 2010 and the second quarter of 2009, total revenue grew 12% or $422 million compared to $378 million. Our net income for the second quarter decreased 8% to $32 million or $1.13 per share compared to $35 million or $1.27 per share. Included in the three and six-month periods ended June 30, 2010 are approximately $8 million in costs [occurred] for the realignment of our operations, including training, agency closings, severance as well as legal fees associated with the Senate Finance Committee inquiry and the SEC investigation.

These costs were offset by a $3 million reversal of accrued bonuses. Additionally, we received a $3.5 million CMS bonus payment from our participation in the pay-for-performance demonstration. The net effect of these items after-tax was to reduce net income by $800,000 or approximately $0.03 during the three- and six-month period. After adjusting for these items our earnings per share were $1.16 for the second quarter and $2.45 for the six-month period.

Revenue growth was generated as follows -- $33 million from our base and startup agencies, $11 million from our acquisition agencies. Gross margin decreased from 52% to 50%, mainly due to the addition of clinical manager resources and also because we've increased our therapy staff associated with our Balance for Life specialty program as a significant number of these hires have been on a salary basis.

EBITDA for the second quarter of 2010 was $63 million or 15% of revenue compared to $67 million or 18% of revenue in 2009. We ended the second quarter of 2010 with days revenue outstanding at 33 days, which are down for days from the second quarter of 2009 and down one day from year end. Our estimated revenue adjustment, our provision for doubtful accounts, was $6 million or 1.4% of revenue for the quarter compared to $7.6 million or 2% of revenue for the same period in 2009. This was due to a significant improvement in our cash collections since the first quarter of 2009.

Our accounts receivable were essentially flat with year end and Q2 of 2009 while experiencing a $44 million increase in revenue. This revenue increase was offset by a similar increase in our cash collections, resulting in improvement in days revenue outstanding and the improvement in the aging of our receivables. Additionally, our accounts receivable aged greater than 90 days and decreased $19 million and $7 million since the second and fourth quarters of 2009, respectively.

We reduced our outstanding debt by $38 million to $204 million as of the end of the quarter, compared to $242 million for the same period in 2009. Our leverage ratio at the end of the quarter was 0.7 times compared to 1.0 times for the same period in 2009 and our weighted average interest rate on our debt was 3.8% for both the three and six-month periods.

From a liquidity standpoint we ended the quarter with $116 million in cash and have $235 million available under our revolving credit facility. Our cash at the end of the quarter was up from $35 million at the end of 2009, primarily because of $125 million generated from cash flow from operations, $24 million in capital expenditures, $3 million in acquisitions and net debt repayments of $23 million.

During the first half of 2010 we generated cash flow from operations of $78 million after CapEx and required debt payments, and we anticipate approximately $130 million in such cash flow for the full year 2010.

As we mentioned, we are continuing to make additional investments in infrastructure and systems, and as we discussed in our first quarter call, we anticipate that these investments will increase our CapEx expense closer to 3% of revenue in 2010.

As many of you are aware, CMS introduced new rules on July 16. If implemented as proposed, home health would see a decrease in the base rate of about 4.9%. This is comprised of a market basket increase of 2.4% offset by decreases of 3.8% in case mix adjustment, 2.5% for the reversal of the outlier benefit that Home Health received in 2010 and a 1% offset to the market basket update that was legislated in the Affordable Care Act.

We believe this continued reimbursement pressure will ultimately create acquisition opportunities for us as Home Health Agency owners begin to feel the bottom-line impact of reimbursement cuts.

Moving over to the hospice side, CMS issued its final rules also on July 16. Providers will receive a net 1.8% increase in the base rate for 2011, which was a 2.6% increase in the market basket update, offset by a 0.8% decrease in the wage index and budget neutrality factor. As I stated in the past, hospice is an area that we wanted to grow and that we believe will provide one of the platforms that the country will need to ensure the continuum of care of the elderly.

As Bill mentioned earlier, our Board of Directors has authorized a stock repurchase program of up to $60 million of our common stock. We believe this is an appropriate use of our capital while maintaining sufficient liquidity to continue our infrastructure improvements and pursue our acquisition strategy.

As I mentioned earlier, we ended the quarter with $116 million in cash, $235 million available under our revolving credit facility. The timing of any repurchase is the actual number of shares repurchased will depend on a variety of factors, including the price of our common stock, corporate and regulatory requirements and our view of the market and economic conditions. The share repurchase program is scheduled to expire on September 30, 2011.

Today we are reestablishing our revenue and earnings guidance for 2010. We estimate that revenue will be in the range of $1.625 billion to $1.650 billion. This range does not take into account any reduction in revenue which may result from any agency closures or acquisitions that occur during the third and fourth quarters.

We estimate that earnings per share will be in the range of $4.20 to $4.50, based on an estimated 28.8 million shares outstanding without adjusting for shares that may be repurchased under the plan previously discussed. It is important to note that the full effect of some of the efficiency initiatives and the operational restructuring previously discussed will not be achieved until the fourth quarter.

In addition, this earnings guidance does not include the effect of any nonrecurring costs that may be incurred during the last half of the year or any acquisitions.

At this time we will open the call to your questions. Please limit yourself to one question and one follow-up so that we may allow question time for everyone. Operator, please open the lines.

(Operator instructions) Whit Mayo, Robert W. Baird.

Mike, I just wanted to go back to some of the cultural changes you referred to, specifically alluding to a more decentralized culture and management philosophy and releasing a lot of decision-making to the agency level. I know it's a very big topic, but maybe if you could give us some more commentary around that, specifically with respect to maybe how you see your clinical delivery model evolving? I hear the ownership of responsibilities, but just hoping you would focus more on the clinical process.

I'm not sure that the clinical process is as impacted as around the business processes. We still have a clinical group in corporate whose job it will be to support our field folks. Clinical decisions are still -- they have always been made in the field. The programs themselves developed in corporate and then rolled out into those sites where it was most applicable. I think, as we go forward, again going to a model more -- instead of just one size fits all or one program goes everywhere, it's about what programs do we develop and then where are the markets, based on kind of local input, where are those programs going to be put in locally?

So on the clinical side, that's a bit of a change here because it's like with BFL; we rolled that thing out just about everywhere, and some places just couldn't accommodate it. So we've had some misses in some locations. But going forward it's going to be more selective based on local leadership in consultation with our medical director about what makes sense for this agency in this location. Does that help?

Yes, that's helpful. And then maybe if you could elaborate a little bit more on the opportunities on the call side; you guys have done a pretty good job historically in running a fairly lean organization. So, just curious as to where we can expect to see those calls come out.

Yes, and I think the jury is still out there, because there's going to be noise as we go through the portfolio realignment. But I think -- we like our position, we like -- there's a lot of things that are right about where we are from a cost perspective. I will say that we have invested additional resources. We talked about that in the first quarter, about putting additional resources back into the field. There was some concern that we had centralized too much, and so part of this initiative is repopulating some resources into our care centers, give them more of the resources and fewer here at corporate.

And, we also recognize that we are continuing to make investments in infrastructure that will provide us a basis for expanding the Company as we go forward. Our PeopleSoft installation that we're planning to have completed by approximately the end of the year is an example of that.

Okay, but I think you guys referred to right-sizing the calls some, and I guess I'm just trying to look for an idea of where those calls -- where they are coming out.

Well, I think it's some in both field operations as well as in corporate, but I guess my point to you, Whit, is that we have not changed the philosophy of building for the future. And that analysis is underway, and we will report to you as we go through the third and fourth quarter.

(Operator instructions) Kevin Ellich, RBC Capital Markets.

Just want to go back to a comment, Mike, that you made about maintaining the confidence in referring physicians. Just wondering if you guys have seen any changes in patient referrals from the doctors or discharge planners.

No, we haven't. As we've looked across our markets, I'm sure there are some pockets here or there. But generally, across the portfolio, no, we haven't seen a big change. We actually, in July, spoke to some of the results we've seen. And, based on our admission totals, which that's the best indicator for, are we having impact with our referring physicians, admissions were still very good. We continue to see the trend in July that we saw in the second quarter -- strong admissions, re-certs weak, kind of offsetting. So the strong admission result would tell you that our referring physicians are still there with us.

This is about reinforcing the positives with them, reminding them -- because our brand is really local for them. So this is despite all the external noise, just reminding them about our value locally.

And then a quick question for Dale. Just wondering, actually, two things. Did you guys provide how many home health agencies you guys closed or discontinued? And then, other expense below operating income was a little bit higher than expected. Just wondering what's causing that.

There are, I guess, two things. We closed 16 the second quarter. We have not talked about any possible future closures, although Mike has mentioned that we are continuing to evaluate that. You also have to, on a GAAP basis, look at some of the things that we disclose as issues for the quarter, in other words, nonrecurring expense. And I think I would use a number of about $8 million. Some of that flows through the below operating lines.

Got you, that's helpful, thanks.

Ralph Giacobbe, Credit Suisse.

Just wanted to look at the guidance, what it implies for the back half of the year. It looks like revenue is flat, maybe slightly up versus the 12% that you put up this quarter. So, maybe help explain that? And to the extent that you're willing to discuss how you see volume versus pricing playing out in that type of scenario for the second half?

Well, I think you're pretty close to the number. Recognize that when we had a decrease in re-certs, in the second quarter that reduced the inventory on our census going into the third and fourth quarter. And as Mike mentioned in his discussion, it will take some time to rebuild that census.

So we're looking at probably more of the effect of the cost containment issues and some of the corporate restructuring, taking more effect in the fourth quarter than in the third quarter. But from a volume standpoint, I think we see that rebuilding over that same period of time.

Okay, maybe let me ask it the other way. When I look at pricing mix, your average revenue per episode was up about 6.5%. Is that a fair run rate as we think about the back half of the year, or is that not the way we should think about that statistic?

Yes, here's how -- I think in my comments, I tried to signal to you that if we have pressure, some of the external pressure we particularly saw around therapy visits, to the extent we have fewer therapy visits, it softens revenue. So whether or not the 6.5% is sustainable -- I wouldn't sign up for that.

And then just my follow-up -- just given your comments about how fast you have grown over the last few years, are you going to continue to seek acquisitions, or is the focus more on the internal operation?

We are going to continue to grow. I think that right now we are very focused internally. I just think the dynamics of the market overall are going to lend themselves to us being acquisitive over time. Just right now, we happen to be very internally focused.

This is Tim Barfield, the Chief Development Officer, and I would echo that I think we are seeing a little bit of a pickup, particularly in the home health side. And specifically, there's a little noise out there about people who are interested in selling. But I still think we're in a position where the new rate decreases that have been proposed, people are trying to decide what the price points are, and we feel like there will be a lot of pressure. I think, as Mike mentioned, there will be opportunities for consolidation. But on the immediate front, I think the markets kind of figure out where that price point is, and we are going to remain very disciplined. We want to be smart about acquisitions. We certainly don't want to just go out there and buy revenue, and I think that's where we are right now.

And on the hospice side we see more activity. But at the same time, we are going to be smart. We're not just going to buy revenue. There are a number of transactions or potential transactions out there, and we will keep working those and see if we can develop those the right way.

Darren Lehrich, Deutsche Bank.

I just wanted to take another stab at the revenue growth outlook here, just so I understand what really you are saying. Are you saying there is flat organic growth built into this new revenue guidance? Is that what you just endorsed, Dale? I'm just trying to parse out the difference between what your expectation is for the impact of closures, which we would expect to see more of, I guess, in the next few quarters versus what's in the revenue guidance on an organic basis.

Well, as I said earlier, we do not include any potential future closures or acquisitions in the revenue guidance. Our view, both from an organic growth standpoint and potentially from a revenue-per-episode standpoint is that those will be relatively flat over the last two quarters.

Okay, and then I guess I just wanted to ask you -- just as it relates to the $6 million of costs, just to clarify this. You mentioned for the future de novo pipeline, Mike, I think you said there were $6 million of costs incurred in the quarter. What was the recent trend of that on a quarterly basis, and how quickly do you think you can get that figure under control, I guess, over the next few quarters? I'm assuming you will be scaling back a good number of those that are in the pipeline.

Yes, Darren, that number has been slowly climbing. We went from 5 -- like 5.5, and now we are at 6. And as I mentioned in my comments, we have included the pipeline as part of our assessment, and where we want to be. We are obviously spending a lot of money. We are seeing -- with state budget cuts, we are seeing surveyors taking longer and longer to get out to survey sites. So it's taking longer and longer to get places open.

Now, with that being said, we are going to go through this in detail. We're always going to need a pipeline. It's just $6 million probably isn't the right number for us, going forward on what we are going to be willing to put into R&D for future sites.

And what is the right number, if you had to put brackets around that? It just seems like that's a number you could probably get at pretty quickly, given that it's crept up so much.

I appreciate your confidence in our timing, but as I said, I'll give you an update in the third quarter. That should probably give you a little better view into how we see things, based on the pruning that we have done both out of active sites and out of the portfolio -- out of the pipeline.

Alright, thanks a lot.

(Operator instructions) Sheryl Skolnick, CRT Capital.

Good morning, and thank you very much for letting me ask a question on this call. I want to focus on the recertification pattern because, to me, this is really a key not only to what's happening here in the near-term, but also over the much longer-term. And that is, you said on the last conference call that re-certs declined much more steeply in the last half of June. So, really, don't want to put words in your mouth, but giving us a sense of falling off the cliff in the last half of June.

And I guess I'm at a loss to understand how a slow progression of re-cert decline, like attributable to the orthopedic growth as well -- which, presumably, is also your Balance for Life program -- would also be attributed to a progression of case mix. And I get all of that part, so that part is all negative.

But it just still doesn't make sense that all of a sudden you should have such a steep decline. If you were to have had that same decline over the whole period for the Company as a whole, you would have had a 50% decline in re-certs in the quarter. So this is nontrivial. And I guess I'm worried about whether it's the behavior of the clinicians not seeking re-certs, whether there was something in the compliance training you mentioned that might have scared them into doing something differently than they had done before and what, if anything, you're doing to address and determine those issues as opposed to just putting it in the basket of changes in behavior and outside influence and therefore not something the Company can do anything about.

Yes, Sheryl, you've got it, you nailed it. We have cut this result nine ways to Sunday. And in the absence of other factual patterns, we have to put it under behavioral; and as much as we have gone out to provide assurances to our clinicians that we've got to take care of patients because this outcome is unexplainable.

So we've gone out and said, do the right things for the patients every time. And so -- but I cannot explain why we had the precipitous drop in June. But what I will tell you is, when you sit back and take a moment and say, okay, well, where are we in terms of episodes per patient? We are coming much closer into line with what is purported to be the industry average. I don't know that there's an industry average out there, but let's assume it's in the 1.5 range. We are coming a lot closer to that, despite what we show to be pretty strong case mix differentials between us and everybody else in the industry.

So I can't explain June, Sheryl, but it was real, and we have cut this thing a lot of ways, but we are where we are.

Right, and it's real and persistent, nonetheless. Okay? Right? Which is what you said?

That's right.

Okay. And then, the other question is on your use of cash, and I did hear you all say that you were going to be focused internally, and I applaud and appreciate that. I think it's quite prudent with all you have on your plate, especially with the behavioral changes, your key employees, not to mention a portfolio review, not to mention the -- well, I am I mentioning it -- all the other things you are doing to reengineer the Company and to improve the responsibility and authority and resources at the field.

But I am perplexed and quite troubled by the decision to take more than half the Company's cash at the current time and apply it to a share repurchase when, quite frankly, there can be no assurance that you can continue to generate cash at the same pace you've generated cash before. There's a negative reimbursement outlook even ex the unexpected 2012 case mix cuts, even if you get that mitigated a bit. There's unknown pressures or potential issues regarding physician interaction and intervention with patients at the time of admission and recertification.

I guess I'm just very troubled by why you would take $60 million of hard-earned cash and apply it to buying back shares when $40 million of your debt is due currently and you have another $160 million there, and you might need cash for other things. I don't understand this.

Well, Sheryl, let me start out with that long description by saying that we are comfortable with our capital position. We have a leverage ratio of 0.7 times. And, yes, the recent events have had some impact on our cash flow, which is frankly still robust. We believe that, going into next year, we will have the opportunity to improve our cost and revenue structures as we move through 2011. And, frankly, with our stock price trading where it was, we believed, and the Board and management believe, this is an appropriate use of capital at this time. That doesn't mean that that will be different a week from now, a month from now, six months from now.

It also does not commit us to spend the entire $60 million to buy back stock. We will do that when we think it is appropriate and prudent. So we are very comfortable with the decision, and hopefully in future discussions with you we can get you comfortable with that.

Excellent, thank you very much for answering the questions.

Kevin Campbell, Avondale Partners.

I just wanted to start real quickly on your startup margins. I think you said, for the $9 million in revenues, the margins there negative 32%. That seems a little bit higher than I recall from the past, and maybe you could comment as to what's driving that to be so negative.

Yes; it is more negative, Kevin, hence some of our reviews. That's why we're going to be looking through our -- add our startup portfolio into our overall reviews. I think some of this gets to initial capitalization, you know, the longer time it has taken to get things open and then, frankly, just slower ramp-ups overall.

As we -- we lump startups into both parents and, I guess, siblings would be the other term. So as we do more parents, they're a slower go. It's easy to do a startup that is a branch off of an existing agency. Those usually ramp up a whole lot quicker. In this particular portfolio, we've had more parents. Does that make sense?

It does, it does. And then, lastly, I was hoping you could talk a little bit about the potential closure of agencies and what sort of impact that could have on outlook. Is it really just a top line and you're only going to be closing those that are contributing at a loss? Are there some that are going to be maybe contributing at a lower rate and still positive, and therefore will have somewhat of a negative drag? Can you maybe better help us differentiate between, say, the top-line impact of closing agencies, versus the actual bottom-line impact?

I'm sorry; you want top-line as well as bottom-line? (multiple speakers) because I'm not going to try to block this on top line, Kevin, but let me just give you kind of the criteria, as we've said. We've got some facilities in our portfolio that are negative contribution margin, and they have been operating for more than a year, some of them operating for more than two years. And those are the ones we're concentrating on. The last thing I want to do -- part of our story is the growth story. Right? And if we have more stores, over time -- but some in our portfolio have just not taken root. And so we can either spend the resources to try to turn those around, or we can make a decision to prune the portfolio and move on.

And so that's the process we're going through right now in evaluating the location, and it has just taken a little longer than I had hoped, but we are just trying to be complete, comprehensive and all that, deliberate in our process. So -- but I would say the more mature facilities with negative contribution margin are on the criteria list at the top.

Okay, thank you very much.

Jerry Doctrow, Stifel Nicolaus.

So, I guess, Dale, any sense of magnitude in terms of the number of closings? Are we talking 10% of the facilities or a dollar goal that you have? I know you are in the process, but it's --

Yes, Jerry, we understand the point, and we are not in a position to talk about the number of agencies or the impact. As Mike mentioned, if we do close some additional agencies, it will probably have a revenue impact, and it very likely will have a positive impact on earnings. Now, that's no guarantee of either one of those, but what we would like to do is update you again in the third-quarter call on where we stand on that.

And just a quick follow-up -- so I'm still struggling with the length of stay and the whole re-cert issued which has been talked about, but is it your sense that this is a long-term structural change because of Balance for Life, because of maybe attitudes of clinicians? Or again, at other times, you -- at times, it sounded like that; at times it sounded like you really thought it could be rebuilt so we were going back to where we were. Just any sense about what your expectations are for the future? Are we on a different length of stay, if you will?

Remember, Jerry, that the number we report really eventually comes out to be a year-over-year comparison. Next year, remember, we've got the face-to-face encounters issue that probably most impacts re-certifications. So if we ever get back to having double-digit re-certification growth -- I doubt it. But that's our own view, I guess. I think we will expect to see some weakness in those year-over-year re-certifications continue, at least in the short term.

Eugene Goldenberg, BB&T Capital Markets.

Just one question for Mike and a quick follow-up. You mentioned new business lines in select markets that you guys are currently exploring. Can you just give us a little bit more color on that?

Well, the two that I mentioned, one around behavioral health, one around wound care -- these are programs that we have already started rolling out in some selected locations. We think there's a real attractive market in behavioral health, to have a behavioral health nurse in our agencies that can see those patients with dementia and other behavioral issues. It's just a real unmet need out there. We continue to hear around markets that they believe that this is just something out there that a large percentage of our patients have.

So we think it represents an opportunity. We are listening to the marketplace, and so developing the specialty programs. We hired a behavioral nurse specialist in our clinical services group and expect that we will accelerate the availability of this program to our agencies as we speak.

Thanks, and the follow-up I have has to do with the clinicians that you guys are bringing on board now and -- versus some of the ones that you've brought in the past. Have you guys put in place perhaps a target that you want to get to as far as reimbursing your clinicians on a pay-per-visit basis, or perhaps where does that number stand today?

I want to make sure I understand your question, Eugene.

You mentioned earlier that a lot of the issues that you guys had in the quarter had to do with basically aligning your labor mix, which is more on a salary basis, a fixed cost. And I was just trying to figure out what, I guess, initiative you guys have in place to migrating that over to a pay-per-visit basis to make it more flexible.

Okay, I'm with you now. We have made a concerted effort to try to start migrating more of our clinicians into pay-per-visit. We think that model makes sense. We think it's -- obviously it converts a fixed cost to a variable cost. And so -- but part of this is about trying to maximize our talent pool. And so there are some clinicians we will have to bring on early in their employment; we have to bring them on, on salary. But as they are with us more, we can build their portfolio of business, we can convert them to pay-per-visit. But right now, we are undertaking an initiative to try to convert many more of our therapists and other clinicians to pay-per-visit.

Are you able to share where that number is now?

We haven't. That's something we will evaluate going forward, but we don't -- we haven't shared that historically.

Okay, thanks for taking my questions, guys.

All right, we appreciate everyone calling in to join us today for the second quarter. More importantly, and Sheryl, this is for you, we had chatted in the last call about having an investor day. We fully expect to set up something probably in mid to late November where the Company will come to New York and spend a full day with our investors reviewing all of the critical issues that we find ourselves having great scrutiny under. We believe we will have full color on these issues, things oriented around case mix, utilization, re-certs, compliance, all of the things that have been questioned in the past. And we believe that we will spend enough time to bring full clarity to all these issues, and we're looking forward to that meeting.

We appreciate all of our investors' continue support and giving us an opportunity to clear up these issues, and we will look forward to seeing you all in November. Thanks for calling in today.

Again, that does conclude our conference. Thank you all for your participation.