Amedisys Inc (AMED) 2010 Q3 法說會逐字稿

Good day and welcome to the Amedisys third-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.

Thank you, James. Good morning and welcome to the Amedisys investor conference call to discuss the third quarter ended September 30, 2010 earnings announcements and related matters. A copy of our press release is accessible on the Investor Relations sub page of 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. Also on the call today during our Q&A session will be Tim Barfield, our Chief Development 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 expression, 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 outcomes to differ materially from such statements.

These results -- these risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q and 8K. The Company disclaims any obligation to update information provided during this call other than as required under applicable securities laws.

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 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 a filing with the Securities and Exchange Commission 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 when new information is made available on the Investor Relations 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.

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

Thank you, Kevin, and good morning. I would like to welcome everyone who has joined us on our call this morning. On behalf of our leadership team at Amedisys, we appreciate the opportunity to update you regarding the Company's performance.

For the third quarter we recorded net revenue of $405 million and adjusted net income of $25.5 million. This represents revenue growth of 4% and a decline in net income of 29% compared to the third quarter of 2009.

With an intense focus we initiated a number of actions during the quarter to address the decline in our net income, as well as prepare us for the reimbursement changes anticipated in 2011. As announced in September, we made the decision to close or merge 39 underperforming agencies. We significantly reduced our start-up pipeline.

We made several operational management changes aimed at improving our ability to drive operational performance down to the care centers in the field. We began the process to better align our cost structure with our current volume level. And we have identified further cost improvement opportunities.

Additionally, we continue to focus on the basics of the long-term success of the business, which are to improve the quality of care, to be as efficient as possible, and to grow the business.

On patient quality care we are working on a number of initiatives that have promise to greatly improve our patient outcomes, especially as it relates to re-hospitalization and ER visits during an episode of care. These initiatives are focused on expanding our patient interaction, or touch points, beyond the traditional in-person clinician visit.

We are focused on improving the transitions of patients from hospitals and other facilities to home health, driven by increased and improved interaction with the patient before and after they are discharged. This is a model of patient self-management known in the home health industry as care transition, and should result in reducing avoidable re-hospitalizations.

In a similar fashion, we are transitioning the use of our Encore call center from patient satisfaction and discharge surveys to intra-episodic clinical intervention focusing on patients with high or very high risk of hospitalization. We piloted the program as five agencies earlier in the year, and expect to roll this model out to 70 agencies by year-end.

We are increasing our deployment of Telehealth to augment the care provided by our visiting clinicians for patients with more complex conditions, from 50 care centers at the beginning of the year to approximately 235 targeted for year-end.

While we have experienced soft volume recently, we believe these initiatives will enhance the long-term growth prospects of our business. The soft volume is largely a result of lower recert rates we experienced in the second and third quarters. However, the long-term growth prospects of the business are driven by admit growth, which on an internal basis came in at a respectable 8% for the quarter.

We believe the operational changes we made this quarter will better align our care center operations and business development and help stimulate admit growth.

Meantime we continue to focus on the development of specialty programs that will differentiate us from our competitors, such as a more robust behavioral health specialty program which has been piloted in five sites, and will be rolling out in the fourth quarter in target markets.

The investments we are making in our various patient care initiatives will drive quality and are ultimately an investment in long-term growth.

On the efficiency front, we continue to invest for the future. We expect to complete the conversion of our HR and financial assistance to PeopleSoft by the end of the year. This will lead to more efficient processes in our corporate back offices, and also provide system scalability for our next level of growth.

We continue to invest in our next generation operating system AMS3, which will yield efficiencies throughout our business.

We are refreshingly substantially all of our Point of Care devices and other field equipment, significantly enhancing remote communication capabilities with our clinicians.

We are investing in the development of a hospice Point of Care system that should rollout in late 2011.

While our third-quarter performance did not meet expectations, I am pleased with the progress we are making with our operational improvement plans, and most importantly, I am proud of our hard-working, dedicated and committed employees and the quality care we provide to our patients every day.

At this point I would like to turn the call over to Mike Snow, who will provide more details on third-quarter results and the actions we have taken.

Okay, thanks, Bill. As Bill said, there were a number of actions we initiated during the quarter to address our operating challenges. As we discussed on the second quarter call, we made substantial progress reviewing the underperforming care centers in our portfolio. As a result of that review we decided to exit nine home health and four hospice markets. These markets had a combination of small demographics and poor market characteristics.

We also merged 23 home health and three hospice locations into nearby care centers. Many of these locations were a byproduct of overlapping acquisitions.

As a result of these initiatives we are expecting a negative $12 million to $15 million annualized impact to revenues and a positive $7 million to $9 million impact to EBITDA.

These expectations reflect the elimination of losses generated by these closed and merged agencies, the majority of which should be realized in fourth quarter, as well as an estimate of the amount of contribution for merged agency revenue we will retain within our system, which won't be fully realized until 2011.

The detailed portfolio review we undertook in the third quarter represented a good first step in our efforts to address underperforming sites.

These efforts are continuing, and although smaller in scale, will likely result in additional closures and/or consolidations in the fourth quarter. Portfolio reviews will be an ongoing component of our management processes in the future.

We conducted a similar review of our pipeline of start-ups, concluding with the removal of 28 home health locations from our list, most of which were targeted to open in 2011. We continue to expect to open approximately 40 home health startups for 2010, but that number will drop to 5 to 10 locations for 2011. During the third quarter we opened 12 new care centers, bringing our total to 35 home healthcare centers open for the year.

Our startup strategy has changed for two reasons. First, our per unit startup investment has been increasing over the last couple of years, primarily due to an extended start-up time frame brought on by various regulatory constraints, as well as a greater percent of locations being true de novos, which require larger investment.

Second, we are facing significant reimbursement challenges over the next two years, which will impact financial returns going forward.

We believe it will ultimately be a better use of capital to purchase financially troubled agencies in the future than to invest in a start up today.

To be clear, we will still do some start-ups, but they will be focused on very attractive market or in locations where we believe circumstances provide a high likelihood of success.

We estimate this decrease in our start-up pipeline will have a positive impact on earnings in the neighborhood of $11 million to $13 million on an annualized basis.

As a reminder, in the second quarter we spent an annualized $24 million on our unopened start-up agencies. We should see some of this improvement in the fourth quarter.

As part of our restructuring effort we also made field leadership changes. We expanded the number of home health regions from 8 to 11. These new Home health regions will each be under the responsibility of a Vice President, which reflects the consolidation of operational and business development leadership. This change in responsibility reflects my belief that decision-making and accountability are best accomplished closer to the care center.

In addition, we completed the restructuring of our hospice division, aligning management into two geographic regions with a much more manageable span of control.

We have made a concerted effort to better align our field cost structure with our volume. The percentage of our Home health visiting staff paid on a per visit basis increased from 79% during the second quarter of this year to 86% during this quarter. For an historical comparison, during the third quarter last year the percent of our Home health visiting staff paid on a per visit basis was 82%.

The major component of this conversion -- of this improvement was the conversion of over 300 therapists from salary to pay per visit. Because of the softness in volume we have also needed to streamline some of our field administrative functions to maintain appropriate staffing ratios in our agencies. These initiatives are underway and should begin to show results in the fourth quarter.

During the quarter we also made the decision to embark on a significant refresh of the computer equipment in the field. This includes making all our Point of Care devices fully wireless, substantially improving the mobility of our clinical staff. The more seamless our communication is with our visiting clinicians, the more efficient they become by minimizing the time spent on administrative tasks, which translates to more time available for patient care.

Turning to growth. As Bill highlighted, total year-over-year revenue growth was 4%. About half of this growth came from acquisitions, with the other half internally based. Historically acquisitions have contributed much more to our growth. While there have been many acquisition opportunities, in our view, the pricing expectations of sellers have not matched the reimbursement pressures facing the industry. And we are content to wait until the buy/sell price expectations become more in line with our view.

Honing in on Home health, internal admission growth, our historical measure of core business growth, was 8% for the quarter, an improvement over the 4% achieved in the third quarter last year. However, internal recertifications declined in the third quarter by 14% versus 8% growth achieved in the third quarter of last year.

As a reminder, we define recertification rate as the number of recertifications during the quarter compared to completed episodes. In this quarter our recertification rate was 44%, a decline from 50% in the quarter a year ago, but consistent with our recert rates in the second quarter.

I would like to note that if our recert remains -- recert rate remains at this 44% range going forward, we should continue to experience year-over-year declines in recertifications until the second quarter of next year.

As I mentioned in our last quarterly call, a plan to migrate our internal volume reporting metric to a more classic same-store presentation. With that in mind, our same-store Home health growth metrics comparing this -- third quarter this year to last year can be broken down as follows. Revenue growth was 1%, episodic admit growth was 6%, episodic recerts declined 14%, episodic revenue per episode grew 3%.

Reflecting on hospice for a moment, on a same-store basis revenue grew 12% year-over-year. Average daily census grew 13%, admit growth was 4%, average length of stay increased 7% from 83 to 87 days, and revenue per day declined 1.2%.

Our Medicare hospice cap liability stood at $1.8 million [a quarter at year end], as we booked a cap expense of $1.1 million for the quarter, or 3% of revenue.

We opened one new hospice care center during the quarter for a total of seven year-to-date. We anticipate 7 to 8 total hospice start-ups for the year and 5 to 10 in 2011.

Next I would like to move to our business segment performance. Our quarterly revenue and contribution margin are broken down as follows. Contribution margin is pretax and pre-corporate overhead, and is presented here adjusted for one-time costs.

We had $351 million in Home health revenue related to agencies we have owned longer than 12 months, with a contribution margin of 25%. $33 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 27%. $8 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 22%.

During the quarter we had $9 million in Home health and hospice start-up revenue related to start-ups opened less than 12 months, with a corresponding negative 35% contribution margin.

Also, in the quarter we incurred approximately $3 million in cost associated with unopened home health and hospice agencies. Additionally during the quarter we incurred approximately $2 million in costs associated with unopened start-up locations we have subsequently discontinued.

In summary, we have taken substantive action during the quarter in response to our operating challenges and to strengthen our ability to face the rate cuts in 2011. These actions have traction and will yield improved results in the fourth quarter and into next year.

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

Thank you, Mike. Comparing our performance for the third quarter of 2010 and the third quarter of 2009, total revenue was $405 million compared to $388 million, and our net income for the third quarter was $22 million or $0.76 per share compared to $36 million or $1.29 per share.

Included in the three-month period ended September 30, 2010, are approximately $10 million in costs incurred by the realignment of our operations, including agency closings, severance and write-off of intangibles, as well as legal fees associated with the Senate Finance inquiry and the SEC investigation. These costs were offset by a $3.7 million reduction in our Georgia charity care liability.

The net effect of these items after tax is approximately $3.8 million or approximately $0.13 per share. After adjusting for these items in the third quarter, total revenue was $401 million and net income was $25 million or $0.89 per share.

We have excluded these amounts in the rest of our discussion this morning. Gross margin decreased from 53% to 49%, mainly due to an increase in the percentage of visits performed by therapists, increases in the number of salaried clinicians and clinical managers, and an increase in utilization.

G&A as a percent of revenue increased 1% on increases in salary and benefits related to corporate support, as well as an increase in the number of agencies. This excludes $10 million in expenses for lease terminations, severance and legal fees.

EBITDA for the third quarter of 2010 was $52 million or 13% of revenue compared to $69 million or 18% of revenue in 2009. We ended the third quarter of 2010 with days revenue outstanding at 31 days, which is down 2 days from the third quarter of 2009 and down 3 days from year-end.

Our provision for estimated revenue adjustments and doubtful accounts was 2% compared to 1.6% of revenue last year.

We reduced our outstanding debt by $30 million to $193 million as of the end of the quarter compared to $223 million for the same period in 2009.

Our leverage ratio at the end of the quarter was 0.7 times compared to 0.9 times for the same period in 2009. And our weighted average interest rate on our debt was 4% and 3.8% for the three- and nine-month periods.

From a liquidity standpoint, we ended the quarter with $128 million in cash and $235 million available under our revolving credit facility. Our cash at the end of the quarter increased $94 million from the end of 2009 as we generated $173 million from cash flow from operations, $38 million in capital expenditures, $3 million in acquisitions and made net debt payments of $34 million.

Year-to-date we have generated cash flow from operations of $135 million after CapEx. And we anticipate approximately $170 million in such cash flow for the full year of 2010.

As we have discussed on previous calls, we anticipated that the additional investments in our infrastructure would result in our CapEx being approximately 3% of revenue. Because of the upgrade of our field computer equipment that Bill and Mike discussed, that number for the 2010 will be more like 3.5%.

As we mentioned in our Q2 earnings call, our Board of Directors 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 pursue our growth strategy and invest in our infrastructure.

During the third quarter we repurchased 496,000 shares of our common stock at a total cost of approximately $12 million. The timing of any future repurchases and the actual numbers of shares repurchased will depend on a variety of factors, including the price of our stock, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions. The share repurchase program is scheduled to expire on September 30, 2011.

In July CMS announced the home care proposed rule for 2011. If the proposed rule becomes final, the industry will see a decrease in the base rate of 4.9%. We expect this final rule to be published about the end of this month.

Moving to the hospice side, in July CMS issued its hospice rule for 2011. Providers will receive an 1.8% increase in the base rate for 2011. As I have stated in the past, hospice is an area that we want to grow and that we believe will provide one of the platforms that are needed to ensure the continuum of care for the elderly.

This morning we are updating our revenue and earnings guidance for 2010. We anticipate that revenue for 2010 will be in the range of $1.625 billion to $1.645 billion, excluding the effects of any future acquisitions if they are made.

Earnings per share will be in the range of $4.20 to $4.35 based on an estimated 28.5 million (sic-see press release) shares outstanding, which also excludes the effects of any future acquisitions.

Additionally, these earnings guidance do not include the effects of any nonrecurring costs that have been incurred or may be incurred during the fourth quarter.

Now Bill would like to share a few words in closing.

Thanks for joining us on this call today. I would like to close our remarks with a few words on why we remain bullish on the industry, on Amedisys, and our long-term prospects.

Although we have faced recent headwinds with regards to our financial performance, our comments today indicate that we are making the necessary operational corrections to address our performance challenges swiftly and effectively.

These proactive operational improvements will also better prepare us for the difficult reimbursement environment to come. What has not changed is that Kathleen Casey-Kirschling, the first baby boomer born in the United States, will turn 65 at 12 AM on January 1, 2011, with approximately 10,000 Americans turning 65 every day for the next 20 years.

The aging demographics facing our economy and the healthcare costs associated with those demographics are overwhelming. These facts create tremendous opportunities. We are making investments in patient quality care, putting us in the position to continue to lead the healthcare at-home movement.

We are also making investments in technology and other clinical intervention models to improve our efficiency. We believe we're better positioned today than anyone else to benefit from the tremendous growth this industry will experience, both organically, via partnerships with hospitals and health systems, or through further consolidation opportunities, which we expect to be much more prevalent over the next two to three years. For these reasons I am very optimistic on the opportunities in store for us in 2011 and beyond.

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

Operator, please open the lines.

(Operator Instructions). Whit Mayo, Robert Baird.

You guys have had some time now to go back and look at the moving pieces within the second quarter, whether it was the jump in therapy or multidisciplinary patients. So I was just wondering, Mike, maybe if you have any additional insights into the recertification trends?

Secondly, it does look to me like things may not have gotten materially worse throughout the quarter, if not stabilized some. So maybe if you could give us an idea of the monthly trends, how did they progress throughout the quarter?

Yes, sure thing. Here is the long and short of it, is as we went back and I think as we described in our calls earlier in the year, we tried to do analytics to try to get to the fundamentals of the change in research, and frankly, where we landed is primarily behavioral.

So whether it is from external factors or a combination of some of the internal education we did, that just laid in the lap of behavioral change.

That being said, our rate of recertifications has stabilized. Now we are going to continue to have the year-over-year fall off in research on a comparable basis through first quarter because the pie shrunk. Once we discharged a bunch of patients in the second quarter our census shrunk. And so now even though our rate of recerts have stabilized, it is on a smaller pie, and so that year-over-year number is going to continue until we get that rabbit through the snake, as the saying goes.

So that is the long and short of it on the change in recertifications.

Maybe just an idea of sort of the monthly trends, how did those progress throughout the quarter?

I think I put 44% out there for the quarter. And it is stabilized, so it is -- that is in the kind of zone that we have seen.

Okay, that's helpful. Dale, maybe one other question. I know I have asked you this several times in the past. I still don't have maybe a good idea -- I think, I have sort of a guesstimate of what the number is -- but if I look at your internal based admit growth number, how much of that growth historically do you think has been derived from your start-up activity? It just might be helpful for us and your shareholders as we think about 2011.

We've got a significant part of that that comes from start-ups. I think as Mike mentioned earlier in his prepared comments, the issue from our standpoint is one of costs related to start-ups. And as that cost has increased, both from a regulatory pressure and from the pricing cuts, we are moving more towards doing acquisitions to replace those. I think you will see that shift as a part of the mix as we go forward.

I think what you are -- if I am reading you right -- one way to get to your answer -- I think you will find in our K -- in the year-end and the K we are going to switch to the same-store, which would give you the prior-year comparables.

We haven't done all that work yet. We are going back and reworking that as we speak. But I think that will give you some view. I think that was your question, right?

Yes, yes, it was. Okay, thanks a lot, guys.

Art Henderson, Jefferies & Co.

Mike, just going back over all the work you have done this quarter, relative to where you thought you'd be at this juncture, do you feel like you are over the hump in terms of the changes that you have needed to make?

I know you're going to -- I know we are going to see some additional costs and expenses running through the fourth quarter, but relative to what your expectations were last quarter, how do you feel right now?

Good question. Well, let's just say that we could always go -- would like to go faster. But I think some of the initiatives we undertook we decided to purposefully go a little slower to make sure we did it right. I am fairly new to the industry and new to this team and believed, while the forensics -- we felt like were fairly straightforward, that our ability to execute and keep folks understanding what we are trying to do, it took a little longer.

So we still have some work to do. I will tell you that I came out of September encouraged that we are getting traction on our initiatives. And I'm optimistic we are going to see that continue into the fourth quarter. So while there is still work to be done, particularly around our portfolio and some of the operational challenges we've got, we are making what I consider to be now some substantive progress. So I think we are getting some positive momentum.

Okay, that's helpful. And then last question. I know you mentioned in your remarks, Mike, that acquisition multiples haven't sort of fallen to where reimbursement rates are going to go. So as you think about near-term uses of your cash -- I know you bought back a little stock to pay down some debt -- is that -- and I guess this could be directed towards Dale as well -- is uses of cash kind of share repurchases, debt repayment, and then acquisitions if they look appropriate? Could you comment on what the near-term use is?

The first part of that is that given our liquidity at this point with $128 million in cash and $235 million in available lines of credit, we believe in the short run we have the opportunity to look at multiple different strategic alternatives as we are going through these kinds of issues.

So the share repurchase plan is clearly on the table. We have made no decisions on that, but there is still a significant portion of that $60 million that is still out there.

In addition, the debt repayments that we have been doing are the scheduled debt repayments under the term loan portion of our bank credit facility. So those are scheduled debt repayments and some small portion of that on acquisition-related notes. The acquisition piece of it is still an active part of that. And Tim Barfield, you may want to comment on that.

We are still seeing activity on the acquisition front. I think the biggest issue is the pricing expectations of the sellers in general. And certainly on the home health side the supposed rule and the finalization of that rule may give more certainty to the expectations there.

But we still think that we are going to have to go into next year to a significant degree for people to really feel the impact of that, and be able to assess this strategy going forward and our expectations need to be readjusted on that end.

On the hospice side we see, again, activity but the pricing expectations have swung the other way to a large extent. And so we are looking very closely at that. We are trying to be very strategic as we look at acquisitions, and the demographics are important. The potential to be a market leader in the markets that are at issue and the potential relationship with key partners in those markets are very important to us.

Okay, that's great. Thank you very much.

Kevin Campbell, Avondale Partners.

First, I want to start with the pricing. If you look at the revenue per completed episode it looks like it went down a little bit sequentially from 2Q to 3Q, so I was hoping maybe you could talk about what caused that change and what we should expect going forward. Should we expect it to continue to climb for a period and then stabilize? Should it be stable here, etc.? So if you could talk on pricing that would be great.

I think I can help you with that. We had some -- remembering that therapy visits, helped with additional revenue per episode, saw a few -- fewer therapy visits per episode, which softens revenue a little bit. We are not really rolling out additional Balance for Life programs. Maybe just hit or miss here or there, but nothing concerted. We are fairly well concentrated in the portfolio now.

We are actually concentrated now on doing something a little more broadly around therapy not related to BFL, just broader therapy provisions. But since we've got such penetration in the portfolio I don't think you're going to see any continued acuity increases, at least we don't anticipate any. So I would say we are fairly stable on our pricing assumptions.

If I recall, an increase in acuity has helped you guys in the past offset some of the pricing pressure. So should we expect that going forward with acuity remaining relatively stable, that potential benefit or that offset to some of the pricing pressures really doesn't exist or is limited as opposed to what it might have been in the past?

Well, just to make sure that we are clear, if we -- because therapy is a component of the acuity factor, so to the extent more therapy is provided, acuity goes up, so it is kind of a circular argument there.

I think what we are trying to do, frankly, is the patients that we are taking care of, what comes in the door, we don't have a concerted effort to go out and try to build a certain piece that is a higher acuity.

We have programs that we are developing. Bill talked about our behavioral health. That is, frankly, a very low acuity part of the business. But overall I think we are expecting on go-forward acuity to be fairly flat.

Then I wanted to talk real quickly just on some of the change in operating expenses, just on a year-over-year basis, just so I can better understand what is happening there.

So if we look at your revenues and adjust for the one-time benefits, it looks like they increased year-over-year around $11 million or $12 million. And the same thing on the operating expenses, adjusting for the one-time items, it looked like they went up $34 million.

So can you help bridge the gap as to why the big increase year-over-year in cost, whereas the revenues didn't go up nearly as much, (multiple speakers)?

This is Dale. I think I can take a shot at that. And Mike, you may want to come in on that. When we went into 2010 we, I think, told the market that we had anticipated adding some resources to the field. And we added, as we talked about, some additional CapEx requirements, which it didn't hit immediately, but will have a depreciation impact.

As we built that cost base, when we saw revenue begin to decline or our volume begin to decline in the second quarter, you had a squeeze based on a cost base built for a higher revenue base. We are now in the process, as you can tell, of sorting that out.

So I think you're going to have a much better visibility on what those numbers will be on a go forward basis by the time we get into the fourth and first quarters.

That's right. You talk about classic whipsaw, you build an infrastructure and you have add resources at a time expecting the volume up and to the right, and we hit second quarter and we couldn't adjust fast enough. And, frankly, we wanted to make sure whether the resource we put in -- how fast could we really take that down. Because we believed -- obviously, we put those resources in for a reason, and so we had to make sure we were rationalizing those appropriately.

So, again, we didn't go as fast as we probably would have liked, but we think we are on the right trajectory now.

That's very helpful. Thank you very much.

(Operator Instructions). Newton Juhng, FBR Capital Markets.

Thanks very much. Guys, I just had a couple of questions here, but one was specifically on the geographic nature of the restructuring that you have been doing. Just kind of getting an idea -- and not just geographically, I guess, but also in terms of the maturity of the agency that you're dealing with here. Can you give us some idea, are there particular areas that seem to be more problematic than others?

Is there places where you really counted on growth in the past and now you're seeing -- now we really went a little bit overboard here? Is there any more detail than you can give us in terms of where and how you are making these kind of adjustments?

Let me put it in a couple of categories for you. First, some difficult markets, generally speaking, are Florida and Texas, rife with competition, and we have a lot of overlaps in those markets also just from historical -- from acquisitions and things. So that was probably the predominant geographic locations.

But I would also characterize these -- first off, all these agencies were negative cash flow, so that is obviously a contributing factor. But the characteristics underlying them, they were generally in markets we weren't a market leader. We were having difficult -- we had strong, established competition and we were having difficulty breaking in and gaining a leadership position in those markets. So that was the general characteristic. But as far as states, Florida and Texas were probably the primary locations.

Got you. Then in terms of your referral streams and your relationship with those agents, I just wanted to check on that front. And you have given some commentary in the past quarter, and I'm just wondering if there has been any change at this point right now or if things have been pretty much status quo?

It is pretty much status quo. We really have not had fallout from our referring physicians. In fact, I still continue to point out that despite noise and challenges we have had, and frankly internally operational changes and leadership changes, 6% same-store growth on admissions I think is a fairly strong signal that the underlying business is strong.

Thanks for pointing that out. That's helpful. Just a last question here. Obviously, we are all going to be anxiously awaiting where the finalized rule comes out at. I'm just curious as to the efforts you have put forth at this point right now receptivity on that, and whether or not you think there is any chance for an adjustment here between now and when I guess the final rule comes out?

Well, this is Tim. From a standpoint of the efforts, the industry certainly had a very concerted effort led by NOC, and we have even commented on some aspects of the rules ourselves. Overall, we are hearing rumors that there will be some accommodation or some changes on the face-to-face requirements, and perhaps some of the other requirements. On the rate changes it is really hard to predict. We should know in fairly short order.

Certainly, internally we are preparing to address whatever the final rule may be. And I would consider the worst-case scenario as well as we can.

Great, thanks, Tim.

Jerry Doctrow, Stifel Nicolaus.

Thanks, just a couple of things. So I wanted to come back to SG&A, the number for the quarter was a little bit higher. It was one of the things that was up. I was just curious if I can get a little more color, maybe where that is trending.

Well, the SG&A number, it is a lot of noise in a lot of these numbers. From last year it was up 1%. And again, that was building some corporate support, and we had some increase in the number of agencies.

I think what you'll see as the year progresses and we get into 2011, I think you'll see a positive trend there, both in dollar amount and potentially in percentage of revenue. That obviously depends on what the magnitude of the cuts actually end up being for next year, and what our acquisition activity looks like.

Okay. I also wonder if you can give us any more color on the phase in of some of these cuts. I think, Mike talked about the total volume of savings that you might see, but I was unclear as to how much that we might see fourth quarter and how much we might see first quarter. Because you talked about the pace picking up or starting to gain traction, so I was just trying to figure out for modeling purposes how we should think about it.

I think we will see some of that in the fourth quarter. A lot of it will be impacting 2011 because of the cumulative impact is going on here and in the start-up operations there are issues that have not been fully fleshed out. In other words, we may have start-ups that are not fully staffed and we have exited those start-ups. So we would have had significantly higher costs next year, by exiting that we will not have those costs.

So some of that will happen in the fourth quarter, a much larger portion will happen in 2011.

On the operating expense side, we didn't provide specifics around that. [I] just considered it embedded in our guidance. But I do think the level of traction, I tried to indicate the level of traction we are gaining there I am encouraged by and think we will see some results on the cost side in the fourth quarter.

I think what we will not see until first quarter, these mergers that we did, and you will see the details of some of that in our Q, that the merger revenue there, because of the notification periods required to the regulatory agencies, and when you can actually do those transitions, it will take time to transition that revenue over. And we didn't expect to get dollar for dollar of all those revenue dollars coming over. So that is going to take a little longer for us to capture that. And that will be in the first quarter.

Last thing, if I could, just any updates or anticipation when you might hear something on the Senate Finance or SEC or the DOJ stuff, anything going on there?

This is Bill. I don't think we have anything to report. We have submitted all the initial filings that they have requested. There has been a few additional questions just simply for clarity, small issues. But we hadn't heard anything either way. And we are very optimistic about the future outcome.

Okay, thanks.

Sheryl Skolnick, CRT Capital Group.

Okay, I want to turn to questions about the actual performance of the business and what trends we're seeing and versus not seeing here.

Let me just ask it this way, your pricing is down sequentially. You addressed that issue of declining acuity in that -- it sounds as if you're saying that it is going to be stable to flattish. Your recert rate, being specific here, your rate is also likely to stabilize, perhaps decline a little bit.

But I am very concerned here. The number of visits per episode is up. The acuity is down, and you're facing a significant price compression next year, which one of my colleagues I think had deftly pointed out, gives you fewer arrows in the quiver to offset this.

There is a behavioral change that has been undertaken by your clinicians, which -- okay, that is an explanation, but why they felt the need to change their behavior is still a question.

Where I am going with this is why should I not be worried that all of these changes in pattern, the drop in acuity, the drop in research, the change in behavior, the compression of price, why doesn't that add up to something that would make the DOJ ask questions?

Well, I'm not going to speculate on what the DOJ might or might not look at. But I will say that our episodes -- our visits per episode are actually going down. I know what you're looking at. You can maybe get some more information through our Q, but the visits are actually going down. Primarily that is some of the softer therapy visits I mentioned earlier.

So I think that is --.

Okay, and you are -- I apologize for interrupting, but what I am looking at on your press release is 19.1 episodic-based visits per completed episode versus 18.7 year ago.

You asked me about sequential. And so in the second quarter --.

No, the sequential -- the pricing went down, but year-over-year let me be clear, year-over-year the visits.

So what is your question?

So what my question is here is what is going on here in these numbers? Are the visits going up? I guess if you're going to tell me that your episodic-based pricing was $32.94 versus $31.89 that that is why the visits went up?

Well, that would be a conclusion to draw [from that].

Okay, and your visits going forward, are you saying that if the acuity is going to be flat, the visits are likely to go down? Or well we still see an increase year-over-year in number of visits and sequential compression of pricing ex what happens with Medicare?

Well, we have drawn -- what we have assumed all along is that visits are related to acuity. So if we are assuming, as I have said earlier, that acuity will be somewhat flat, we would expect the same in our visits.

Now, with that being said, I think the underlying theme for us is doing the right number for the patient, and matching that visit count with the patient. So some of this is about making sure that we have strong care tracks by diagnosis and have our folks adhere to those care tracks, where clinically appropriate. And that is where it what we are focused on doing.

We actually did have a decline in visits per episode from the second to the third quarter.

Okay. That's good. Now my next question along those lines is a year ago, if I'm not mistaken, in the fourth quarter your reported growth in, I believe it was internal, but you may correct me if I'm wrong, the internal episodic-based admission growth was 4%. Right?

That's correct.

Okay. That's correct. That was from the press release.

I wasn't here, but (multiple speakers).

And that is from the press release. Right, the internal episodic was 4%, some portion of which was from start-ups. So you had an easy comp relative to some of the other growth rates that you have reported historically.

And where I am going with this is that the trend in that admission number, therefore, given that you're not going to do as many start-ups, as we roll forward into next year, given that you're going to have a roll off of the start-ups and you're not going to have that contributing to the internal growth rate, and given that it appears that you're changing -- you have anniversaried the rollout of some of the specialty programs -- could we also see a compression in the admission growth rate?

Then I will stick this in there, because I know you only want a follow-up, but others have asked three questions, so I will stick it in there too. I would like to understand the impact of all of the programs that you're introducing on the actual expense ratios on an ongoing basis on the operations as opposed to the numbers you have given us, which are CapEx.

Okay, well, let's see if I can remember what your first question is. But one of the reasons that I felt like we needed to switch to more of a classic same-store volume, because if we are not going to do start-ups to get to a more -- and we are going to be doing portfolio management -- to me, it gives a better underlying view of what our real portfolio performance is, number one.

And as I said earlier, I think I reported 8% internal growth in this quarter, but same-store is 6%; therefore, the delta there obviously [include] start-ups, etc.

Right.

So what I have been saying around here, and to anybody who would listen, is that I believe that on a same-store basis that the underlying admit is what matters to me. If we assume a stabilization of the recert rate that I believe that admission growth -- I have no reason to believe that if we can hit 6% through the noise we are going through right now, why we should not continue to see at least that into next year.

So that is kind of my operating thesis. I could be proved wrong, but that is my underlying thesis of what I think the value proposition for this Company represents in terms of growing the fundamental business. I think starting in second quarter next year our year-over-year comps are going to look pretty good.

Okay, but I would ask the question, is that 6% really real or is it 6% because it is versus a very easy comp, i.e., something less than the 4% internal reported last year.

For argument sake it was 3% -- if it is 4% in total, 50-50 from internal and external, it is really only 2% from same-store and de novo -- then it is really only 2%. And a 6% growth rate off a 2% comp, not so surprising. But if it is 6% over -- off a 4% comp, then it is more impressive.

I guess that is really the question I think we are trying to get at is, if you normalize what for the year-ago performance, which was a little bit soft, where would we really be, and is the 6% really enough?

It is never enough.

Right.

But I would argue, again, given where we are in the environment we're in right now, that it is still a damned good result. So I will be happy to spend time with you off-line if you want to go through this, and let's allow some other (inaudible).

Now as for the other part of your question on the costs related to some of our other initiatives, I think we can do that. I don't have numbers in front of me at my disposal, but we have made significant investment in areas where we don't get paid for it.

We have invested in a call center. We have invested in Telehealth. We have invested in -- with other vendors in new and exciting technology to help us manage patients better. And we are not getting paid for that, but we are making those investments. We would be happy to profile that for you at some point down the line.

One last issue. The fact that we are slowing down our start-ups doesn't mean we are not going to grow our business. We fully intend to be the major player -- or a major player in the consolidation of this industry.

What we are reacting to is the change in economics associated with start-ups. If we replace that with acquisitions as we go forward, because we believe there is at least a reasonable opportunity, we will able to do those on more economically attractive terms. Then the concerns that you have are simply shifted from one side to the other.

Thanks, Sheryl.

Once again, please limit yourself to one question and one follow-up. Kevin Ellich, RBC Capital Markets.

I just want to -- [last thing] discussed and I just want to lay out a few quick questions. Could you talk a little bit about the competitive landscape? Have you noticed any significant increase given all the headlines flying around and what is going on with the business now?

One of the concerns around that is you always worried about getting counter-sold. We did a little bit of work around this in markets where we had for-profit -- primarily for-profit competitors and then not-for-profit competitors. And we really didn't find any market characteristic differential there, which kind of debunked the counter-selling. We certainly have that from place to place, but there is nothing systemic out there.

In fact, I would tell you that as we go out and talk to potential hospital partners, and to other potential partners, there is an understanding that where we are right now is not that unusual in healthcare these days. And the scrutiny that we are under is a cost of doing business. We owe our biggest customer solid responses, and we will do that. But the people we are talking to seem to understand that it is a product of where we are.

Understood. That is helpful. Then I just want to go back to the earlier comments about uses of capital and strategic alternatives, or I guess more or less acquisitions. I think earlier this year Bill talked about hospice and how you guys will one day be the biggest hospice player. I am just wondering where that strategy stands and how aggressive you want to get in this environment?

Well, look, there has been a lot of hospice activity, let's say. There was one particular transaction that set a bar for valuations that we are not sure we want to support. So we certainly intend to make hospice a significant part of our business. It is a part of our business, it is going to continue to be a significant part of our business. It is going to be a more important part of our business going forward. But we are going to be smart about how we go get it. So that is the takeaway for you here.

We like that business. We are going to be in that business, and we will be a major player in that business, but on our terms.

As we discussed, we are positioned from a financial and resource standpoint to be a consolidator in both of these industries, and we will continue to use that in an appropriate fashion.

While we see the hospice reimbursement and the outlook a little more stable, as Mike mentioned, the price has gone up significantly. We have a full pipeline of hospice opportunities. The market will probably see us engage in that activity probably more aggressively from this point until the end of next year.

And to be very frank, we think the end of next year and 2012 is going to be just riddled with huge home care opportunities as well, from all different sizes and different markets. And we see a very robust opportunity to move both of the portfolios along. And it is our intention to be the largest in the space of home care and hospice, helping us with our long-term objectives of moving into chronic care.

Okay, so basically the objective of being the largest hospice provider in the next five years still stand?

It still stands.

Okay, thanks.

Because of time, we will take one final question. That will come from Darren Lehrich with Deutsche Bank.

I just wanted to ask a question, so I can get a little better handle on your margins, and maybe normalizing some of the things you have laid out on the call.

If I piece together what you have said with regard to start-ups and some of the exit markets and the annualized benefit from that, it sounds like there is about 200 basis points or so of margin that we might want to add back to this quarter. Is that the right starting point?

And I'm just wondering if you could maybe give us a more normalized view of where you think margins are based on the cost that you have taken out thus far?

Let me answer that question this way. First off, we are not going to speculate on where that margin is going to be, but over time I think we expect to see our cost structure be more in line with the revenue base.

Secondly, I think you will see significant improvements over the next two or three quarters in how that margin looks. I think from a revenue standpoint, we are going to see what happens over that period of time. But it is difficult for us to speculate on that issue, but we will see improvements in the margin in the fourth quarter. I think we will see that continuing on in 2011.

But if I -- I guess if I piece together the things that you have discussed so far in the call relative to what you think you can save on an annualized basis, it might be helpful for your investors just to understand how some of that hit in the quarter, how you exited the quarter? Was there a full benefit or will we not see that full benefit of those numbers until Q4?

Very little of that impact was felt in the third quarter -- the positive benefit. We did take a significant charge in the third quarter, as we mentioned that was about $10 million related to severance, lease terminations and that sort of thing. But from an operating standpoint, very little of that benefit occurred in the third quarter. More of it will occur in the fourth quarter, and I think it will continue on into 2011.

Okay. And then if I could just follow up. Relative to some of the things you have mentioned, Mike, like tele-monitoring, you've got a little bit more of an aggressive strategy there. You're transitioning some resources in Encore. Will that require additional expense? Should we be thinking about those things as being additive to the cost base from here go forward or is that really just shifting resources?

It is really -- think about it that way as a way of how we allocate resources. I don't think at the end of the day on a year-over-year basis it will be a material change in your assumptions for SG&A or corporate expense.

But we do think it is going to have a very positive effect on patient care.

Good point. That's why we are doing it.

Thank you. That will conclude our question-and-answer session. I will turn the conference over to Mr. Bill Borne for any additional or closing comments.

Again, we want to thank everybody for their time and attention to this call. We appreciate your patience as we move through this transition period. We look forward to the fourth quarter and year-end, and hopefully seeing you in between and different conferences. Have a great day everyone.

This does conclude today's conference call. Thank you for your participation. And have a nice day.