Amedisys Inc (AMED) 2010 Q4 法說會逐字稿

Good day and welcome to the Amedisys fourth-quarter 2010 earnings conference call. Today's conference is being recorded. At this time it is my pleasure to turn the conference over to Mr. Kevin LeBlanc, Director of Investor Relations.

Thank you, Cynthia. Good morning and welcome to the Amedisys investor conference call to discuss the fourth-quarter and year ended December 31, 2010 earnings announcement and related matters. A copy of our press release is accessible on the Investor Relations subpage 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 release 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 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 address is www.amedisys.com. We use our website as a channel of distribution for important Company information. Important information, including press releases, analyst presentations and financial information regarding the Company is routinely posted on and accessible on the Investor Relations subpage of our website.

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 subpage 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 page.

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 Linked Press Releases.

Thank you, now I'll turn the call over to Bill Borne.

Thanks, Kevin. Good morning everyone and welcome to our fourth-quarter and year-end earnings call. On behalf of our leadership team at the Amedisys we appreciate the opportunity to update you regarding the Company's performance.

For the year we recorded a net revenue of $1.6 billion, an increase of $121 million over 2009, and adjusted net income of $122 million, a decline from 2009's net income of $136 million.

For the fourth quarter we recorded net revenue of $394 million, a sequential decrease of $10 million from the third quarter, and an adjusted net income of $27.3 million, a $2 million sequential improvement over the same period.

In conjunction with this earnings call we are issuing earnings guidance for 2011. Dale will provide the detail shortly.

And looking back at 2010, I'm very proud of our team for delivering results in the face of changes within our Company and industry. Our team responded swiftly. These actions were taken without compromising our focus on patient care.

The second half of 2010 has truly been a transitional period for the Company. In the first half of 2011 we expect to solidify our baseline business with expectations of seeing significant improvements in same-store growth and acquisition activities in the second half of the year.

In addition, our intentions are to leverage our operational infrastructure to maximize our earnings potential.

We enjoy strong balance sheet, great market position and unmatched long-term strategy. We have established the most sophisticated home health infrastructure and delivery network in the industry today, with care centers in 45 states delivering more than 10 million patient care and education encounters per year.

As we look ahead to the future we will focus on making smart investments and working with everyone in the healthcare industry from hospitals to managed care providers, technology partners, academic medical centers, foundations and other leaders to develop a better solution.

Our strong home care foundation can help with delivering on this promise. In 2011 we will continue to focus on improving quality care for our patients and running an efficient company and growth.

As it relates to quality, our 12,000 field clinicians across the country are focused on strategically deploying our evidence-based clinical programs, as well as our technology and clinical expertise to reduce our acute-care hospitalization rate in every community we serve.

Programs that are showing effectiveness in reducing acute-care hospitalization rates include Care Transitions, where we engage patients and their caregivers before they are discharged from the hospital and throughout their episode of care. Telehealth, which is our remote patient monitoring; and advanced chronic care management, where patients are re-stratified while we offer additional care and oversight as well as interventions.

We believe our home care and hospice care divisions are best aligned in caring for our patients from managing their chronic illnesses through the end of life. Our palliative care program will be deployed in several markets, and we believe it will yield positive outcomes in our care quality.

Offsetting the fourth quarter of last year we redeployed our Empowered for Life, our home-based behavioral health program that helps patients manage symptoms of conditions, including depression, and Alzheimer's.

In terms of efficiency, our philosophy here is to deploy those processes and technologies that enable our clinicians to deliver better care to more people in the communities we serve.

Mike will provide more detail on this, but one example is the deployment of secure wireless technologies to all clinicians' point of care laptops so they can receive assignments and transmit their reports from the field without having to stop at the local care center.

Now turning to growth. Historically our growth has come from acquisitions and startups. While we see ourselves playing a significant role in pending industry consolidations in both home health and hospice, moving forward we will also be focused on maximizing our organic growth potential.

This type of organic growth will come from continuing to invest in our people with a focus on having the best clinical care delivery team in the industry. Refining our sales strategy, ensuring our marketing and sales infrastructure supporting a market-by-market growth plan to gain marketshare everywhere we can serve patients and healthcare systems.

Leveraging technology, to be in more places to serve more patients with greater collaboration across multi-stakeholder care teams, including hospitals, hospitalists, primary care physicians, and caregivers, as well as other partners.

Thanks for the opportunity to share my perspective with you. Most of all, thank you to the 17,000 Amedisys colleagues, who have had patience and perspective during a challenging year, and they will have entered to 2011 with fresh energy and excitement for the future.

I will now can this call over to Mike Snow, our Chief Operations Officer.

Thanks, Bill. Today marks my first anniversary with the Company. As I reflect back, I am reminded of why I came to Amedisys in the first place. If anything, I'm more convinced than ever that care for patients in the home is a value proposition that is not only compelling, but essential to managing healthcare costs.

So the last year has been marked by uncertainty, external regulatory pressures, operational challenges, and the need to invest in the scalable operational infrastructure. I'm pleased with the progress we are making and I would like to comment on each of our three operating strategies.

First, I will talk about our operational efficiency. We have improved the everyday operating platform of the Company. A few examples of this are we completed the conversion of our HR and financial assistance to PeopleSoft during the fourth quarter.

We consolidated three disparate operating systems into one that will provide our leadership and management teams with greater visibility and more accurate information to make smart business decisions. This platform also supplies provides scalability for growth.

We also started to deploy a system-wide technology upgrade in the fourth quarter of last year. This includes a significant replacement of our point of care devices and other field computer equipment, which we expect to complete by the end of the first quarter. This technology refresh arms our care teams with full wireless communication and e-mail access.

We believe this investment will improve productivity, reduce travel and overhead costs, and ultimately improve the quality of care provided to our patients. Already we are seeing faster transmission rates of clinical information, such as drug reconciliations, resulting in improved care coordination between our clinicians, clinical managers and patient's physician.

This system enhancement will also allow us to implement a medical supplies delivery system, allowing supplies to be ordered from the clinician's laptop and shipped directly to the patient's home. This will allow our clinicians to spend more time in the field with patients than in the agency on administrative tasks.

It also has the added benefit of increasing the geographic territory that can be effectively serviced from a care center, tying into our strategy of merging operations with our overlapping territories.

Third, we continue to make progress in the development of a point of care system for our Hospice division that we have scheduled for deployment before year-end.

The investment Amedisys has made in technology has been prudent. When you think about it, in the face of reimbursement pressure, if a home health or hospice provider hasn't already invested resources into this critical resource they are unlikely to do so now. We believe our information system gives us a differentiating advantage to drive quality, efficiency and growth.

In talking about growth, it is important we build on our strengthened operating platform, as Bill discussed. We are investing resources and maximizing our market-by-market organic growth.

We have a strategy to deploy our local market teams to increase their engagement with healthcare providers, academic medical centers, community leaders and patients and their families. To ensure this strategy is executed well, we are enhancing our business development teams with more in-depth clinical education, a new sales incentive plan that better aligns growth with service quality and earnings, a new customer relationship management tool that will enable our teams to have better visibility into their territory trends, and referral source tracking from their wireless laptops or mobile devices. This tool will be deployed starting the second quarter of this year.

Last, but not least, we have developed a model for an enhanced cadence of accountability for our business development teams regarding their progress against sales goals, including benchmark sales activity with existing referral relationships and brand-new ones we want to establish.

Both the day-to-day operational improvements and realignment of our business development efforts lay the foundation for the core mission of this Company, providing the best patient-centered care. We are beginning to lay this foundation for what we believe will be the care model of the future.

During the fourth quarter we completed the transition of our Encore call center to provide intra-episodic clinical interventions in 65 of our home health agencies. This pilot program, which focuses on patients who are risk stratified as likely candidates for hospitalization, provides active monitoring of health status, encourages adherence to care plans, and reinforces education. As a result, we believe that patients will have a better care expense, and more on the point, be less likely to experience a rehospitalization.

We hired nurse practitioners in certain markets to enhance the clinical care we could provide. Further results from these pilots suggest that this capability has merit in many of our markets.

Finally, we are reviewing the appropriate use of new remote monitoring technologies and telephonic interventions. We believe this can augment the high-touch evidence-based care our talented clinicians provide. Our goal is to eventually provide longitudinal care for patients in a bundled and/or risk environment with health systems and payers.

So let's now turn our attention to the practice steps we have taken and the operating performance of our home health care and hospice care divisions.

First in home health. We substantially completed the agency portfolio review that we initiated in the third quarter of last year. We closed an additional 10 agencies and merged an additional 19 during the fourth quarter, and also reduced the number of anticipated startups for 2011. We opened five startups in the fourth quarter, bringing the total for the year to 40.

We also completed a hospital joint venture in South Texas with Valley Baptist, bringing our total owned agencies to 486 at year-end, with seven joint ventures. Those agencies that we closed and merged in the fourth quarter are expected to have a negative $12 million to $16 million annualized impact to revenue, but a positive $6 million to $8 million annualized impact to EBITDA going forward.

While we have now substantially completed our portfolio review, this will be an ongoing component of our management process.

As you can see from our earnings release, we have now fully converted our historical method of reporting volume to a same-store methodology. It is our belief that this metric will give investors a truer sense of volume trends and growth potential going forward.

Comparing fourth quarter of '10 with fourth quarter '09 on a same-store basis, we saw episodic admit growth of 5%, episodic recert decline of 11%, a trend that will continue into most of Q2, and flat episodic revenues per completed episode.

These components contributed to a same-store revenue decline of about 4%, primarily a result of the lower recerts. Also contributing to the revenue decline was a 2011 reimbursement cut impact on episodes in progress at year-end. Thanks to our revenue growth, it would have declined 2.5% without this impact.

We also experienced positive traction on our operating costs through a conversion of clinicians to per-visit pay and streamlining administrative positions. On a sequential basis our cost per visit was about flat; however, when normalized for the holiday pay and we actually experienced a 1.5% reduction from the third quarter.

We also experienced a decline in care center overhead of about $5 million on a sequential basis, driven primarily through closures and administrative staff reductions.

Given the leadership changes and closure activity we initiated in the third and fourth quarters, we are pleased with the 5% admit growth, but as noted earlier, are working on a number of initiatives to improve that result going forward.

The recert rate continued to hold constant at approximately 44% during the quarter; however, the year-over-year comparison continues to be unfavorable, given the recert rate drop we experienced in the second quarter last year. We will need to get through the second quarter and into the third quarter of this year before the year-over-year comparison normalizes.

Turning to the Hospice division, we had a very strong quarter. On a same-store basis revenue grew 17%, average daily census grew 18%, admit growth last 19%m and average length of stay declined 2% from 91 to 89 days. Our revenue was fundamentally flat on a per day basis.

We are very pleased with the growth we are seeing in our Hospice division. This growth can be attributed to investments we have made in our leadership teams and focusing our sales efforts on top accounts, many of which are hospitals.

In addition to growth, hospice margins have been improving. Adjusting for one-time cost, our hospice care centers showed a contribution margin of 26.6% in the fourth quarter, up from 20% in the third quarter. Some of this improvement is a product of the 1.8% Market Basket update that went into effect in October. Some of the improvement is leveraging the impact growth has on care center performance. In other words, our revenue is growing faster than our overhead.

This improvement is a result of better management of staffing ratios and a decrease in pharmacy costs per day, as we work with our pharmacy vendor to identify lower cost alternative medications.

We continued to gain confidence in our hospice management expertise and believe there are additional synergies that can be realized from the overlap of this business with our Home Health division. We opened one new hospice care center during the quarter, for a total of 8 during 2010.

I will now provide some comments on 2011. Looking ahead to the first quarter for a moment, we have seen some weakness in volumes during January and early February relative to prior-year. In the first quarter of 2010 we had a 10% same-store episodic-based admissions growth, with a significant amount of that coming from a national managed-care agreement. So our comps are high to begin with.

But bad weather in the first weeks of January in some of our strongest markets, such as Alabama, Georgia and Tennessee, hit us hard. Just as a point of reference, while we don't track the agency closures due to whether, we offer our per-visit clinicians inclement weather pay under certain conditions. In January of this year we incurred $1.2 million in this category versus only $100,000 in all of last year. So while we are confident about our outlook, early results indicate that first-quarter volumes will be less than we anticipated.

On the regulatory front, the new therapy reassessment requirement for home care and the face-to-face rules for both home care and hospice are significant changes for the industry. Although CMS extended the enforcement deadline of these changes to April, we have already begun addressing these.

We are responding effectively to this new requirement across clinical operations in our care center network, leveraging our point of care system, our physician portal, Mercury Doc, and our Care Transitions teams.

In summary, the actions we initiated in the second half of 2010 are having their desired impact on results. We are optimistic about our ability to grow the business in spite of the regulatory environment, become more efficient in our delivery of care and demonstrate high-quality outcomes to our customers.

Before I turn it over to Dale, I would like to take a moment to welcome the employees of Valley Baptist to the Amedisys team. Having worked in that market in my past, I think we can do great things together providing care to people in the Valley.

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

Thanks, Mike. Before I begin my comments on financial performance, I would like to highlight the addition disclosures in our earnings release we issued this morning. We have included a complete balance sheet and income statement, and we expanded the information on our operating units.

As Mike mentioned earlier, we are moving to a more traditional same-store approach in presenting our results. In order to help with this transition we have included the results of the previous three quarters to reflect this new presentation.

Turning to our financial performance, I will start with an overview of 2010 and 2009. Revenue increased $121 million, with $84 million of the increase coming from our Home Health division and $37 million from the Hospice division. Total revenue was $1.634 billion compared to $1.513 billion. Our net income was $113 million or $3.95 per share compared to $136 million or $4.89 per share.

Included in revenue was $3.7 million from the settlement of our Georgia indigent care liability, and $3.6 million in quality care bonus from CMS. And included in expense was $13.6 million related to our agency closures and consolidations, and $9.6 million in costs associated with the realignment of our operations and legal expenses related to the Senate Finance Committee inquiry and the SEC and DOJ investigations.

After adjusting for these items, total revenue was $1.627 billion. Net income was $122 million or $4.29 per share. And EBITDA was $242 million or 15% of revenue compared to $262 million or 17% of revenue in 2009.

Excluding these costs, gross margin decreased from 52% to 49% mainly due to an increase in the percentage of visits performed by therapists and increases in the number of salaried clinicians and clinical managers. G&A was flat at 37%.

Comparing our performance for the fourth quarter of 2010, and the fourth quarter of 2009, revenue decreased $11 million, with a $17 million decrease coming from the Home Health division and the Hospice division increase of $6 million.

Total revenue was $394 million compared to $405 million. And our net income for the fourth quarter was $22 million or $0.77 per share compared to $38 million or $1.35 per share.

Nonrecurring costs for the quarter were $8.5 million. The net effect of these items after tax is approximately $5.2 million or $0.18 per share. After adjusting for these items in the fourth quarter, total revenue was unchanged and net income was $27 million or $0.95 per share.

Excluding these costs, gross margin decreased from 51% to 50%, mainly due to additional clinical manager resources and growth in our hospice operations.

G&A increased from 36% to 37% on increases in salaries and benefits related to corporate support, as well as increases in the number of agencies.

Results for the quarter also included a reduction in revenue of approximately $5 million for the CMS rate reduction that affected episodes in progress at year-end. EBITDA for the fourth quarter of 2010 was $55 million or 14% of revenue compared to $71 million or 18% of revenue in 2009.

From a liquidity standpoint we ended the quarter with $120 million in cash and $235 million available under our revolving credit facility. Our cash at the end of the quarter increased $86 million from the end of 2009 as we generated $206 million from cash flow from operations, spent $64 million on capital expenditures, $4 million on acquisitions, and made debt repayments of $45 million.

In 2010 we generated cash flow from operations of $142 million after CapEx.

We reduced our outstanding debt by $33 million to $182 million as of the end of the quarter compared to $215 million for the same period of 2009. Our leverage ratio at the end of the quarter was 0.8 times, which did not change from the same period in 2009. And our weighted average interest rate on our debt was 4% and 3.9% for the three- and twelve-month periods.

As you can see, from a balance sheet standpoint we are well-positioned to accelerate our acquisition activity in 2011.

We ended the fourth quarter of 2010 with days revenue outstanding at 33 days, which is down 1 day from the fourth quarter of 2009. Our provision for estimated revenue adjustments and doubtful accounts for the year decreased from 1.9% to 1.6% of revenue.

In 2011 we expect to spend approximately $50 million on capital expenditures or approximately 3% of revenue. As Bill and Mike mentioned, most of this expenditure relates to our continuing investment in IT systems, which we believe are the key to our ongoing efficiency initiatives.

As we mentioned in our third-quarter earnings call, our Board of Directors authorized a stock repurchase program of up to $60 million of our common stock. We did not repurchase any stock during the fourth quarter of 2010, and for the year we have repurchased approximately 500,000 shares at a total cost of $12 million.

This morning we are issuing our revenue and earnings guidance for 2011. We anticipate that revenue for 2011 will be in the range of $1.600 billion to $1.650 billion, excluding the effects of any future acquisitions, if they are made. Earnings per share will be in the range of $3.00 to $3.30 per share based on an estimated 29.3 million shares outstanding, which also excludes the effects of any future acquisitions.

As Mike mentioned, our first quarter has historically been our weakest quarter. January and February are weak volume months followed by a very strong March. This volume strength late in the quarter pushes some of the benefits into the second quarter. Additionally, our March leadership meeting, as well as increased payroll taxes, will negatively affect the quarter.

This year the first quarter is being further affected, as Mike mentioned, by the recent weather difficulties we have experienced.

The first quarter will also be impacted by the 5.2% home health cut, which he expect to reduce our earnings per share by $0.25 to $0.30. Therefore, in the first quarter we expect a significant sequential decline from the $0.95 run rate in the fourth quarter of 2010.

However, while our first-quarter earnings expectations are substantially below the fourth quarter, we are optimistic about the last three quarters as we expect a significant improvement in the second quarter to a run rate more in line with our annual guidance and more reflective of our 2009 sequential results.

Our sequential revenue growth has historically been strong from the first to the second quarters due to increased episodes in progress at the end of the first quarter and seasonally positive volume and revenue per episode.

In addition, our portfolio cost and efficiency initiatives will have a growing impact over the course of the year. This earnings guidance does not include the effect of any nonrecurring costs that may be incurred during the year or the impact of any future CMS rate changes.

Lastly, as Mike mentioned, the industry faces a number of operational challenges in 2011 associated with CMS rule changes, including therapy reassessment and physician face-to-face requirements. While we believe we are well-prepared to implement these changes, their ultimate effect is difficult to predict.

To sum up then, 2010 was obviously a difficult year for us and 2011 will present its own challenges. However, we believe that from a clinical, operational and capital standpoint we are well-positioned to meet those challenges in 2011 and beyond. And we are focused on clinical quality, growing our business and continuing to improve the efficiency of our operations.

I would also like to remind everyone to save the date for our Investor Day we will be hosting in New York on April 29. We will be posting a registration site on our website in the coming weeks.

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.

The question and answer session will be conducted electronically. (Operator Instructions). Art Henderson, Jefferies & Co.

Thanks for taking the question. Dale, I guess, first question for you. Talking about your guidance of $3.00 to $3.30, can you talk about what the swing factors are to get you to the low-end versus the high-end? And more specifically, how should we think about your SG&A expense this year? Is it worth analyzing just where you were in the fourth quarter and using that as a proxy?

The first question would be how should we think about the $3.00 to $3.30. I think that depends on a number of factors, how successful we are in continuing to build internal growth, which is a major focus of ours. Secondly, how successful we are in continuing to improve the efficiency of our operations, not only through the initiatives that we started last fall, but the technology initiatives that we have put in place, such as PeopleSoft and making sure that we get the majority of that return on investment that we anticipate out of those issues.

From a G&A standpoint, I think we are looking at essentially somewhere around a flat year, although we are optimistic, as we talked about, the $3.30 to the $3.00 that we will make improvements in that as the year progresses.

Okay, thank you for that. And then my follow-up, on the acquisition front, I know this is going to be a more active year for you. Bill, I think in your opening remarks you had indicated more activity possibly occurring in the second half of the year. Could you talk about what you're seeing out there right now in terms of opportunity? And how should we be thinking about when to be looking out for announcements possibly?

I will take the first part, and I will let Tim give a little more color on that since that is his area. But you know, as we have said all along through the middle of last year that we felt we had to see the impact of the cuts, and not just the threat of them coming but them actually coming, and than businesses, especially hospitals and large systems, which is a big focus of ours, really feeling the brunt of that impact before we would see some more activity. And we are actually starting to see that now. Some of the larger opportunities are starting to come to the market.

We think hospitals are going to be a little slower to come to that realization, probably more the middle of this year. But we feel towards the middle and the end of this year we are going to have a lot of exciting opportunities in the acquisition arena. I will let Tim comment a little more about that.

All in all, I think we see what we talked about the last couple of quarters. As we get into this year and the impact of the rate cuts, many companies are basically at an inflection point. They really have to invest in scale, invest in efficiency to grow and get over the hurdle of the rate cuts, or they have to look for alternatives.

And at Home Care 100 last week there seemed to be a little bit different attitude than we saw a year ago. We are seeing the expectation from sellers in home health area coming back down to something more reasonable in light of the current regulatory structure and the current pricing structure.

So I think this is going to be a second half of 2011, and into 2012 I am very optimistic about our opportunities to do what we have been talking about, and that is start moving towards some consolidation in the industry.

You're going to see that, Art, in both the home health and hospice. Hospice is a little pricier now, but there are some good opportunities out there.

Okay, that's good to hear. Thanks very much.

Darren Lehrich, Deutsche Bank.

So I guess it would be maybe an interesting exercise if you could, Dale, to just bridge numerically the guidance. Your basically starting off point is run rate EPS of $3.80 and you say $0.25 to $0.30 or $1.20 down from the cut, so in my mind the starting point is $2.60. How do you get the two $3.30? And maybe if you could just highlight a few of the components that you think are relevant to that EPS bridge.

Okay, I am not sure I got all of your math, but we ended the fourth quarter of last year at $0.95. So if we just annualize that it is $3.80. Maybe that is where you were going.

I think the cuts involved in that, you can do the math on that, but that is going to be a significant issue for us, as we mentioned, that is somewhere in the neighborhood of $0.25 to $0.30 hitting us in the first quarter. And that is net of -- and that is a comparison to the fourth quarter -- that is net of the impact that we took in the fourth quarter.

But the issue here is those cuts will impact us and we have, we think, the opportunity and the initiatives in place to offset some of those cuts, and therefore end up in that $3.00 to $3.30.

Right, so I guess just to maybe get a little bit into some of the operational things you have done, so we can sink our teeth into the numbers a little bit more. I think, Mike, you laid out some things in terms of annualized savings in 2011 from closures and scaling down the de novo pipeline; maybe that is one element of it. Obviously, you will have same-store growth on volumes, so that is another component that we can think about.

But I am still having trouble seeing how $3.30 is in the range at the starting point at the low end is really after the cut is closer to $2.60 -- $3.80 minus $1.20.

If you are talking about the low-end you are assuming no growth. So we are counting on growth being a significant part of our mitigation. We have been growing, so obviously that is the most material component.

But, I will also tell you that what I tried to refer to in my comments around our cost structure, I think if you look -- well, first of all, my comments that we were flat and it normalized out. We actually had a reduction, and we actually exited the quarter on a lower rate. So I think it is going to be even more positive for next -- I think you might be discounting what efforts we underwent in the first and fourth quarter, it is not visible in our fourth-quarter results just yet.

Okay, thanks a lot.

Kevin Campbell, Avondale Partners.

Thanks for taking my questions. I was hoping, Mike, you could start by talking a little bit more about the Hospice segment. The margins there obviously were very strong. I know you mentioned some of the reasons for that. But if you could just dive a little bit deeper there, let us -- give us some idea as to whether or not that is sustainable at the current levels.

And, also, I wanted to touch on the organic growth there, the 17%. What is driving that at the mid- to upper-teen range, and how should we think about that for next year?

I think the way you need to think about it is remember that this division is pretty young. For the revenue basis we've got -- I mean, we've got 70 whatever centers in that division, so some of this is a rule of small numbers.

That is not to say that just because you are small you can expect those kind of numbers. They have done a great job. But some of this truly is about having some of our agencies with 30 ADC or less having some success.

And now on the cost side I will say that there you get two factors working for you. One is that you are already embedded with your fixed costs. And then to the extent you can drive your pharmacy costs, which is what we have done, is we have both gotten leverage on our fixed costs in the agencies, plus we have done a good job on our pharmacy management. So it has had a double positive impact.

So do I think it is sustainable? Yes, we do. We expect some impressive things out of our hospice folks from a growth perspective. And I think that margin is sustainable.

We are continuing to make investments in hospice through the point of care system that Mike mentioned earlier, which we hope to have rolled out by the end of the year. We think that is not only going to improve the capability of that division, but obviously the efficiency.

Okay, and then last question on the home health site, the revenue per episode was flat sequentially, despite some of the reimbursement pressures affecting results in the quarter. So maybe you could talk about why that was flat -- I would have thought it would have been down slightly -- and then maybe what we should expect going forward.

We have had -- if you look back on where it was quarter over quarter, we have seen some step-up through the time, so the $0.10 or so that we applied back in the fourth quarter didn't just dampen -- so that increase that we have had (inaudible). We are expecting our -- and I think we have said in our earlier comments, we are expecting this year, if you normalize out the 5.2% rate cut, we are expecting revenue per episode to be pretty flat.

But why exactly was it flat sequentially from 3Q to 4Q? Again, I would have just thought with the 5% cut affecting, say call it, two-thirds of the business, why it wouldn't -- wasn't down.

Yes, the rate on the impact of episodes in progress, so maybe I'm not following your question.

The way we report revenue per episode is on a completed episode basis. And so a rate cut affected episodes in progress at the end of the year, so it did not affect that number. So I see where you're going, why didn't it go down, and the answer is it only affected revenue or episodes in progress.

Okay, that makes sense. Thank you very much.

Newton Juhng, FBR Capital Markets.

I had a question just regarding -- I guess the initiatives that you did in the third quarter and the fourth quarter to right size your operation, can you talk a little bit more about how you are focusing on that going forward so that as you look to add on more businesses in the future through acquisition and/or more de novo activity, you may make sure that you are not falling into the same situation that you did prior to 2010?

Good question. Well, we have really focused on -- first, when you get past the portfolio review that part is fairly straightforward, you know, where are we not doing well? And even in places where we are not doing well, do we have a plan -- a sustainable plan or are there assets in that vicinity where we can consolidate operations?

So we kind of went through that process. Once you go through that then there is a corollary around people and processes. So we did some reorganization around our management teams and consolidation of responsibilities, going to more of a general manager role in our regional slot, then around our processes.

And some of this is about the disciplines, accountability, cadence of operating reviews, doing market reviews. And, in fact, all the way down to the local level so that we have that cadence of accountability and we have visibility into what is going on at the local level.

So it is a very different kind of operating style than the Company had versus a Baton Rouge-driven operating style. We are having much more bottoms up. So we think that decentralization, if you will, for lack of a better term, makes us more responsive to local market opportunities, and frankly, right sizes our portfolio for where we have the most opportunity. So it is a combination of people, processes to go along to match the new portfolio size.

And one other thing that Mike had mentioned earlier also and that is technology. By the investments we are making in the connectivity with our care givers it is improving our capability to communicate with them through e-mail and wireless communication, their ability to upload and download information.

But more importantly, strategically long-term it allows us to be less concerned about the footprint of an agency, because our caregivers don't have to come to the agency that as much as they used to. Because we will be in a position where we can order medications -- or medical supplies through the Internet or from the laptop and have it delivered to the patient's home. They can get their schedules through that medium. And it allows us to be a lot more flexible in that it gives us a better opportunity to manage our overhead.

Got you. But, Mike, just back to your comments. So you feel at this point now that you have done the reviews and the re-reviews of everything that you have in there. That what you have in your base at this point, the 486 agencies, I think was the number that you guys put up out there, are ones that are sustainable going forward. And we shouldn't expect to see any more culling of underperformers at this point word, or is that going to be a constant process that we are going to be going through?

I wish I could tell you that we would never do another reduction, but I think it is just part of the management process over time. We obviously kept these in because we believe that every single site in our portfolio right now has an opportunity to be successful. But it is just part of the management process, and things change, so I wouldn't be surprised if we have some changes going forward, but right now we don't anticipate any today.

Okay, okay. And then just, Dale, the $1.2 million of inclement weather pay that you were talking about earlier, does that fall into a cost of services bucket or a SG&A bucket?

No, it is cost of services.

It is the clinicians that didn't get to go do the visits that they otherwise would have done. And we have some metrics around when that pay is done. But that will be a negative effect in the first quarter that, if we are fortunate with global warming, it won't happen in the second quarter.

Okay, thanks a lot, guys.

John Ransom, Raymond James.

Dale, just asking about -- digging into the first quarter volumes a little bit, do you expect that they might even be negative, given the weather you have had?

Negative from the fourth quarter?

No, year-over-year.

Well, if I can chime in -- John, it is Mike. Recerts are going to be lower, for sure. So we looked at first quarter last year and we had such strong year-over-year growth. And obviously that managed care component that I told you about last year doesn't repeat. They are still -- they are down on our base. So we expected first year -- first-quarter admissions to be fairly flat, so that would suggest then our total volume admits, plus recerts, would be lower than last year.

The other piece of it, if you think about it with the 5.2% cut, regardless of volume that 5.2% cut is -- everything else being equal and no acquisitions -- probably gives us a lower revenue number in the first quarter -- not probably, gives us a lower revenue number in the first quarter than the fourth quarter of last year of 2010 and the first quarter of last year.

So we should think of admissions, revenue, recerts all being down compared to last year when we build our models out?

In the first quarter.

First quarter, excuse me, yes, first quarter. Okay. Then my other question is just on the topic of re-certifications, I know it is sensitive around maybe compliance, but could you just talk about your policy around re-certifications maybe compared to 18 months ago? Are you -- where would you be more conservative? What things are you more attuned to now that you might not have been 18 months ago?

One of the things about -- I guess, the events of last year taught us, what we decided we really needed was to formalize the processes around recertification, because digging into it, it is a lot of art work.

Some of this -- two, both very confident clinicians can look at the same patient and come to a different conclusion. So what we decided to do was to formalize the processes around that through our care team conferences that happen every week. So we built the reports they should be looking at and built the questions they should be asking at each care team conference for each patient that is coming close to the end of their episode.

So we also had then clinical -- our quality managers calling into some of those care team conferences to participate -- and some of our compliance folks called into some of those care team conferences to participate -- to try to formalize the process around how do we come to the decisions on whether to recertify or not.

So what we really tried to -- it is still art work, but what we have tried to do is kind of narrow the band of variability that you get in the subjectivity around recertification.

Okay, thanks.

Kirk Streckfus, Stifel Nicolaus.

First off, Dale, can you remind us again what the CapEx guidance is for 2011 that you threw out there?

We expect to have about $50 million in expenditures on CapEx, and that is going to be roughly 3% of revenue. It is down a little bit from 2011, as we have implemented our PeopleSoft project. But we continue to have a major undertaking to get to our next generation of operating system. We call it AMS3, which be a couple of years away.

But we are going to spend a significant amount of our effort and money this year to continue to improve the capabilities that we have from a technological standpoint, because as I mentioned earlier, we think that is not only a differentiator for us, but that is how we ultimately drive efficiency through this business.

Okay, and could you talk a little bit more about hospice? Valuations in the market are still inflated, so in your opinion what do you think will bring that down and create more opportunities for you in the acquisition front? Do you think the biggest catalyst might be some of these reimbursement developments that CMS are talking about in the next few years or do you think that you could see more near-term opportunities?

I think certainly more visibility on the reimbursement side would be helpful. There is a lot of talk, but I think we don't see anything happening in the short term there. And what has been talked about is really going to be a zero impact on the overall hospice budget. So it is more of the shape of the reimbursement, I guess, than anything else.

But all in all that we are looking at the -- you know, hospice is -- there is some attractive assets out there. There is certainly some expectations on the seller side that at times are finding it difficult to get in the same ballpark.

But if you look at, as Mike was talking about, our hospice business is going very well. And there's going to be some markets and there is going to be some opportunities out there that fit well with our business, fit well with our existing footprint, that we feel very confident that we can take it forward at some of today's valuations. And there is going to be opportunities out there that we don't feel as strongly about. So it is really a case-by-case basis.

And the assets look so different. When you really look at some of the companies close, the way they operate their businesses, the sophistication, what they have in terms of disease-specific programs, and how they allocate their overhead, and what they're doing to support their business, it is really hard to say across the board. You have to really get into enough detail to understand what is driving the business and look at it on a case-by-case basis. And then do the work to see how it fits with our current business.

So we see some opportunities out there, and we expect to have some opportunities by the end of the year, but it is really an exercise in looking at each opportunity on a case-by-case basis.

The overarching theme on hospice is the fact that we have the best home care -- the largest home care distribution in the nation, so we feel that we are better-positioned to grow hospice than anyone that is out there. Also, our pilot care program, that helps to bridge our home care to hospice and allows us to take those transitional patients. We think both of those on top of acquisitions will give a strategic advantage in growing our hospice portfolio.

As we mentioned earlier from a balance sheet standpoint, from a capital standpoint, we are in a great position to be acquisitive in 2011 as we pick through what issues we want to take advantage of.

One last one and I will jump off. It looks like you take down your AR reserves this quarter somewhat compared to where you have been reserving in the past four to eight quarters or so. Are you saying any improvements in cash collections that maybe you could provide a little bit more color on?

Our cash collections have continued to improve really over the last 18 months, and they continue to be very strong. The issue from our standpoint is simply that our percentage of reserves to our AR has remained relatively stable. We've got $30 million plus in reserves in total, and we are comfortable with those numbers.

So there is really no message to be taken from that differential. Our reserve -- our provision on a quarterly basis is generally run in that kind of range between 1.5% and 2%.

Okay, thank you very much.

Eugene Goldenberg, BB&T Capital Markets.

Good morning, guys, and thanks for taking my questions. You're not the second home health operator to implement new sales incentive plan. Can you provide us with a little bit more detail as to exactly what that entails on your end? Are you targeting any particular new referral sources or just any detail you can provide on that would be great.

Sure thing, Eugene, it is Mike. Well, we do not have a sales incentive program that says go out and find new referral sources. But what we do have is a quota-based system, but that is only responsible for about one-half of the total incentive plans for our salesforce.

We also have a quality component and we have an earnings component. So that they are responsible for bringing in the kind of business that makes it possible for us to have a solid operation, but it is also a quality operation.

So we think our salesforce can contribute to the overall quality and growth of our individual sites. So that has not always been the case, but we decided that this year that it was important to link our sales teams and the success of our operators.

We have kind of had a disconnect. We had historically used a pharma model, where our local sales teams would -- their incentives would be just totally on sales. And we felt it was really important to integrate the sales function with our operations to align them more closely. So that is the change we undertook.

Okay, great. Thanks for that color. Another question I have is, as far as adjustment to the face-to-face regulation, can you characterize the receptivity among your he referral sources and how has your educational effort with your referral sources has gone so far and then in these first few months?

I think it is fair to say that our referral sources are experiencing some documentation fatigue. We have gone out -- we originally had some of our -- the forms we use, the processes we used in response to the initial rule and in the last transmittal that came out, I guess last week, was disappointing in that it prevents us from being able to -- the industry -- prevents us from being able to take verbal orders.

So what we are finding ourselves doing is having to go back and reeducate now based on the last transmittal and using the resources we have such as our Mercury Doc. Frankly, Mercury Doc is a great tool for the doc to be able to do the documentation or their -- frankly, it can be the doc, their nurse practitioner or PA can do the documentation and send it to us on line.

Frankly, we are also using our sales teams to go out and do that kind of one-on-one with the referral sources to try to get the documentation lined up. But I think the overarching theme is some fatigue about yet another requirement on them with -- and they don't get paid for it. So it is disappointing.

A couple of other things to add on that, if you take a look at where our referrals come from, 40% to 45% in that range may come from hospitals. We feel that there is a minimum exposure there. Another 40% may come from ongoing physicians that actually have just visited with the patient, probably a limited disclosure there.

So the way it slices, we're probably looking at 20% to 25% at any given time of our referrals that really have this exposure. And in addition to local sales education that Mike mentioned, we are doing a national webinar with our physician drivers to make sure we can educate.

And finally, we are not giving up. We support the bottom line concept of face-to-face and the long-term value of that, but we think the actual process and the rollout leaves a little to be desired. So we are going to focus on that and stay very attentive to it.

Great, thanks for the additional color, guys. I will take the rest of them off-line.

Matthew Gilmore, Robert Beard.

Thanks for taking the call. I am calling in for Whit today. This sort of dovetails from the previous question, but can you just describe your comfort level with the face-to-face requirements? Then how much progress had been made quarter to date in terms of implementing the appropriate procedures that will be needed beginning April 1?

Remember, we were going down a path and documenting what we thought was going to be an acceptable process for taking -- documenting the face-to-face, and the transmittal that just came out changed it. So what we have been doing, we have to change again.

So we are having to get back out in front -- in fact, we will have a call here with our folks soon, trying to get out the word on what the new requirements are and what we have to do to operationalize the new requirements.

So that is -- frankly, it is one of the advantages of having the technology that we've got is that we can work with the physicians and try to use that technology to make it easier. It is all about making it easier for the physician to do that documentation.

But, frankly, having a transmittal come out this soon before the effective date was -- especially the way it was done, we felt like we -- it was disappointing. As Bill said, we are fully supportive of the intent behind legislation, but not being able to take a verbal order is a setback for us. So we will get in front of our referral sources. We will do the education, and we will do what is required to document the face-to-face.

Bottom line, we are going to take patients that qualify for the benefit and get referred to us. But in 30 days if we can get them in front of a physician, then we are going to have to discharge them. And people are going to be out there and they are going to lose access to care, and it is going to wind up costing the whole system more money. So we think it is in everybody's best interest to get this right. And we will monitor it and we will push forward to get it right.

Has there been any communication regarding other delay or do you think April 1 is the real date at this point?

We haven't heard any indication that there is another delay on it.

Okay, and then on the CapEx guidance, I know you're still in the process of doing the point of care refresh, but should we expect that number to be more front-end loaded as you complete the refresh versus the back half of the year?.

To some extent, but recognize the other comment I made about AMS3 and our next-generation operating system, that is an ongoing project; it will go on into 2012. But the refresh piece of it will be completed, I believe, by the end of the first quarter, and so there will be more of that coming out of the first quarter. The rest of it will be a little smoother over the year.

But we spent that in the fourth quarter too.

Yes.

So it shouldn't be a material lump in the first quarter.

Okay, so it sounds like it won't be as high as it was in the fourth quarter.

No, because we are down to about the last one-third of our laptops that we are refreshing.

Okay, great. Thanks a lot.

That is all the time we have for questions. I would like to turn the conference back over to Mr. Borne for any closing remarks.

We just appreciate everyone calling in to listen to our fourth-quarter and year-end conference call. We are very excited about the demographics compelling this to be a great industry to be in. We feel we are very well-positioned to take advantage of the opportunities that 2011 will bring us. And we will look forward to our first quarter '11 conference call.

Thank everyone for calling in this morning.

This does conclude our conference call today. We would like to thank you for your participation.