Amedisys Inc (AMED) 2015 Q2 法說會逐字稿

Good morning, my name is Candace and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions)

Scott [Ginn], you may begin your conference.

Thank you, Candace. Good morning and welcome to the Amedisys investor conference call to discuss the results of the second quarter ended June 30, 2015. A copy of our press release is accessible on the investor relations page on our website. Speaking on today's call from Amedisys will be Paul Kusserow, president and CEO; and Ronnie LaBorde, Vice Chairman and CFO.

Before we get started with our call, I would like to remind everyone that statements made on this conference call today may may constitute 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.

The Company assumes no obligation to update information provided on this call to reflect subsequent events other than is required under applicable Security laws. 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. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the investor relations page under the tab Financial Reports Non-GAAP.

Thank you and now I'll turn the call over to Paul Kusserow.

Thank you, Scott. And welcome to the Amedisys second-quarter conference call. This morning I'm very pleased to announce we reported revenue of $314 million, adjusted EBITDA of $32 million, and adjusted earnings per share of $0.43. We're very encouraged by our strong year to date performance and the trends that we're seeing in our business.

In home health, field level contribution increased $7 million or 22% over the second quarter last year. Same store Medicare revenue was down 1% on flat admissions. We continue to see strong same store non-Medicare revenue growth at 16%, again driven by our larger contracted relationships.

In hospice, we posted our strongest quarterly same store revenue growth in nearly three years. Same store admissions continue to increase and cost per day is down more than 5% year over year, leading to a healthy increase in margin. Hospice field level contribution was up almost $4 million or 28% versus the prior year.

As of June 30, our hospice census was slightly under 5,000. Clearly, the hospice restructuring put in place in the fourth quarter of last year has favorably impacted its performance.

In only nine months, Jim Robinson has built a strong team, established a sound growth strategy, executed cleanly, and delivered results. I expect to see continued strong performance from our hospice business. Congratulations to Jim and the entire hospice team.

On the regulatory front, CMS will soon finalize its proposed rule for hospice that will go into effect in October. In its current form, the change in hospice reimbursement methodology will have a net neutral to slightly positive impact to us.

CMS also recently released the proposed rule for home health and we are currently in the comment period. Ronnie will provide more details on the potential financial impact to us in his remarks.

In the home health proposed rule, CMS introduced a value-based purchasing program pilot in nine states that will provide financial incentives to providers generating superior outcomes for their patients using similar metrics to the stars program.

This is a significant shift for CMS away from traditional fee for service to outcomes-based reimbursement. It's important that home health providers monitor the design, criteria and implementation of this pilot program. But in general, we are supportive of its goals.

Home health providers that deliver the best quality care should be rewarded. Ultimately, we believe a well-designed program like the proposed one will drive consolidation and ultimately benefit providers with scale, capital resources, and clinical sophistication.

This month, CMS also released star ratings for home health agencies for the first time. We are pleased to report that over 90% of our providers were rated at least three stars, compared to just over 70% for all providers. This data will be publicly available and provide transparency to those seeking home health services.

We believe stars will drive a disportionate (sic) share of volume to higher quality providers. We are and we will continue to be a high quality provider. CMS also introduced changes that reflect the value that they see in hospice services.

Although the details are still emerging, CMS has proposed that one, physicians will now be reimbursed for end of life discussions. And two, there is a pilot program being introduced that allows for curative treatment when a patient elects hospice. In fact, one of our hospice care centers in South Carolina will participate in this pilot starting in January 2016.

Since our last call, we have continued to work on and build out our strategy, culminating in the strategic plan that we presented to our Board last week. Our plan aligns and focuses efforts on the most impactful opportunities to drive growth, margin improvement, and clinical distinction.

We believe that Amedisys is well positioned for the future. Both payers and consumers will continue to push for more care to be performed in the home, which will reduce costs and improve patient experiences.

As a result, strategically we are focused on two things. One, optimizing our performance in our core home health and hospice businesses. And two, building capabilities that allow us to meet the future demand for a broader continuum of home-based services.

We've identified four key areas of focus that will be critical to success in our core businesses. Building clinical distinction, becoming the employer of choice, increasing operational efficiency, and driving growth organically and inorganically.

Clinical distinction is foundational to our business and truly at the heart of what we do. Our focus is on driving improvement in our clinical quality today and continuing to develop distinctive clinical programs tailored to our patients' needs.

While we are pleased to see the Company's strong relative industry positioning in the initial star scores, continuing to improve our quality metrics is and always will be a priority for Amedisys.

Clinical distinction will be essential as we prove out the value proposition in healthcare in the home to payers and the referral sources in order to move away from a commoditized view of post-acute care. Our scale, educational programs and access to clinical resources will provide an advantage in this area.

Investing in our people is another fundamental and foundational element of our strategy. At its core, Amedisys is a people business. The quality of our clinicians directly drives the quality of the care provided to our patients. Our goal is to become the employer of choice in home health and hospice.

Achieving this goal means we need to recruit, train, develop, and retain talent at all levels of the organization. We're focused on making operational improvements that will make life easier for our clinicians while also improving retention.

Employee turn-over is not only difficult operationally but very costly. Ultimately, we will benefit by way of higher productivity and lower costs. And our patients will benefit with higher quality of care.

Improving margins in a challenging rate environment necessitates a constant focus on operational efficiency. Last quarter, we announced our plan to transition away from our proprietary software platform, AMS3 and AMS2, to Homecare Homebase over a period of 18 to 24 months.

Today, roughly 90 days after signing the contract with Homecare Homebase, implementation remains on track with 18 sites fully live on the system. Although it is early and the preliminary feedback we are receiving from the field is very positive, particularly the comments from our clinicians.

On patient visits, clinicians have been able to maximize their time, providing care to our patients and spend less time documenting in the point of care computers. This will maximize the opportunity to capture efficiency gains that are made possible with our upgraded platform.

As we proceed through this transition, we are gaining best practices insight from our pilot sites and the Homecare Homebase implementation team that will benefit the broader rollout. We expect to implement the system in 60 additional care centers before the end of the year. If the initial results prove to be highly positive, we may accelerate the rollout.

All of these areas I've touched on will improve productivity and retention. And they will free up capacity to allow for organic growth. We are also driving initiatives that will provide greater standardization and consistency in our business development efforts, resulting in a more effective sales team.

In addition to driving organic growth, we are continuing to pursue M&A opportunities. We're pleased to have wrapped up two transactions in the past week. We closed on the purchase of hospice assets that will add seven key counties covering the greater national area to expand our existing Tennessee hospice footprint.

We also signed a definitive agreement to add five new counties to expand our home health license in our key Georgia market. We have increased the volume of deals we evaluated to over 150 in the second quarter, versus 17 in the first quarter.

The two completed transactions were identified through our internal prospecting and sourcing efforts and didn't involve bankers. I'm encouraged by our deal flow and why we're -- and what we're seeing. A key longer-term piece of our plan is what we refer to as the new game strategy.

More care can and will be delivered in the home because of advancements in technology and a response to payer and patient demand. We think eventually that the home will be the pivot point for care delivery and planning versus institutional settings. Our aim is to be a leader in building care continuums that center around homecare and aging in place.

We're also out looking for deals and partnerships that give us capabilities to do this. In the evolving consumer-driven, value-based world, these capabilities will be essential to our success in the new game of care being delivered in the home.

Sorry, page. We recently announced the location of an executive office in Nashville and are excited about the opportunity to have a presence in one of the leading healthcare markets in the country. Most of our essential back office and many of our corporate functions will remain in Baton Rouge and leadership will spend significant time in both places.

Internally, we are being very transparent about our intentions, as this kind of move can be disruptive. We need the most talented people regardless of location Our patients don't care about where we're located, they just want the best care in their homes. This decision will help us get the best talent to drive our strategies forward.

As you will notice in our filings, on July 28 we reached an $8 million settlement on the wage and hour collective and class action litigation that we previously disclosed. The settlement will be payment -- will be payable later this year and we are glad to have resolved this issue.

Overall, we are very pleased with the results for the quarter but there is always room for improvement. One area of concern for us is Medicare volume and the business mix in home health.

We have some regions in our home health business that are growing Medicare well and we are looking -- and we are working to carry over some of these practices across the entire home health platform. We are confident in our plans to address these concerns. We're all over it and we're seeing encouraging results.

Lastly, as we always try to remember, it's a privilege to do what we do. Taking care of people in their homes in their most vulnerable times, 13,000 people serving 57,000 patients a day, 7.5 million visits a year. We believe there is a virtuous circle in our business where the right people with the right tools deliver the best outcomes clinically and financially.

The two are intertwined and we appreciate your interest and support as we move forward to improve and transform our business of caring for people where they want to be, in their homes. With that, I'll turn it over to Ronnie LaBorde.

Thank you, Paul. So for the second quarter, again, our revenue was $314 million and adjusted earnings per share was $0.43. Adjusted EBITDA was $32 million, or 10% of revenue.

There were several one-time items in the quarter detailed in our press release, including the $8 million wage and hour settlement, $3 million of severance, and a $4 million gain on the sale of an investment.

Turning to home health, revenue was $248 million, up $4 million. Home health operating income was $38 million, an increase of $7 million over the prior year. Medicare same store revenue was down 1% as a result of flat admissions and lower re-certifications. Our re-certification rate was 36% compared to last year's 37%. Medicare revenue per episode was up 1.5%.

Non-Medicare same store revenue again grew handsomely at 16% and admissions increased 15%. In home health, our gross margin was 42.6% compared to 42.8% last year. Cost per visit was down slightly from last year.

Turning to hospice, our revenue was $66 million for the quarter, up $5 million. Operating income was $17 million, an increase of $4 million over last year. Same store revenue growth increased 10% with admissions up 11% and ADC up 8%. Cost of service per day declined 5%. This reduction was mainly attributable to declines in pharmacy cost as well as DME costs.

So resulting hospice gross margin was up 350 basis points to 49.6% compared to last year's results. With respect to G&A, on an adjusted basis, our G&A was $105 million, down $2 million from last year. Corporate G&A was up slightly over last year and up $3 million sequentially.

Sequentially, depreciation expense is down $2 million, largely attributable to the software write-off of AMS3 in the first quarter. This earnings improvement of approximately $0.04 per share reflects the removal of AMS3 costs but not the cost of Homecare Homebase, which will be reflected in third-quarter results. We expect the run rate for depreciation to level out at approximately $5.5 million per quarter.

Cash flow from operations for the quarter before changes in operating assets and liabilities was $29 million, an increase of $2 million over the prior year. Our DSO was 31 days, down 1 day from March 31st.

Capital expenditures for the quarter were $14.6 million, an incremental increase of $12.4 million over last quarter. A large portion of this increase is due to the one-time Homecare Homebase software licensing fees. Our projected CapEx for the year remains between $20 million and $25 million. And we expect our run rate in 2016 and beyond again to be reduced below the $10 million level.

At quarter end, we have a cash balance of $33 million, a deferred tax asset on our balance sheet of $140 million, $97 million in total debt outstanding, and our total leverage ratio is 0.9 times adjusted EBITDA for the last 12 months. We have $99 million available under our revolving credit line.

Looking forward to the second half of the year, I want to discuss a few items that will impact results. First, the second quarter generally reflects higher home health volumes, higher than those in the third- and fourth quarter. We are focused on growth and that should overcome these normal trends.

Second, we have holiday costs that will increase for one additional holiday in each quarter, compared to the first and second quarters. This is approximately $0.02 per share in incremental costs in each the third and the fourth quarters.

And as Paul mentioned earlier, we're making investments in key areas. With respect to ICD-10, which becomes effective October 1st, the third quarter will be the most intense preparation period. We are completing our training for our internal staff and dual coding to prepare for the implementation.

We are adding resources amounting to approximately $2 million per quarter to mitigate anticipated productivity impacts and other risks presented by this transition as well as effect improvements in our processes. The anticipated improvements should eventually offset this cost.

We have begun implementation of our new technology strategy which we expect to ultimately result in $20 million of G&A savings. In conjunction with this new strategy, cost of our technology platform will shift from depreciation under AMS3 to EBITDA under Homecare Homebase.

The next three quarters will likely reflect higher costs of $2 million to $3 million impacting EBITDA. And as previously discussed, depreciation will be lower, offsetting a portion of these costs. We expect the bumpiness in EBITDA to be neutralized in the latter half of 2016.

We have restructured compensation programs to shift toward a higher proportion of equity based compensation, 80% of which is performance based, and lower short-term cash incentives. The effect of this restructuring is essentially cost neutral. However, beginning in the third quarter, you will see a $1.5 million increase in non-cash compensation.

We are about to launch an effort to refinance our existing debt and replace our second lien term loan with a bank rollover -- bank term loan and a revolve. If successful in this endeavor, we anticipate lowering our interest cost on the $70 million of the second lien loan by approximately 600 basis points.

CMS has issued proposed rules, as you know, for both home health and hospice. With the hospice rules, this is soon to be finalized. We expect the impact of the new hospice rules to be neutral, again, to slightly positive.

In home health, we are working through the impact of the proposed rule to us. We can't give any specific financial impacts today, but we do know that CMS has estimated a 1.8% cut in overall payments to the home health providers, which exceed our expectations primarily because of the unexpected case mix precut of roughly 1.7%.

Finally, I would just comment, on our last call, we identified a goal of 400 basis points of EBITDA margin improvement over the next three years. At the time, we did not anticipate the additional case mix adjustment that CMS has proposed for both 2016 and 2017 in the proposed rule.

Our goal remains to deliver as planned. We still intend on hitting our volume growth target and reducing costs. But ultimately, we don't control pricing impacts from CMS.

This concludes our prepared remarks. Candace, would you please open up the call for questions.

Certainly. (Operator Instructions) David MacDonald, SunTrust.

Look, I know a couple of these are obviously pretty new with the star ratings and value-based purchasing. But when you talk about the pipeline, can you give us a little more detail.

Are you guys seeing any increased discomfort from the smaller guys as it's becoming apparent that more and more of your compensation is going to be tied to clinical outcomes? And I got a couple follow-ups.

Well, Dave, good morning, this is Ronnie. Unfortunately, we're having some technical difficulties and you faded in and out. And I'll ask you to try one more time. Candace, I don't know if there's anything you can do here.

He sounded okay on my end. Can you try your question again, Mr. MacDonald?

And if you could listen, Candace, and then translate for us if this becomes a problem. It seems -- why don't we try that?

Certainly.

Hey, guys, I think the background noise was the operator. (technical difficulty) So guys, basically the question is, with the star ratings and value based (technical difficulty) obviously this is fairly new. Can you guys hear me at all?

Yes, we can hear you.

Okay. Obviously (technical difficulty) fairly new. But are you seeing any increase in discomfort from some of the small providers as it becomes apparent that more and more of compensation is tied to outcomes. You know, how that ties into what you're seeing with the pipeline. And I've got a couple of other follow-ups.

Okay. So let me translate, just because you did fade in a little. So what you're basically saying is on the star ratings and the increase and the push towards value-based purchasing and other things, that are we seeing pressure that would result in potential M&A opportunities? Is that right?

Yes, are you seeing the smaller guys becoming a little bit more uncomfortable and more willing to have (technical difficulty).

I'd say we are not seeing that sort of foresight that we were hoping that people would see the tsunami gathered out there and see what's going to hit them. But we haven't seen that in a huge way yet.

We think once it sinks in, that there are all these initiatives that fundamentally, if they do get finalized, will drive big, big cuts in terms of these folks' margin. Which the margins are much lower in general in the mom and pops. We think we'll see a lot more activity there.

We also think that the mid-level folks that we have been seeing will -- we've seen a little movement there. I think as they, in the kind of $50 million to $100 million range on revenues, we've seen some discomfort because they've been studying more and have, I think, been doing more calculations in terms of what it's going to do to their business.

What we haven't seen, though, is valuation expectations go down. And I think we will start to see that in a very good time for us when I think we have more implementation on Homecare Homebase. When our home care operations are running as well as our hospice operations are.

So we think in about six months we'll start to see some very meaningful flow. As we -- as I said in my comments, though, Dave, our team has done a great job of building up the pipeline and sourcing deals.

The good little deals we brought in were just nice deals that really are very additive, relatively inexpensive and we'll continue to do those until we see the spigot open up and more realistic expectations.

And then, you already kind of touched on this a little bit in your answer. But with regards to Homecare Homebase, you talked about those while you could (technical difficulty) the rollout a bit.

Can you give us a sense, I think 18 to 24 months was the original timeframe. If you were to accelerate it, is it 18 months? Could it be less than that? Give us some sense of what the timing could be if you did decide to accelerate that.

Okay, you faded a little. But let me try to translate. So Homecare Homebase implementation, if we do decide to accelerate it, would we -- what would that acceleration look like? And what would cause us to accelerate it. Is that a fair answer?

And also I think 18 to 24 months is what you originally talked about. How should we think about, you know, would it be 18 months? Could it be less than that? Just some sense of timing.

Well, it's three months later from when we first talked to you. So I think we would reduce that. My IT guys, Marty, here is laughing nervously at me. So I'll let Marty answer that in terms of what we can do in terms of implementation.

Our belief that is -- our -- here's what I've been, I've been out in the field and I've talked to people who have started to use Homecare Homebase. And the feedback is very, very positive. Particularly on our -- from out clinicians.

So we're seeing, you know, and obviously our clinicians are who deliver the care. Then they're a lot of the cost to the Company. So I think the key thing for us is to make sure we give them the best tools they can have to do their job.

So as we continue to roll this out, if we see that this is as positive as we've seen in these first 18 sites, we're going to look towards our implementation team and see if we can put more resources into this and speed up implementation.

Because the -- once we get Homecare Homebase in, we can drive a lot of the operational efficiencies that we think are going to push those additional 200 basis points we talked about in terms of operational efficiency.

So the faster we get that done, the faster we can start to implement along those lines. So we're very motivated and pushing our folks but we aren't going to be unreasonable where they start to botch up implementation. So I don't know, Marty, if you have anything additional on that?

No, that's, Paul, thank you, that's pretty complete. So the method of acceleration would, as Paul indicated, be to bring additional resources, making sure that, of course, we do that in the least disruptive way.

And we would do that by working with our internal teams, with Homecare Homebase staff, and with their business partners to bring additional resources to move the transition more quickly to enable the results that we're starting to see in the field and in the back office.

Okay. Thank you, guys.

Thanks so much, Dave.

Kevin Ellich, Piper Jaffray.

Thanks, guys. Can you hear me okay?

Yes, we hear you well.

Yes.

Thanks. Ronnie, just wanted to go back to your comment about the 400 basis point margin expansion over the next few years. And I thought you said the case mix adjustment wasn't included in that assumption. Does that have an impact and will you still be able to drive that 400 basis points of expansion?

Yes, Kevin, thanks for the question. Sure, the 400 was not at that point. So now if that flows through, just the math of it might cut that just by the math in half.

And what we want to indicate is our plan is still the same to deliver on those initiatives and those opportunities that we see. But stand-alone all, with this rate cut coming through, the math of it would cut in half with those same results.

Okay. That's helpful. And then obviously this quarter, you guys saw--

And just, Kevin, just one point I'd like to add to that. Is these -- clearly, there's going to be a lot of industry interest in this portion of the rule. And this is still -- there's still -- it's still in the comment period.

We -- this isn't fully baked yet and I think there's going to be a lot of momentum to make sure that this is addressed. And that potentially there's some mitigation on this. We're going to try for it. We anticipate our brethren will as well.

So it's not in and baked yet. But I think the key thing is, do we -- will we do 400 basis points better than our -- better than the industry? Or what we consider the industry? Yes. Will pricing take -- it -- could pricing take 200 points back on us? Yes, it could. But we're waiting to see. That's what we're waiting to see.

Okay, that's fair, Paul. Appreciate that. And then looking at the strong EBITDA growth this quarter with the margin expansion you saw, you talk about 5.5 million of run rate D&A per quarter. And it came in at, what, 4.6 this quarter?

So just wondering what the delta is. And is it just going to be more lumpiness as we think about things until the latter part of 2016?

Yes. Kevin, this is Ronnie. I think I understood you of -- and we'll go back the -- so between ICD-10 and the early stage of our technology strategy implementation, the cost side definitely can be a little bit bumpy here.

And we're signaling that that could be just on the cost side up to perhaps $4 million or so in the quarter between those two. Offsetting that from an EPS perspective will be the lower depreciation. And so you see that net effect of -- net of that probably about $0.04 a share if it -- if just the cost side of it is reflected.

And so it's early. We want to just let you know there's some bumpiness. We certainly have a view of how to offset those costs which will emerge over time. We're just not talking precise timing on that.

Got it. Yes.

But ultimately, I'll conclude that, again, on the technology side that we, this EBITDA cost, that side of it as we transition and get more efficient, transition staff and implement certain opportunities there, we think that lumpiness will be about neutral or neutralized by the end of next year, 2016.

Okay, great. And then with the move to Nashville or the new office that you're opening up, plus the build-out of the senior management team, was there much incremental G&A expense this quarter? Or should we look for that next quarter?

Incremental G&A on the move to Nashville.

It --

Or the net effect of it. Is that right, Kevin?

Yes, that's right, Paul.

Okay. Yes, so the net effect, I mean, we expect that to be pretty neutral at the end of the day. A slight increase but we'll continue to look at that cost. So we built in some of the management team. It's our run rate that's reflected today. So we think at the end of the day, that's certainly a material issue as we move forward.

Great. And then two last quick ones for me. Paul, you talked about the two deals that you wrapped up. Can you give us some more color in terms of the cost and what type of multiples you're seeing out there and what you're paying? And then also the strong non-Medicare same store admissions growth in home health. Should we expect that to continue?

Okay, we got you first on the two deals. And can we give you more -- can we be more expansive on valuation on the two deals that we've gotten. And then we kind of lost you. So why don't I answer that first one and then if you can repeat.

So the first one is, we did very well on these deals. We're, for a variety of reasons, we aren't disclosing the purchase price. But what we did is we, you know, kind of classic gumshoe work. We basically figured out where we needed to fill in gaps, particularly initially in hospice.

This was, and fundamentally what we're doing is we're buying market share. We're buying a CLN in a place which is very, very important to us where we have a strong presence in hospice in Tennessee.

In Georgia, similar again, we've gone in and we're buying turf. And we see huge effic-- I mean, very strong efficiencies where we're going to be operating these out of existing centers, have minor additions in terms of staff, in terms of resources.

So we think these are going to be very, very accretive very quickly. I don't know, Steve Seim, head of strategy and B.D. is here. I don't know, Steve, if you have anything to add on that.

I think that's fair. They were plays that fit very well as tuck-ins. They're contiguous to geographic areas we already do business in. And particularly in Tennessee it's a real nice fit with not only the hospice but a home care market that we're very strong in. So we're very comfortable and we're continuing to look for those kinds of things.

Okay.

Great. And, Paul, my follow-up was, with the non-Medicare same store admission growth strength, should we expect that to continue?

We have a couple good, I mean, so here's where I'd look at this. Our admissions growth this year has been extraordinarily good. So volume is coming in. What I think the issue that we have to think about is how do we process all the volume that's banging at our door.

And so I think what we did, and there were two things that, you know, you bring home a great report card and you always look at the B minus and not the As. And so if we're looking at the B minus, I think what we need to improve on is we need to think about mix more critically, particularly as admits are coming in.

And we need to sort through that and get our fair share of traditional Medicare which is, you know, obviously has higher margins. And then the other thing is our re-certs were down. And our re-certs in traditional Medicare were down.

And so we're spending a lot of time and attention understanding that. The key things is, as we saw it a couple months ago. And Dan McCoy, who I'll let comment after this, has really done a wonderful job getting our folks going. And we've seen very early good results.

To tell you it's fixed yet would be presumptive. But I think we've seen a lot of changes. Our people certainly have read the message. And we're seeing some good results thus far. I don't know, Dan, if you have anything to add on that.

Yes. Just on a real high level, Paul, you spoke about investing in our people and the operational efficiencies. Which includes retention as well as the productivity. So we have initiatives underway already that will help drive our growth.

In addition, we've identified some best practices across the country that some of our regions are doing extremely well. So we're taking those best practices to drive that standardization and efficiency across the country.

And that includes data analytics, business intelligence, whatever information we can have to help grow the business. And I think what Paul, just to complement what Paul had said, we're very encouraged by our preliminary results for the month of July through the fourth week, third week, we're seeing encouraging results.

So overall from where I sit, the growth pattern is definitely headed in the right direction. So we made a lot of strides in the last 60, 90 days with the intention of growth through the second and third quarter of 2015.

Yes, I think just to follow up and beat this thing to death, Kevin. Is the message has been well received in the field that this is important in our mix. That traditional Medicare is important in our mix. That there's a sorting process that has to be done better to fix mix.

And that there's -- and that the appropriate re-certs can be done. So I think there's been a very strong message out there and we're starting to see very good results this month. So I think we're all over it.

Okay, thanks, guys.

Thanks.

Thank you, Kevin.

Brian Tanquilut, Jeffries.

Congratulations. First question for Paul, so with the stars data and all the discussion of value-based, so how do you translate your superior performance relative to most of your peers into market share gains and increased reimbursement?

So how do you communicate that to your target market? And what is Amedisys going to do going forward to make sure that you maximize that opportunity?

I'll let Kate Jones, who's here, who's our Chief Clinical Officer, talk about how we're going to maximize and move the dial on stars to an even better level. I think what we do, though, just to be clear on how we will take advantage of this.

First of all, I think star -- and I'll go back to my past. I was involved in Humana's implementation of stars. And it was an extraordinary, complex endeavor. The results, though, were very good. And we're seeing the same thing here.

You have to be a sophisticated provider with a lot of scale, a lot of resources, a lot of education to move stars. And so I think what that's going to do is those people that don't have that I think are going to have a hard time with stars.

And so I think it's moving towards, I think once again, towards scale and resources. It's going to favor those folks that are out there. The other thing is when our referral sources I think are going to have be more quality oriented.

And so when they, when the referrals in hospitals and in physicians, when they see, and the patients see and make the choices for which home health agency to be referred to or not, they're going to look at the star ratings.

And that's going to drive more and more referral sources because it's going to be very hard to recommend somebody who isn't at the top of the pile from a stars perspective. So we understand what this is going to mean from a business development perspective.

I think, Kate, you want to talk a little bit about how we're going to do well? And what initiatives we have towards driving?

Sure. Thank you, Paul. So to answer your question about how this may impact growth, we, our planning all along has been to include all of our team members in how we get ready for and respond to star ratings.

So our operations leaders, our business development leaders and our clinical leaders are all working together in concert on our star planning. And our star -- our response to our star ratings. We're pretty pleased with how the first results looked when they came out just over a week ago.

And we are already hearing anecdotally from some of our markets that people are making choices based on star ratings. And so it's a continuous quality improvement effort including for those locations where we already have 4.5 stars to continue to push everyone to the right on where we are with star ratings.

At the end of the day, it's our ability to reflect the quality of care that we're providing. And stars ratings gives us an opportunity to do that. And so what we're seeing and hearing so far is that positive results in star ratings will be a positive driver of growth, which makes perfect sense because people want good care provided in their homes. And it allows our clinical team, our quality team and our office team to really focus on that.

And just a follow up on that, Kate or Paul. Is this also going to open up opportunities for BPCI? As we see bundled payments and also the new joint bundling program that was introduced for the hospitals? So are you seeing any doors opening already for you guys related to those?

Yes, it's very prescient of you, Brian, is the -- we were having this discussion right before the call started. So, and I was asking Kate for, trying to get prepped for this in terms of what the similarities were in terms of stars versus across the various government programs that are out there.

So the things is, if we go conquer the star measures, does that give us credit for other measures? Or help us be better prepared in going there. And so I'll let Kate give that answer.

Yes. So what we've done is a crosswalk between all the various measures that are being looked at, either proposed or are already in place. And, of course, re-admission rates are included both in star ratings and in the proposed VPP measures.

So and having a lower re-admission rate certainly will help in any potential BPCI partnerships that we pursue. So we're certain we can be a good post-acute partner for our community hospitals where the 75 that may be faced with the joint replacement BPCI program.

We're certain we can be a good post-acute partner for them. And star ratings will contribute to that. But also some of the other measures that are out there will be necessary for us as we work with them.

Appreciate that. And then for Ronnie, so as we think about the 400 basis points, last quarter when you gave this guidance, the EBITDA margin was 8.7%. And sequentially it already went up about 130 basis points.

So if you're saying that the rate cut could reduce the margin upside opportunity by half, you're essentially saying that there's only 70 basis points left. But we're in very early stages of Homecare Homebase. So how do you reconcile all that?

(inaudible)

Brian, if -- you did break up on me. But I think I got the gist of your question. Just to the walk between 400 and the comment about half of that. And it's nothing more -- try not to make it any more complex. And we still will deliver, have views to deliver on the efficiencies and the reduction in cost that we had intended.

If we take these rate cuts off the top, which'll be $20 million plus over a couple years for Medicare, then just the math of that gets us down to about half. (multiple speakers)

Be -- so, Ronnie, my question was the fact that you've already seen 130 basis points of margin improvement.

Yes.

From when you initially gave the guidance. So if you're saying half, there's only about 70 basis points left, I guess.

That's not unfair. I think that's in the zone. Yes, we've gotten some of it. And price is going to put us -- take some of it back and we'll keep going. I think you framed that fairly.

Okay. I got it. And then last question, hospice. Obviously good performance there. So are we in the third or fourth inning of the game? Or are we in much earlier stages on that one?

I'd say in hospice we're -- I'm really proud of what our hospice folks are doing, I've got to tell you. I think Jim Robinson and his team just done a great job. So I think they're executing extremely well.

I think Jim has boiled this thing down to -- I mean, I was just out there in Boston and then in Pennsylvania talking with some of our hospice folks. And just very encouraged by how they're all singing off the same hymnal, which is a good -- a very nice sign for an organization.

They know what they have to hit. They know what their metrics are. They're focused, their heads are down. They're feeling really good about what they're doing. They're delivering great care.

So I think what I'm basically saying is, the way I'm kind of looking at it is, Jim, you're doing a great job. We're going to let you continue to do a great job. If I can put you on getting some more acquisitions in, I'd love to do some more deals in hospice, because hospice is ready.

Once we get Homecare Homebase in hospice, which is upfront in the queue, it'll be even more ready. And then I think my sense is home health will be ready a little after that. We still have -- it's a little more complex business. But I think we'll be able to start in selective places where operations are going very well.

I think we'll be able to start to. And we started to target those areas where we'll be able to do some deals and bring some things in. So all good.

I appreciate it. Thank you, guys.

Sure. Thanks, Brian.

Brian, this is Ronnie. And I'm going to follow up on your question. And just know from our -- looking at it, the second quarter, again, we're trying to indicate is not a run rate.

So we posted good results and good margin here in the second quarter. But that's not a full year result, as you know. And so to say there's just 70 basis points left, we probably have a little more work to do. And probably there's more in that than -- from just second quarter. If that makes sense.

Yes, that makes sense. Thank you, Ronnie.

You're welcome.

And then I think-- one other thing I'd like to add, Brian. Is if this pilot works out where there's -- which could be very interesting, I think, for you. I think there will be a lot of shake out in the industry if there is a 5% in the nine states that we're talking about is pulled out.

And then re-assessed and then re-distributed, giving quality bonuses, I think there'll be, obviously, some incremental revenue potential there. And once again, we're going into that full bore and we anticipate we're going to get the quality bonuses and come out with more than 5% that they take away from us initially.

Got it. That makes sense. Thank you, guys.

Okay.

Thank you, Brian.

Whit Mayo, Robert Baird.

Just wanted to follow up on Brian's hospice question. How sustainable do you see the margins in the quarter? Was this one of those quarters where everything just sort of fell the right way? And do you expect this to continue?

I'll talk about the business in general and then I guess Ronnie'll talk about the margins.

The winds are at our back in hospice in terms of -- from my belief. I mean, the two things that have come out in terms of the rulings. CMS now is going to reimburse physicians for talking about hospice. I think there'll be more people coming through hospice.

And then I think the other proposed pilot where they're going to be testing, because they've already seen good results where there are going to be people having curative care as well as hospice, I think is going to be an interesting project.

But once again, I think it shows a wider acceptance, a wider interest of hospice in more places. So I think from that perspective, we're very, very sanguine about the business. From a margin perspective, I'll let Ronnie talk about if we're-- (multiple speakers)

Sure. Well, and we don't want to put Jim on the spot but we will.

He's not here.

It was really a good quarter. And it was certainly the highest gross margin we've had and -- since the beginning of 2014. But looking at last year, just how much of that will carry forward, I think a great deal of it.

And last year, even before Jim stepped into leadership again effective October 1st. But from Q2 to Q3 last year, we went from a 46% gross margin to 48%. So we did it last year, essentially. And some good things have happened since then.

So I think a large part of this, if not all of it, can go forward. And we'll get Jim to sign up for that. But good results and I think it's pretty real, given the volume changes that we're seeing.

Okay. And, Ronnie, you mentioned that you're calling your second lien debt soon. Did you say that you're addressing your bank agreement and just any sense for what the size of the facility may look like?

It -- yes, there is. It'll -- again, I don't want to go into that now till we get further down the path. But -- so I don't want to get too specific but that just yet. But we're about to launch a process, feel good about where the market is. And I think we'll be successful. Hopefully get this done before Labor Day.

And last question, just CapEx for the year. I think you pointed us to maybe $20 million to $25 million is the right expectation. And is that still a good number to use?

Yes.

Okay, thanks.

Thank you, Whit.

Cheryl [Ullness], MFUSA.

Good morning. Thank you very much. I'm going to beat this horse some more, if I may. Ronnie, you identified starting here, you're basically doing a great job of identifying why $0.43 of EPS on an adjusted basis is not the right run rate going forward. Thank you for that. Step, item number one.

Item number two is, you gave some specific impact of $0.02 to $0.03 per share per quarter, I believe, for some of the labor issues related to holidays. Then you said something along the lines of $2 million to $3 million of costs associated with shifting the IT system from D&A to ongoing expenses. Was that a quarterly number or an annual number?

Cheryl, thanks for your question. And welcome back.

Thank you.

Sure. And it was, the numbers I was referring to are quarterly.

Okay, that's what I thought. Because I actually have a series of questions here. And the $1.5 million that you also identified increase in non-cash comp was also a quarterly number.

Yes.

So all told, if I'm doing my math right, there's somewhere around $0.11 at the top, using the higher end of your range in EPS that is a headwind going into third quarter. Is that correct?

Well, it -- I'm glad you're tugging on that, Cheryl. And I think that's a little larger than I wanted to share. I think you've captured it all but let's start with the non-cash compensation.

There, you'll see on the face of the statement that $1.5 million a quarter. But we think the restructure of the program is neutral, meaning that there's a reduction in short-term incentive. Now, that's going to be buried in another line item.

So but you'll see the $1.5 million on the face of the statement. And just wanted to call attention to that. So that $0.03 a share I don't think is a negative in and of itself to the run rate.

Okay. So that would take $0.11 down to about $0.08.

There you go. And so now the other $0.03 positive, so I think you've got it. $2 million of ICD-10, $2 million of front end technology costs. That's the $0.08 you're referring to. But I have $0.03 of lower depreciation that's (inaudible) of how technology, you know, just under the old system since it was internal and capitalized.

Yes.

The cost, as you know, was embedded in depreciation. That $0.03 will offset that on an EPS basis.

Okay. So I got the $0.02 of the holiday should be in the $0.08, right?

Yes.

Okay. And then I got--

No, no. (multiple speakers) Let me just say, $0.02 for holiday, $0.04 ICD-10, $0.04 technology. That's $0.10 on EBITDA. And then $0.03 positive on depreciation.

Okay. And so that's net $0.07 of headwind to the bottom line.

Yes.

Okay. All right.

Yes, just (multiple speakers).

That's helpful.

Yes, okay.

Yes, that's extremely helpful because I might have been led to over-estimate the impact. Okay. Now, the next thing I'm going to ask you for is, I think one of the things we're getting wrapped in here is the use of basis points of margin improvement rather than dollars of cost savings and efficiency gains.

Because if you can give us a sense of what your targets are in terms of dollars of cost reduction that you expect over this next 18 months to two-year period, then we can do the math on the -- and then we can grade you on whether you achieve that as opposed to netting it against what the government may or may not do to you on the top line when all is said and done.

Fair enough. And I think as we start out, that 400 basis points on $1.2 billion of revenue, our thinking was roughly $45 million to $50 million of opportunity to reduce costs and get efficiencies.

About half of that will result from the technology strategy. And that will -- that's -- there's a little bit more clarity in that in timing of what'll come out as it's largely driven. And we'll get most visibility into that when we fully implement Homecare Homebase. So that's that half of it.

The other half of that is going to be more general in work flow processes. We think we have capacity issues. We have some inefficiencies in our work flow that we want to get to. Efficiency in the B.D. staff.

Those types of things will be the other half of it that, again, we reflected with probably less scripted at this point. But certainly aspirational over the next two to three years. Probably closer to three to fully realize.

Okay.

So again, in total, $45 million to $50 million.

Got it. Okay. So that's very helpful. So now that I understand that and now that I understand what the headwinds are going into the third quarter and then sustained likely through the fourth quarter offset by growth and improvements in the Medicare home health business, which I assume you're going to get because you're so focused on it.

As we look at the margin opportunity today, as was noted earlier, you're already over ten. So aren't -- is there only 70 basis points left? We should restart the clock for that again in terms of margin improvement in the third quarter. Right? Because some of what you got this quarter is not sustainable, given that you're just in the midst of putting your strategy in place.

Right. She's right.

I think that's correct. That's fair.

Okay. So the margin, if I do my math right, the margin is going to come in somewhere around 9%-ish on -- given -- for a bottom line -- for an EBITDA margin. Maybe a little bit lower because you're getting some back on the EPS line.

But that shouldn't scare us off from still contri-- still getting the additional cost savings in top line growth.

Yes.

That's sort of observation number one. Observation number two is, when you talked about the operating leverage component of the margin improvement, did you anticipate hospice as being so robustly alongside of its plan as it appears to be, if not ahead of plan on its turn around?

Thank God for hospice. The -- (multiple speakers)

Yes. Well, that was my thought, too. But I didn't want to say it.

Yes, so, no, we didn't anticipate it would be doing as well as it is now, candidly. That's why we're focused on trying some inorganic growth there. And letting Jim do his thing, Cheryl. So I don't know, any other comments in terms of--

No, it is, obviously, very good results. I think Jim had a plan that had some stretch in it. And he's at this stage certainly meeting plan and exceeding it slightly. So we were -- but he had a good plan that had some rigor to it. And so we're enjoying good results.

Right.

And he's sustained them. Yes.

Yes. And then I heard you say that. So to some extent as we think about the pluses and minuses going -- coming out of second quarter going into third quarter and beyond, we're doing better on home health.

We're doing somewhat less better on Medicare. Better on hospice, somewhat not so hot on Medicare home health. And there you have to be careful not to drive unnecessary re-certs so you just have to take your time a little bit because we don't want to miss -- repeat mistakes of the past. And then we move forward into these other headwinds.

So it sounds like we need to take a breath, slow down a little bit but still be optimistic longer term that the turn-around is on track. Because what I'm concerned about here is you've done a spectacular job putting the Company on strong footing.

This quarter could cause us to run away with our estimates. You're clearly backing us off but I'm worried that you're going to back us off so much that we're kind of going to lose confidence in the growth potential of EPS beyond where estimates are now.

Well, Cheryl, let me comment. And Paul may want to add to this. First, we wanted to, and it's a little bit of a -- what we wanted to portray was, look, we to not surprise you, we do have some front end investment here. And we know there's some bumpiness.

So you're certainly, we're articulating the cost side of this as we see it today. And we believe there's some opportunities to mitigate those costs. And those aren't reflected in our comments yet. And our results in the third quarter and clarity around that will be helpful.

But at this stage, we really wanted to present the headwinds that we see. And have some transparency into that. So that's a general comment. And I was thinking about our earlier list. I want to add to that the benefit that if we're successful, $0.02 per share perhaps a quarter interest savings. Just from an EPS perspective. I don't know if we -- I didn't remember if we talked about that.

We didn't and I'm aware of 600 basis points is a huge number if you're able to renegotiate successfully. I got that. And I think what you're doing is correct, just whatever it's worth.

I think being transparent about headwinds and backing us off from estimating a $0.43 run rate from now till the end of the year is absolutely the right thing to do. I just don't want to swing my pendulum so far the other way and miss something as a result.

Yes. I think that's fair. I mean, I think, Cheryl, just if you look what we're dealing with from an IT perspective. We're operating on three platforms now. And we're getting rid of one and that's -- but that's still not over and we still have back end uses of it.

So, I mean, as we're moving towards the efficiencies that we see to moving onto one platform, that's one thing. In the people area, we're still -- have some real capacity issues in key markets. We're turning away business.

So I think we're going to work through those lumps. We've got a really good team in place that's now starting to dig in and tackle these issues. And -- but I also, we wanted to, and I think in our last call, we just wanted to prepare everybody for the fact that we're going invest. And we're going to do the right thing so that the business is in great shape. So that we can really run the margins very aggressively six months, a year from now.

And I think it's absolutely the right thing to do. And I commend the fact that it's not easy for a company doing the kind of growth strategizing that you're doing to make sure everybody takes a deep breath and sees the business objectively. So I appreciate that no end.

I have one final nitpick of a question, if you'll indulge me. How many home health agencies --

Sure.

How many home health agencies are you running today?

360?

Three si-- 300--

It is 360?

I think it's 318.

318?

Yes.

Okay. That's perfect because some of my metrics I do on a per agency basis. It's helpful to look at the business that way. And then a final recommendation, to the extent that you can put a slideshow together for the next call, we really appreciate having this kind of walk forward in numbers so we don't miss things. Sometimes you have to spoon feed us.

Well, we wanted to give you that -- we wanted to actually walk you through the strategy with the -- so that you would understand that. Next call, we'll walk you through the key slides of the strategy as well as the metrics by which we -- the strategy translates by which we will all sing to every day.

Perfect.

So you'll see that on the next call.

Thank you so much. That would be extremely helpful.

Of course. And we're delighted to talk about our strategy with anybody at any time, if people want to call us. So.

Excellent. Great job. Thanks so much.

Okay. Thanks so much, Cheryl.

Thank you, Cheryl.

Welcome back. All right.

There are no further questions at this time. I turn the call back over to Paul Kusserow.

Great. Thank you, Candace. And thanks, everyone who joined us on our call today. We appreciate the good questions and the good dialogue. We sincerely appreciate your interest in Amedisys. And we look forward to updating you upon our visits and on our next earnings call. Thanks very much and have a great day. Bye.

This concludes today's conference. You may now disconnect.