Amedisys Inc (AMED) 2016 Q2 法說會逐字稿

Greetings and welcome to the Amedisys second-quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). I would now like to turn the conference over to your host, Scott Ginn, Senior Vice President of Finance and Accounting. Please go ahead.

Thank you operator. Welcome to the Amedisys investor conference call to discuss the results of the second quarter ended June 30, 2016. A copy of our press release, supplemental slides and related Form 8-K filing with the SEC are available on the Investor Relations page on our website.

Speaking on today's call from Amedisys will be Paul Kusserow, President and Chief Executive Officer, and Ronnie LaBorde, Vice Chairman and Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that statements made on this conference call today may constitute forward-looking statements and are protected under 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 as required under applicable securities 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. Now I'll turn the call over to Paul Kusserow.

Thank you Scott. Good morning and welcome to the Amedisys second-quarter conference call.

During the quarter, Amedisys reported adjusted revenue of $362 million, up 15% year-over-year on strong volume growth in all three segments. Adjusted EBITDA was $30 million. Adjusted EPS was $0.42. These results were delivered while undergoing large-scale change and intentional disruption in our organization.

We continue to make good progress on the four key tenets of our strategy. First, we delivered strong organic growth across the board. In home health, same-store Medicare fee-for-service admissions grew 4.1% and total episodic admissions grew 5.3%. We also made progress on improving our business mix in home health as non-episodic admissions fell 2.2%.

In hospice, we continue to exhibit strong same-store growth where admissions grew 18%. Our new personal care business segment has delivered 38% year-over-year growth in billable hours. We also just announced the signing of an agreement to acquire another personal care asset in Massachusetts, Professional Profiles.

Second, we are beginning to realize targeted efficiencies enabled by our Homecare Homebase rollout. We have 313 care centers live on Homecare Homebase and continue to target a go-live date of October 31 for our last group of care centers.

We are experiencing more disruption due to implementation than we originally envisioned. These costs are substantially contained to 2016 and we remain -- we still are confident that we will achieve the run rate of $46 million in annualized savings by the end of 2017. Based on implementation results and what we are presently projecting, we think it could be more.

We are making strides in becoming our industry's employer of choice. Turnover and retention metrics continue to improve with voluntary turnover down to 23.3% in total, and 18.3% amongst full-time employees. We are also beginning to crack the code in terms of our part-time, PRN, weekend labor pools with turnover rates down in all three areas. As we have repeatedly stated, our business is only as strong as our people. We must identify, develop and retain the right employees.

Finally, our clinical quality metrics continue to improve as demonstrated by our average quality of patient care score of 3.59 stars in the most recent July release. In our October preview scores, we reach a 3.74 star rating with 50% of our care centers above four stars.

Similar to our first-quarter report, we are monitoring several areas closely and tracking our progress. Referring to Slide 6 of our supplemental slides, we are extremely pleased with our performance in terms of growth, business mix and clinical quality. While we are seeing increased Homecare Homebase disruption, our experience in the initial rollout market shows the effective cost returned to normal roughly 60 to 90 days after a conversion is completed. Accordingly, we believe these costs will be substantially eliminated by the end of Q4.

On the inorganic front, we are seeing several M&A prospects across the three business segments, but we believe there is a valuation disconnect at work in the market. Our pipeline includes approximately $200 million of EBITDA. However, pricing expectations, particularly for the larger deals, may keep these deals from getting done in the near term. We continue to remain disciplined with regard to capital allocation. With all of that being said, we have plenty of dry powder and are looking to execute opportunistically where we find value for the organization.

Smaller tuck-in acquisition opportunities continue to be actionable, and we are pleased to announce that we have signed an agreement to acquire Professional Profiles in Massachusetts in our personal care division for $4.4 million. Professional Profiles is a great strategic fit and generates approximately $10 million in annual revenue. We anticipate closing the transaction on October 1.

In addition, we have executed an asset purchase agreement via bankruptcy to purchase a certificate of need in New York. This purchase would expand our service area into Kings and Queens County in New York, the eighth and ninth largest Medicare population counties in the country. We are awaiting final regulatory approvals and expect to close in late Q3 or early Q4.

We also recently formed a joint venture with Tucson Medical Center to deepen our presence in that market. We will be working collaboratively to support their ACO and are excited about the ability to demonstrate our impact on clinical quality readmissions and cost.

For the acquisitions, we announced in the last year Infinity and Associated Home Care. We have been performing regular look-backs to determine their performance against our original projections. I'm happy to report both are progressing according to plan with Infinity helping to establish us in Florida and growing ahead of schedule. AHC is presenting us with new growth -- with a new growth platform in personal care that will allow us to round out our service offerings in the home.

Last quarter, I mentioned we had just kicked off a business development realignment pilot program in home health. The concept is to identify and prioritize the best sales targets and reallocate these amongst our most productive business development employees. While these are very early days, we have seen 2% incremental Medicare growth over our 4% growth rate, mainly driven by increased productivities per employee. Perhaps most encouraging is that we have seen these results accelerate and improve in recent weeks. We will push to prove out this concept across our business and evaluate the most effective way to deploy business development resources across our geographic footprint.

On the human capital side, our turnover results continue to improve across -- continue to improve across the regions, declining to 18.3% amongst full-time employees as of June. Our target for full-time employee turnover is 16% by the end of 2017. We are also seeing good results with our part-time and PRN staff by more effectively selecting, managing and utilizing this necessary labor pool.

We have built and are deploying a proprietary resource planning tool to maximize our deployment of human capital resources, helping us to achieve our aggressive growth goals. This tool will help to guide our local care center leaders who are seeing increased capacity post-Homecare Homebase implementation with better information on resource planning. We will have more information to provide you in the subsequent quarters on this initiative.

G&A expenditures remained higher on an absolute level in the second quarter, consistent with our planned transformation. We should start to see savings initiatives begin to show up in the latter half of the year, both in the field and in corporate G&A. As a percentage of revenue, total adjusted G&A decreased 50 basis points sequentially, and we expect this trend to continue.

Another key metric we are monitoring in home health is our cost per visit. We are tracking it intensely and believe we have reduction plans in place to employ at the appropriate time. On Slide 11, we have detailed these components and our plans to address these particular areas, which Ronnie will address more in his comments.

Our human capital team did a comprehensive study of all our markets and found our wages were very competitive versus market pricing. In the markets where we weren't competitive, we have already made the adjustments to market pricing.

Overall, our disruption costs during implementation have been deeper than expected, but we are tracking and monitoring it and have mitigation plans in place. We are very confident it is contained to 2016 and will not impact 2017 results.

Our rapid pace of implementation had an impact on billing and collections in the first quarter, which reversed course slightly in the second quarter. While we don't think that the pace of collections has completely normalized at this point, we have a good handle on the issues and expect them to be largely resolved this quarter. Sequentially, our days sales outstanding are down two days to 37 days.

On the regulatory front, as expected, CMS issued a new bundled payment program for heart attacks and bypass surgery. This program differs from the existing CJR bundle in that these patients have chronic conditions with high post-discharge readmissions. These are exactly the types of patients that we have the ability to positively impact with multiple conditions and comorbidities. We believe there are opportunities to reduce readmissions to the hospital and also shift patients out of nursing homes into home health. CMS has not yet decided on which of the 98 MSAs are selected for this new program. Additionally, CMS has also added hip and femur fractures to the CJR program that took effect in April. Overall, we are excited about these developments which we believe present a large opportunity for home health. We have protocols and we know how to bend the curve here.

CMS has also been active on other fronts, including finalizing its pre-claim review, or PCR, processes, in five states as a tool to fight fraud and abuse. While we believe there are better ways to directly fight fraud in the industry, we view this program favorably compared to the proposed prior authorization program. However, we are concerned about the ability of the max to meet these new complex administrative requirements. We are working to estimate the additional administrative burden associated with this new process. This will affect our care centers in Florida, Massachusetts and Illinois, representing less than 10% of our total home health revenue.

In July, CMS issued its proposed rule for home health in 2017. The market basket increase was slightly higher than we anticipated and the final year of rebasing, along with the second year of a three-year coating intensity cut, will reduce payments to the industry by approximately 1%. However, CMS has shifted reimbursement dollars in a budget neutral manner that can impact providers differently based on their patient mix. The calculation of the net impact to us is not yet complete, complicated by our software transition. We currently anticipate that the case mix re-weighting will result in an unmitigated incremental 1% to 2% reduction in payments to us on top of the 1% industry reduction. On a net basis, we anticipate a reimbursement decrease next year of 2.5%.

Last week, CMS finalized its 2017 rule for hospice, resulting in a net payment increase of 2.1%, somewhat mitigating the impact of the home health payment reduction. This payment increase is effective October 1. If current expectations hold, we expect a combined $14 million pricing headwind in 2017, roughly the same as we experienced last year.

Before I turn the call over to Ronnie, I'd like to discuss a few issues in closing. On June 27, we received a civil investigative demand issued by the US Department of Justice related to 68 identified hospice patients in Parkersburg, West Virginia. As previously disclosed, we received a CID on November 3, 2015 requesting records related to 66 patients in Morgantown, West Virginia. We are continuing to regularly communicate and fully cooperate with the Department of Justice and expect to reach resolution of all hospice investigations as soon as possible.

Finally, I'm sure everyone read yesterday's news that Ronnie LaBorde has decided to retire from Amedisys effective January 2 of next year. It is a bittersweet day for many of us as Ronnie has been involved with Amedisys in some form or another for almost 20 years and was instrumental in helping us achieve our stunning turnaround in 2014. His leadership helped put the Company on solid footing. Ronnie has also been running our hospice business unit for the last year on an interim basis, and again has been delivering stellar performance.

We have identified some very good qualified external and internal candidates for the hospice leadership role and anticipate the same for the CFO role. The good news is that Ronnie has built a great and very deep team in finance accounting and hospice, and he will be here for the next five months helping us make a smooth and seamless transition.

Finally, I'd like to thank our tremendous team out there in the field that remain focused on providing the highest quality care to our most vulnerable populations. The results you have delivered during this period of change throughout the organization are extremely impressive. We have the right strategy and we are executing on it very well.

Thank you. And with that, I'll turn it over to Ronnie LaBorde.

Thank you Paul. To get into the financial results now, I'd like to first start on a GAAP basis, of course we generated $361 million in revenue and earnings per share of $0.32 in the quarter. As we have stated since the beginning of our transformation, we have continued to incur self-induced restructuring and one-time costs that have caused disruption to our operating results. As we approach the end of our Homecare Homebase implementation, we aspire for our adjusted results to be consistent with GAAP results. That being said, let me call your attention to our earnings release and Slide 19 of our supplemental slides. This slide provides detail regarding income and expense items adjusting our GAAP results that we have characterized as non-core and temporary or one-time in nature. This schedule also detailed the income statement line item that they impact.

Now, let's begin by discussing our quarterly adjusted results and year-over-year comparisons. On a consolidated basis, revenue was $362 million, up $48 million, or 15%. EBITDA was $30 million, down $2 million. While down from last year, our comparative results were impacted by the following: a $3 million Medicare rate cut in home health; a full quarter of Homecare Homebase platform costs of $2 million, which is an incremental $1 million over last year. These two items are permanent. And finally, I'd like to mention that, in this quarter, we also incurred $2.4 million in temporary expenses related to Homecare Homebase disruption outlined on Slide 9. These costs, as Paul indicated, are temporary, and we think are contained to 2016 for the most part. Our EPS, our adjusted EPS, was $0.42, down $0.01 from the previous year.

So, turning to segment highlights, in the home health segment, revenue was $276 million, up $28 million over the prior year. Medicare same-store admissions were up 4%. Total episodic admissions were up 5%, and non-episodic admissions were down 2%. Medicare -- our Medicare recertification rate was down slightly to 35%. Segment EBITDA was $41 million, flat compared to last year.

Our cost per visit was up $3.00 over last year and flat sequentially. The year-over-year increase of $3.00 is composed primarily of about $1.15, which, again, is due to our growth, $0.70 due to higher health insurance costs in this quarter over last year, and $0.60 based on our Homecare Homebase disruption.

Turning to the hospice segment, our revenue was $77 million, up $10 million over the prior year. Same-store admissions were up 18%, same-store ADC was up 16%, and our segment EBITDA was $19 million, an increase of $2 million over the prior year. Our cost of service per day was up $1.62, mainly due to wage increases and also some DME cost increases.

Turning to G&A, I'd like to refer you to Slide 4 in our supplemental slides. On an adjusted basis, our total G&A was $122 million, an increase of $17 million over last year. Approximately $9 million of this increase is related to acquisitions. Our G&A cost as a percentage of revenue increased 40 basis points to 33.8% year-over-year, and decreased 50 basis points sequentially. For the year-over-year increase of $17 million, I'd like to discuss the expenses in each segment and then in corporate.

In home health, our G&A costs were up $9 million to $71 million, or 25.9% of home health revenue, a 60 basis point increase year-over-year and up 10 basis points sequentially. $4 million of this G&A is attributable to Infinity, our Infinity acquisition.

At hospice ,G&A our costs were up $2 million to $17 million, or 22.6% of revenue. This was a 50 basis point decline compared to last year and sequentially.

And finally, turning to our corporate G&A, our total expense was $31 million, up $4 million over the prior year. Included in this $4 million increase was $3 million of corporate expense from acquisitions. As a percentage of revenue, total corporate expense was flat at 8.6% of revenue. Again, sequentially, corporate G&A expenses were down approximately 50 basis points as a percentage of revenue.

Our cash flow from operations for the quarter before changes in working capital was $24 million. Our use of working capital was $9 million during the quarter, and our DSO was down two days to 37 days.

Our capital expenditures for the quarter was $3 million. We still expect between $20 million and $25 million of capital expenditures in 2016. And we expect routine CapEx of approximately $10 in 2017 beyond at our current size.

At quarter end, we had a cash balance of $10 million and $176 million available on our revolving line of credit or a total available liquidity of $186 million. As of June 30, we had $98 million in total debt outstanding and our total leverage ratio was 0.9 times adjusted EBITDA for the last 12 months. We had zero borrowings under our revolver at June 30, and in early July, we again were borrowing on our revolver as we anticipated and are continuing to work through the Accounts Receivable issues we discussed earlier.

In closing, we knew we would challenge our organization to simultaneously implement a new technology platform at a very rapid pace, improve quality scores, grow organically, and begin to realize operating efficiencies. To the credit of our team and our organization, we are pleased with our progress to date. Our additional experience in Homecare Homebase implementation has bolstered our confidence in our ability to realize the identified $46 million in annualized run rate savings. This truly demonstrates the capability of our organization.

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

(Operator Instructions). Brian Tanquilut, Jefferies.

Good morning guys. Ronnie, congrats on the upcoming retirement. So, if you don't mind, I'll start there. Do you think you can give us some color into your decision to retire? Why now? And what is the plan in terms of finding your replacement for your CFO spot?

Let me speak to my decision. As Paul indicated, it's been really a 20-year relationship with the Company, very interesting, very rewarding. It's just been wonderful. And it feels like the right time to move to the next chapter, and I do that with confidence in the Company, in the leadership team, in the strategy. It just feels like the right time. Great things are going to happen, and so I feel good about work done to date, progress made and in some small way contributing to that. And so it feels right. And so it seemed like the right time with results achieved, and really the great opportunity ahead of us. I'll let Paul talk about kind of where we go from here and the plan to replace.

As I said, I think it's a bittersweet time for us here around the table. We are excited about what Ronnie has done and his legacy here, the stability he built here, the way he put -- at least when I arrived at the Company at the end of 2014, it was in much better shape than when I first started looking at the Company in the beginning of 2014. So we owe Ronnie a ton here. At the same point, I think Ronnie and I both feel that there's real good stability here. We've built a good team. We are on a really good trajectory. We are very excited about, once we get through our self-induced change here that we've been talking about for the past year, in 2016, that we are very excited 2017, and we think that what we've put in place in 2016 is going to pay very good dividends in 2017 and 2018. So I think we feel it's a very solid ground with which Ronnie can safely move onto other things.

The process, though, is obviously he's going to be very hard to replace, because he's stepped in wherever we've needed him. And so we have been out looking. We have some very good internal candidates from a hospice perspective. We also have been looking at external candidates. We have a very good list. And we've been moving through that list over the past I'd say four months or so. So we are getting closer there.

On the CFO piece, we've got, again, good folks internally, a very stable team, and then we have five months of runway with Ronnie. We think there will be some good interest obviously in this role, but we're going to need to find somebody really good. And we have the time, the luxury and the great team and the guidance that have Ronnie on this to make sure find somebody who's good. So that's where we are at on that front.

I appreciate the color from both you guys. Paul, just hitting on the Homecare Homebase adjustment on the CHOP essentially, how should we be thinking about what the main drivers were of the incremental disruption costs that your factoring in, number one? And ten number two, as you think about the earnings power of the Company for 2017 versus where you had thought it was going to be prior to the adjustment in the cut, how should we think about the comparability of the earnings power, at least in your internal budget?

I think from a -- one, I'm not really that fussed over the deeper CHOP than we thought. A couple of reasons. One is it came from things that we have a handle on and know and know we are going to -- and have seen where we've done early implementation that it comes out. So in places like Louisiana, Mississippi, Alabama, Tennessee, we do -- we did see some of these things. Particularly in Tennessee, we saw a recert issue which we didn't see in the first three states that I mentioned. But what we see is it's very controllable. We have really good operators, and what they do is they go through this. It requires a lot of people walking and chewing gum at the same time, and there's a little confusion on that.

Where we've seen the costs increase, for example in the state of Tennessee recert, we are starting -- we are seeing a little recert issues in Georgia, but Tennessee has got a handle on it. We anticipate that's going to be largely played through. We also are seeing things like health desks increase in terms of cost of that. We've seen some increased travel expenses. We've seen some increased overtime expenses. And then concurrently, what we are also starting to see and what we are starting to see now is efficiencies coming out of this. And we are now starting to -- we will have much more to talk about in the next quarter, but we are seeing a lot of efficiencies starting to come out of these first places and we are pushing those harder now because we believe that what we are setting up now will be much better for 2017.

Ronnie, as we all know, is the more conservative person on these fronts. But I think we will do better than our $46 million based on the sort of -- now they're all looking at me and giving me the evil eye -- and based on the margins that we are starting to see and the cost savings we see that are going to pass through to 2017 on a consistent basis doing the hard work we are doing now, it's looking really good, the model. So I'm very excited by it, frankly.

Okay. And then I guess Ronnie, on the heat map slide, there's a comment there about 5% to 6% organic growth expectation. Is that a good way for us to be thinking about post 2016, post Homecare Homebase, and what do you think are going to be the key drivers of that one?

Sure. I think that is the way to think about it. It's how we are thinking about it. We've been showing and posting good organic growth. Aspirationally, we've been talking north of 5%, so that hasn't changed. I think the way to think about it and where really we are enthusiastic forward-looking, as Paul mentioned, our business development and market initiative there to help drive that, to really bring better science to our markets, and better targeting and increasing productivity by our sales teams there. So we are very pleased about that early stage, and as that gets rolled out.

And the other thing I think that we haven't defined but certainly we are confident about is we -- again, I'd highlight that we have been posting this organic growth while implementing Homecare Homebase. And as that kind of -- we get through that occupation of the organization and doing it, that just removes some barriers. While we posted good results, we do all of this, I think we are very optimistic about our ability to achieve yet more growth, as we say, 5% to 6%.

Just let me add to that. We have -- in terms of what we've seen, we are pushing change now on both sides of the organization, on the operational side and on the BD side. And so -- and what's interesting about it is -- and there's play on both sides.

If you look at what's happening on the operational side with what we've seen when we implement the Homecare Homebase and we start to push some of the efficiencies that we see there, we create capacity with our own people. And those are our assets. As we said, 85% of our costs are our people costs. We are starting to create efficiencies and excess capacity there that we believe we now need to start to fill in. That's why we built our human resources productivity tool, so that, in each care center, people can make sure that people, their employees or their clinicians, are working at maximum capacity and to start to make sure that that occurs. So once we achieve, once we start to build that excess capacity in the operations, which is what we anticipated with Homecare Homebase, that's why we are being so aggressive.

Concurrently, we want to have that volume growth in there that eats up that capacity. And we also want to make sure, which we have been doing, this is what I'm very, very happy about in our results, is that it's fee-for-service Medicare. And so I'm delighted to have a negative number there on the non-episodic, and I love -- and what I want to make sure is the targets that we are finding that we are setting up, that we are incentivizing these salespeople to do, is that type of business.

So our plan is great capacity with our clinicians, have it filled up with our best type of episodic business, and drive growth that way because then we will have organic capacity. So that's how all these moving parts relate.

And then obviously the other good thing that we are seeing is our quality is really good so that the referrals can be there because we have -- we are delivering very strong quality numbers so that there will be no excuses from that perspective. So that's how we put it all together.

I got it. Thanks guys.

(Operator Instructions). Ryan Halsted, Wells Fargo.

Thank you. Good morning. Maybe just as a follow-up to that last point, on the cost per visit, do you have visibility into how much of the increase might be related to increased use of contract labor that you could specifically relate to Homecare Homebase versus potentially needing it for broader staffing needs?

Sure. We tried to kind of tease this out on Page 11 of our supplemental slides, that the use of contractors is up $0.85. I think we are looking at that and really think, while it's an area of high focus, how to be more efficient, it's a growth kind of inspired increase. I think as Paul articulated, as we create this capacity with the system rollout, that relieves some pressure there that we can reduce that. It's certainly one of our points of focus of how do we get more efficient, and have greater productivity and existing staff and not rely on the contractors as we have when we needed them.

I think, Ryan, from that perspective, the cost of contractors fundamentally turns our fee-for-service business into managed care business and the margins are reflecting of that. So if we drive volume growth and have to have contractors serve that, it's going to hurt us from a margin perspective very badly on fee-for-service, and obviously it takes us into a whole new zone in terms of our non-episodic business. So I think that's the other thing.

Also, we believe that there is a correlation, although we have improved it with quality, that is when we use contractors, there's lower quality. So that will affect obviously future payments.

So the point is what we are seeing, though, is I think if you look at the next slide on Page 12, that's the reason why we are driving turnover down. And when we drive -- that's why it's important for us as we are doing it as a company to say there's two types of employees. There's those that work for us full time, which we want to keep and keep as productive as possible, utilize all that capacity, and then there's part times, PRNs and weekend folks. And we want to make sure that these people are readily available, and they are like our internal contracting group, or contractors group, and we want to make sure we have a good, stable group of people that we can utilize there instead of going outside to contractors. That way we will see better -- we have more stability in that group and that way we will also see much better quality in terms of the outcomes because we have people who are familiar with how we do things and our protocols. So on that side, we are seeing there's a direct correlation between our ability to recruit, our ability to fill in with good people as we continue to grow as strongly as we are growing. So we are pretty confident in it.

Also what we are seeing is -- and we will be reporting on this next quarter -- we are seeing very good progress on that. It's been something we've articulated very strongly to our operators, and some of them are just knocking it out of the park. And so I think you'll see improved numbers there. So I'm glad you asked that question, frankly.

That's very helpful. Thank you. Maybe sort of on the flipside of this topic, you seem to have opened the door for maybe increased potential upside on the efficiency savings. What's sort of the biggest contributor there on post-implementation the annual savings opportunity?

I've got my colleague here, who is head of Strategy, Steve Seim, and he's been the one who has been driving this. So I'll let Steve answer the question. I think he can do a better job than I can on this.

Sure. What we are seeing is we are seeing that there are places in our processes that when we developed our initial savings estimates, that we are finding that it's more systematic that flows become efficient as we really get more comfortable on Homecare Homebase. So we are seeing opportunities to drive some efficiencies in just the way the workflow goes through the entire system as opposed to more of the backoffice, which is where we were putting our original projections.

And then we are also focusing pretty heavily on, as Paul mentioned in the last conversation, on the way we are thinking about things like contractors and how well we are able to integrate our human capital people with our operators to really be targeted in driving, hiring and retention in the right places to affect contractor usage, and then how we can use the workflows of the system to be most effective in terms of our clinical efficiencies.

So when you put all that together, I think we are very comfortable that we haven't bitten off more than we can chew in terms of the projections that we've made going forward, and we are comfortable that this is going to be something that we are really going to proud of in 2017.

I'd add, Ryan, that I think of this is an iceberg. You have known things that we've clearly articulated that we've been talking to you about on the $46 million. We found as we dug in and built clinical and operational initiatives that are fundamentally below that, that we are driving as a result of this, and we are finding we are getting very good results. It's opening up our sort of -- our savings that actually --t hat are able to open up our margins in a pretty substantial way. So these clinical initiatives are kind of some -- very hard going, but we've actually been attacking them in the past six months. And we are just starting to see some results of those.

We've also been combing through on a cost basis to go after various cost pieces. So again, below the iceberg, we have two chunks of initiatives that are pretty substantial that we are very optimistic about for 2017 and 2018.

Thanks for taking my questions, and best of luck to you, Ronnie.

Brian Tanquilut, Jefferies.

Paul, as I think about cash flows, I think, in the past, you've talked about $30 million of operating cash flow per quarter, slightly below that this quarter. So how should we think about cash flow progression? And really the question for you is capital deployment, given that you basically have $85 million of net debt, you're going to generate more cash going forward. And you are giving your comments on M&A being probably a little more expensive than you want right now. How should I think about that?

In terms of -- I'll let Ronnie talk about when our -- our growth in cash. He's got the specifics in front of him right now. I'll talk to you about what we intend to do with it. So Ronnie saves it and I like to spend it. That's going to be sad when he leaves. So Ronnie, I'll let you talk about it in terms of what (multiple speakers)

Sure. We've been going through, as we know, this -- really the kind of disruption in working capital is really a function of the Homecare Homebase implementation. You can clearly see that's what's been going on there. It's just as we've gone through implementation, working through some system issues where we just had to touch things and in some instances more manual, which was more tedious, time-consuming, etc., we are seeing that start to clear on both fronts, obviously. It is clearly temporary.

I think the only thing I would say at this point that will come out of that is probably a couple extra days just to drop bills from our old platform to Homecare Homebase. That's as we sit today. That's not the endgame. But I've got about probably if you looked at kind of best case DSO, we probably have $25 million of working capital tied up with excess receivables that I think is going to -- we'll get back out in pretty good order and make some good headway in this quarter, certainly and continuing on. So I think cash flows, we want to and certainly have line of sight that our cash flows, our operating cash flows EBITDA will fall really basically through to free cash flow and provide those resources to spend as we want to do.

I just think it's a temporary blip in the market. I'm not overly concerned that I'm going to be sitting on piles of cash or that we're going to be sitting on piles of cash waiting for people to sober up on the pricing. We are seeing enough out there. As I said, our pipe is basically tripled. And as you saw, we are doing some cool small things. We have a lot of others in the pipe that we are excited about.

We aren't going to slow down. I'd love to do a big deal but, post-synergy, I want to make sure it's in a single-digit space that I can justify. So I think we are getting there. There's a couple big ones out there that we are excited about that post-synergy should pay off pretty well. So, I would expect us --

And then the other thing is I want to make sure that we get to where we need to get to in terms of these two final quarters of this year before I take the implementation team from Homecare Homebase and possibly stick them on something else, or they're also the integration team, so I want to make sure they get through what they need to get through so we can get those good cash flows, be assured of them. And I would start to look for a lot more activity. I think the end of this year kind of teeing up for the beginning of next year is when we really intend to do it. So we've clearly chummed the waters pretty successfully and have brought a lot of people around. And I think what we are trying to do now is work through some of those so that the timing works for us late this year, early next year.

A follow-up to that, on the personal care, you announced an acquisition recently. So, how should I think about your long-term strategic view on how to meld together the offerings between -- you've had hospice for a long time, but going to PC? And how do you enhancer offering or your referral flow from either physicians or hospital discharge planners given that now you are trying to get bigger in the PC business?

I think it's largely going to come from plans and ACOs. I think ultimately our thoughts on the future is eventually MA is going to be here in a bigger way. We don't think it's going to really affect us for the next maybe three to five years in terms of our abilities to really target fee-for-service business, but ultimately we see MA as coming in more strongly. We also see clearly with what the government has been doing much more interest in risk, much more interest in us taking risk.

What I've learned from my past in managed care when we bought one of these companies and we used it very successfully to manage risk, you need both. You need the skilled and the unskilled. And for you to show up -- and you need the cost differential between the two. You need to have really good skilled people, pay them well, and then you need to have people who do activities of daily living, nonmedical activities. You need to combine that.

And what I really like about the Company that we bought, Associated Professional, is these folks have been doing risk management for the state of Massachusetts in very, very deep areas like paces and [SCOEs] and ASAPs and duals, and these folks really understand how to combine taking that risk and putting nonskilled and skill together. Ultimately, I think, if you're going to take and keep people in the home, which is what our ultimate objective is as a company, and our value proposition, you have to have both. And so this is our first toe in the water in New England to get this going. We'll prove out the case in New England, and then what we want to do is take it to other markets. We are already looking at other markets where there's been some requests that we get involved with people to start to bring this model into play. So that's what we are seeing for the future.

Got it. Thanks guys.

I know Brian stepped off, but let me just add to that. I think it would be also appropriate as we talk about the buildup in working capital, but the other thing, we talk about our adjustments. And so as we capture that, that's certainly cash at that's being spent that we know is self-induced, it's temporary. We are one-time temporary. So as that winnows down, as we know it will, I think that will also enhance cash flows that don't show up necessarily in the description of the AR build up. So I just thought I should draw your attention to that also.

David MacDonald, SunTrust.

A couple of quick questions. Just on the pipeline, can you chop it up a little bit? You talk about $200 million of EBITDA. Can you give us a sense of how much of that, if you've thought about it this way, would be smaller tuck-in deals where maybe the pricing is a little bit more reasonable and maybe something you could move on a little more quickly as opposed to the bigger, chunkier, typically private equity backed deals that are caring around more frothy multiples?

I'd say probably between $30 million and $50 million or probably in that range.

In terms of the --

(multiple speakers) is pushing me up. So, I'd say more than 2 to 1. I'd say 2 to 1, two-thirds of the bigger stuff, one-third on the more manageable stuff. So a little more than that, so maybe $60 million, $70 million is what we've got that we are looking at.

The big stuff we are looking at, once again highly attractive. We just have to be sure from a synergy perspective and from a management time and capacity perspective we are prepped for that.

Again, I think the interesting thing is this is actually -- there's more sellers out there than buyers by a fairly good ratio, and there's more on the market than there is money. And we've done that analysis pretty carefully. So understanding that, we want to make sure that we buy properly and that we buy in a disciplined fashion because, ultimately, when there is an imbalance in that market, it should come down a bit.

Paul, can you just spend a minute on the business development realignment in home health and some of the benefits it sounds like you're starting to see? Can you give us an example? I'm not sure I followed that completely.

Yes. So what we did is when I came here, prior to joining Amedisys, I came in and did a little consulting work, and I had done -- I started my career as a consultant and done a lot of sales force realignment. And my sense was that we were -- we hadn't updated our approach to sales previously, and so therefore I felt that there was more information out there than we were using, there was more capacity in terms of -- more places to focus than what we were doing. I felt we were doing scattershot approaches. And our new head of Business Development, Caroline Henderson, kind of went out and confirmed that.

And so what we've really been doing is we've been just -- we now have information on where the business comes from, what our level of penetration is, and we are able to realign things so that we have better, more equitable territories for people and we are able to assign those to good sales folks who really know where they can call and what the potential of their market is and where the real potential is. So we are seeing just lots better productivity in the places where we are going.

Now, these are early days still. We are in I think five or six places, pods, so bigger than care centers, but we are seeing very good results. And as I've seen in my previous career, these things sort out this way. You will see a bump. You will see with better targets, better information, harder targets for the sales folks to hit. You will see a shakeout, better productivity, better people staying on the case. Some of the other ones will drift away. I don't know, Steve, if you want to add anything?

Yes, I guess I would just add one of the things that the sophistication that Caroline and her team is bringing to the territory realignment and assignment really does help get our arms around measuring the effectiveness of the sales force relative to what expectations are. So there's certainly been some opportunities there. But there's a lot of basic blocking and tackling here, just standardizing the reporting, building new dashboards, and focusing not just on the training of the account executives but also the training of the supervisory level so that we are consistently driving it across the organization. And when we look at what we've seen in those handful of pods in terms of the productivity per sales executive, we've been pretty pleased with it.

Yes, volume growth has been good. We think it's going to get better as it settles in. Productivity has been much better, much, much better.

And then, guys, just one other quick question on the Homecare Homebase disruption. If I look relative to your initial estimates, the disruption has been year-to-date about $3.3 million heavier, which suggests to me that the core business is performing better. You guys have put up numbers while that drag has been a little bit choppier than your initial estimates. Other -- I know you've called out productivity. Is there anything else that you would call out in terms of what has performed or acted better that has at least offset that incremental drag?

If you could repeat that question so everybody could hear it again, that would be great. I'm just kidding, I'm just kidding, I'm just kidding. That was a very nice one. Thank you.

Yes, we believe we have performed better despite the costs, the increase in costs. So once again, we are really confident we know where to take the costs out. We are really confident we will bring it back to below what we were anticipating in terms of a normal run rate on G&A. So I'd say it's volume growth. I'd say the volume growth has been there. That's what we've seen. And then we are starting to see some intangible things that are starting to drive different types. With the sales coming through, we are now starting to shift our mix, so we are getting better mix of business in, and that's doing well. Turnover, which was a huge cost to the business, is now starting to come out. Referrals are getting better because our quality scores are better. So I'd say all of those mixed in, but mainly volume growth. I don't know, Ronnie?

I think that's true. We have seen good growth. Hospice is up, nice contribution there --

Yes, hospice of course.

Yes, and so there's some things that are working well that help cover this disruption and still hit targets.

Guys, just last question, and Paul, I don't know if you want to get into this yet, but just the proprietary resource management tool you mentioned. Is there kind of any high-level things that you could talk about in terms of what that would be? Is it an IT product that will be on the clinicians' tablets? What exactly would that be?

We just saw a demo of it about a month ago, and it's -- basically what it's doing is it's informing all the managers that do us in the care centers, it's basically saying how productive are the folks that they've got, and then are they -- since we are creating a lot of capacity with the Homecare Homebase, that as we said, I think we jokingly said, wow, we had really busy people when we were doing AMS, doing an AMS through three. We were overworking them. We bring in Homecare Homebase, they kind of take a break. There is some excess capacity. We now want to put this tool in place to make sure that we fill up that capacity and that there's pressure at the local level on those clinicians to start to make up that capacity. That's largely what it's for. And it also gives us a forecasting ability on the trends and it allows us to start to understand it predictably.

You saw we are working against -- we don't want any contractors, so it also allows us to forecast more predictably based on past data and then start to build better staffing pools so that we don't have to go to outside labor, which is a big element of that. So we will be able to talk about it. We are out there testing it out right now, but it's exciting. And we have to have this tool. If we are going to create capacity, we have to have the tool that allows us to optimize it once it comes to us. And obviously, this is our people. Homecare Homebase helps to a certain level, but this takes it to one step beyond.

It sounds like it's fair to assume that this would help both on the volume side because it would allow you to better manage volumes, capacity, etc., and also the cost per visit side because you're going to need less temp labor.

Yes. That's what our hope is. Our hope is that we understand the ebbs and flows of this business; we understand we can build our growth trajectories in so that our hiring can correspond with it so that we don't have to go to outside labor. As I said, maybe even worse than the expenses of outside contractors is just the level of quality they deliver. As you know, with value based purchasing, we can't be having people who don't care about us or don't know our protocols or don't know -- can't deliver the quality that we expect.

Okay. Thanks very much guys.

Dana Hambly, Stephens.

Good morning. Thank you. With M&A being a little pricey right now, I wonder if you could spend a couple minutes on de novo opportunities, and how long those would take to ramp. I assume this license in New York that you've obtained is part of that. Maybe you could just inform us there for a second.

Yes, on the de novo side, we aren't really a de novo shop. And we did have that capability several years ago, and so we are rebuilding that. At this point, we are starting to do that. We are looking for de novo-like ideas. We believe we can do that within our footprint. But better for us is to find desirable areas that our operators identify and to go in and do a very small deal, advantageous deal, that gives us existing clients and employees that we can go in. And we are very good at buying at this point even small deals like that, and we can see very quick returns on them. But we are going to start to push that capability of de novos. We think in the hospice and in home care it's very important. Right now (technical difficulty) we tend to buy small and we are looking at a lot of little bite-size things.

Understood. The license in New York gets you into a couple of big Medicare areas. I think you have a few licenses in New York. Is that more of -- is that more kind of a tuck-in opportunity?

Yes, it's more of a tuck-in. There's employees attached to it, there's a brand, there are some partnerships attached to it. And we have a very strong market adjacent to it that we believe that we are going to be able to migrate some of our good players who have been looking to get into this market. So we have a really strong management team there too that we are excited about giving them some more. That's kind of how we work, is we find really strong managers in certain markets. We ask them to look for opportunities within the markets, and then we really dig in deep at that level to find those opportunities, and then we put it on their shoulders and say, okay, you asked for it, we gave it to you, now we need you to perform. And that's the case here.

Okay. Understood. On Medicare Advantage, I know the focus has been on the fee-for-service, but that population is obviously growing. I think you've said in the past they're still kind of viewing home health more as a commodity type business. How much time are you spending or is it worth spending a lot of time trying to educate the managed care providers, or is this something you just need to wait on and it will kind of shake itself out in the next several years?

No, I think both, frankly. So, one, I do, since I'm an ex-managed-care folk, I go out and I do call on the large managed-care players and I bring them case studies of where using home health within their generally capitated MA programs is highly effective and is the best way to most efficiently drive their costs. So, we are continuing on that front.

We are seeing a lot more interest in the MA plans in building these partnerships, because largely most of these partnerships were originally built around physician -- capitated physician clinic practices. And fundamentally that world has been bought up now. There's not a lot of capitated docs out there. So the idea is we can fill in where they can't, where these docs can't, where these docs -- there are no docs that do this sort of thing. So we believe that we can start to offer help there working with local physicians, local physicians' practices and key people in the home.

Okay. And does the personal care make it a more compelling value proposition?

Bingo. I was just getting a note passed to me saying you forgot personal care. So, you're dead on, good pickup. Personal care adds tremendous amounts to it and you can show up that way efficiently, making sure the home is a good environment to live in, making sure you're observing people on a regular basis and then supplementing it with skilled care. It's a very good environment. Clearly, the reason we bought associated in Massachusetts was that's what they do with very vulnerable populations, particularly in the pace world, which are very vulnerable. So we see -- we witness this every day in Massachusetts and we are excited to take it elsewhere. And we think that's the key to going after MA plans and ACOs, although I will say ACOs seem to be much more interested in real conversations now than payors.

Okay. That's great. Last one for me, the hospice growth, really strong. I assume, with Ronnie leaving, we should drop that growth rate down significantly?

(Laughter). No. They will flatter me and say look what we can do now. So, no. I think the growth is good. Obviously, the comps get harder and that will, just as a percentage basis, will moderate, but the team is doing a fabulous job as we saw, again, increasing admits in this quarter. And if we continue at this pace, which I'm highly confident of the team to be in that zone, we will have good comparative growth this year into next.

Thanks a lot. Good luck Ronnie.

This is a really solid team. The hospice folks have just been doing a fantastic job.

I appreciate that. Thank you.

Ryan Halsted, Wells Fargo.

I know we are running over here, but I felt I had to ask a question about bundling. Do you have any sort of initial experiences? What's been your experience so far under CJR in the quarter? And it looks like, based on the number of hospital partners you are in conversations with, things have been progressing on that front. Any sort of detail on that would be very helpful. Thanks.

Sure. You know I kind of rained on your parade a little in terms of the initial CJR bundling -- bundles that came out. The new pieces of the CJR we are excited by. We are excited by what we are starting to see in terms of new partnerships and inquiries. We are excited by our protocols, how they are being responded to, some of the early results we've gotten in the initial joint bundles.

We are also really excited by the heart, the cardiac bundles. We are just actually spending some time looking at the DRGs that were coming out and then we were looking at the split with how many were sent home without home health, how many were in home health and then who were going to SNFs and where we thought we could start to move some of this business away from SNFs. So in CABG, there's some real opportunities. In MI, there's great ones. We see, in PCI, we see some very good opportunities in very specific DRGs, which we know are going to be very expensive to payors and ACOs. So we look to -- we really look to move some of that business. And this is our sweet spot, because there's comorbidities involved, these are high readmissions people, and we believe that the type of care we can provide will show some really meaningful results. So, I'm getting a bundles T-shirt soon so that I can mirror that enthusiasm that you have for it. So we are excited (technical difficulty)

That's great. And the low utilization volume, has there been any change in that dynamic as well?

No. (multiple speakers) okay. Thanks Ryan.

I'll now turn the call back over to Paul Kusserow for closing comments.

Thanks Shay, appreciate it. I wanted to take this opportunity to address one final thing. We are calling from our sparkling new Google-like headquarters. It's been described as Google-like, so I'm just repeating that -- headquarters in Baton Rouge that we moved to in June. Thus far, the reviews of the new building have been really overwhelmingly favorable from our employees.

Our goal is to demonstrate our commitment to the great team that we have headquartered here in Baton Rouge. When we were looking at this possibility, I promised our Baton Rouge employees, if we moved, it would be an upgrade, and a good upgrade. And thus far, I think that's been an overwhelmingly affirmative vote, that this has been a great upgrade, and that we are in good -- in a wonderful space.

On a more serious note, many of you have heard about the tragic events in Baton Rouge this past month. Amedisys has had some employees that were personally affected by some of the community unrest and violence, and our heart goes out to those who lost their lives here. Baton Rouge is a special place. We are offering our full support in any way we can to a community that's really nurtured and supported us and has been great to us.

So with that, I'd like to thank everybody who joined us on our call today. We sincerely appreciate your interest and support in Amedisys and look forward to updating you on our visits out to the markets and our next quarterly earnings call. Thanks, everybody, and take care.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.