LHC Group Inc (LHCG) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2006 LHC Group Inc earnings conference call. My name is Annie and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to host for today's call, Mr. Barry Stewart, Executive Vice President and Chief Financial Officer. Please proceed sir.

Thank you operator and welcome everyone to LHC Group's fourth quarter 2006 financial results conference call. In a moment we will hear from Keith Myers, President and CEO of LHC Group. John Indest, LHC Group's Chief Operating Officer and I will review the financial results.

Before that, though I just need to caution you about the legal formalities, statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to a number of risk and uncertainties such as changes in reimbursement, changes in government regulations, changes in the company's relationships with referral sources, increased competition for its services, increased competition for joint venture and acquisition candidates, and changes in the interpretation of government regulations.

Therefore, actual results may differ materially from any financial outlook present here in. Other information or potential factors that could effect the company's financial results and can be found on the company's form 10K for the year-ended December 31, 2005.

LHC Group will have no obligation to update the information provided on this call to reflect such current events. Now I'm please to introduce the President and CEO of LHC Group, Keith Myers.

Thanks Barry and thank you all for joining us this morning. The fourth quarter fiscal 2006 was another very good quarter as we continue to accelerate a growth trend that began the first half of the year.

Our net services revenues were $64.2 million for the quarter and $215.2 million for the year ended December 31, 2006. Our earnings for the quarter were $0.39 per fully diluted share and $1.20 per fully diluted share for the year ended December 31, 2006.

We are continuing to expand our geographic footprint through carefully selected strategic acquisitions and we are growing our business at an accelerated, but healthy and sustainable rate. As is usual in these calls, our CFO, Barry Stewart, will review financial results and then Johnny Indest, our Chief Operating Officer, will provide an update on operations.

However, I'd like to touch on the highlights of the quarter before handing it over to Barry and Johnny for more detail.

On November 1, 2006, the transaction of the Lifeline Florida entities was completed. We managed the Lifeline entities in Florida from September 18th until November 1st, when they became wholly own subsidiaries of LHC Group. The acquisition marked LHC Groups expansion in the state of Florida. The population covered by this acquisition is 1.46 million with about 25% over the age of 65.

Also on November 1, 2006 we completed the acquisition of a home health agency located in Union City, Tennessee. This acquisition provides us entry into another very important CON state in our targeted expansion geography. The population covered by this acquisition is 160,000 with about 15% of that over the age of 65.

On December 20, 2006, we announced that we had signed a definitive agreement to acquire in separate transactions the assets of 67% interest in the home health and hospice agency owned by the Camden-Clark Memorial Hospital in Parkersburg, West Virginia. And a 100% interest in the home health agency owned by Floyd Medical Center in Rome, Georgia.

On January 1, 2007, these transactions were both completed. Both of these acquisitions are important Certificate Of Needs states with assets in West Virginia expanding the company's presence in that state and the assets in Georgia marking the first expansion of LHC Group into the state. The approximate combined populations in their respective primary service areas is 700,000 with almost 13% over the age of 65.

On February 1, 2007, we announced that we had acquired in separate transactions to assets of 100% interest in the home health and hospice agencies owned by Rapides Healthcare System, LLC in Mamou, Louisiana. And 100% in the home health agency located in Pine Mountain, Georgia and owned by Lanier Health Services.

The approximate combined population in the respective primary service areas covered by these two acquisitions is 969,000 with almost 12% over the age of 65. The Pine Mountain, Georgia acquisition spans three counties in Georgia, which brings LHC Groups' service area in that state to 11 counties.

Now with regard to our acquisition pipeline, I'll limit my comments to only those opportunities in which we've reached a point in negotiations process where we have executed a letter of intent. At this time, we have 18 active letters of intent, two of which have executed the definitive agreements with closing dates scheduled within the next 60 days.

In additions to these two we have an additional 16 executed letters of intent outstanding. While definitive execution dates for this 16 have not been established, we do anticipate these will close at various times throughout 2007.

As you can see we have a very active acquisition pipeline. The opportunities created by these acquisitions have already revealed de novo opportunities, some of which we will describe later during Johnny's operations review.

And now I'll let Barry Stewart, our CFO, provide the financial details. Barry.

Thanks Keith. In brief, our fourth quarter and year-end financial results reflect strong business operations. We'll start with the fourth quarter financial results and then I'll review the year-end.

Our net service revenue for the quarter ended December 31, 2006, was $64.2 million, up 50.4% from $42.7 million in the fourth quarter of 2005. With the three months ended December 31, 2006, in 2005, 78.5% and 85.1%, respectively, of our net service revenue was derived from Medicare.

Net income in the fourth quarter of 2006 reached $6.9 million or $0.39 per diluted share. For the quarter ended December 31, 2005, net income was $3.2 million or $0.19 per diluted share. Included in the $6.9 million net income for the fourth quarter of 2006, was $1 million or $0.06 per diluted share from the proceeds of a life insurance policy from our former CFO.

Fully diluted weight average shares for the quarter ended December 31, 2006, were 17.8 million as compared to 16.6 million for the same period in 2005. Breaking these down by business segment, home based net service revenue for the three months ended December 31, 2006, was $51.6 million. An increase of 74.3% from $29.6 million for the three months ended December 31, 2005. Organic growth was approximately $15.1 million or 59.2% during that period.

In the facility-based services segment, net service revenue for the three months ended December 31, 2006, was $12.6 million a decrease of $500,000 or 3.4% from $13.1 million for the three months ended December 31, 2005. Johnny will discuss the reasons for the decrease in a few moments.

Day sales outstanding, our DSS for the three months ended December 31, 2006, was 68 days compared with 65 days for the same three month period in 2005. DSO when adjusted for acquisitions and unbilled accounts receivable was 59 days.

The adjustment takes into account $6.1 million of unbilled receivables that the company has delayed in billing at this time due to the lag time in receiving the change of ownership after acquiring companies. For the comparable period in 2005, adjusted DSO was 60 days, taking into account $2.3 million in unbilled account receivables.

Turning to the year end results, net service revenue for year ended December 31, 2006, was $215.2 million, an increase of $62.5 million or 41% from $152.7 million in 2005. For the year ended December 31, 2006 and 2005 81.6% and 85.6%, respectively, of our net service revenue was derived from Medicare.

Net income for the year ended December 31, 2006, was $20.6 million or $1.20 for diluted share. For the same period for 2005, net income was $10.1 million or $0.69 per diluted share. Again, included in the $20.6 million net income for the year ended December 31, 2006, is $1 million or $0.06 per diluted share for the insurance policy.

Full-diluted weighted average shares for the year ended December 31, 2006, were 17.1 million as compared to 14.7 million for the same period in 2005. Again, by business segment and looking at home based services first -- we had net service revenue for the year ended December 31, 2006 of $164.7 million. An increase of $59.1 million or 56% from $105.6 million for the year ended December 31, 2005.

Organic growth was approximately $35 million or 34.5% during the period. Meanwhile facility-based services provided net service revenue for the year ended December 31, 2006 of $50.5 million. An increase of $3.4 million or 7.3% from $47.1 million for the year ended December 31, 2005. Organic growth made up the total growth in this service sector during the period.

We can drill down into these results further during the Q-and-A if anyone desires. Now I'm pleased to have Johnny Indest, our Chief Operating Officer take over to review the details of our operations.

Good morning everyone and thanks Barry. I would like to begin with a quick comparison of operational data from the fourth quarter of 2006, versus the third quarter of 2006. Average [census] increased 8%. Total admissions increased 11%. And completed Medicare episodes and home visits provided, both increased 15%. Now I would like to turn to the prior year comparison.

Total admissions to our home nursing division climbed 87.7% to 8,173 in the three months ended December 31, 2006. From 4,355 in the three months ended December 31, 2005. Organic growth in admissions was 41.4%. Medicare admissions rose 78.7% to 5,685 in the three months ended December 31, 2006 from 3,182 in the three months ended December 31, 2005. Organic growth in Medicare admissions was 37.9%.

We have identified patient's census as a key performance indicator within our home based services. And we monitor it very closely. For the fourth quarter of 2006, our average home based patient census was 14,073 patients, an increase of 69.4% as compared to 8,310 patients for the fourth quarter of 2005. Organic growth in home based census was 38.6%.

We had 15,034 completed Medicare episodes and 275,932 Medicare visits in the three months ended December 31, 2006, for an average of 18 visits per completed Medicare episode. Total growth in Medicare episodes was 47.1% while organic growth in Medicare episodes was 26.3% for the three months ended December 31, 2006 as compared to the same period in 2005.

Our average case mix for completed Medicare episodes in the fourth quarter of 2006 was 1.33 with an average reimbursement of $2,599 per episode. Looking at our facility based services segment, we had a decrease in patient days of 11.1% to 10,978 in the three months ended December 31, 2006, from 12,353 in the same period last year.

On March 31, 2006, we sold one of our hospitals, which is the primary reason for the decrease in patient days. Outpatient visits decreased to 2,907 at the end of December 31, 2006, a 67.6% decrease as compared to 8,985 for the same three months ended December 31, 2005. This due to our sale of our clinics -- of one of our clinics and the closure of another in April 2006.

I'm pleased to report that LHC Group has formed a new care management department that reports directly to me. One of the primary initiatives of the care management department is to be more close -- is to more closely monitor our documentation methodology to highlight the outstanding levels of care we are currently delivering.

Of course, one of the best indicators of the quality service remains the growing and recurring number of referrals in our markets from hospitals, health professionals, and physicians. We consider these referrals a very strong endorsement of the level of care we provide.

As pleased as we are with our quality of care performance we are always anxious to improve. One of our major points of emphasis will be to focus more attention on the currently used Oasis Quality Questionnaire. Taking full advantage of our decentralized operating model, the questionnaires, all answered at the local level, will now be reviewed by a team of registered nurses assigned to regions who have extensive experience in this area. These nurses evaluate responses and confer with personnel at the local level.

The result being better documentation, more accuracy, better planning for our patients and improved statistical outcomes. We have made some significant acquisitions and partnerships in recent months. And these transitions make up an important part of our growth strategy. We understand that successful integration of these operations into the LHC Group is crucial to our future success.

I'm very pleased to report that the integration of these acquisitions and partnerships, which Keith mentioned, has gone extremely well. While it is true that due diligence and planning has significantly aided the smooth transitions. I would be remiss in not attributing a great deal of the credit to our talented transition teams, devoted managers, and employees at these locations.

Without their kind of spirit and desire to be the best home care providers these transitions would have been much more challenging. Along with the active acquisition pipeline, we have also been busy establishing the de novo locations. The De Novo locations are start up branches developed from existing locations.

In October 2006, we established a de novo location in Laurel, Mississippi. So far in 2007, we have established four de novo locations. Those being in McGee, Mississippi; West Memphis, Arkansas; Liberty, Kentucky; and Bonham, Texas.

As Keith mentioned earlier, we have identified opportunities for de novo locations from the acquisitions and joint ventures we have established. We currently have 15 more de novo locations planned for 2007.

Like Barry, I'd gladly take any questions you may have concerning operations in a moment. I'll hand things back to Keith now to wrap up.

Thanks Johnny. Before we open the call up for questions, I would like to welcome Senator John Breaux to the LHC Group Board of Directors. His long public service demonstrates the commitment to helping others that is consistent with our mission and founding principals.

During this 32-years of service, Senator Breaux was highly involved with Medicare policy including the creation of the Balance Budget Act of 1997 and the Medicare Modernization Act of 2003.

In addition, he served as ranking minority member of the Senate Committee on Aging, as a member of the Senate Finance Committee, and a member of the Senate Commerce Committee. Senator Breaux's guidance and insight will be of enormous value to our company as we continue providing quality healthcare to a growing and aging population base.

We welcome Senator Breaux to our Board and we look forward to benefiting from his leadership and experience.

Our strategy remains the same. We will continue our goal of being the premier provider of home and community based services to the elderly and disabled in every market we serve. We will continue to expand our geographic footprint at an accelerated pace to do fairly valued strategic acquisitions.

With a continued commitment to patients, perseverance, discipline, and attention to detail during the due diligence phase, which has served us so well in the past. We will continue to focus primarily on home health or home health and hospice combinations in our future acquisitions.

Once again we have proven that the combination of compassion and quality care is key to consistent financial performance. Ours is a business where shareholder value and exceptional service are indivisible.

We are pleased with our performance in 2006 especially so because it confirms the hard work and dedication of our healthcare professionals. I am honored to be their colleague, truly. We view our strong fourth quarter and year-end financial results as a bridge to 2007, a year in which we expect to continue our positive momentum. We are both confident and excited about the year ahead.

Reflecting back on 2006, it was an active and very productive year in which we demonstrated our ability to identify complimentary acquisitions, successfully integrate them and maintain our operational focus. This bolds well for the future as we evaluate a robust acquisition pipeline and leverage our strong balance sheet to expand our footprint.

I want to once again thank our employee and shareholders for the confidence and trust that they continue to place in our Board of Directors and our Management team. Thank you also to the caregivers, to the commitment to the many patients, families and communities entrusted to our care. Rest assured we are more focused than ever. We have only one agenda and that is to advance the missions, vision and objectives of the LHC Group family. It's all about helping people.

Thanks for listening. Operator we are ready to open the call for questions.

[OPERATOR INSTRUCTIONS].

And your first question comes from the line of Arthur Henderson with Jefferies and Company.

Hi. Good morning, very nice quarter. First question I have is could you give us sort of an update of your pipeline and how that looks forward. My sense is that it's strong but I just want to kind of get your perspective on it.

Art this is Keith.

Hi, Keith.

You know looking back at the third quarter in the last call. We had 11 letter of intent that were outstanding at that time. We closed four since then. So today, we're at 18 letters of intent. We're obviously accelerating our activity out there, which means we've had to add 11 to be at 18 today. You know looking forward, I don't see any slow down in that area.

Are these prospects ones that are coming to you? Are you going out and finding them? What sort of the nature of how they're -- how you're getting them?

Most of them are -- most of those are our own prospecting. We don't have a lot of acquisitions that come to us through third parties.

Okay.

A lot of these -- we're sourcing through mining data and looking for opportunities.

Understood. When you are looking at opportunities for acquisitions as I recall staying in Certificate of Need states is your sort of first priority. If an opportunity comes up in a non-CON state, how do you look at that as far as, I mean, are there -- do you look at any acquisitions in non-CON states or where do you stand on that issue?

No, we of course look at them. We're a lot more skeptical on those and what our concern is, is the stability of top line revenue. I mean we've seen so many times that because they are -- there is no barrier to entry you'll see the top line erode on you.

If the staff starts to jump ship after a transaction takes place, so what we prefer in non-CON states is to look towards joint venture type opportunities where some local ownership that has goodwill and connection to the community that's willing to partner with us.

Okay. Fair enough. And then if you don't mind going over the de novo outlook. I think you kind of went over it but I wanted to make sure I had it clear sort of what you're thinking about doing over then next year or two years timeframe?

Right. Johnny and I might share this one but as we pick up acquisitions now, when we pick up single locations in CON states, they are almost always carry licenses to operate and the county's contiguous to the base county.

With 18 LOI in the pipeline we're trying to grab geography and take care of those first. But at any point that we have some excess capacity on the transition teams, Johnny is constantly looking at those de novo opportunities and going back and filling in. But obviously if we -- if the pipeline is full those become a priority. Johnny do you want to say a little bit about that?

Yes, all right. I mean we've said we've opened up four de novos already in 2007. We have mapped out 15 that we have mapped out by quarter for the remainder of 2007. Not even looking and this is through the third quarter, we're kind of leaving the fourth quarter open for some additional activity.

We're very confident about opening these 15 additional locations but we also know that there are a good number of additional opportunities for de novos not only in our in acquisitions.

We're finding some real opportunities for de novos in agencies that are already there. And the great thing about that from our standpoint Art, on the operations side of things is that we have real solid startup conversion team. That is really deployed out in the field right now with start-ups. If we ever hit any kind of lag time or anything that might happen we can deploy those people into de novos as Barry has said so often that we can pull off the shelf and say now we can pursue this one or that one. So I think our pipeline for de novos is very, very strong.

So should we think John about sort of 15 to 20 even beyond 2007?

Yes.

Okay. Great. Very nice quarter. Thanks very much.

Thanks Art.

Your next question comes from the line of Michael Wiederhorn from CIBC World Markets.

Good morning guys, congrats on the quarter. My first question is in light of the reimbursement question remarks associated right now in home health. Are you seeing any changes in the pricing for future acquisitions? And also, can you give us any idea what the average sizes for the acquisitions in your pipeline right now?

Mike, this is Keith. I will take the second part of the question first. The average size is in the $1 to $2 million range per location. You know we, as you've seen in past acquisitions, we -- when you look at the historical revenue in our acquisitions we look for opportunities that have a significant amount of upside potential in the first year. And so -- but if we look at the historical revenues at $1 to $2 million.

And to the evaluation question, I certainly don't see values gong down and I don't think I see values changing very much. When I look at the discussion we're having now, but what I do see is people that would maybe were sitting on the fence as to whether they would or would not do something. The signs are there will be additional change in reimbursement--will kind of cause them to maybe think about selling when they didn't before.

Thanks. I think it's a follow up on that. Can you give us any color update on Washington, specific to the reimbursement changes; you know the HHRG refinements and the therapy threshold.

No, I don't think there is anything new. Mike the last time that we were up there and that we got any information back it was kind of out for discussion in April. It looks like they are sticking to that and after they come through the out for discussion period, they are going to monitor that for a few months probably.

So it's a matter for us to just keep track of what they are looking at, which is you know, is on HHRG's and the therapy threshold limits. There is going to be a lot of activity on that probably no decisions until they finish the discussion period. I would anticipate kind of a mid to late summer type answer.

Okay, great. And my last question is with the ramp up of the de novos ; can you take us through the economics of de novo?

Yes. It all comes through the P & L. It's all in start up costs. It comes straight through salaries, rent, utilities. An average start up is going to run over about I would say 9 to 12 months. It's going to cost you 150 to $200,000. And will take you about 40 patients to reach a break-even point. After that it starts to be just an inventory agency that we're continuing to try and mind the local referral sources in. Johnny.

Now, you are right on Barry. The great thing about the de novos it's in territory that we're familiar with, dealing with employees that we're familiar with. Normally when we do a De novo, we will train people in house at the parent location. And then moving into the de novos, so we have trained people from the very beginning with our software package fully implemented.

We've already done our marketing studies in the area. We've already been marketing the area because it's within our parent. So it's a pretty low cost, very low cost way of entry. And our De novo activities as these agencies have matured as Barry said over 9 to 12 months have performed quite well for us.

Thanks a lot guys.

Your next question comes from the line of Newton Juhng with BB &T Capital Market.

Thanks. I'm just making sure that I got the numbers correct here so right now looking at about 22 acquisitions over the course of 2007 and 19 de novos. Is that what this is adding up to based on your new numbers here?

There is no guarantee, Newton, that all of those in the-that have signed Letter of Intent will close in 2007, although we expect them to. And then your numbers would be correct from there.

Okay. So based on that assumption. All right and then how many of your centers that you have now are currently in CON states just wanting to get a breakdown there.

Give us a moment to do that addition we will come back to that for you in just a second.

Okay. All right. Maybe I'll just ask another question here while you are looking for that. And then just do you have any outlook towards multi-center acquisitions? Is that something you would be looking into now considering that you've been able to transition with the larger centers?

Yes, actually, after we've done it. We've done a few of those in the past and there are some in the pipeline now that are multi-location. When you say multi-center, I assume you mean multi-location.

Correct. Correct.

Yes and I mean that the answer is yes. Clearly, the Lifeline acquisition in '06 where we brought in 17 locations at one time really boosted the confidence of the operations team. That went so smoothly that they were well prepared to take the acquisitions of that size and larger.

Okay. Thanks for the color there Barry. And then just on the [Alltech] side of the business. How should we be looking at gross margins on that side? Something in the mid-30's, as a target, to high 30's?

I'd kind of stay consistent with what you are seeing for the fourth quarter.

Okay.

And the reason being is we took that last price decrease off of the L tax in the fourth quarter, that kind of stabilized everything else when that came through in January to make the changes. The only potential you have out there is the low cost outliner and it doesn't seem to have an effect on our revenues.

Okay, I see. And then just last here, only $5 million in debt on your balance sheet. A comfort level with moving that upward going forward if you find a nice acquisition of a multi-location that you feel is appropriate. I am just kind of wondering what kind of comfort level you have in terms of moving your debt to cap up or?

Yes as the leverage ratio I'd be comfortable moving us into one to two type range. I don't think there would be too much problem getting us there. We cash flow quite well to do so and of course, we would be looking at very accretive acquisitions to do it.

Absolutely. Thanks a great quarter, guys.

All right, you want the answer on the locations?

If you have it.

Yes, basically that number is a 113 of our agencies are in CON, or moratorium related states.

Great, thanks John.

Your next question comes from the line of Eric Gommel with Stifel Nicolaus.

Good morning.

Good morning Eric.

Hi. I just had a couple of housekeeping questions on for modeling. What were the D&A and the CapEx for the quarter and also, acquisition expenditures for the quarter?

Say that again.

Depreciation.

Hold on Eric. The G&A is 800. I will get the G&A question for you in a second.

No I said D&A. Depreciation.

Depreciation. I'm sorry, Eric. And the second part of your questions was Eric?

The CapEx and then the actual expenditures on acquisitions?

Okay. I got it here. I just have to shuffle my papers around until I can't see them. Acquisitions was approximately $1 million. And CapEx was $900,000 for the quarter. And I got the D&A number here.

Depreciation.

Yes, okay, 670 in depreciation in the quarter. And I got 2.4 for the year.

Okay. Thanks. And then one thing that's in the quarter tax rate it seemed a bit lower than what we expected at. Could you talk a little bit about your tax rate and what your expectations going into '07 for the effective tax rate?

Yes. And we're enjoying quite a few tax credits as a matter of fact so everybody should be aware of it. That is a temporary issue for us because of the legislation went last year on Katrina and Rita. The tax credits are a little bit hard to monitor because it's based on when you hire employees and train employees in those areas and put them back to work. Make them productive again and that's what the credits are all related too.

So it depends on when we start to expand services and are able to train people in those areas. So that's why it gets a little lumpy because you can't guarantee that you're going to be hiring people and training them to go back into productive employment. And they were living in those areas prior to the hurricanes. And that's why we get into it.

If you take the face of the income statement and let's just get back to the correct tax rate to make sure everybody is on the same page. You've got income from continuing operations of 12,126. Then you would deduct out the minority interest of 1,346 and then you take the 3,282 of tax expense against that 12,126. That ought to give you a 33.6% number. And that includes all the credits that are coming through.

When you get to a fully loaded tax rate. You are going to be looking in the fourth quarter of 2007 at about a 38% rate. But for the first three quarters of 2007 we're still going to be able to enjoy those credits from the [inaudible] legislation there is no guarantee on how much that's going to be.

As an example, if you look at the full year number it's 34.5% as a tax rate. And if you go back to Q3, it was a 36.3% rate. So kind of modeling in, which I think is what you're trying to get to, if you're looking at those numbers for the first three quarters I would probably be looking at something in the 36 to 37% range and in the fourth quarter go to a 38.

All right. That was very helpful. John, question on the operations. I mean, you have some fantastic organic growth and this is kind of a two-part question. In the markets that you're going into with these acquisitions are they under served markets, is the competition just very poor competition? And can you talk a little bit about what structural changes you make at a program level. I think you hinted to some of these with your marketing studies and things that really ramp up the growth in these markets.

Correct. As Keith said first, Eric, I mean, clearly our focus is on home health agencies that are under-performing that have a real potential for growth and improvement. And we have proven ourselves to be very successful with that.

So -- and usually those agencies have some kind of connections to the community. And what we do is simply give them the resources, give them the training, give them the expertise where they can grow quite rapidly.

And we've proven that over the last few years that we're able to accomplish that. I think the second thing that we're doing, Eric, is from the very beginning Keith and I make it very clear when we talk to people that we have been a very disciplined, focused operations company. We have some tremendous operational personnel within the company.

We're also becoming equally now a sales related company where we have done some basic changes within our sales force brought in some people who understand our model and how to grow our model. To the use of various these management programs specific focuses on disease entities, motivating our sales force, et cetera. We have just really started to gain momentum in our sales and we feel like we're just starting to really scratch the surface as far as what our sales force can truly do for us.

And then my last question going to the other part of the P&L on the labor management side. What do you see with wage rates and increases there? And are you doing anything in particular-how are you managing your labor what particular tools are you trying to utilize there to manage staffing?

Sure. Every, of course, our payroll is every in every two week payroll. We present to every one of our managers payroll reports that shows how you are doing related to your payroll as far as visits made. I mean this whole industry, the efficiencies that you get is making sure that you're field staff are meeting the expectations that need to be met in order to run an efficient agency. That you have an operational model set up within the agency to maximize the ability of RN's who are our team leaders.

And the other thing that we do is on a monthly basis we present all of our managers with a statistics from the previous month to show how their trending, what's going on. And then, in addition to that, on a weekly basis we have what we call our operations spreadsheet.

Where every agency knows exactly how they are trending as far as admissions, as far as the percentage of admissions from which kind of pair sources, what your case mix is running, what your census is running. All of the various operational matrix that all come together to make a well operating agency. And we do that for all of the agencies that are within our system.

Okay, thank you.

Your next question comes from the line of Derrick Dagnan with Avondale Partners.

Hi, thanks and good quarter. I had a couple of clean up questions. Well I guess a couple of follow up questions. On the quality program that you've initiated when you think you should see the fruits from that in your Medicare quality data.

We think within six to nine months. Of course, there is a large delay time and we're talking about the home care compared data, which runs a good nine months behind time. We began our care management process on December 1, 2006. We are looking at some internal results, which are very, very positive, but to where that they will start showing up on the home care compared data I would say at best six to nine months.

Okay and I guess then the last question is more of a bigger picture is in press reports that certain states are talking about increasing Medicaid funding for home health, with the hopes of reducing the long term care population in the nursing home. Are you guys seeing that in any of your states? And does the rate look better, is there any incentive in there to maybe take on a higher acuity patient?

You know the first answer to the question is we have not seen any great movement to increase Medicaid rates in the ten states that we service. Other than in Kentucky, where our Medicaid percentage in Kentucky is a little higher than we would like the norm to be within our company. But Kentucky has a very strong Medicaid program. So that has not effected our performance within Kentucky. But I can't say that in any other state that I have seen anything with regards to increasing the Medicaid rates.

Okay. Well thanks. Thank you very much and good quarter.

Thank you.

Your next question comes from the line of Balaji Gandhi with Oppenheimer.

Morning guys, nice job on the quarter.

Thanks.

I just had a couple other items that I wanted to fill in here. Are the revenues for the year, for some reason, they are not adding up properly for me? If I take the four quarters, I'm getting something around $217 million instead of 215. Did something move to discontinued ops?

Yes, we did. We actually moved a pharmacy operation that has a lot of infusion therapy over to [disco].

And when did that happen?

We did it in the fourth quarter.

Okay. So I guess how would I reconcile that if -- would I take that out of the $64 million then.

It's not included in the $64 million.

Right, okay, I got it. I just take it out -- I got it -- I take it out of the prior three quarters. Okay.

Right.

Great. And then accounts receivable the $6 million that you talked about in AR that's still uncollected. Is that mostly Lifeline or is that for the other acquisition as well?

There is another acquisition in there that we made in Alabama at the early part of the year.

Okay.

It made a significant amount of transition work over there trying to get the approvals. We were just notified this past week of two of the provider numbers that still yet to have the EFT approval. As you know, you got to through a lot of steps. It's not only getting it approved by CMS and getting the business licenses and all of that. But then you've got to go through EFT approval to move it over.

What is the EFT stand for?

Electronic Funds Transfer.

Oh, okay. Okay. So in terms of timing for that you think you'll be probably get paid in the first quarter is that going to be into the second quarter?

No, it's going to go in the second quarter, we'll probably have a little bit of spill over some of that into the third quarter. It will be really hard, Balaji, to get that. It's very fluid because as we're getting those moved off and start to pick those up for approval and start to bill and collect on those. We are going to acquiring at the same rates. You are going to see that number move a lot.

Okay. Okay great and then the cash flow for operations for the fourth quarter?

$1,741,000.

741. And then the gain you talked about for insurance. That is included in the line item with other?

Yes that's in the non-operating income line. The $1,388,000.

Got it. Got it. Okay and then maybe for Johnny, those helpful all the stats you threw out. I just wanted to make sure I got them right. You said, what was the Medicare episode to the quarter?

Let me pull that up for you. Completed episodes 15,034.

15,034. Okay and then, you did talk about sequential growth. So you said, if I heard you correctly, it was 15% growth in episodes?

Yes what I was pointing out in the first part of my presentation was growth from the third quarter of '06 to the fourth quarter of '06.

Right.

So quarter to quarter growth and what I said is I average interest increased 8%. Our admissions increased 11%, episodes 15%, and visits increased 15%.

If we had to think about maybe just focusing on the episodes. That 15% how much would you attribute to the acquisitions and how much organic?

We gave you that. Well we gave that in census not in episodes but those are going to correlate very close.

But I thought the other numbers where year over year as opposed to third quarter to fourth, correct?

That is. You got that number?

If you can want to give that me maybe off line that's fine.

Census the organic moved up quarter over quarter 19%.

Okay, so, that compares to the -- what was that an 8% number though? That Johnny just said?

Episodes?

No, he gave episodes and I talked about census. Yes.

Okay. Okay, so 19%. Okay. And then just kind of big picture, I guess for any of you guys for 2007 looks like the margins have gotten up into the high teens for this quarter and that's kind of the size we've seen in the industry. And is this where we should --

Well actually, you have to back that out the gain that came through there.

Okay so --

If you back that out, then you're EBITDA number is about 15.5%.

Yes, okay.

Which is very consistent with where we were last quarter.

Okay. So I guess that is still where you feel comfortable for '07 or is that.

Yes, what I said at the end of the third quarter is it's you're probably ought to look at the third quarter results as being very consistent margins for the year.

Okay. Okay and just any other kind of detail for 2007 in terms of earnings or revenues for guidance?

No, we said that we were going to be flat on the pricing and growth volume from 20 to 25% for 2007.

Okay.

I'd like to stick in that range and you can roughly split the growth between organic and acquired.

Okay then we can kind of think about margins being --

Consistent with where they were at the third quarter.

Got it.

You've got a fourth quarter here, you can extrapolate a little bit, but they are very consistent. We were at 15.2 in the third quarter and we're at 15.5 now.

Okay and then with all the de novo activity, depreciation amortization, should we see that go up a little bit?

There is no capital that goes into them.

Okay.

De novo is really coming through the P&L. It's rent, utilities, and salary.

Okay. So Keith that will be pretty much flat?

I've got to put a couple of computers in there but they're not very much. It's not going to swing the needle.

Okay, great thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of [Darrin Lyrick] with Deutsche Bank.

Thanks. Good morning everyone. Most of my questions have been answered but I guess just wanted to talk about a couple of things here. The care management department, Johnny, that you've discussed in some length, I just wanted to get an understanding of what they've been up to thus far and if you could just maybe speak specifically some of pro actions or edits that they have been doing. And how that is trending for you in terms of getting better documentation on Oasis?

Sure, basically what we've done through our care management department, we have a person that manages the department. We have RN's who are each responsible for about 30 home health locations. The manager of the department has put into place eight edits into our [Mysis] system which will -- those edits point out inconsistencies in documentation.

A patient can't be independently walking, but also confined to a bed for a period of time for instance. And there are a number of edits within the computer that point out inconsistencies in documentation. I want to make it real clear those care managers call the field and simply point out the inconsistencies and discuss them.

Any changes that would happen within the Oasis questionnaire would be agreed upon by the field personnel and all of those changes initiated in the field. In addition there is a lot of education that happens between these care managers and the team leader out in the field.

To point out inconsistencies within the questionnaires that are within Oasis. We also have artificial intelligence, the SHP, strategic health partners. So with a combination of the software package that the system that we have with SHP combined with these nurses who all have extensive experience in Oasis, who have extensive experience in home care working together we'll find we're just getting a lot more accurate documentation within to our system. And as I said internally we're starting to see some really improvement in our outcome scores. And we expect to see that consistently as time moves on.

Okay, that's great. And then Barry where do we stand on material weakness? Will that be continuing when you file the 10K?

Well it's too early to say because E&Y has not applied. They are not applying until the date of the report signing. Everything is looking pretty good from our internal ward. I don't see that we've got anything from my own assessment of how we've run through this is going to create a material weakness. But we've got another couple of weeks before we file the K.

Fair enough and then I guess just lastly, maybe, just taking another stab at your 2007 performance, Perhaps, you know, it seems like you've got a little bit more of an active M&A pipeline than we would have anticipated for this year.

And I think you originally talked about 15 de novos. You are talking about closer to 20 perhaps. So is that 20 to 25% volume and no pricing in terms of the top line growth translation? Is that really still an appropriate level for '07 or should it be slightly higher than that you think?

Well you're not going to get me to move up there. I'm going to stick with my 20 to 25% growth and I'm going to split evenly between the two. As you get into de novos, we can plan those out. But they are really an expense item for us and there is no guarantee on how fast you can attract the patient base as you move into a new market. So we're going to be careful about how we go through this.

And the same thing on acquisitions, even though we've got very active pipeline and we're seeing lots of opportunity for us. There is no guarantee that they will close on the time schedule we're looking at or if they will close at all.

Okay.

We'll stick on the same process we've been on before.

All right then, and if I just ask one last thing here as it relates to the de novos. Johnny the ones that are mapped out I guess can you just give us a sense of how many of those are anchored with a parent, since you are sort of extending the market, if you will. And already have pretty good presence versus just totally new markets.

Just by the definition of our de novos, all of them are anchored to a parent. These are all considered branch offices of a provider agency. So the answer to the first question is that they are all anchored to a parent. So we know the market we are in. Usually 99% of the time when we go into this de novo we're already serving patients in those areas.

So when we move to that de novo, we already have an established patient base to grow on. We already have trained personnel. And what we have simply found is that when we have a physical presence in that de novo community. And the sales increases and you have your own sales force, et cetera. Your own nurses servicing that area, that the de novo begins to grow.

Great. All right, nice job on the quarter. Thanks.

Thanks.

At this time there are no further questions, I would now like to turn the call back to Mr. Myers for closing remarks.

Well, thank you everyone for joining us this morning. And we look forward to speaking with you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.