LHC Group Inc (LHCG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter earnings conference call LHC Group. (OPERATOR INSTRUCTIONS). I would like to turn the presentation over to your host for today's call, Mr. Eric Elliott, Vice President of Investor Relations. Please proceed.

Welcome, everyone, to LHC Group's third-quarter 2007 financial results conference call. In a moment we will hear from Keith Myers, Chief Executive Officer of LHC Group; John Indest, President and Chief Operating Officer; and Pete Roman, Chief Financial Officer.

Before that I would like to remind everyone that 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 risks 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 the financial outlook presented herein.

Further information or potential factors that could affect the Company's financial results can be found in the Company's Form 10-K for the year ended December 31, 2006. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I'm pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you all for joining us this morning. The third quarter of 2007 was a good quarter for LHC Group as we continued the accelerated growth trend that began in the first half of the year. Our net service revenues were $77.5 million for the quarter and $216.8 million for the nine months ended September 30, 2007. Our earnings for the third quarter were $0.34 per diluted share and $0.94 per fully diluted share for the nine months ending September 30, 2007.

As usual on these calls, our CFO, Pete Roman, will review financial results, and then Johnny Indest, our Chief Operating Officer, will provide an update on operations. However, I would like to touch on the highlights of the quarter before handing it over to Pete and Johnny for more detail.

We had several partnerships and acquisitions that began service with LHC Group in the third quarter of 2007. Effective July 1, 2007, we formed two separate joint venture partnerships. Under the terms of the first partnership, LHC Group sold a 33% interest in an existing agency in Lafayette, Louisiana, to our Lady of Lourdes Regional Medical Center. In the second partnership, LHC Group sold a 33% interest in an existing agency in Monroe, Louisiana, to St. Francis Medical Center. The primary service area covered by these partnerships has a combined estimated population of 975,000, of which 13% are over the age of 65.

Our partnership with the University of Tennessee Medical Center located in Knoxville, Tennessee, to provide home health and hospice services, also became effective on July 1, 2007. The service area of this partnership spans 16 counties in East Tennessee. The approximate population in the primary service area covered by this transaction is 1.1 million, with almost 14% over the age of 65. Total Medicare revenue for 12 months for this location is approximately $4.8 million.

Also on July 1, 2007 we acquired 100% interest in the assets of Wetzel County Homecare in New Martinsville, West Virginia. The service area of this acquisition spans two counties in West Virginia. Total Medicare revenue for 12 months is approximately $560,000.

On August 1, 2007 our partnership with Boone Memorial Hospital in Madison, West Virginia, to provide home health services became effective. The service area of this partnership includes three counties in West Virginia, two of which were not previously serviced by LHC Group operations. And brings LHC Group's total service area in West Virginia to 26 counties. The estimated population for this service area is 85,353, with 14% being over the age of 65.

Effective September 1, 2007 we acquired the assets of Extendicare of West Tennessee. Extendicare of West Tennessee has four home health agencies located in Jackson, Union City, Paris and Henderson. The service area of this acquisition spans 21 counties in West Tennessee, of which 16 were not covered by an existing LHC Group agency. This brings LHC Group's total service area in Tennessee to 42 counties. The primary service area for this location has an estimated population of the 1.5 million, with almost 12% over the age of 65. Total Medicare revenues for 12 months is approximately $4.1 million.

Again on September 1, 2007, we announced two additional separate transactions. The Company signed a definitive agreement to form a partnership with Columbus Regional Medical Center located in Columbus, Georgia. LHC Group will sell a 33% interest in an existing agency in Pine Mountain, Georgia to Columbus Regional Medical Center. Columbus Regional Medical Center is a 471 licensed bed facility that serves as a referral center for Western Georgia and Eastern Alabama. In addition, LHC Group signed a definitive agreement with Mississippi Baptist Medical Center to convert a license lease agreement implemented in October 2003 to a joint venture effective October 1, 2007.

On October 1, 2007 we entered into a partnership agreement with Howard Memorial Hospital located in Nashville, Arkansas to provide home health services. LHC Group acquired a controlling interest in the assets of Howard Memorial Hospital Home Health. The service area of this acquisition spans a 50-mile radius around Nashville, Arkansas, and has an estimated total population of 241,000 with almost 15% over the age of 65. Total Medicare revenue for 12 months at this location is approximately $700,000.

Finally, today, November 1, 2007 we entered into a partnership with Huntsville Hospital, an 881 bed hospital located in Huntsville, Alabama; and Decatur General, a 237 bed hospital located in Decatur, Alabama. Both of these hospitals are members of the Healthcare Group of Alabama. LHC Group acquired a controlling interest in the assets of HGA HomeCareHuntsville and HGA HomeCareDecatur. The combined service area of these acquisitions spans 13 counties in Alabama, of which six were not covered by an existing LHC Group agency. This brings LHC Group's total service area in Alabama to 39 counties. The combined primary service area has an estimated total population of 1.1 million with almost 14% over the age of 65. Total combined Medicare revenue for 12 months for these locations is approximately $3.2 million.

With regard to our acquisition pipeline, we have eight active letters of intent, of which six have been executed. Three of these six have closing dates scheduled within the next 60 days. In addition, we remain in active conversations with multiple other facility owners to continue expanding our pipeline. We continue to maintain a very active acquisition focus. The opportunities created by these acquisitions have already revealed de novo opportunities, some of which we will describe later during Johnny's operations review.

Now I'll let Pete Roman, our CFO, provide the financial details.

We will start with the third-quarter financial results and then I'll review the nine-months results briefly. Our net service revenue for the quarter ended September 30, 2007 was $77.5 million, which is up 32.2% from $58.6 million in the third quarter of 2006. For the three months ended September 30, 2007 and 2006, 82.0% and 81.3%, respectively, of our net service revenue was derived from Medicare. For the three months ended September 30, 2007, home-based services accounted for 81.6% of revenue, and facility-based services was 18.4% of revenue, compared with 76% and 24%, respectively, for the comparable period in the prior year.

Income from continuing operations for the third quarter of 2007 totaled $6.2 million or $0.35 per diluted share, compared with income from continuing operations of $5.4 million or $0.31 per diluted share for the third quarter of 2006. Income from continuing operations for the third quarter of 2007 includes a $560,000 after-tax charge to record the severance and consulting agreement with our former CFO. This one-time charge is approximately $0.03 per diluted share.

The effective tax rate for the quarter ended September 30, 2007, was 35.1%. It was 36.7% for the nine-month period that ended. The variance between the quarterly rate and the annual rate is caused by tax credits related to Hurricanes Katrina, Rita and Wilma, which occurred in 2005. The qualification period for these credits ended in August, but we expect some run out in the fourth quarter, and the 2007 effective tax rate to stay around 37%.

Net income for the third quarter of 2007 totaled $6 million or $0.34 per diluted share, compared with net income of $5.3 million or $0.30 per diluted share for the third quarter of 2006. We had a loss from discontinued operations of $0.01 per share in the third quarter of 2007.

Breaking these down by business segment, home-based net service revenue for the three months ended September 30, 2007 was $63.2 million, an increase of 41.9% from $44.5 million for the three months ended September 30, 2006. Beginning with the third quarter of 2007, we have changed the way we calculate organic growth. We now calculate organic growth by dividing organic revenue growth generated in a period by total revenue generated in the same period of the prior year. For the quarter ended September 30, 2007, organic growth was approximately $11.6 million, or 26%.

In facility-based services segment net service revenue for the three months ended September 30, 2007 increased 1.3% to $14.3 million compared with $14.1 million for the three months ended September 30, 2006. Patient days decreased about 4% in the September 2007 quarter compared to September 2006. However, facility-based net service revenue increased, primarily due to the acuity mix of the patients who received care during each respective period.

Days sales outstanding, or DSO, for the three months ended September 30, 2007 was 69 days. DSO was also 69 days for the same three-month period in 2006. When adjusted for acquisitions and unbilled accounts receivable, DSO at September 30, 2007 was 64 days. The adjustment takes into account $4.1 million of unbilled receivables that the Company has delayed in billing due to the lag time in receiving the change of ownership after acquiring companies. For the comparable period in 2006, adjusted DSO was 63 days, taking into account $4.4 million in unbilled accounts receivable. Compared to the DSO at June 30th, 2007 of 75 days, the decrease in DSO equates to approximately $5.1 million. Cash collected in excess of claims billed contributed about $3.8 million to this decrease. And the increase in the bad debt reserve in the quarter contributed about $1.3 million.

Net service revenue for the nine months ended September 30, 2007 increased 39.4% to $216.8 million compared with $155.5 million in 2006. For the nine months ended September 30, 2007 and 2006, 82% and 83.7%, respectively, of net service revenue was derived from Medicare. For the nine months ended September 30, 2007 home-based services accounted for 81.3% of the revenue, and facility-based services was 18.7% of revenue. This compares with 72.8% and 27.2% of revenue, respectively, in the comparable prior-year period.

Income from continuing operations for the nine months ended September 30, 2007 totaled $17.7 million or $0.99 per diluted share, compared with income from continuing operations of $13.7 million or $0.81 per diluted share for the same period in 2006. Net income for the nine months ended September 30, 2007 totaled $16.8 million or $0.94 per diluted share compared with net income of $13.7 million or $0.81 per diluted share for the same period in 2006.

Again, by business segment and looking at home-based services first, we had net service revenue for the nine months ended September 30th, 2007 of $176.3 million, an increase of $63.2 million or 55.9% from the $113.1 million for the nine-month period ended September 30, 2006. Organic growth was approximately $49 million or 43.3% during the period.

Facility-based services provided net service revenue for the nine months ended September 30, 2007 of $40.5 million, a decrease of $1.8 million or 4.4% as compared with $42.4 million for the nine months ended September 30, 2006. The decrease in net service revenue is due to revenue and bad debt adjustments recorded in the first two quarters of 2007 relating to certain commercial payers in the LTAC setting. These adjustments were disclosed in the June 2007 Form 10-Q.

Cash provided by operations was $15 million for the nine-month period ended September 30, 2007. Principally all of this was provided in the September quarter. CapEx for the nine months ended September 30, 2007 was $2.6 million, approximately $1.1 million in the September quarter. These expenditures are primarily related to information systems and technology.

During the September 2007 quarter, we acquired five entities for $11.7 million in cash, which includes $200,000 in acquisition cost. This brought the nine-month totals to 18 entities for $21.1 million in cash, including acquisition cost of $1.2 million. At September 30, 2007 cash was $12.9 million compared with $13.3 million at June 30, 2007. We can drill down into these results further during the Q&A day, 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, Pete. First, I would like to touch on the operational data for the third quarter of 2007. Total admissions to our home nursing division climbed 52% to 11,216 in the three months ended September 30, 2007, from 7,377 in the three months ended September 30, 2006. Organic growth in admissions was 24.4%. Medicare admissions rose 49.6% to 7,819 in the three months ended September 30, 2007, from 5,225 in the three months ended September 30, 2006. Organic growth in Medicare admissions was 19.8%.

For the third quarter of 2007, our average home-based patient census was 16,862, an increase of 29.4% as compared to 13,029 patients for the third quarter of 2006. Organic growth in home-based patient centers was 15.2%. Average Medicare patient census rose 33.9% to 12,767 in the three months ended September 30, 2007 from 9,537 in the three months ended September 30 2006. Organic growth in Medicare patient census was 17.7%.

We had 20,365 completed Medicare episodes and 367,690 Medicare visits in the three months ended September 30, 2007, for an average of 18.1 visits per completed Medicare episode. Total growth in Medicare episodes was 55.6%, while organic growth in Medicare episodes was 43.0% for the three months ended September 30, 2007, as compared to the same period in 2006. Our average case mix for completed Medicare episodes in the third quarter of 2007 was 1.35, with an average reimbursement of $2,555 per episode.

Looking at our facility-based services segment, patient days decreased 4% to 11,202 in the three months ended September 30, 2007, from 11,674 in the three months ended September 30, 2006.

Now I would like to turn to the operational data for the nine months ended September 30, 2007. Total admissions to our home nursing division climbed 73.7% to 32,656 in the nine months ended September 30, 2007, from 18,799 in the nine months ended September 30, 2006. Organic growth in admissions for the nine months was 47.6%. Medicare admissions rose 68.4% to 22,652 in the nine months ended September 30, 2007 from 13,453 in the nine months ended September 30, 2006. Organic growth in Medicare admissions for the nine months was 41.4%.

For the nine months ended September 30, 2007, our average home-based patient census was 16,208, an increase of 28.9% as compared to 12,573 patients for the nine months ended September 30, 2006. Organic growth in home-based patient census for the nine months was 14.5%. Average Medicare patient census rose 32.1% to 12,168 in the nine months ended September 30, 2007, from 9210 in the nine months ended September 30, 2006. Organic growth in Medicare patient census for the nine months was 15.8%.

We had 56,789 completed Medicare episodes and 1,046,295 Medicare visits in the nine months ended September 30, 2007, for an average of 18.4 visits per completed Medicare episode. Total growth in Medicare episodes for the nine months was 57.3%, while organic growth in Medicare episodes was 47.9% for the three months ended September 30, 2007, as compared to the same period in 2006.

Looking at our facility-based services segment, patient days increased 1.5% to 34,329 in the nine months ended September 30, 2007 from 33,814 in the nine months ended September 30, 2006.

At this time I would be remiss not to acknowledge our facility-based team members. Our consistent operational performance remains a testament to the dedicated employees within our facilities and the leadership guiding them through the many challenges facing this industry. A sincere thank you goes out to all.

Now turning back to the home-based division, we have again completed a number of acquisitions and partnerships since our last call. We continue to be pleased in our ability to successfully integrate these operations into our Company. I want to extend a huge welcome to all of our new LHC Group family members that have joined us recently. And thank each of you for the crucial role that you have and will continue to fulfill as we extend our services to others.

Along with the active acquisition pipeline, we have also been busy establishing de novo locations. As we have described previously, de novo locations are start-up branches developed from existing locations. In the third quarter of 2007 we established six de novos. These locations were in Sulphur, Louisiana; Waynesboro, Mississippi; Nicholasville, Kentucky; Cedartown, Georgia; Mountain Home, Arkansas; and Belpre, Ohio. Our plans are to open three additional de novos in the fourth quarter. Through the first nine months of 2007, we have established 18 de novo locations. With our scheduled openings in the coming months, I am pleased to report that we will exceed our stated goal of establishing 15 to 20 de novo locations in 2007.

Home health-care providers across the country has been studying, assessing and making their plans for the coming changes in home care reimbursement. Change in this industry is something that we have simply come to expect. I want to acknowledge our home-care leadership team that has developed what I believe to be an operations plan for 2008 that will assure our continued success.

This team has put in long hours of study and planning, and I could not be more pleased with the outcome of their efforts. I would like to take a minute to single out one particular person who works with me in leading the LHC operations team. Don Stelly is our Senior Vice President of operations. He first came to work with our Company as the leader of our facility-based division. Don brought to our Company experience with publicly traded hospital companies, such as Columbia/HCA, Province and LifePoint.

Just as with me, Don started his nursing career working in surgery. His leadership abilities were quickly identified, and he rose to become a Chief Nursing Officer and finally a CEO. There is no doubt in my mind that Don has become one of the most significant additions that LHC has made to its operations team. Don's superior knowledge of hospital management, coupled with his growth and experience in our home-based services, has made him invaluable to me.

It is because of Don's leadership abilities that I have been able to accept the role of President and COO of LHC Group. While I remain very involved in the day-to-day operations of our Company, Don has freed me up to focus more of my time in driving long-term value initiatives within the Company, helping to assure the successful integration of new acquisitions, purchase more in Investor Relations, and to be more active in the National Association for Home Care and Hospice, where I currently serve as a member of its Board of Directors. Don and his wife [Shanna] are very committed to this area, are natives of the area. They live in a rural community of Port Barre, which is about 30 miles northeast of Lafayette, where they are building a new home.

Like Pete, I will gladly take any questions you may have concerning operations in a moment.

Before we open the call up for questions, I would like to first offer a special thanks to our more than 4,000 employees. They are the people who every day do more than anyone else to carry out our mission, which is to provide the highest-quality care possible to the many patients, families and communities we are so fortunate to serve. And doing so in the most cost-effective and least restrictive environment possible.

On our last call, I mentioned that we had begun the process of canceling contracts with certain commercial payers that reimbursed us at rates below our cost and were slow to pay. I'm very pleased with our progress in this area. Through close of business yesterday, 192 cancellation letters have gone out via certified mail, all with termination dates in either December or January.

We started with the payer representing the highest patient volume and the lowest reimbursement in the markets we serve, Blue Cross of Louisiana. I am pleased to report that Blue Cross of Louisiana responded quickly, indicating an interest to enter into good-faith negotiations with LHC Group to gain a better understanding of the value proposition we offer, the full range of services we provide, and the costs associated with providing these services as a Medicare-certified home health agency.

I'm very encouraged with the progress of these negotiations thus far, and also encouraged with the reaction of management when notified of the high percentage of past due amounts on our books from Blue Cross of Louisiana.

I'm also very proud of the work that our entire team has done on this initiative, and would like to specifically recognize and thank Denise Romano, who took this project on, on an interim basis while we pulled a more formal long-term team together to manage this process going forward. Thanks, Denise, for getting this project off to such a great start.

Since our last earnings call, management has reconsidered our past policy of not issuing formal guidance. Because we want our stockholders to have an understanding of the financial impact of both the final rule and any further reimbursement changes that result from the ongoing legislative initiatives in Washington D.C., our management team has elected to provide formal annual guidance for 2008. We intend to provide this guidance following the resolution of the home health reimbursement issues currently being addressed by Congress, which we expect to be resolved during the fourth quarter of 2007, most likely in November or early December.

Since the final rule affecting Medicare home health reimbursement was published in August 2007, bipartisan legislative efforts to block CMS home health PPS rate cuts began in Washington DC. These cuts, which would reduce home health provider payments by 2.75% each year from 2008 to 2010, with another 2.71% cut proposed for 2011, are being vigorously opposed by the National Association for Home Care and Hospice, many industry representatives from home health agencies both large and small throughout the country, and LHC Group.

On October 18th, Senator Susan Collins, Robert Casey, Kit Bond, Maria Cantwell, Pat Roberts and Jack Reed introduced S-2181, the Home Health Care Access Protection Act of 2007, designed to block the 2008 to 2011 regulatory cuts in Medicare home health payment rates and to institute a rational process for evaluation of increases in the average case mix weight.

On the same day, a bipartisan House companion bill, HR-3865 was also introduced by Congressman Jim McGovern and Walter Jones. Needless to say, we're strongly supporting this legislation, along with the National Association for Home Care and Hospice, and the entire home health industry.

On August 1, the House narrowly passed HR-3162, the CHAMP Act, a bill combining the SCHIP reauthorization with $50 billion in targeted Medicare provisions, including a two-year extension of the 5% rural add-on beginning on January 1, 2008. The rural add-on would add approximately $300 million in additional reimbursement for rural home health services. Unfortunately, the legislation also froze the scheduled 3% market basket update for home health providers for 2008, which would reduce home health reimbursement by $2.6 billion over five years.

Ultimately, in an agreement with the Senate, the House dropped all the Medicare provisions in an SCHIP bill that was sent to the President. That bill was vetoed. However, Medicare-related legislation is still expected this term.

Currently, the Senate Finance Committee is putting together their Medicare legislation, which we expect to be released in the next couple of weeks. We're confident that there is strong support for a 5% rural add-on among Senate Finance members, and are hopeful that the Senate will also make the rural add-on retroactive to January 1, 2007.

We're also supporting industry's efforts to convince the Senate not to freeze or eliminate our market basket update for 2008, as was passed in the House CHAMP Bill. You should note that elimination of the freeze is also supported by 61 senators who signed a letter to the committee requesting that they not reduce payments for home health services. We're also encouraging the Senate Finance Committee to eliminate the scheduled case mix adjustment rate cuts in its Medicare package.

With regard to the rural add-on, we're optimistic about the reinstatement of the 5% add-on for fiscal 2008. The case for reinstating the rural add-on is well-documented and supported by independent third-party data outlined in a report produced by the Lewin Group in cooperation with Outcome Concept Systems. The Lewin Group report resulted in a recommendation that the rural add-on be reinstated, and that an add-on of 15% would be necessary to equalize reimbursement for patients in rural areas versus urban areas.

When you think about it, it is common sense. Home health nurses, aides and therapists must drive longer distances between patients, often on substandard roads, some even dirt or gravel roads. Rural agencies have lower average daily census per location. This adds up to higher direct costs per patient served.

The reason that rural agencies are reimbursed less in the current PPS reimbursement model is because of inaccuracies in the current wage index values used to calculate home health PPS rates. Medicare rural wage indices are uniformly lower than urban wage indices, a reality that results in substantially lower Medicare reimbursement to the home health agency for the same services provided to the same type of beneficiaries as compared to urban agencies. This is the reason that the rural add-on was part of the PPS reimbursement model until 2007. We believe the first step will be a reinstatement of the rural add-on, but we will continue to push for a permanent solution by addressing the wage index values that are at the core of the problem.

The House and Senate will still have to resolve the differences that exist in their respective Medicare bills, which we expect to happen sometime in November or early December. Our representatives at Patton Boggs, led by Senator John Breaux, are continuing to work with members of Congress to communicate that the rural add-on must be a priority.

In addition, we're working closely with the National Association for Home Care and Hospice and other home health industry representatives to communicate the importance of not eliminating or freezing the market basket update, and the importance of eliminating or at least postponing implementation of the case mix adjustment rate recently -- rate cut recently promulgated by CMS, until a rational process for evaluating the underlying costs for the increase in the average case mix weight for home health beneficiaries can be developed.

For instance, we see our patient acuity in home health rise each time admission criteria is tightened in the inpatient rehab, SNP or LTAC programs. Wherever these patients go, they go to home health, driving up our acuity, which is what we should all want as taxpayers, if we can provide the appropriate level of care required in this least costly, most efficient manner, and it's what the patients and their families want as well -- to be at home.

We want our shareholders and employees to know that we understand this issue, that we're very passionate about this issue, not only for LHC Group but as a member of the home care provider community. And that we will vigorously continue our efforts in Washington working in concert with the National Association for Home Care and Hospice and other industry leaders in the short-term to see our ongoing legislative issues through over the next 30 to 60 days, and long term, to become more organized and more effective at communicating the unique, one-off-a-kind value proposition that the home care industry has to offer more proactively and effectively than in the past.

Home care is not part of the problem when it comes to overall Medicare spending. In fact, we are clearly a large part of the solution to the problem of managing the rapidly growing number of chronically ill elderly Medicare beneficiaries, and we're able to do that at a cost of about $50 per day. Best of all, it is where patients and families want to be cared for. No one wants to be institutionalized unless it's a last resort.

Again, because we want our stockholders to have an understanding of the financial impact of both the final rule and any further reimbursement changes that result from ongoing legislative issues in Washington DC, we have elected to issue formal guidance for 2008. And again we intend to provide this guidance following the resolution of ongoing issues being addressed by Congress at this time.

The one thing I urge our shareholders and employees to remember is that we are always thinking long term. Yes, I'm about to say it again. This is a marathon, not a sprint. Reimbursement is changing, but the needs of the patients we serve are not changing. Our strategy remains the same. Our goal is to be the leading provider of post-acute services to the elderly and disabled in every market we serve. We will continue to expand our geographic footprint through fairly valued strategic acquisitions with a continued commitment to patients, perseverance, discipline and attention to detail.

Once again, we have proven that compassion and quality care translate into strong financial performance. We're very pleased with our performance in the third quarter of 2007, especially so because it confirms the hard work and dedication of our health care professionals. I am honored to be their colleague. We view our strong third quarter of 2007 as a clear sign of our positive momentum. Our team has never been more unified, more focused, or more committed to our long-term vision than we are today.

This month, Johnny and I will celebrate ten years together as partners. Johnny, thanks for a great ten years, and I look forward to the next 10 years. The good news is that we have a lot of help today that we didn't have ten years ago. Today, we're blessed to work with a team of managers that are truly best-of-class in our industry. Johnny talked about Don Stelly, our Senior Vice President of Operations, and I echo his comments. I think Don has turned out to be Johnny's 10-year anniversary gift from the Company. Thank you, Don, for all that you do. Keep up the great work and know that we appreciate you.

I'd like to say a little about other key members of our senior management team, starting with Richard MacMillan, our Senior Vice President and General Counsel. Many are surprised to learn that Richard is a registered nurse, first of all, who practiced nursing for 16 years before going back to law school and earning his law degree specializing in health law.

He practiced health law for 13 years before officially joining LHC Group. I use the term officially because Richard has been with the Company since day one. And he's still a nurse. In fact, you may hear me with a little bit of a rattle and a cough here. I've been a little under the weather this week. And earlier this week Johnny and Don had all of the nurses out on the training session across town. So I had to pull Richard in to give me a shot. When was the last time you had your in-house Counsel give you a shot?

You should know that Richard was also the attorney that filed our original Articles of Incorporation for the first home health agency in 1994, and has been General Counsel for the Company ever since. Richard's wife, Carleen, is also a registered nurse and works for the Company, where she is responsible for clinical due diligence on all new acquisitions. Thanks, Richard, for 13 great years. We are blessed to have you and Carleen as part of the LHC Group family. It's great to have you in-house, and we especially like the fact that you don't get to bill us by the hour any more.

Our CFO, Pete Roman, spent fourteen years with Ernst & Young in New Orleans before becoming the CFO of a publicly traded company based here in Louisiana, where he was for five years until the company went private in 2004. In 2004 Pete joined LHC Group as Controller. And from day one he had his sleeves rolled up and into the details of our business. His people love him and would run through walls for him, because he leads by example. He makes his office back in the department among his staff. Always has his door open, and refuses to take one of the big offices in the department. Pete is a true servant leader, and that's something we value highly at LHC Group.

Like Richard, Peter's wife, CeCe, works for the Company also, and actually worked for the Company before Peter did. I think she actually recruited him. CeCe is an occupational therapist, providing hands-on patient care every day in our LTAC facilities or home health agencies as needed. Just like Pete, another servant leader. Pete, thanks for stepping up to the plate and answering the call. And thanks to both you and CeCe for being part of the LHC Group family. We appreciate you both very much.

Then there's Daryl Doise, who serves as Senior Vice President of Corporate Development, also a former hospital CFO and CEO, and also worked with both Columbia/HCA and Health Trust before making his last stop as the CEO of Opelousas General Hospital, our local nonprofit community hospital in the parish, as we call them here in Louisiana, where LHC Group was founded, and one of our first JV partnerships with HomeCare, which went into effect in 1999.

It's funny how things work out in life. Daryl and I were the two signatures that executed that joint venture when he was the CEO at Opelousas General. A few years later an opportunity presented itself for Daryl to make a move, and we snatched him up quickly. And I mean LHC speed, which means the same day he became available. Daryl and I have been friends for many years, and in fact his wife, Anne, also works for LHC Group as a patient care representative before we recruited Daryl over.

You know, Johnny, it seems like we have a pattern going here, doesn't that? First we get the wives on board, then we pull the husbands over. Seriously, many of you know bus development is an area that I really love and spend as much time as possible in. Daryl is to me, as Don is to Johnny. Together we make a great team, and we really enjoy working together. Daryl, thanks for all that you do. It has been a great ride thus far, and I look forward to many more years together. Remember, the best deal we've ever done is the one we walked away from. Right?

From the time our Company was founded, we've always had a balance of clinical and financial people at every level, which has shaped our Company culture and kept patient care as a priority in our Company at every level. If you look at our six-member senior management team, 50% are clinical -- Johnny, Don and Richard, all registered nurses -- and 50% are financial -- Pete, Daryl and myself. This trend continues when you look down to the next top 30 management positions, which includes Vice Presidents and key departmental Directors, 50% are clinical and 50% have either financial or administrative backgrounds. The average years of health-care experience in this group is 16. The average number of years with LHC Group is 7, and the average age of this group is 47.

I'm often asked, what is it that's different about LHC Group? The answer is quite simple. I think the data speaks for itself. It's our people, plain and simple. Our people are the difference. We could not be more confident and excited about the future of the LHC Group family, and we look forward to the next decade because of our people. I look forward to introducing you to each and every one of them on November 20 in New York.

We recently sent out a save-the-date to announce an LHC Group Investor Relations Day to be held at NASDAQ on November 20, 2007. All of our top managers will be there, as well as former US Congressman, Billy Tauzin, former Senator John Breaux; co-founder of Volunteer Hospitals of America and former CEO of Memorial Health System in Houston, Dan Wilford, and other LHC Group Directors. In addition, Founder and CEO of the National Association for Home Care and Hospice, Val Halamandaris, will also be a keynote speaker at this event. I look forward to seeing you there and to the opportunity to introduce you to all of the key members of our team.

Once again, I went to thank our employees and shareholders for the confidence and trust that they continue to place in our Board of Directors, our management team and everyone at LHC Group. Rest assured that we're up to the challenges ahead, and that we know how to plan, and that we know how to execute a plan.

In all honesty, where others see challenges, we see more opportunities than challenges. We know that as long as we stay true to our founding principles and values, as long as we focus on the needs of our patients and provide the highest quality level of care possible to every patient we serve and make a difference in every life we touch, we will always be successful. It is all about helping people.

Thank you for allowing us to share these results with you this morning. Operator, we're ready to take questions at this time.

(OPERATOR INSTRUCTIONS). Darren Lehrich.

You mentioned the termination letters that you sent out to a number of managed-care payers. I was hoping you would put that 192 termination letter number into context. How many contracts do you have? If you could help us think about what those terminations might mean to your topline? Obviously, it would have a benefit to your bottom line. But I just want to get your thoughts on what you're trying to do here. Thanks.

I will take that. This is Keith. I don't have an exact number for you on the number of contracts that we have in total, but I can tell you this. When we began to terminate contracts with a payer, each individual provider number entity has to send a separate termination letter. When we look at the commercial volume we had, about 70% of our volume was represented by 10 different payers. So I think -- how many home health providers are there? 65? How many?

72.

72. And there are number of branch locations within providers, but I just talking about the parent providers. So if you have 72 providers and you're going to terminate contracts with a payer, 72 letters would go out to terminate services with one payer.

I guess we should expect some diminutive effect on your topline growth, but no impact to margins and EBITDA; is that fair to say, based on this initiative?

Yes, and I'm not really sure how much of an affect it has on topline. It's interesting; whenever -- just as an example, when we started to look at this -- I mentioned Blue Cross of Louisiana. The revenue per admission for a Blue Cross patient was about $600. If you looked at revenue per episode for a Medicare patient, it was $2,555. So even though -- when your census goes down with these commercial payers, your revenue doesn't go down that much, because they really have been viewed as loss leaders.

When you start looking at mitigation strategies to offset cuts, one of the first things that you have to do is address these huge loss leaders. And by terminating a contract, it does not mean that you won't get that patient; it only means that you don't have to accept the patient at those contract rates, and we are free to negotiate rates on a per-admission basis.

But just so I'm totally clear then. I guess I get the strategy, but from a non-contracted basis, what would you expect your DSOs to have an impact at all, based on that, if you are out of contract?

We really wouldn't expect there to be a DSO impact. Especially if there was one, we wouldn't expect it to be negative, because you would have an individual negotiation on those particular patients. And you would expect that to actually collect a little bit quicker and more efficiently than going back to the contracts.

Then on just internal growth, I know you mentioned that you're calculating a little bit differently the organic growth number. Can you just maybe give us the last couple of quarters based on the new calculation, and what your, Keith, what your outlook is on organic growth in the core home health business on a longer-term basis?

Well, I can give you the -- we went back and recalculated the prior quarters, and I can give you those numbers. The March 2000 quarter was 36%. The June 2007 -- I'm sorry, the June 2007 quarter was 34.8%. And the year to date through June was 29.3%.

I guess I just have one more question, and that relates to de novos. Johnny, can you just talk about the start-up costs associated with de novos in the current period and what you're seeing in terms of contribution from the de novos, whether they are a drag currently or whether they are contributing?

We consider the start-up costs for a de novo right in the area of $150,000. We look at a rollout schedule as far as contribution from our de novos at six months. We expect them to be covering their direct costs, at nine months covering home-office allocation, and in 12 months to have a positive contributing margin to the overall Company, basically functioning as a mature agency within the market. Those are the goals that we set out for our de novos.

Pete, what was the start-up impact or drag on this quarter? Can you just quantify that?

Well, I don't think that we actually quantify that in this disclosure. But I can tell you that that makes up the difference -- or I guess it's approximately the difference between the gross margins from June versus September. We had about a 1.5% to 2% drop in the margins between those two. And that drop was actually the margin related to acquisitions and de novos was a little bit higher than the difference. So that gives you some kind of ballpark about where it is.

Ralph Giacobbe from Credit Suisse.

It seems like you have been signing more and more partnerships with hospitals. I know that's part of this strategy, but could you maybe elaborate on that point? Is there just more willingness on the hospitals to talk at this point? Are you able to just close more deals, given recent track record? What's driving that?

I think it has become somewhat of a niche for us. We have so many successful joint ventures with nonprofit hospitals under our belt that we just have a lot of credibility, and so our phone rings a little bit more on those. We are still pursuing freestanding acquisitions and look to be more aggressive in that area going forward. But we really do like these joint ventures because, typically, those that we enter have significant upside potential because they just haven't been an area of focus for the hospital partner prior to us coming in.

Going back to the reimbursement -- I know you guys haven't given specific guidance for 2008 yet -- just putting it in a different way or a different way to look at it, is there any reason for us to believe under the current rules that the topline impact next year would be worse than what the CMS impact table -- that 3.9% cut, I think, if you take a weighted number would give for us, just in terms of framing the conversation and how we can think about it?

I think that would be accurate. There's no reason that you should consider the impact worse than what you see in the table.

Are you seeing any indication of other providers maybe already struggling with new changes or trying to implement new changes, or do you think that's something we are going to see play out in 2008?

And then as a part of that, with the potential for increased acquisition activity, can you maybe talk about what you think you all can handle with your current infrastructure? You've almost doubled the number of agencies since the end of 2005. Should we think of any -- I don't want to say concerns, but should we think about a certain limit on to where you can go?

We will split that into probably a couple of parts. First of all, let me address your question about are we seeing challenges -- other providers having challenges out there? I guess you're talking about smaller providers?

Sure.

And we are not yet. There's still significant hope that we're going to have reimbursement relief. The national association communicates regularly with the membership, and they are pretty confident that there's a significant momentum in Washington right now. So those providers with that confidence are not making huge changes right now.

The other thing to remember is that on January 1, all of the patients that are existing on census that transfer over are going to be reimbursed under the old reimbursement methodology until their episodes play out. So it's only going to be new patients admitted on January 1 and after that are affected by the new reimbursement. So if you combine those two things, I don't think we're going to see people begin to struggle until we get out into the possibly second quarter, but probably more likely third and fourth quarter of 2008 before they start realizing the impact.

On the operational side and our ability to handle volume, we already have 30 de novos mapped out in the calendar for opening next year, not considering acquisitions. For the past more than a year now, Johnny and Don and the entire operations team have been beefing up their operations and their capacity. And I'll let Johnny talk a little bit about that.

On the business development side we've increased our capacity there as well. We have -- one of our Vice Presidents who is also a CPA, John Whitlock, that handles all of the due diligence and all of the coordination in that area. And that has significantly increased our capacity. And it has freed Daryl up to be more out on the road pursuing new deals and loading the pipeline. So we feel really good about our ability to handle more capacity.

Johnny, would you comment on the operational side?

Sure. I feel as good about our ability to continue to handle our increased activity as far as acquisitions within the Company as ever. I think with the addition of John Whitlock and the team that he has put together, we have a fully staffed start-up team which can handle multiple locations simultaneously. Don and his team has begun a stellar leadership development program within the Company. So I feel very confident heading into 2008 in our abilities to expand.

David McDonald from SunTrust.

I just went to touch back on these cancellation letters. Guys, if these contracts were shut down tomorrow, would it actually be a positive margin impact? Are you guys making any money on these accounts?

The other question I have that kind of goes hand-in-hand with that -- are there some Medicare patients in those markets that you would be able to substitute in at higher margins because you're able to free up some of your clinical folks?

Yes. The answer to both of those is yes. First of all on the contracts that we're canceling, we are getting absolutely no contribution on those. They are a drag on earnings from a direct cost basis. So in plain English they are a no-brainer cancellation.

In some locations where we do struggle for staffing, how ridiculous is it when you're accepting that business and you have to turn down Medicare business because you don't have the staffing? So, yes, we have worked through those things as well. It would be an absolute positive impact on the bottom line, and really no impact to speak of on the topline.

Then, when I think about just walking away from those contracts, two more questions. I don't know if you guys have this number, but how many days would that improve your DSOs? Two, is part of the reason you're servicing these is to make sure the referral source is happy and you don't end up losing some referrals?

Right. Yes, it would have a significantly positive impact on our DSOs over time because -- I don't know what the exact number is, but I know that we had looked at it, and I think 50% of our --.

30%. 30% of our receivables are commercial payers, but only --.

The aged outlook.

Yes, it would be half of the older --.

50% of the older stuff is commercial, and it is related to that smaller percentage of our business. We have an eligibility department though that functions more or less as a gatekeeper with payers. And we are very sensitive to those referral sources that do give us a fair distribution of referrals in a market.

On those patients, we're going to take some of those that are losers. But you have to have some way of controlling people that would send you only all of those losers and send all the profitable business to someone else.

I think you had targeted kind of mid '60s in terms of DSOs by year end. Is that still a good number?

I think that is our target. And I certainly would say it's a good number right at this point in time, yes.

Then you obviously had some tax benefits in 2007. For modeling purposes, when we think about 2008, is around 38% a fairer number on the 2008 numbers?

Yes, 38 is a good 2008 estimate, yes.

Then you just one final question. Keith, can you just run through the LOI stats you gave again at the beginning in terms of how many active, how many you expect to close, etc.? Then the second part of the question is, as you start looking at the changing reimbursement environment in 2008, is there an appetite, or are you seeing opportunities that are bigger than some of your historical deals?

First of all, we have eight active LOIs now. Six have been fully executed. Three of those six are scheduled to close before year end. Those are the stats.

The second part of your question is -- you know, I really don't see -- you asked about appetite. We have an appetite for more deals at the right price. But I don't see a significant increase in larger-volume deals with prices that are attractive. I don't see prices moving at all yet, and I don't think that we will until late in 2008.

Eugene Goldenberg from BB&T Capital Markets.

It's Eugene filling in for Newton. Just a follow-up question here. What actually drove the increased acuity on the LTAC side of the business this quarter?

I'm going to ask Don to address that.

Essentially, it's just the shift mostly that we've seen in the type of criteria for admission that we prepared for. We have been, all along, talking about shifting that acuity to make sure that we have the patient in the most appropriate setting. And so truly it's about the intake coordination and making sure that we've got the right person in their right setting.

Because I was just looking at it, and I know you guys have been disclosing these numbers for awhile now. But last quarter it was 1.36, the quarter before that it was 1.34. This quarter it was 1.35. Am I missing something or is that just the overall acuity as opposed to just the LTAC side?

Actually, a part of that contributing factor is that one location was mainly a hospital that focused on psychiatric diagnoses, and we converted that hospital to a full medical LTAC. So in the aggregate rollup that's that push.

I see. Then two more, if I can. Can you remind us again what is running through your nonoperating income line?

Primarily that is interest income, and there's a small amount of gain or loss on the sale of assets, and I believe there's a small amount of rent in there.

As far as your -- I'm sorry, hold on a second. No, that has been answered. I'm sorry. No more questions.

Greg Williams, Sidoti & Co.

Just a couple of modeling questions actually. In the first quarter, I think it was, you mentioned as you built-up the bad debt reserve, bringing up your provisions about 1.5% of revenue, and maybe tapering that down as you built adequate reserves. I just wanted to know the progress on that and when you would be "tapering it down", so to speak?

The bad debt expense that we picked up in the quarter, I believe, was right around 5%. That is up a little from the prior two quarters. I think it's going to stay at that level for the fourth quarter. I don't think it's going to taper back down yet. We probably are looking at some time in the middle of next year before that would start to tick back down.

So middle of 2008 coming back down to more normal levels?

I think it's going to stay in the 3% to 3.5% range thereafter.

The only other question I have is I'm trying to get my arms around the minority interest allocation. I think you guys have always said take a percentage of EBITDA, like 14%. But it seems to be dwindling in the last few quarters. I'm wondering if you guys can provide some insight as to modeling that allocation out?

It's kind of a honeycomb when you're talking about the minority interest because there are no real -- that's very difficult to model. You're talking about the relationship between pre-minority interests with the various partners that we have. And we do have some mixed ownerships. In some cases it's 49%, in some cases it's 33%. So I think it would be very difficult to put a number out there and say that this would be a definite model number.

Maybe said another way, you are doing a lot more joint ventures where you're giving them one-third and keeping two-thirds?

I think that going forward, or at least at this point in time in the JV's we've done this year have been predominantly two-thirds and one-third, yes.

(OPERATOR INSTRUCTIONS). Balaji Gandhi, Oppenheimer.

Cash flow from operations, either year to date or for the quarter?

For the quarter, it was $14 million. Year to date was $15 million.

Eric Gommel, Stifel Nicolaus.

Johnny, if you could just talk a little bit maybe about how you've gone through the analysis of maybe your episodes relative to the impact of the new home -- your expected impact of the new home health rule? I guess what I'm asking is can you describe some of the analysis that you've done?

And I was curious. One of your competitors had talked about, if you look at different years of data that has a different sort of output or impact relative to this home health rule. I wonder if you could talk about whether you've seen that, given that you are using probably more recent data than CMS was using when they were assessing the impact?

I don't know what data competitors are using. We are spending a lot of time paying attention to ourselves. We worked very closely with OCS. They grabbed all of our data related to the HRGs under current system versus the HRGs under the new system, and they gave us a map of what we would look like going into the new reimbursement era.

I guess what I'm wondering is does the -- using data that's more recent relative to the data that was used to analyze it in the CMS analysis, does that make any difference, do you think, relative to the impact for you guys?

This is Keith. Again what Johnny said is we are looking at our own data, and we are using the most current data to analyze what our impact is. We are not as concerned about what data CMS used. We are really concerned about current patient population and what would the impact look like to LHC Group. That's what we've used as we've developed all of our mitigation strategies.

You are using a vendor now to do some of the billing on the LTAC business. How is that working out for you guys, now that you've switched over?

We are about two months into that, and it's actually going very well. The Company that we have is here local. It's right up the street. They have been very responsive to us for reporting. And I'm very pleased with where we are with that side of it.

Just given your success in making acquisitions and things, I guess from the comments you have made here on the call, I don't see you maybe stepping back to kind of see how things shake out for the new rule impacting your smaller maybe competitors. You're just going to keep on keeping on, sort of fulfilling your strategy of acquiring these smaller operators. You are not going to stop and maybe step back and see what the impact might be on valuation stuff? Could you talk about that a little bit?

You have been knowing me for so long that I know that you're just making a joke. I don't have step back in my vocabulary.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Okay.

Pardon the interruption. There's a final question from Brian Tanquilut from Jefferies and Company.

Congratulations again on the quarter. Just the last question. Pete, I just want to check what your confidence level is -- or comfort level is when it comes to leverage. I know you don't have debt on the balance sheet. You got $12 million of cash. We are talking about 30 de novos for next year and, obviously, some acquisitions in the pipeline. What is your view on leverage?

I don't think we're against leverage. I think that at the acquisition rate that we are going right now and the one that we've gone so far, we have been able to fund those acquisitions through operations. So far, it has been pretty successful and very clean. I think that we certainly can -- I think the market could easily provide us with a line of credit in the two times EBITDA range. And I think that would be available to us if the correct deal would come along.

And you're comfortable at that level, two times EBITDA?

I think so. I don't think we would have a problem with that.

(OPERATOR INSTRUCTIONS).

If there are no further questions, I'll just close by saying on behalf of all us here at LHC Group, thank you once again for taking the time to listen in and participate in our call this morning. As always, we are available to answer any follow-up questions and any questions that may come up between quarterly earning calls. I wish all of you a great day. Thank you for supporting and believing in the LHC Group family.

This concludes your presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.