LHC Group Inc (LHCG) 2009 Q4 法說會逐字稿

Good day and welcome to the LHC Group's fourth quarter and year ending December 31, 2009 earnings results conference call. This conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Eric Elliott, LHC Group's Vice President of Investor Relations. Mr. Elliott, please go ahead.

Thank you, Anthony. And welcome to LHC Group's earnings conference call for the fourth quarter and year-ending December 31, 2009.

Hopefully everyone has received a copy of our earnings release. If not you may obtain a copy of this along with other key information about LHC Group and the industry on our website at www.LHCgroup.com.

In a moment, we will hear from Keith Myers, President and Chief Executive Officer, Don Stelly, Chief Operating Officer and Pete Roman, Chief Financial Officer of LHC Group.

Before that I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include are not limited to comments regarding our financial for 2009 and beyond.

Actual results could differ materially from those projected in forward-looking statements, because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings.

LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events. Now I am pleased to introduce the CEO of LHC Group, Keith Myers.

Thanks, Eric. And good morning, everyone. Good morning again. I would like to begin today's call as I always do by thanking all of the LHC Group employees, who work so hard each and every day to care for the many thousands of patients and the growing number of communities that we are very privileged to serve across the country.

As I try to remind every member of our family, in my daily morning e-mails to our team, you are very valued and appreciated for all that you do everyday. The value that our company creates for both payers and patients is a result of the exceptional service that you provide, to each unique individual entrusted to our care. And for that, we sincerely thank you for all that you do.

As we begin the next decade in our company's history, because of well thought out strategic choices our team has made with regard to infrastructure investments over the especially over the past two years, the LHC Group family today has the people and process in place to fully capitalize on opportunities for growth and geographic expansions that lie ahead.

The infrastructure investments we have made over the past several years have now laid the foundation for an unprecedented period of growth for LHC Group family, that we will talk about more later on in the call today. But first, I would like to talk -- to say a little about Washington, DC and the on goings there. Clearly the outcome of the Massachusetts election create an uncertainty about the future of health care reform.

However, given last week's health care summit and President Obama's latest proposal, it is clear that the President and congressional leaders intend to move forward with health care reform.

Based on the President's latest proposal and the house and senate previous support for home health industry, we believe, if adopted, that a health care reform bill will look much like what the senate passed in its proposal.

Stepping back a minute, we believe that 2009 was an important year for the home care industry, in terms of successfully delivering the message to our representatives in Washington, that home health is the most cost effective manner in which to provide care especially to the elderly and chronic population.

It is increasingly clear to us that leaders on both sides of the isle believe that home health care can and will be key component to the solution to the health care crisis in our country.

I would encourage all of you listening to this call, to log on to the LHC Group website and review a letter I sent to our shareholders on December 6, 2009 regarding the senate floor debate on home health. You will see from that letter that both senate Democrats and Republicans support home health and understand the importance of not taking any action that would limit access to critical services we provide.

Throughout 2010, we will continue to work with the national association of home care and the alliance for home health quality and innovation to continue strengthening this message. As an industry, we made great progress in 2009, and we are committed to continuing this work with all members of the industry, in 2010 and beyond.

As many of you are aware, the Med Pack Payment Advisory Commission or Med Pack released its 2010 report to Congress on Tuesday of this week containing recommendations for Medicare payments to home health agencies and other health care providers along with its evaluation and analysis of home health service payments.

Med pack recommended significant reductions in the basic payment rates of Medicare home health services through a freeze in 2011 payment rates, and the implementation of a rate rebasing. As stated by the National Association for Home Care, and its statement released on Tuesday, the report contains a combination of serious data omissions analytical prejudices and no consideration of the value that home care brings to ever costly Medicare program in term of preventing hospitalizations and rehospitalizations, as well as its value regarding more costly institutional care.

As an industry, we will continue to provide our representatives in Washington, DC data that points out the flaws in the Med Pack report, we will also increase our efforts to work more closely with Med Pack in order to educate them on the benefits of home care.

As we announced in January, LHC Group was honored to add Dr. Ken Thorpe to our Board of Directors. Dr. Thorpe currently serves as the Robert W. Woodruff, professor and chair of Department of Health Policy and Management in the Rollins School of Public Health of Emory University.

He also codirects the Emory Center on health outcomes and quality and serves as the Executive Director of the Partnership to Fight Chronic Disease a national and state based coalition committed to raising awareness of the number one cause of death, disability and rising health care costs in the US. The rising rates of preventable and chronic diseases.

With the addition of Dr. Thorpe to our Board, LHC Group will be at the forefront in the development of best practices for treating the chronically ill. Dr. Thorpe will also serve as a valuable resource in placing the entire home health industry in a leadership position, in the battle to treat chronic diseases and to reverse the effect of chronic disease on the United States health care system.

Now, turning to acquisitions, I would like to begin by welcoming all of our new employees, that have recently joined the LHC Group family.

Since our last earnings call, we have added locations, in Cookville, Tennessee, Clinton, Louisiana, Leitchfield, Kentucky, Etowah, Tennessee, Rogersville, Tennessee, Collins, Mississippi, Kingwood, West Virginia, Savannah, Tennessee and Branson, Missouri. On March 1st, we completed the previously announced purchase of Hutchison Home Health located in Fort Oglethorpe, Georgia the primary service area of this acquisition spans six counties in Georgia which is a certificate of need state.

The estimated population with the service area is 322,000, with almost 12% over the age of 65. Net revenue for the Fort Oglethorpe, Georgia agency during the most recent 12 months was approximately $3.5 million. I would like to with welcome the employees from Hutchinson Home Health as well into our growing LHC Group family.

In 2010, we plan to continue aggressively implementing the acquisition strategy that has allowed us to provide a rate of return on investment that has ranked us in the top ten on the Forbes list of America's 200 best small companies in America for the last three years in a row.

Since our public offering in June of 2005, we have completed 67 transactions adding 149 locations. At the time of acquisition, these 149 locations had trailing 12 month revenues of $201.4 million.

These same transactions in 2010, are budgeted for $381.7 million for an average increase in the volume of 54%, from the date that we took over. It's important to also keep in mind that 53% of these transactions were completed in 2008 and 2009.

Although we have had significant success in terms of both the quality and volume of acquisitions we have made in the past, as Pete and Don will discuss with you in a few minute, today we have the balance sheet, and the operational infrastructure to significantly increase our volume of acquisitions and denoble expansion in the future.

Among the many infrastructure investments we have made over the past several years, we have built an acquisition team that is second to none as it relates to our ability to operationalize and integrate and close acquisitions more efficiently and effectively than ever before.

Therefore, we are fully prepared to successfully pursue a more aggressive growth strategy in 2010 and beyond. To accomplish this, we have implemented a strategy that will significantly increase the number of acquisition candidates we review and score on an annual basis. Johnny Indest will play a key roll in this strategy going forward as his you full time focus will be in this area in 2010 and beyond.

In addition, I have also allocated more of my time in this area with my focus being primarily on larger multisite and health system opportunities. As demonstrated in the statistical performance of our acquisitions made since our public offering in June of 2005, our strategy is sound and producing positive results for our shareholders. That being the case, our plan for 2010, 2011 and beyond is to continue executing proven strategy.

But to significantly increase our volume of acquisitions, and to fully leverage the infrastructure investments we've made over the past several years. While only one-third of our total locations today are joint ventures, LHC Group is recognized as the clear industry leader and successfully partnering with hospitals and health systems for the provision of home health services.

We currently have 56 successful hospital and health system joint venture arrangements throughout the country with over 90 service locations. We have been successfully operating joint ventures for more than a decade now, since 1999. Over the years because of our deep understanding and connection to the hospital industry, and the hospital experience our management team brings to the table, we have developed a niche market within our industry, through our ability to successfully model the hospital based home health agencies and hospice agencies, while at the same time improving quality scores, improving patient and referral source satisfaction scores and helping our hospital partners and the Medicare system to reduce costs through avoiding unnecessary rehospitalizations and emergency room visits.

With the addition of Dr. Thorpe to our team, our strong commitment to quality, which Don will discuss during 2010 will continue to improve upon our clinical affiliations with current and future hospital partners and further enhance the value proposition, we bring to to the table.

Our history has proven that our hospital partners come to see our value proposition as irresistible, once introduced to our model and learn of our impeccable track record of success. Through a partnership with LHC, hospitals can truly offer their patients and medical staff the continuity of care, that they and their families seek.

Patients and their family members and care givers take comfort in knowing that the transition from the hospital to the home will be smooth, and their caretaker is there with them every step of the way. We work seamlessly with our hospital partners to successfully manage many thousands of care transitions everyday.

We believe strongly that 2010 and 2011 will provide a greatly expanded population of acquisition candidates. In 2009 the uncertainty around health care reform caused buyer and seller expectations to be further apart than normal which obviously lowers the odds of successfully completing transactions.

The only way to increase acquisition volume in 2009 would have been to pay significantly more than fair market value, for our assets, accomplishing growth for the sake of growth, and with great risk with little to no upside potential for our shareholders. That's simply not in our dna.

That being the case, we chose to focus our time and energy on infrastructure investments and preparing for the future while waiting for the health care reform debate to play out and seller expectations to align more realistically with the future reimbursement landscape.

In the fourth quarter we began to ramp up our pipeline efforts to historical levels and then Q1 of 2010 we opened the spice so the speak and committed the additional resources I mentioned early as we saw activity begin to pick up and seller expectations becoming more realistic and in line with fair market value. Throughout our history, we have always seen an increase in acquisition opportunities in the years immediately following reforms or reimbursement change.

We are already seeing increased activity based on the number of conversations that we are having with potential free standing and joint venture candidates. Speaking only of those that will fall within our narrow definition of active negotiations, we currently have 15 candidates which include 23 existing locations, in ten states, and approximately $32.7 million annual revenues, that are in process.

We define active negotiations more narrowly than most might. For an opportunity to be included on our list of active negotiation, it means that we have moved beyond the initial phase of negotiations and either have a LOI executed or engaged in structuring a final offering and letter of intent. More simply active negotiations for us means that management has a high degree of confidence and that these transactions are on track to closing. In an effort to give our investors some insight into our business development activity, we have historically reported this number and will continue to do so. However, there is another component of our pipeline which we do not report and that would be the larger number of opportunities that we are reviewing and conversations that are still in the early stages at any given time.

This is where I see the most significant increase in volume in our pipeline activity at this time. And now I will turn the call over to Pete Roman for a review of our financial results, and be glad to answer questions later during the Q&A session. Pete.

Thanks, Keith. And good morning everyone. Consolidated net service revenue for the fourth quarter of 2009 was $141.5 million, an increase of $30 million or 27% compared to the fourth quarter of 2008. Consolidated net revenue for the year was $532 million, an increase of $149.4 million or 39% compared to 2008.

Net income (inaudible) to LHC Group for the fourth quarter of 2009 totalled $12.7 million or $0.07 per diluted share, compared with net income of $10.5 million or $0.58 per diluted share for the fourth quarter of 2008. Net income attributable to LHC Group for 2009 totaled $43.8 million or $2.43 per diluted share, compared with net income of $30.2 million or $1.69 per diluted share for 2008.

For the home base segment, revenue for the fourth quarter 2009 was $124.7 million, an increase of $27.9 million or 28.9% compared to the same quarter in 2008, and consists of $108 million in organic revenue and $16.7 million in revenue from acquisitions. For the year, revenue for the home base segment was $469.5 million, an increase of $143.4 million or 44% compared to 2008, and consists of $415.6 million in organic revenue, and $53.9 million in revenue from acquisitions.

For the facility based segment, revenue for to fourth quarter of 2009 was $16.8 million an increase of $2.2 million or 14.9% compared to the same quarter in 2008, and consists of $14.7 million in organic revenue and $2.1 million from acquisitions. For the year revenue for facility based segment was $62.5 million, an increase of $6 million or 10.5% compared to 2008, and consists of $58.2 million in organic revenue and $4.3 million in acquired revenue.

For the home base segment for the fourth quarter of 2009, total organic revenue growth is 11.6%. And organic Medicare revenue growth is 8%. For the year, total organic home base revenue growth is 27.5%, and organic Medicare revenue growth is 27.2%.

Medicare revenue was 80% of consolidated net service revenue in the quarter compared to 83.9% in the fourth quarter of 2008. Commercial revenue was 14.3% of consolidated net service revenue in the quarter compared to 9.5% for the fourth quarter of 2008.

The home based segment made up 88.1% of total revenue in the quarter. In Q4 2009, our gross margin was 49.2% as compared to 47.7% in the third quarter. The increase in gross margin is due almost entirely to improved margins on agencies acquired particularly in the fourth quarter of last year. In third quarter of 2009, the operating results of these locations reduced consolidated EPS by $0.05 per diluted share. In the fourth quarter of 2009, they contributed $0.03 per diluted share.

In the fourth quarter of 2009, G&A expense was 32% of revenue compared to 33% in the third quarter. We expected G&A expense to be between 33% to 34% of revenue, in the quarter, we expected to spend approximately $2.1 million in G&A expense on internal infrastructure. The actual amount spent was $1 million in the fourth quarter which accounts for about half the decrease in G&A expense. The remaining decrease is from the improved operating results, on the same locations referred to above.

Through 2009, we discussed internal investments and compliance quality education and IT that would decrease G&A expense that would increase G&A expense in the range of $4 to $5 million.

In 2009, we spent approximately $2.8 million. We expect to complete these initiatives and have included in expense in our 2010 guidance of completion of those expense. We expect G&A expense to be approximately 32% of revenue in 2010. We expect at that bad debt expense in fourth quarter to approximate $2.1 million or 1.5% of revenue.

However, bad debt expense was $585,000 an improvement over expectations of $1.5 million or $0.05 per diluted share in the quarter. Several factors contributed to this. Throughout 2009, strong collections on receivables, particularly older receivables, improved our agings.

Receivables over 365 days old dropped from 4% of total receivables at the end of last year to 1.7% this year. In the fourth quarter, we billed approximately $146 million and collected approximately $141 million. Day sales outstanding or DSO at December 31, 2009 improved to 48 days, compared with 51 days at September 30th.

In evaluating the adequacy of our allowance on uncollectible accounts at December 31, 2009 we considered these factors. As well as evaluating in hindsight, the adequacy of the reserve reported at the end of last year. As a result, we reduced our bad debt reserve as a percentage of total receivables from 14% at the end of last year, to 10.1% at December 31, 2009.

For 2010, we expect bad debt expense to return to 1.5% to 2% of consolidated revenue. The effective tax rate for the fourth quarter was 38.7% compared to 36% for the fourth quarter in 2008. The effective tax rate for the year of 2009 and 2008 was 37.8%. For 2010, we expect the tax rate to be approximately 38.5%. Cash provided by operations was approximately $14.4 million in the fourth quarter of 2009, and $49.2 million for the entire year.

During 2009, we acquired one health tech, 14 home care agencies, and two hospice entities. The total purchase price of the acquisitions was $34.4 million which was paid primarily in cash. These investments were funded primarily through operations.

At year end, we had $5.7 million drawn on the $75 million credit facility. As of today that amount has been completely repaid and nothing is drawn on the line of credit. CapEx for the quarter was $2.1 million, and $8.2 million for the entire year. We expect CapEx to remain between $2 million to $2.5 million per quarter in 2010. Depreciation expense is $1.3 million in the quarter and $4.8 for the year. We expect depreciation expense to be between $5.8 million and $6.3 million for 2010. We can drill down into these results further during Q and A if anyone desires. Now I am pleased to turn call over to Don Stelly. Don?

Thank you, Pete. Before I discuss our operations I also want to acknowledge our entire LHC Group team as many of you are listening in this morning. Your dedication to our patients, your commitment to our mission, and our constant desire to exceed expectations, even in the midst of change was amazing in 2009. And you put us in a prideful position for the future. We appreciate you and we thank you.

Now, moving on, I will start with quality. Our standardized, outcome index or SOI is calculated by OCS at December 31, 2009 was 1.94 while the national norm was 1.76. Again, our scores are significantly higher than the industry averages, but importantly we continue to improve each quarter.

We continue to use SOI as a concurrent measure of our improvement, in the nationally reported home health compare outcome measures, and in the latest reporting period we have improved in seven of 12 categories. We continue to make incremental strides in this area, and expect outcomes at recently acquired agencies to show incremental improvement thereby, aiding overall quality metrics for the company.

During the third and fourth quarter of 2009, we began our quest to become the first national home health and hospice provider to be 100% joint commission accredited. At the end of 2009, we had 119 agencies that obtained joint commission accreditation. In 2010, with we are scheduled to have 113 agencies surveyed and the majority of these will incur in the second half of the year.

While these surveys take considerable time, effort and intense resource allocations, our operators have proven their ability to build over expected result in the agencies while preparing for and going through survey. We'll see nothing different as we complete this process going toward this year.

Lastly, in the area of quality and service, I would also like to mention our recently announced partnership with the student group. Prior to going LHC Group, I was a hospital CEO, and had the opportunity to work closely with Quint and his team. Through this experience I had the opportunity to witness first hand the benefits of their evidence based tools, processes, and creating and sustaining outcomes, and service and operational excellent.

During 2010, we intend to work with the student group in order to provide our professionals additional resources to help further differentiate us in quality and service. Turning toward technology, investment in and appropriate use of point of care technology is continued to be an overall part of our operational platform. We now have 28 locations on point of care and pleased with their predicted modeling and associated results.

Because of such, 2010 acquisitions already on point of care may be integrated utilizing one of the three systems in those 28 agencies that I just mentioned. Going forward we will be pursuing two integration tracks for point of care. One is related to acquisitions and the other will concentrate on same-store conversion. This 2010 year will be more heavily weighted towards inquisitive piece in years 2011 and 2012 we will incorporate both more equally.

I have previously publicly stated that we intend to be fully implemented by this three year period and we're well on track to meet that goal. Throughout this year, I will keep you updated on our progress and any anticipated changes, if any, in the schedule.

I will now turn my comments toward our internal volume growth. Total in new admission growth for our Q4 of 2009 was 41.0% while organic growth for total new admissions in the fourth quarter of 2009 was 14.3%. Total new Medicare admission growth was 32.7% in the fourth quarter of 2009 while organic growth for the new Medicare admissions was 9.1%.

For the year, total new admissions growth is 43.3% while organic growth gor total new admissions was 17.1%. And total new Medicare admission was 36.7% while organic growth of new Medicare admissions was 13.7%. We have had three consecutive quarters now with over 8% organic growth in new Medicare admissions.

As Pete mentioned earlier, we have seen our commercial business increase throughout 2009. At year end, commercial patients made up about 13.5% of our total home health census, compared to 10.2% at the end of 2008.

This growth in commercial business is the result of our successful efforts to negotiate new contracts with managed care providers, to rates that more closely mirror Medicare rates. We intend these efforts to continue throughout 2010.

Turning now to de novo growth in 2009, we executed leases and applied for branch approvals for 13 denovo locations in the states of Alabama, Tennessee, Washington, Virginia and Mississippi.

In 2010, I want to change the way that we discuss de novo or new market opportunities. When we look at growth in new markets, that we have already acquired the rights to operate them, we will consider three options, the first is traditional branches, which are the de novos we historically discussed and I just disclosed. The second, is the use of a drop site, or what we will call a virtual office. And thirdly, we will will use point of care behind staff in grabbing that market share. Collectively, we will call these three methods green field opportunities.

In 2010, we have 30 to 40 green field opportunities planned incase de novo make up 30 of those but the remainder will fall into the other two categories that I just explained. If you have further questions about this new terminology and strategy, I will be glad to answer those during Q&A. In closing, I would again, like to thank each of our home office and field team members but I will now turn the call back over to Keith.

Okay. Thanks, Don. As you saw in our earnings release, we announced our net revenue and fully diluted earnings per share guidance for full year of 2010. Full year net service revenue is expect to be in the range of $610 to $620 million, and fully diluted earnings per share is expected to be in the range of $2.60 to $2.70. This guidance does not take into account an future acquisitions or green field opportunities and is based upon the CMS final rule for the calendar year 2010 released on October 30, 2009. And before I turn it over for questions, I want to, as always, thank our shareholders for your investment, for your confidence and your support for being part of the LHC Group family. And with that, operator I think we are ready to take questions at this time.

Thank you. (Operator Instructions). We'll take our first question from Art Henderson with Jefferies.

Hi. Good morning. Thanks for taking the question. Very nice quarter. Actually, this is kind of a question, Don you might be the one this is best addressed to. On the unmanaged care, obviously this is becoming a greater component of your business and you're getting the rates that you want, or at least negotiating those out. What's changed on the commercial payor beside from where you were a few years ago or where the industry has been for a number of years, where they've been reluctant to do it. What is -- is it density that's played into it, your presence in certain locations, what's really contributed to the change of the tide there?

Thanks for the question, Art. And it's a good question. And I will answer it in a couple of ways, I think the biggest thing that has changed is our approach. We have done a much better job of getting to decision makers inside of these managed care plans where is it is quite candidly, to start with lower level employees, so you have the right audience. Secondarily, with and as Keith mentioned we have been in the hospital JV business for a while. We have got much more adept at using them and the understanding of the marketplace to go to those managed care providers and show the value added proposition and service to show what it takes for us to take care of a patient, what avoidable days they can avoid truly inside that hospital, and that's really worked well. And the other part is honestly our back inside of taking care of that managed care business. Pete and the team have done a yeoman's job of doing that. So we just kind of combined those together. But I would sum it up by saying the biggest thing is we have done a better job of communicating, aligning with our partners to help us communicate that message, and right now, the last part I'll say is that everyone actually comes to me so I will make sure those rates are what we want and that the density is there so that we can get a return with the back office pieces.

Okay. That's very helpful. Keep up the good work. That's great. And on the point o of care side, I know you obviously have a time frame for rolling this out, your focused on the acquisitions front but right now you are 28 locations today. Where do you envision being by the end of the year? Is that something that, that you are willing to put a number around or a rough guess of where you might be?

It is -- first of all it is a rough guess, but I will tell you as I said inquisitively, when we bump up against these people on point of care they're no more profitable or less than on paper. So we have to plan to integrate those inside of point of care. So that number is anticipatory and would be a guess. But I will say this, we have a conglomerate in the state of Tennessee that we are going to convert at the end of this year. You can look at another conservative 20 agencies in our portfolio in same store side going to the point of care world. If I am just throwing it out there for you, Art, I would say about 50 total locations by year end.

Okay. That's helpful. And then just two quick ones and I will get back in the queue. On the, the gross margin looked better than expected. I am just curious if if we should, and you may have said that, Pete and I am sorry. I got on late on the call. If we should expect to see sort of a similar trend in your gross margin percentage and as always, Keith I would love to get your thoughts on the chaos in Washington, and where you expect, you know,w things to kind of go from here, and that's all I had. Thank you.

On the -- on the gross margin, Art, yes, we believe that the fourth quarter was pretty indicative of what we will look at for 2010. The biggest change from Q4 to Q3 were really some of the -- if you look back at the fourth quarter, 2008, the first quarter of 2009, we had some really large acquisitions that we rolled in. One was right up the road in New Orleans and the other two were pretty remote in Maryland and Washington. And each of them had unique challenges and turned around really probably about a quarter after when we would have initially forecast. So, that improvement in the fourth quarter is baked into the numbers in the fourth quarter margins, and we kind of think that's where we're going to sit at for 2010.

Okay.

Art, I will take the Washington DC piece.

I left you the hardest question of all.

Yes, no kidding. I guess this means, you don't, you don't have network TV in Nashville, I guess.

No, we haven't gotten there yet.

Seriously, you know the way we view this, time has been on our side since the fall of last year.

If health care reform would have moved on a fast track let's say around the Thanksgiving period, there was a higher degree of, it was a higher risk that certain components of the house bill, that really is Chairman Stark's bill, had the $54 billion number for home health. Some of that could have leaked into a finer bill but as the delay continued, our efforts began to catch up and we began to get more, began to have more and more traction.

The combined efforts of the National Association for Home Care and the Alliance and all of our colleagues in the industry working in Washington, DC, today, I think I can say with a high degree of confidence and I think the National Association of Home Care, Bill Donby would say the same thing, that the high water mark now is the senate package which is at about $39 billion.

Over a ten year period which is something that would effect smaller providers, as you have incremental reductions in reimbursement and margin compression, they don't have the ability to leverage and mitigate those.

But, it is survivable. And gives us plenty of opportunity for consolidation and growth, so it is the most favorable. So I think that's the high water mark now and of course the low water mark is if nothing happens, at least this year, we, you know, we don't get any, any cuts.

It is kind of hard to, you know, not that with we have any control over it, but it is a little hard to answer the question of which one you prefer because on one hand, while you have the $39 billion in cuts, you do have much more clarity than we have ever had in this industry. So, if I -- so if I were in control of the decision, I would probably vote for the senate package, just for the clarity. Around rebasing and some of the, you know some of the, some of the guidelines and boundaries that are established in that. But, beyond that, to handicap what ultimately happens, I really know no more than you would at this point.

No, that's fair. And I appreciate your comments on that. Thanks very much and very nice quarter.

Okay. Thank you.

Our next question is from Kevin Ellich with RBC Capital Markets.

Good morning. Thanks for taking my questions guys. Just want to go back to Pete and going back to some of the operating costs, you gave us some good color on the gross margin, mentioned. you know, the agencies you acquired in that late 2008 impact of that. I was just wondering is there anything unique about that, other than the size?

Well honestly, yes, I don't think we have gone into that on a acquisition by acquisition but the distance was also unique. The size was unique.

The payor base was also unique, all those kinds of things added to the -- added to the complexity and particularly, specifically, in Washington, we turned over the state director which is a key function in operations during that period and it took a little while to recover from that. I think those were really the specific things. The fact they were all big is what impacted earnings, you know, if they were all $2 million a year you wouldn't have seen it in the earnings but because they were all big and had those types of issues then you saw the turn around.

Understood, Pete. Thanks. And then going to the G&A expense you made a comment about you guys had expected to spend $2.1 million on internal infrastructure and you only spent $1 million. Just wondering what the difference was, why you didn't spend as much and is that going to get dragged on next quarter maybe?

Yes, it just got deferred out and I can tell you when we initially predicted what we were going to spend in the entire year on these initiatives, we had it laid out pretty aggressively the amount that we thought was going through in the fourth quarter. I mean from my perspective we just couldn't get it all done. So some of those costs moved into 2010. I don't think anything fell off of the table, and it is kind of cooked, when you spread it out over a year like that, it kind of blends into being pretty marginal. So yes, it is baked into the 2010 guidance.

Okay. Thanks, and then wondering if I could ask Don a couple of questions on organic growth, the average weekly census, it seems that Q4, you know, low single digits is that seasonal of is that -- what's behind that?

You kind of the main thing, honestly, I don't think it is seasonal. I think when you look, and it just so happens every once in a while to fall that way. The amount of patients that normally you would go ahead and research, we just simply didn't have that amount in the fourth quarter. It was just time to discharge them, and that's just the way that fell.

The other part of that is, is you also have to look at the preparatory work for oasis, that kind of fell into that. So those two things combined is the majority of tha piece. But I think it also ties back into the acquisition part that, you know, Pete was talking about some of those growth areas, and some of those challenges, and I will be very candid. The other piece of that in Washington was the lack of staff that was available.

So even though you have market share you bake into projections of growth, if you don't have staff to take care of that flushes through that. So, I think that's what you really saw.

Got it.

I will say this, if you look at the numbers and the organic growth, and by the way, our organic revenue number too, you will see those trail with the organic admission number that we're turning in right now at, I think that was, 11.6% for the quarter.

Yes, looks pretty good. And then, I don't know as I -- if I'm doing the math right but average revenue per completed episode looks like it went down about 5% or 4.8%, just wondering what's behind that outside of, you know,case mix crete or anything else there?

Actually, you are absolutely right. It is not actually case mix crete, it is reflective of the patients we got in into the quarter. I mean you've got to remember 32% of our total patient population fall into one of three categories. That's diabetes, hypertension and congestive heart failure. And if you look at the case mix of those patients, and by the way, those are what's in the majority of rural America. That comes with a lower case rate. So, i is just kind of tough to follow that way. I don't see that continuing to fall, but it just kind of flushed through just like the census.

Got it. Okay. And then I will through this one out to, I don't know, maybe Keith. If you could talk about your specialty programs and also ancillary segments, you know, you have the long term acute care hospitals but wondering your thoughts on Hospice? It seem like that's a hot natural add on for your business, if you want to grow that. Any comments?

Yeah, I will tell you what. Don and I will tag team on that one. Let me say that, start with hospice. Hospice is an area of our business that we are very excited about. We have seen tremendous improvement in our modeling in hospice and we see it l following a similar path to home health. I believe that you will see that it will be a very important percentage of our growth in the future.

I will let Don talk more about that. With regard to LTAX, we couldn't be be more pleased with the performance of our existing LTAX, the management team and operations team, we have that oversees that piece of our business, statistically, they're as good as it gets.

Now, we don't have the volume that the major LTAX players have, of course, but the LTAX that we have are in communities where we are the clear dominant provider in home health services, so it ties in the continuum of the elderly population we serve. So I guess if your question is whether we are considering to divest that piece of business, or anything like that, that answer would be no. At this time we are very happy with that and we just intend to continue operating it. Don, would you like to add some color to that?

Sure, I will Keith. And good question, Kevin let me answer it. Let me keep with the LTAX theme right now. I will say I think Stewart Archer and his team have done just a yeoman's job again.

They continue to deliver those kind of results even if you have a net revenue decrease, I mean, since I've been here in five years, the total net revenue decreased in those hospitals, all factors considered equal, has been around 12% and yet our team has delivered consistent and even out margins. So, no we don't plan on doing anything with that. As a matter of fact we are up to 188 beds, and we only actually managed 32 beds. So we have nine of those hospitals in portfolio right now and they're doing very well.

Turning it towards hospice however, as equally, I've got to complement our hospice operators. Those margins have wobbled historically but they're not doing that in the last six months, so it's given us and quite candidly me, the confidence to go growing. Before you never know what I was going to turn in. Now, it's predictable, and it's solid. So, w have an organic growth plan and honestly we are looking at inquisitively as long as it compliments our home care markets.

Understood. Thank, guys.

Your welcome.

Our next question comes from Ralph Giacobbe with Credit Suisse.

Thanks. Good morning, I guess, I mean you obviously talked about the benefits on hospital side and your relationships and continue to put up good volume numbers, can you give us a sense of either how much of your volume growth or maybe what percentage of volumes come from, you know, the hospital JV's?

I can tell you that the percentage of revenue in total coming from the JV is right at a half. And that has grown over the last two or three year, I believe it was down around maybe 38% or 39%, a couple of years ago. The JV strategy that we applied this year has,or that we apply, has caused us to depend a little bit more on those, on those relationships for revenue.

The other component of that is it generates a little bit more profit to the bottom line now because the percentages that we have, we use to negotiate probably 80% of them were 66/33% relationships and now we have gone to a 75/25% relationship. So you sort of see in a growth in revenue, that is based on generating a little more to the bottom line from those JV partners.

Ralph, this is Don. I will take the growth part of that. I've got to tell you, if it's JV, I don't even look at it that way. We expect our agencies to be number one, two or three in the market and if they're three there's a time frame that we're going to push toward to be number one. So, I think the first thing we do is we look at the external demographics of the market. If it is a small JV, what can we tap. If it is a large, the same. I will tell you that the 12.6% baked in number of increase in admissions throughout 2010 blends those evenly. So, not one is more important or heavily weighted. They're different and they're based on the demographics of the marketplace.

Let me, Ralph this is Keith. I will say just one more thing about that. I mentioned in my prepared comments, that in 2009, because of the uncertainty around reimbursement, it seemed that there was more of a disconnect between expectations of buyers and sellers. I could have been more clear. And I probably should have said that, I was specifically speaking about free standing agencies and at that, in those comments we did not see that with hospital agencies. It is such a small piece of a hospital's business, really the uncertainty around reimbursement didn't slow that piece of our pipeline down at all. So, I think that contributed to you seeing more activity in hospitals maybe as a percentage in 2009, and I look for us to be much more active in the free standing side going forward.

Okay. And then, you guys mentioned projects and maybe looking a little differently. You have the traditional de novo. You said number two is virtual office. I missed what the third one was. What was that?

Ralph, it's using our point of care strategy. Essentially using point of care with the existing staff inside of that marketplace and seeing the patients like that. And let me tell you I want to be very transparent. CMS is tier 4 status caused us to step back and figure out how to still serve those beneficiaries, when you are inhibited or prohibited from putting a physical plant there. You know, we bought a lot of geography, Keith talks about the land graph that we have been the last couple of years, and organically, that's how we are going to get it. So, it kind of made us step back and get a little creative. So, you know, all three of those, and I will just put this out there. Regardless of what three, whether it's de novo, virtual office or simply point of care, when we say we're going to do 30 to 40 of those you can kind of model in between 50 to 75 patients after a 12 month strategy there. And the revenue associated with that.

That's helpful. Just help me understand the virtual office a little bit better.

Essentially a virtual office a very small physical plant where staff goes into that to simply get supplies. Hook and sink up with our system, than when you don't have a signal or capabilities, but really a virtual office is not recognized as anything by LHC. You cannot hold yourself out to the communities as a provider of home care services in that location. You can't have signage et cetera. It really is kind of a meeting place to make sure that you get physician's orders and those type things but you cannot hold yourself out. So, that's the difference between a virtual office, or drop site as a branch.

That's helpful. And then just my last one, are you seeing anything on recruiting and retention of your staff, just given some of the volume trends that you've seen in the areas of pressure, finding difficulty maybe to staff up.

Honestly yes, the Northwest and Northeast. But our push, our engagement it is going to help that, it already has but I will tell you, we mitigated that and still do right now, so at this time, we don't have any pressures, but what happened when Pete was alluded to that and I chimed in on Washington, it was far and we didn't know. We didn't have the ground cognisance as we do in normal locations, and we kind of stumbled upon that but we did some creative things and that ranged from, you know, international recruiting to doing some competitive work I would say.

Okay. Thanks very much.

You're welcome.

Our next question cops from Darren Lehrich with Deutsche Bank.

Thanks. Good morning everybody. Just a couple of questions here, Keith, you mentioned your prepared remarks that, you know, sounds like you were acquisition pipeline obviously is gearing up and you indicated that in the focus in 2010 maybe in some larger multi site deals, I guess my question is, you know you have done a number of multisite deals in the past, and we have seen success there, but you know I think the greatest success, or at least perception is that, you know, you have created the most value with some smaller, tuck in deals, some of the smaller market deals where you can price them very well and grow them very well. So, I guess I just want to get your thoughts on kind of how you are thinking about some of these larger deals, and if there's, sort of, a change in your strategies or thought process there and how you guys are just setting up a little bit more from an integration standpoint?

I got it. I really want to thank you for that question. It gives me an opportunity to clear something up. Make no mistake, you know, these -- what's brought us to dance these smaller acquisitions with huge upside potential that have been so accretive are the most important part of our strategy. And if anything we are looking to double the strategy in our, in the pipelines going forward. As a separate, as a separate strategy, there are a, there are are a handful of home health provider, that are are long standing with strong operational background and would enhance the ability to grow certain geographic regions that we are focused on, but those for us would really be what we refer to as platform type acquisitions, that would give us more experience in a geographical area. So, you know, we're not going in to look at -- in those cases to purchase revenue, we are looking to purchase a base that would allow us to greatly expand in that geographic area.

So that is great. And thanks for the clarification. So, it's really looking at platform deals that have regional density, from if I am hearing correctly.

That's correct. Okay. And then, I guess I just had a question as relates to hiring and training and just sort of building out your staffing capacity. If I heard Don's answer correctly to an earlier question, you know, that's always a constraint for everybody in the industry but I am just wondering how you guys are managing that, you know, whether you feel a need to build out staff a little more aggressively to sort of get ahead of that, or maybe if you can help us think about how that may play a role if at all, on gross margins and I think Pete said that the gross margins may be similar in 2010 to '09. I've been in this business a long time and I can't remember a year that staffing wasn't a concern. So, I think I've got to tip my hat to the operators because you have to find a way to do it even in lieu of that problem period. So, I don't think you'll see my committment to this management team that you won't see our gross margin be affected by that.

There are too many other external factors not in our control to let that happen. We have some really good things, going on with our leadership development, and truly, this is a national statistic, people go and come to organizations because of the culture. And they leave because of their boss.

So that's a long way of saying that we're going to be the provider of choice and their employer of choice. And that really does go a long way because I've got to tell you as I nurse I know that to be true. And so we we're going use that and this insight that I have as competitive advantage. I will say we have done a good job, and we will do a better job of converting contract labor utilizations to employed status, so when you put all of those out on the table, I don't see SWB, our salaries, wages and benefits being increased any more than any other year other than our normal merit raises and performance based incentives. I don't think that's a concern of ours. It is always a problem, and I would really hope one day that I don't have to say that, but that's not the case today.

Okay. Thank you.

You're welcome.

Our next question comes from Newton Juhng with BB&T Capital Markets.

Thank you very much. Actually, following up on that response there, can you give us an idea as to how much your break down is what's contract labor versus employee at this point? How much are you utilizing it? How much room to do you have to go here.

On the therapy side, Newton, we have about 50%. Of all, of all therapy dollars spent are contract but we do have a ways to go there. But I'll caution you, even when we execute that, you've got to do certain things be employing them that even the benefits side can offset that. Where you get the biggest advantage is that they are now partners with you. They're employees with you, so you can do things from a productivity stand you couldn't otherwise do as a contractor.

Sure. Sure. Obviously you would, ideally, you'd like to have more rather than less though, and you are migrating toward that.

Yes.

Another question here just on minority interest, once again it was kind of in the $3 million range this quarter, I was wondering if you could provide us an idea of what you have baked into your 2010 guidance on that front. Is this level that we saw in last quarter from a percentage of revenue basis where we should expect it going forward, or can we see a return to where you were at in the first half of the year?

I think that we -- I think that 2.2% is a little bit low. And in the guidance, we sort of cooked in 2.5%, it wouldn't surprise me if we got to 2.7%, but that's probably the range that it is going to wobble around in, somewhere between 2.2% and 2.7%.

Okay. So, kind of in between where we were at and where you were in the beginning of the year. Okay.

And you know, Newton the part of it is that that's a hard number to predict just because of the ownership difference is and where the money is being made. But I really do think the trend right now is downward as a percent of revenue because our deals are changes, we are owning more of the JV's going forward and have been now, I don't know, maybe about 18 months. So, you're see a trend coming down, it is hard to predict much closer than that because where's the money being made, is also.

So, Per, in your financing activities on the cash flow statement that purchase of additional controlling interest, and was that for the year or just for the quarter that the $2.3 million that's in there.

It was actually it was for the year, put it was all done in the quarter.

I see. Just wanted to double check that. The other thing was just wondering about was the, the definition of active negotiating stage, that Keith had mentioned before, what is your close rate on that, but you are making some active bids here on the later stage, you know, once they hit that point high degree of confidence, but at the same time is that close rate, you know, 75% , 80% of what you got usually in that

And also a timing on that would be like within the next year or so or it can be longer than that?

Yeah, I think 80 -- let's say 80% to 90% in the timing would be less than a year. And so something would have to go wrong for it not to close. So I say 80% to 90%, if everything goes on track, based on what we know today, it would be 100% but some times in the due diligence process something pops up. That's unexpected and that's where something might fall out.

Got you. Got you. And then one last question just on the de novo front, 25% to 30% is what you talked about in your guidance, I was wondering about relatively smooth, is there anything that could potentially slow down the process, and have a bunch of them kind of open up at the same time or are we looking at de novos over the course of the year should see a normal, a normal quarterly release of them.

I think we'll always see, based on the last two years of what we done is that Q2 and Q3 more heavily weighted then the first and the last quarter. That's exactly how we have it mapped out right now, 2/3 of the number that we just talked about or in that six month period.

Ok, thanks for the help in putting the seasonality on that.

Our next question comes from Kevin Campbell with Avondale Partners

Good morning. Thanks for taking my questions. On wanted to start if you could remind us on the active candidate pipeline. I think you said you had 15 active negotiations, how does that compare to where you have been in the more recent quarters, can you remind us of the history there?

Yes, I don't have those numbers in front of me. But that would be included in that category, it would be less. Because of what I talked about earlier. Generally in 2009, especially with freestanding acquisitions that would also be included in that number, again we saw this, this gap in expectations between the sellers buyers, and then there was somewhat of a wait and see mentality. So with those numbers would naturally be down at this point in the cycle. But as we go forward based on the conversations that we're having now, I think that number will come back up in future quarters as we go into 2010.

Okay. Great. That makes sense. When you look at your recertification rate, you had indicated that that was low in the quarter does having exposure to payers impact that at all, do they manage that process more tightly, the recertification process more tightly. Would that be something that's causing that?

I will answer it in two ways. The commercial, we don't look at that, definitely have a bigger play in that because many times you've got to preauthorize visits but the recertification rate that I was eluding to was on Medicare side and we've always talked about that rate. and it's not tremendously low compared to what it's been. But about 1.52 at that roll in versus the last quarter of 1.54.

Okay. Excuse me. I am curious if the lack of seasonal flu that we have seen here through the first quarter, should have any impact on your outside volumes, year-over-year basis, because last year I am sure you had -- there was greater impact from the seasonal flu here in the first quarter, will that impact volumes at all?

I don't think so. You know we are just under 80% r right now. And two of our LTAX and that has nothing to do with that and one is truly heavily weighted toward. So, while we may see that a little bit, I don't foresee that as a problem. I think we will see the same consistent performance as you can look at right now and factor through the rest of the year.

When looking at the segment as we model, can you remind me how that changes sequentially, should we expect it to be consistent and model that going forward, or are there any particular quarters where you have different types of patients where maybe that might fluctuate?

I will take the first part and go over it with Pete if he has anything to add. You can factor the same PPD number going forward. You know, with the rule changes we all factors considered equal, this year we would see an aggregate 1% net revenue decrease but we have already done a good job of mitigating that. So from our eyes Pete I don't see that changing if you will weigh in.

Yes, I think that's right. The -- we really had a good 2009, the, the case fix a little bit higher, the first and fourth quarters were a little higher than they were last year, we added a couple of LPACS but I think what we did for the forecast it is really just leave that flat going from the fourth quarter run rate, damped it down a little bit for the seasonality, the second and third quarters. And then we ran it into next year -- so I don't, I don't necessarily think that with we will anticipate 2009 because I do think we had some up tick there, but I will --

But on a per patient day basis I think you actually right..

Okay. Great. Last question, as you look at some of these larger acquisitions you had mentioned you would target specific geographic regions, can you, are you willing to provide any comments as to where you might be looking in and why?

No.

I thought I would ask anyway. Great. Thank you very much.

Thank you for asking.

Our next question comes from Matthew Gilmore with Robert Baird.

Thank you for taking the question. Calling in for Whit this morning. I want to get your thoughts around the 36 month rule, a more aggressive M&A strategy you have outlined.

It is a good question, and good morning. We have been very involved in that discussion, and I will personally been to CMS as part of two separate delegations. And you know, the intent is the stated intent when we meet with CMS officials in person is to try to get a handle around what they believe to be the the out of control proliferation of new start up agencies and they specifically, they specifically say Miami-Dade county and Harris County in Texas. So, it is amazing to hear that focused on two counties. And so we try to explain to them, that there are better ways at getting at that problem. But I think where they are now is that they're, there zeroed in on not approving changes of ownership for agencies that have had a change of ownership within the last 36 months. Now, in our case, we went back and reviewed all of our transactions we have done historically and it is extremely rare for us to pursue an acquisition in an agency that has been owned for less than 36 months. The only thing that with we run into from time to time are agencies, long established agencies for one and one CMS has told us is their intent is not to focus on those type but when we have them we will have to address them on a case by case basis, and we have successfully gone with one of those that had occurred got it overturned. So I don't think CMS is on a mission to in any way stop consolidation in the industry, and in fact they understand that consolidation brings economies scale ultimately results in more efficient services that they purchase for their beneficiaries. They simply, making an attempt to control the back layers if you will in the business. We will continue to work with them. The dialogue is on going, and I believe that we will improve the situation. But I don't believe that you are going to see an announcement from CMS that the whole 36 month rule goes away in any short period of time.

Do you have any sense for when they might refine the rule to make it more easy to handle?

I don't.

Hard to tell at this point?

I don't. We have tried to push them on that and face to face meetings, and they refused to backed into a corner. They only tell us that they are, consolidation, and they say all right things but they haven't given us any indication they will make a different ruling.

Thanks a lot.

Our next question comes from the line of Andreas Harnagle with Stephens

Thanks. Keith, I was wondering, you mentioned a couple of times now that GAAP in expectations in terms of size buyers and sellers is coming back together. I wanted to make sure I understand that. Is it basically that buyers with the listing of the uncertainty, are willing to reduce the discount you might have wanted in order make an acquisition or is there a reason the seller expectations are coming down?

I think it is both, and and other early on that said they wanted to wait and see how reimbursement fleshed out. I mean if there was no health care reform, then that would mean there would be no cuts. So the value of their business could be greater. Some believe that. And on the buyers side, with the house bill in cuts and the senate bill at $39 billion it was hard for us to pro forma out postclosing to determine IRR and to make a decision in the Board remember especially on significant material acquisitions. So, you really had no which I say but to factor in the high water mark which was the house bill. So, what I am saying is now that we know the high water mark as we see it is now the senate bill, if anything, and I see sellers being more realistic of, you know and saying well there's going be some reduction and reimbursement. We are getting pack closer to together.

Okay. And then, you mentioned that just now in terms of your internal IRR calculation, I am just wondering, in terms of what you -- at this point, has there been sort of any change in in the calculation, are you making more aggressive. , or is it basically still same methodology with the

It the same methodology and the same hurdles, but we have gotten so much better on the operations side and the transition side that, it is making it easier for us to reach those hurdles. So on some deal, we are able to i price them more competitively because of how well we are doing operationally.

And then finally you mentioned baked our guidance is the final rule. Given the fact it looks very likely and I think you said this yourself, if health care reform does come through it will be mostly the form of the senate bill. What are the major differences between the final rule and the senate bill basically just 100 basis points in the market and then the 3% it is really nothing for 2010. You know, the -- if we believe that if the senate is health care reform passes as far r as our guilt or innocence dance, we are assuming the fact that whatever passes would not go into effect until 2011.

Okay. Great shifting everything one year forward from the way the legislation was written. Yes.

Okay. Great. Thank you very much.

At this time, it appears we are no further questions in the queue. I would like to turn the conference back to Mr. Myers.

Thank you, operator. And thanks everyone and on behalf of everybody here at LHC Group, thank you for taking the time once again to listen in and participate in our call this morning. As always, we are available to answer any questions that may come up between our quarterly earnings calls. So have a great day and thank you again for supporting and believing in LHC Group family.

That does conclude today's conference call. Thank you for your participation.