LHC Group Inc (LHCG) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group's Q4 2010 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Eric Elliott, Vice President of Investor Relations.

Thank you, Jevon, and welcome everyone, to LHC Group's Earnings Conference Call for the fourth quarter and year ending December 31, 2010. Hopefully everyone has received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry, on our website at lacgroup.com.

In a moment, we'll hear from Keith Myers. Chief Executive Officer; Don Stelly, President and 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, but are not limited to, comments regarding our financial results for 2011 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'm pleased to introduce the CEO of LHC Group, Keith Meyers.

Thank you Eric, and good morning everyone. We'll keep our prepared comments brief this morning to allow more time for Q&A. In a moment, Pete Roman will provide a financial overview, and Don Selly will provide an overview of ongoing operational initiatives. But first, I'll provide a brief overview of our 2011 guidance, and then an update on acquisitions.

As we announced yesterday afternoon, full-year net service revenue for 2011 is expected to be in the range of $660 million to $670 million, and fully diluted earnings per share is expected to be in the range of $2.15 to $2.25. This initial annual guidance takes into account certain non-recurring costs expected in Q1 of 2011, but does not take into account the impact of any future acquisitions, de novos, or share repurchases.

Now, with regard to acquisitions. From 2005 to 2009, our acquisitions team completed 67 transactions, acquiring $201 million in trailing 12-month revenue. In 2010, these same 67 assets accounted for $367 million of the $635 million in revenue reported for the year, or an approximate 30% compounded annual growth rate on acquisitions made in the five-year period. Also in 2010 alone, we completed another 14 transactions, and have already completed five transactions in the first two months of 2011.

So in total, we've successfully completed 86 transactions over a 74-month period. The average size and volume of acquisitions continues to increase, and we look for this trend to continue as consolidation in the industry accelerates.

Our strategy of partner with nonprofit hospitals and health systems continues to be a key niche and differentiator for us. We've been able to leverage the experience and relationships of key Board members and our Management team, and our proven track record, to position LHC Group as the clear leader in this area.

Of the 86 transactions completed over the 74 months, 56 of these were hospital or health system joint ventures. From an ROI perspective, joint ventures have performed significantly better than freestanding acquisitions over the years, and we see this trend continuing. At this time, we have $107 million in trailing 12-month revenue in our active pipeline, and 88% of this is associated with ongoing nonprofit hospital joint venture discussions.

As for pricing, we've already seen a decrease in valuations for transactions completed in 2011, as compared to those completed in 2010. We also see an increased volume of sellers coming to market, and we intend to leverage our strong balance sheet, and our proven ability to evaluate, close, and integrate acquisitions even more in 2011 and beyond, to take advantage of the growth opportunities we see ahead.

And now, I'll turn it over to Pete for a review of our financial results.

Thanks, Keith, and good morning, everyone.

Comparing the results of the fourth quarter in 2010 to 2009, our consolidated net service revenue increased 18,8% to $168.1 million. Net income attributable to LHC Group decrease 9.6% to $11.4 million, and diluted earnings per share for the quarter was $0.63.

The effect of the CMS rate update was to reduce reimbursement by approximately 5% for all episodes starting in the fourth quarter of 2010 and ending in 2011. This rate cut reduced revenue of approximately $1.8 million in the quarter, which is about $0.06 in diluted earnings per share.

We began converting all legacy building and revenue systems during the fourth quarter to Homecare Homebase, and today we are on two systems. We determined this conversion to be necessary because each vendor had to address the pending 2011 changes and documentation and process requirements, and we did not see a standard methodology developing. Therefore, it would have been necessary to develop different internal procedures, depending on the billing software program. We concluded that acceleration of the conversion of these legacy systems was more prudent. The fourth quarter cost related to these conversions was approximately $1.6 million, or $0.05 in diluted earnings per share, and the conversions were completed during the first quarter of 2011.

Home-based segment revenue was $147.6 million, an increase of 18.4% compared to the same quarter in 2009. Home-based segment revenue is made up of $138.9 million in organic revenue, and $8.7 million in revenue from acquisitions. Total organic home-based revenue growth was 11.4%, and organic Medicare revenue growth was 10.2%. Our home base segment makes up 87.8% of total consolidated revenue.

The facility-based segment revenue was $20.5 million, an increase of 21.9% compared to the same quarter in 2009, and consists of $17.2 million in organic revenue and $3.3 million in revenue from acquisitions. Our consolidated gross margin was 47.9% in the fourth quarter, which is higher than last quarter, but lower than the same quarter last year. Last quarter we had about 110 agencies working through joint commission accreditation, which reduced gross margins. We did not initiate this process for any agencies in the fourth quarter.

The decrease in gross margin compared to the same quarter last year was caused primarily by the $1.8 million reduction to revenue caused by the CMS rate cut. Additionally the gross margin in the LTACs was lower than in the fourth quarter last year due to a decrease in revenue for patient day, and an increase in pharmacy expense. The combination of these two items led to a margin decrease of about $400,000 for the LTACs in the quarter.

G&A expense in the fourth quarter of 2010 as a percent of revenue was 32.9%, which was higher than last quarter and last year. This increase in G&A as a percentage of revenue from Q3 to Q4 was primarily caused by the cost of converting our legacy billing systems to Homecare Homebase. In addition, the reduced revenue from CMS rate cut increased G&A as a percentage of revenue during the quarter.

Generally we do not provide guidance on a quarterly basis; however, we're going to provide some clarity regarding the first quarter of 2011. We completed the conversion of our legacy systems in the first quarter of 2011, therefore we will have costs in the first quarter related to that effort. In connection with our initiatives to reduce overhead costs and offset some of the CMS revenue cuts in the first quarter, we reduced administrative personnel and incurred severance expenses.

We are educating caregivers on the face-to-face requirements and the new therapy regulations that will become effective April 1, 2011. We estimate this will require approximately 16,000 hours and the cost of this education will be primarily incurred in the first quarter.

And finally, the host hospital of one of our largest LTAC locations is undergoing construction, and we will lose ten beds over six-month period. Because of these factors, in addition to this being the first quarter with the CMS reimbursement cuts in full effect, we expect first-quarter 2011 EPS to be in the range of $0.32 to $0.35 per diluted share. Regarding our guidance for 2011, we estimate the reduction of revenue of the CMS rate cut to be approximately $25 million.

For 2011, we expect our gross margins to be 44% to 45% of revenue, and that G&A will be approximately 31%. Included in our guidance is the cost to continue converting agencies to Homecare Homebase. During conversion, productivity and operating margins decline. In addition, G&A increases because of training and education. In discussions with April Anthony, the CEO in Homecare Homebase, and her staff, it takes six months to recover operating margin to their pre-conversion level. After that, what they have experienced is that the margins improved over pre-conversion levels.

We have not built into the guidance margin improvements for those agencies previously on legacy systems. However, we expect improvements to begin late in the second quarter, and we expect these margin improvements to help fund conversions.

Keeping all these factors in mind, our estimate is that earnings for 2011 will be in the range of $2.15 to $2.25 per diluted share. We can drill down into these results further during Q&A. Now, I'm pleased to turn the call over to Don Stelly. Don?

Thank you, Pete.

I'll first touch on the internal growth. The fourth quarter of 2010 produced the highest three-month organic growth period within the last two years. We knew this was a critical success factor for 2011 and beyond, and thus spent considerable resources and effort during the past year to model our market development team and our sales programs.

Total new admissions growth for fourth quarter of 2010 was 21.3% as compared to the fourth quarter of 2009, while organic growth for total new admissions in the fourth quarter of 2010 was 11.5%. New Medicare admissions growth was 15.6% Q4 of 2010, that's compared to the fourth quarter of 2009, while organic growth for new Medicare admissions was 8%. This growth in admissions has contributed to us now having the highest census at any time in our Company's history. As stated in previous calls, we still expect organic admissions growth in the 5% to 8% range during 2011, and expect the census growth to be in line with these numbers as well.

Next I want to touch on the regulatory environment, and expand just slightly on what Pete said. April 1 is quickly approaching, and these new Face-to-Face therapy rules will go into full effect. We have been preparing for these rules since last July, and now have the systems, processes, and the education in place to comply. Test will run in pilot locations, so we can re-define any processes, and be fully ready to comply when they're effective shortly.

Going into the fourth quarter of last year, we had agencies on six different clinical systems. As I indicated on our last call, we considered it imperative to get down to the two, in order to be prepared for Face-to-Face, the therapy mandates, and to increase efficiencies in dealing with revenue cuts. Since signing our partnership agreement with Homecare Homebase in September of last year, we have converted 33 agencies inside of that fourth quarter of 2010, and 17 additional agencies in this first quarter of 2011.

As Pete has discussed, we incurred a $1.6 million cost in conversion, or $0.05 per share in the fourth quarter and have incurred similar cost in this first quarter of 2011. As of today we have completed this accelerated pace.

Going forward, we will continue to convert to Homecare Homebase on a Company-wide basis, but without the intent of acceleration, and without the need to adhere to a predetermined schedule. Our due diligence on the Homecare Homebase product, and the home care and hospice companies that use it, inclusive of ourselves now, clearly demonstrate the financial return on this investment.

Because of this return, as well as other demonstrated benefits of this approach, our Management team as well as our Board of Directors, believes moving from paper to this point-of-care platform provides the best foundation for future success, and the greatest value to our shareholders, through scalability, workforce efficiency, and overall margin improvement for our home-based portfolio.

Earlier, both Keith and Pete touched on our cost reduction initiatives that have been executed in this first quarter of 2011. I want to re-emphasize that no cuts were made that adversely affect patient care. We have focused these reductions on general and administrative costs that include, but are not limited to, FTE reductions, contract renegotiations, outside vendor cessation and/or reductions, as well as discretionary cost control. Our Q1 guidance that Pete has given includes one-time charges needed to recognize these savings, and our fiscal year 2011 guidance incorporates both.

My last update is on our progress with our Joint Commission accreditation. At the end of this 2010 year, we had 249 of our 294 home care and hospice locations Joint Commission-accredited. The remaining agencies and acquisitions that are not included in the aforementioned number are those that are new into LHC Group, and are on schedule to be accredited as well. We will continue this approach to quality, and I'll update you of any changes that the year may hold.

I will now turn the call back over to Keith.

Okay. Thanks, Don. Operator, I think at this time we'll go ahead and take questions.

Thank you. (Operator Instructions)Our first question comes from Newton Juhng with FBR Capital Markets.

Thank you very much guys. Had a quick question about the severance cost you have here. In the $0.32 to $0.35 that you're guiding for the first quarter, is that a baked-in number, and can you give us an idea of what the level of cost is associated with that? So we probably want to strip that out, since it's a one-time item?

Yes, I can tell you about the amount. It's around $650,000 in the quarter, about $0.02.

Okay. About $0.02. Thanks, obviously helpful. As I look at your facility-based revenue, it came in a couple million light of our estimate. Understanding the factors you were pointing to earlier, but can you give us a little bit more idea -- is there some seasonality in the fourth quarter that we should be keeping in mind here? And in particular, the gross margin coming up a lot, where it seems like the top line impacted that as well. Can you give us some help on understanding how we should be looking at the facilities, seasonally and going forward?

Sure, I think that the first and fourth quarters have traditionally been a little bit stronger for the LTAC' than the second and third quarters. I don't think that part is going to change. In the fourth quarter this year, we actually had several patients that got to the limit on the number of reimbursement days that they had available to them. We had about 500 days that were non-paid days. So if you look at just the days in the LTAC', per-patient-day revenue was a little bit lower as a result of that.

We also have some payor changes that -- we had this in the past. It depends on the mix of the Commercial payor's, also. I don't think either of those are seasonal, I just think that they both happen in the quarter. We kind of forecast the LTAC side to be in the $73 million to $74 million range for 2011, and primarily the drop has to do with the effect of this payor change that we're seeing, as well as the decrease in the number of beds at the LTAC. Don, do you want to talk about the (multiple speakers) --?

Yes, Pete. And Newton, I think Pete has done a pretty good job. We've said so many times to bake these things through as a pretty consistent level. We do have these two main factors of the payor mix diversification and this bed issue that are going to depress that going forward. The bed issue is not going to resolve itself until July 1. So even when we get our beds back on July 1, we anticipate it taking at least 30 to 45 days to get the word back out, and get the percent occupancy back up.

Okay, great. Very helpful there. And then, last question from our bigger picture for Keith. We're a few months away from the next proposed rule, and I'm just wondering what your impressions are at this point right now with how the lobbying effort has been progressing? Specifically, I know it's hard to kind of peg it, but do you think that the industry is in a good position to not get -- to get a market basket without some sort of offset? Or whether or not there's any kind of insight you can give us on that front, would be helpful.

Yes. I can tell you that the industry's never had a better advocacy team in place right now. Our own Lead Independent Director, Chairman Tauzin, is very active in that group, as is Senator Breaux and Podesta Group -- a number of people. The Home Health Advocacy Coalition has recently hired a new CEO that's full-time in DC, and dedicated to the effort. I feel really good about that. I feel we've also got a number of research projects underway, with respected firms inside the Beltway that we believe will provide compelling data to members of Congress, as well as CMS.

So, that's what I know. But I also have to tell you that when we went through the battle last fall to try and block the 5.2% cut, and we had meetings directly with CMS, we presented what we thought was very compelling data, and I think the thinking at least in October, or maybe in September, was that we had a better than 50% chance of blocking those cuts, and we ended up coming up short. So that's why I may sound a little bit hesitant. We have a great team, a lot of good data. But we need to see a different level of interest from decision-makers in Washington. Hopefully that will come to pass this year.

And Keith, those projects that you've got working on to provide data to CMS, do you think you're going to be able to get that before the proposed rule comes out, or is that something that you're probably going to look to use if necessary towards the finalize rule?

Oh, no. The projects I'm talking about here are projects that were put in play in early February, and they're all -- they had four- to six-week time lines. So they'll all be out before the end of March, and in the hands of the advocacy team to begin working.

Got you. Thank you very much.

Okay.

Our next question comes from the line of Darren Lehrich with Deutsch Bank.

Thanks. Good morning, everybody. I guess, Pete, I'd love to just maybe follow up on the question around first quarter. Maybe, just to get a little bit of a bridge perhaps to how you think that sort of run-rate [excess] costs -- I think you've given us a few of them discretely -- the severance, the conversion costs, the training cost --maybe just a little bit more, to give us a sense of what your sort of normalized earnings level is, post that.

Okay. I guess, Darren -- I guess that's what I was kind of trying to do when I gave you the annual guidance. I mean the easy way would be to back the first quarter out of the year, and divide that by three, and I guess I'd load the fourth quarter a little bit better. Maybe that's what you're saying. Right now we see that the beginning of 2011 is a little bit soft, and we expect to recover on that as the year progresses. So, part of that has to do -- I mean, I've heard all kind of different things about weather, and about holidays, and things that impact that, but the actual census numbers are a little bit lower than we would have liked. I also believe that the cost -- the mitigations that we've put into place will have a greater effect on the second half of the year than the first half of the year.

So, taking those two things into consideration, I think the run-rate will actually recover pretty nicely in the second quarter, and by the fourth quarter be back up to -- in the vicinity where we are right now. Just looking at the costs themselves in the first quarter, we talked about the conversion costs associated with the remaining 17 agencies. And we had about $1.4 million go through the quarter. I don't want to lose this one particular point. We spent close to $3 million converting about 50 agencies over the last four-month period, and it was a breakneck pace. We expect to convert about 25 to 40 agencies over the remainder of the year. So in that number, we think we have about another $1.5 million that's going to come through as conversion cost, and about another $1.5 million coming through as productivity decreases on those agencies. If you think about it in terms of the entire year, or the remaining three quarters of the year, those are not really significant costs.

Looking at the way our Company works, there's not a lot of top-line leverage that we have. And by that I mean that we're price takers. So if Medicare makes rate cuts, we accept those rate cuts. In our gross margin, just factoring in a 2% to 2.5% cost-of-living increase, without having a commensurate increase in revenue, we lose 1% every year at the gross margin level. So consequently, if we're going to leverage -- you can talk about leveraging G&A, and I think we do a pretty good job of that. I think this year our G&A on an annual basis was lower than last year, so I do think we're effective at sharing services and getting some leverage out of that. But if we continue to stay on paper, and we continue with the service-providing model that we currently have, there is no leverage in cost of sales.

We're absolutely convinced, firmly, that the move to point-of-care, and specifically, the use of HomeCare home base and their product, is going to allow us to reduce indirect cost -- I mean indirect time for care providers, and to also reduce travel costs and other related costs associated with having agencies and providing care to the patients. So consequently, we make our decisions based on having no impact to the care to the patients, but only having leverage associated with providing that care, and that's what we think we're doing with HomeCare home base.

No, it makes a lot of sense. Two other real quick things I would just follow up on. On the Facility side, you talked about what's going on in the revenue side of the equation. Maybe just to understand the pharma expense, was that somewhat unusual relative to just a few patients and pharma use, or is there something sustainable there in pharma cost we should be thinking about?

I think that cost kind of comes and goes just depending upon the criticality of the patients that we have. We've had other quarters where the pharmaceutical costs went up a little bit in a particular quarter. It just happened to be higher in the fourth quarter this time. I think probably the flu season is one of the major drivers for us, and that probably had an impact on it. But the number itself kind of fluctuates.

Okay. And then the last thing is, just maybe can you update us a little bit more on the Hospice? I know you rolled that into your Home-based Service segment, but maybe put a little bit more disclosure around it, or update us on sort of sizing it, and how that is trending discretely? Thanks.

I'll start that, and then maybe Don you can talk about the overall strategy. Once upon a time, when we would acquire a Hospice, it was because it came along with a Home Health Agency, and they were linked. That's no longer the case. In the last couple of years, we've specifically targeted and acquired hospices, because over the couple years prior to that, we have been able to develop our operations methodology and service model, and be profitable. And not just profitable, but be relatively consistent about generating that profitability.

In our Home-based segment for the year, Hospice revenue was somewhere in the $30 million range or thereabouts, and that's up from last year. Next year, we expect that to be up probably another 25%. So we're looking at growth in that particular business. We also have relatively stable operating margins in there. So I think probably the future is that hospice will start to be more pronounced in our financial statements, and quite honestly, I can see it being split out in the not-too-far-distant future, as a third segment.

Darren, this is Don, I'll add a little bit of color, and specifically to Pete's explanation. We had just over $26 million in hospice revenue in fiscal year 2009, up to about $34 million this past year. And we really do like the approach of tucking in Hospice locations next to our bigger home care, as well as inside of our joint ventures. I don't think you'll ever see this out-pace a third of our total net revenue in our five-year strategic plan for hospice.

And I think the only other comment that I would give you short-term is that we've got to be very careful when we buy certain types of Hospices, and the deal flow that we do, because of sequential billing and the bad debt hit that rolls into the P&L. So all in, we expect to have just under the equivalents of our home care margins in our Hospice locations, but that is being influenced by bad debt right now.

And your year-end census, just to round up the notes here?

Year-end census at hospice is about 758.

Great. Thanks so much.

Our next question comes from Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Just wanted to go back to the organic growth. You had mentioned obviously fourth quarter on the home health side -- I think you said best results in the last couple years. So just trying to reconcile those comments, obviously you're saying we're seeing a little bit of softness in the first quarter thus far.

So just trying to reconcile -- when you look at the guidance, it seems like the organic expectations are lower than historical. Is that because of the trend we've seen in the first quarter, or to kind of Keith's point when he was talking about all the deals you've done over time, obviously you've done a good job growing those acquisitions. Is it just law of large numbers that's kind of catching up a little bit, and so it's going to be harder to sustain the organic growth that we've seen in the past, and we should think about it as sort of a mid- to high-single digit, underlying trend in the Home Health business?

Yes, this is Don, I'll take that. I think it's part of both of what you said. One, we are still about 54% rural in some pretty small communities. So the same organic approach and secondary market share that we talk about so often, we're not going to tap that there. So we are. You heard Keith talk about all the acquisitions that we brought forth, those are growing and we will continue to push those to grow at a disproportionate higher number. But when you add that up to the smaller agencies that are extremely mature, that's where I'm coming up with our 5% to 8%.

Now, you also look at census. I mean, we've had so many questions in the industry about how census correlates to admits. We've been very proud of our predictability, about our episodic rate. That's why I said when you look at the 5% to 8%, I would say that proportionally, you'll see the same thing going forward in the year. We did have a little bit of mix differential in home care, too. And that's what Pete was alluding to when he said census was a little softer.

But we couldn't be more proud and happy with the way we've modelled out market development. I mean, to hit that kind of organic approach and growth, with all of the things this sales crew has had to do, I think that's exactly what Pete was saying when we see the upside potential going into Q2 and beyond. Just think about it. February was a record month for us, and two days short of what our normal is, so that's going to carry us through to April before we even consider what we're doing today in March.

Okay. And then in terms of -- obviously there's incremental cost coming into 2011. But do you also assume any levels of cost offsets to the cuts in the guidance?

Well, we do. And some of the costs -- I guess our approach right now, and what's based into the guidance, there are two pieces in there. The first thing that's in there has to do with some of the reductions in force that went through in the first quarter. So we're getting the benefit of that, if you will, in the last three quarters of the year and that's baked in.

In addition to that, the roll-out of HomeCare home base does have a financial effect for the second three quarters. In the first quarter, it was about $1.4 million that hit. Over the second three quarters we've got another $3 million, both in terms of productivity, decay for the conversion piece, and in terms of G&A. So those are additional costs that are kind of offsetting the total effect of the reduction in force.

Ralph, this is Don. I think the only other comment that I'd add for Pete is, in our guidance, we do have upside potential baked-in on some of the initiatives that I alluded to. Specifically -- and I can't disclose it because I'm in contract negotiations -- one of our largest vendors, we have a reduction in essentially a per-patient-day cost for an item. So what I'm going with there is, we do have cost savings on the table, inside of a strategic plan for 2011, that would be upside to the guidance that we provided.

Okay. All right, that's helpful. And then just want to go back to the LTAC side for a second. I know you mentioned some of the issues there with the beds. But are you also seeing more higher acuity patients with longer length of stay, and do you think you're losing share on lower acuity patients?

I think the answer is we're seeing both. Remember, the criteria that are being put forth by the industry are designed to have the sickest of the sick. So, you do have some of that. But honestly, our whole patient mix, other than shift in payor sources in the issues, more so than the bed size, and the two issues that we've already talked about -- payor source mixing, and our pharmaceutical cost. Those are really where our opportunities are. We do have one or two smaller LTACs that we've seen our occupancy dip in those. But conversely, we have seen the two latter ones that we bought increase their occupancy. Therefore the whole group is about flat.

And then, just my last one. Can you remind us again, what percentage of your volume comes directly from a Physician office without an acute or post-acute stay?

I'd have to get you the firm number, but I'm guessing less than 30%. We still have it from Facilities and Hospitals and other care. It's kind of hit-and-miss depending on the community, and some of our communities, we only have two or three Physician offices, and then you have a hospital there. So I'd have to get back with you on the exact number, and I'll get Eric to do that offline.

Okay, appreciate it. Thank you.

Our next question comes from Ellen Spivey with Stephens.

Hi, thank you. I just want a little more color. Given your prepared comments, would you say it's correct to say that you don't necessarily see M&A slowing in 2011, but actually accelerating and price coming down?

Yes, this is Keith. I think that's exactly right. We definitely see it accelerating. With regard to pricing, what we're seeing right now is about 60% of trailing 12-month revenue, so it's down significantly. I think there's a possibility it could go down a little more. Especially if there's any real signal about any additional cut in the future. And we take advantage of those immediately by billing it into the pro forma, so it would translate into lower pricing. But I definitely see volume increasing significant.

Okay. Given the 2011 guidance was below where the street was, and given the stock's reaction today, does that affect your thoughts on share repurchases in the near term, and do you still view M&A and share repurchases as being mutually exclusive?

Yes, they're definitely mutually exclusive. When we put the Share Repurchase Plan in place, the thoughts that we had around the plan at that time are still the same, and one of the drivers in that decisions was that it would be mutually exclusive -- meaning that the share repurchase, if triggered at any point, would not have any impact on our acquisition strategy.

Okay, thank you. Just one last question, just to make sure I understand what you're saying regarding the guidance for 2011. This could be seen as somewhat disappointing guidance. I just want to get a little more color. There's a number of issues -- seems to be the main one -- the LTAC dip due to the loss of beds, because of the Hospital renovation. But a lot of this seems to be driven more by choices you're making to accelerate, increase or cost-expense IT initiatives, versus really any decrease in outlook for fundamentals, volumes and such, under this Medicare reimbursement cut environment?

Well, I think that's absolutely accurate. Obviously, the LTAC bed loss was kind of out of our control. Our Hospital had construction, and so we agreed to the decrease while the construction went on. So that was certainly not a decision that we made, other than just to accept it. The other costs that we're incurring, they're related to buildings long-term shareholder value.

It is a cost in the current quarter, and it is a cost at the end of last year, but you can't imagine how disruptive it is to try and manage these really critical changes to regulations through six different revenue systems. And then try to mirror all of the procedures that your have related to those systems, or related to the Clinicians and the documentation that you maintain, in light of how each system handles it differently. It's very disruptive, and very difficult to do.

So the acceleration was, quite honestly, a conscious effort. I think probably everybody at the table would say that we spent a little bit more than we thought we were going to in the fourth quarter. And those costs, had we done this over a year, certainly would have been spread out, and I don't think anyone would even have noticed them in there. I also think we would all come to the same conclusion that we had to get that done in the quarter. And the acceleration almost wasn't a decision that we made, but something that we had to do to get through that process.

Our view is always on a long-term basis. It's never for the current quarter. I can understand some concern, or I guess disappointment in the guidance. But quite honestly, I think that if you consolidate it all up, if we're at 250 or 240 and not do these conversions, I truly believe we're in worse shape than we are right now at 220 doing the conversions.

Ellen, this is Don, this is what I'd like to add as clearly as I possibly can. Our desire and our intent to create long-term shareholder value, as Pete said, certainly doesn't cloud our responsibility to be prudent in managing the business on a day-to-day business in a very financially sound manner. Because of that ,that's why this quarter looks as it is. We made the decisions to cut the costs, both administratively, and other -- take that this quarter, so we can get back on the footing that we talked about going forward.

Great, thank you so much. That's very helpful color. That's all for me.

Our next question comes from Eugene Goldenberg, with BB&T Capital Markets.

Good morning guys, thanks for taking my call. The conversion cost on the IT front that you guys are incurring -- I just wanted to clear -- this is the cost going from six systems to two. Is the ultimate goal to get down to one? And is that still in line with the original guidance by the end of 2012?

The answer is yes, where I would say that by the end of 2012 is where we're lifting that end point. We're going to look at several factors. One, the existing resources that we have within our Clinical Resource team. Two, the amount of acquisition that will absolutely take precedence on conversion for them versus same-store. And then three, the predicted profitability within the quarter to hit our expected guidance range.

Let me add that at this point in time, where we are, there is no benefit to accelerate the remaining agencies. Now, it is a matter of managing resources and expectations and rolling this out in the most efficient manner. We could do it faster, if the roll-out results are smoother, and if we're able to transition on a -- quicker, and get some efficiencies there, it could be faster, but it doesn't have to be. I think it -- we absolutely had to get off the legacy systems, other than the two that we're on right now. And that did have an end-game, and end-time in mind. But that's no longer the case, and we can roll them out over the next couple years, as it makes economic sense.

This is Don. One more time, because I just want to be clear to everyone there. We did more conversions in the 3-1/2 month period to get down to these systems than we had planned for 2011, thus you had that kind of shifting of that total cost in that period. It's not going to be that way going forward.

And Don, just so I could clarify for the 2011 guidance. So the first quarter, you're looking at about $1.4 million of these IT conversion costs, and you guys have another $3 million over the remaining 9 months, combination of IT conversion and some lost productivity correct?

That's absolutely correct. About half and half on both of them. The productivity side, half of that number; and the actual licensure and usage fees on our telecom cost on the other.

Okay, so about $4.5 million. And as far as the education effort that you guys are putting forth with your Clinicians and your sales force, the 16,000 man-hours that you were talking about, how much cost was incurred during that process in the first quarter?

As of right now today it's not all incurred, but I can tell you that we think it's about $0.5 million going through in the quarter. So what I'm saying is that part of it is done already, and part of it will be done in March. So in my numbers, the guidance that I provided for the quarter, it contemplates about $0.5 million worth of education coming through.

Do you see that spilling over into the second quarter? Because I know technically the enforcement starts on April 1.

Not significantly. I think we'll have -- I think we'll be pretty much done by March 31. If not, you won't see the number in the quarter.

Got you. Two follow-ups from me. How has the receptivity been among your referral sources? You've been clearly doing the work and making investment in the education front. What kind of feedback are you getting from the referral sources? Are you getting some push back, which I believe is inevitable. But are you really seeing Physicians draw the line and saying -- if this is not going into effect until April 1, I'm not worrying about this right now?

Yes, we've not seem them draw a line in the sand, as you've said. Physicians, just like us as providers, are as discouraged with some of the decisions that are handed down to us, and we're then forced to take care patients from. I think we're going to continually see doctors say that this is a pain for them, that it's an extra burden that they don't get compensated for. But our Physicians and the partners in the communities that we're in, they understand the benefit of what we do. We don't see them drawing that line in the sand. But we definitely see it as our job to educate them why it's important, and how we can minimize their burden.

Got you. And the last question from me is, we've kind of dealt with this issue about two years ago the last time oil spiked as much as it did. Here we're back again with oil climbing. What are your thoughts on this issue right now? Can you remind us what's your mileage reimbursement policy currently, and do you anticipate any changes to that over the course of the year?

I'll take the first part, just on the numbers themselves. And you're right, I mean, right now I think we're all looking at about $4 for a gallon of gas coming in the future. What we believe that would add to our margin -- the travel costs are about 2% to 2.5% of revenue, and that would add less than 0.5% to that. So what we do is we calculate a mileage reimbursement based on some standard calculations, and the gas prices in particular regions, and then we adjust that quarterly for all of the people, just based on the gas going up or down. So it will react relatively quickly in our numbers, probably as early as the second quarter in our numbers. But it won't be a dramatic increase. And part of that is in our guidance, so to some extent I did kind of forecast $4 gas. I hope I'm wrong.

I actually don't have anything to add to that, Pete. That's well done.

Great, thanks. I'll take the rest of them off-line. Thanks a lot guys.

Thanks, Gene

Our next question comes from Kevin Campbell with Avondale Partners.

Good morning. I just have one question for you this morning. Could you talk about your assumptions for the fourth quarter, and I know you don't typically give guidance on a quarterly basis. But in terms of rates there, we obviously know what CMS proposed last year, initially another cut for 2012 before backing off on that. So does your guidance assume some level of conservatism in the fourth quarter as it relates to pricing, or are you assuming really no change?

Okay. You talking about the fourth quarter of 2011?

Right, for 2011. If we -- what I'm worried about is, if there's another case mix adjustment for 2012, and it affects, obviously, fourth-quarter numbers -- that's what I'm getting at.

Got you. If there is a final rule that comes out with the same kind of a cut, and the same application of that cut, to the open episodes at year end, that's not baked into our guidance. I have no idea how you would even contemplate that. It would be a guess both as to the rate, and to the application, and the number of episodes. So for right now the numbers that we have out there do not have an adjustment in Q4 relative to a significant CMS rate decrease, and the application off that decrease, to open episodes at 12/31/2011.

Thank you very much.

Okay.

Our next question comes from Kirk Streckfus with Stifel Nicolaus.

Good morning. Going back to Face-to-Face, do you think the JV strategy helps offset some of that risk, or is it pretty benign?

Actually, it has very little affect. Yes, because if the volume's coming from -- whether it's our joint venture or not -- if Hospitalises are allowed to do it, and others inside a facility aren't, it really doesn't matter. So no, I don't think that's a hindrance, nor a help.

This is Keith. I would just add that we check that routinely, and once we've been inside of a Hospital JV relationship for beyond three years, about 50% of the referrals are coming directly from the community, not from the Hospital at all. So it's important to keep that in mind, also.

Good point.

Okay. In terms of acquisitions, given the uncertainty surrounding basing, can you give us some color on how you price your deals, given the risk?

I'm looking here at General Counsel. I'm not sure how much we can say, Pete, on pricing. Let me just say this. We're building in what we believe to be worst-case scenarios in our Forward-looking pro forma.

Okay.

And that creates significant pushback for us right now from sellers. As you would imagine, they would want to forecast something a little better than worst-case scenario. That 's a hurdle to getting deals closed right now.

Okay. In terms of hospice acquisition, are you still seeing a lot of opportunity there, or the evaluation a little too rich?

Yes, I think both of those are true. We're seeing a lot of opportunities, at valuations that are too rich for us.

Okay. Has it changed at all since the first of the year or --?

No, We just really believe hospice valuations are at a peak right now, and that there's -- we all know these program reimbursements run in cycles, and in home health we're on the low end a valuation cycle. So we're able to find value there. On the Hospice side I think we're at a peak, and I think there will be an adjustment coming. So on hospice deals, we're looking for a lot of upside potential, when we do make an acquisition, to offset what we believe are high valuations at the current volumes.

Okay. And just one last one and I'll jump off. What are your CapEx assumptions for 2011?

Yes, I can give you that. It's about $8 million for 2011, and it does include something in there for the revenue program. So it's not -- if you go back a couple of years, I think we had a $11 million or plus a little bit in 2010, but we had a lot of Software projects underway, including converting our HR system, converting our general ledger system, a business intelligence program. It was a lot. So, if you strip that out, really somewhere between $7 million and $8 million is our normal run-rate, and most of what we spend it on is updating IT, so you're changing over laptops and desk tops and monitors and printers and that kind of stuff. I don't see that going away, and that's sort of baked in there too. So, that's kind of where I see CapEx.

Okay, great. Thank you very much.

Okay.

Our next question comes from Michael Martin with Small Cap Report.

Hi. Good morning, and thanks for taking my question. I just wanted to ask you a little bit about your thoughts on what's going on in Washington, not on such a near-term basis, but over the next several years. It seems that, Washington -- one side is trying to penalize one of the most effective parts of the -- cost-effective parts of the Health Care system, and perhaps on the other hand is trying to force a consolidation here. What's your view on all that?

Well, I think you see it the way we see it. I'm not sure if the objective is to force consolidation or not. I do believe that there's a belief around industry margins that's not correct. And I don't think there's been data that's been able to successfully push back on that. By that, I mean, MedPAC is using historical cost report data to estimate where margins are at any given point in time. But that cost report data does not take into consideration a lot of the cost to operate the business; per examples, certain IT-related cost, any cost associated with community outreach efforts, sales or however you label that, all of those cost are not included in cost in their methodology, and in fact show up as profit. So one of the -- and this is what we're hearing from our high-level advocates in the Beltway.

So one of the research projects that I mentioned early is an in-depth analysis of industry margins, what they really have been, in prior periods when you take all costs into consideration, and then projecting forward what they actually would be industry-wide for all providers in 2011, once you factor in the cuts that are already in place. Seems like something pretty basic to those of us on the phone, but we're realizing that basic understanding isn't there in Washington, especially with members of Congress. They just point to whatever is the most recent information out from MedPAC, and without anything else in their hands, they're only reacting to that information.

All of which would suggest that the truth finally prevails, and there's a more positive environment develops than people are expecting, I guess.

Well, I have to -- I do believe that. I do believe that. It's difficult to see -- a lot of the conversation we've had this morning and the questions we're getting, I mean, I understand that. These are a lot of short-term questions and questioning your reacting to -- short-term reaction to reimbursement cuts. But when you look out two to three years -- and thank you for that question -- we're beginning to see signs in conversations with policy makers, that they do intend to leverage Home Health services, Home- and Community-based services, more in the future. Right now, they just believe that there's room to buy it cheaper than they're buying it. So we have to have a margin discussion. But in many cases, I find people view reimbursement cuts as a sign that policy makers have no confidence in the benefit, and that would be a wrong assumption.

Thanks very much. Just one other quick question. The SEC investigation, do you have any sense of how long this could go on, on the billing practices?

No, we don't, not at all. We provided information to them. I know other companies have provided information. We're just in -- it's just a process and we have no idea. As they give us requests, we respond and send them information, and that's really all we know.

Thank you very much.

Okay.

Our next question comes from Whit Mayo with Robert Baird.

Hi. Thanks guys, for squeezing me in. I just wanted to go back to the Point-of-Care, the IT conversions, and I guess the question is for Don, and sorry to kind of beat a dead horse here. I'm trying to cut at this a different way, and maybe understand some of the early lessons learned through the conversion. You mentioned you've extended the timetable for roll-out. I understand all the disruptions, the productivity losses, the training cost, et cetera. Maybe just some color on the things we can't necessarily see in your numbers that may give us a better sense of where you are and what the pace of the roll-out is going to be?

Whit, first of all, I think that's a very good question, and candidly, we have lessons that were painful, and some that were extremely pleasing. The pleasing side is, as Pete said, in our discussions with April Anthony and the entire HomeCare home base team, we expected margin improvement, but had to experience it before I could come out on this call and say that. I couldn't just do that anticipatory We do see that. So that's a lesson learned that's positive.

The lesson learned that was negative is that we were essentially forced, through at least what we believed the necessity to convert all of these agencies so fast. And while we did it, I think in an exemplary fashion inside the walls of the agency, the overhead that it takes, the time of training, the number of education hours, and the parallel hours of running two simultaneous systems for 60 days is extremely taxing on the staff and on the P&L. All that said, we would have made the same decisions that we made then. We had to do that to minimize risk, and throughput of all of these rules to mitigate it.

So I think in a nutshell, we'll take those lessons, we'll take the 50 agencies that we have today that are converted, and we're going to let their sequential improvement in margin pay for our decisions going forward, so that we hit the numbers that put out of there today.

Can I add one thing. I know you didn't ask me, Whit, but I'd like to add this. The position that we were in prior to this, or maybe prior to engaging HomeCare home base, was -- when we would acquire an agency that was on Point-of-care, we really did not have a Point-of-care platform to roll that agency into. So consequently, the decision was made to maintain the legacy system. We had McKesson for one location, Care Tinuum for another location, Cerner for another location. It was always the same conclusion that we ended up reaching.

So in a way, the conversion costs associated with all of those agent -- with all of those systems -- was sort of baked in, and could have been accrued as an acquisition cost, if the FASB would allow you to do that, because it was a cost that sooner or later you're going to have to incur. That situation no longer exists. Now, when we go acquire somebody on Point-of-care, we have a platform that we can roll out, and consequently will do that along with the acquisition process itself. And I think that efficiency is something that we've never enjoyed in the past, and that we now have available to us.

Okay. I guess what I'm trying to get at is, what it was that really surprised you? I guess I'm hearing that it was the cost, but this obviously isn't April or HomeCare home base's first conversion. I guess was it one or two very specific things -- just the training and disruption? Presumably you knew that there were going to be some potential issues that evolve. I guess I'm just trying to specifically cut it at that question.

Yes. I don't think there is one answer that we can give you that was the lesson learned in that. First of all, it was the largest conversion that we know of any company that did this in that short of a timeframe. So just the volume, the sheer volume, and the number of people that we had in the classroom versus outside in the patient's home is a variable. But, again, I want to go back. I mean, we accelerated that by design.

The surprising part was how it becomes almost exponential, when you're doing these, and you're converting them, and you're doing the same things over and over, it really is the ultimate bell curve, and we're on top of it from the cost side. That's where we are today. That's the bad news, and our guidance for Q1 clearly illustrates that to everyone on the call today. The good is that now those groups are sequentially going to improve, and allow us to take those lessons, convert the rest of our new acquisitions and our home care, same-store, and hospice, as we go along, realizing those efficiencies along the way, Whit. That's the biggest thing, is that the external environment of the rule forced our hand to do something, not surprisingly, but at a cost that we had to come out and we had to put together the plan and bridge for you today.

Whit, this is Keith. I don't think surprise is the right word, honestly.

I agree.

We really weren't surprised by it.

Yes, I know. I think I understand that now. Don, back to what you said earlier. I think you mentioned that you guys have decided to extend the timeframe for the conversion. Is that correct? I guess what I'm trying to ask is, what was like the original plan back in September, and what is it now? I guess I'm just trying to understand what factors have changed that may have shaped your decision to elongate that implementation?

The plan -- what we wanted to do is try to convert all of them in a two-year period. And like Pete said, that actually still may happen, but I'm not going to commit to that. That's what changed, is my commitment to that number, and internally as Management, us lifting that self-imposed pressure off of us, and quite honestly, off the P&L.

Whit, this is Keith again. Don mentioned earlier that in our ongoing conversations and close -- this is really like a partnership with April and the folks at HomeCare home base. They believe that we're going to realize incremental improvement six months out and beyond on agencies, and that continues to improve. And their history of implementations is what they're basing that on. We haven't baked it in, and we've always been very conservative on everything we say. If we in fact see that, then we're going to be able to accelerate that deployment. If we don't see it, then we're going to have to throttle back. But we intend for the improvement in existing agencies to fund the deployment in the remainder of the agencies, if that makes sense.

Yes, that's all real helpful color, and I can appreciate that. And she does have an exceptional product. I guess maybe just the last question, either for Don or Keith, just last year you made several changes -- I think it was last year -- with your sales force, some reorganization. Can you talk and update us what the response has been with those incentive changes, and just the organizational changes -- just looking for a refresher there?

Yes, I'll take it, Whit. Be clear, the incentive changes is not what I was alluding to. The organizational changes, the training, the expectations, and quite honestly, the product that our Clinicians are putting out, is a better story, better data-driven tool, from Acute Care hospitalizations, all the way to improvement in home care compare. Lastly ,our Joint Commission differentiation. It allows our salespeople to go talk to referral sources, both futuristic and existing on what we're doing different than the people in the space.

It was really three things. We had an organizational and leadership change. Number 2, we had a turnover of upwards of 22% of our sales force, because we needed different types of people and different understanding and acumen in the heads of who was going to speak about our business, and we've got a better product to sell.Those things have attributed to what we have seen. It's still a fight with -- let me be clear -- there are forces out there. There are a lot of things that we're dealing with, but I think we're better positioned and modeled in this than we ever have been in the history of LHC Group.

Thanks a lot, Don. I appreciate it.

At this time I'm showing no time for any further questions, and I would like to turn it over to Keith for any closing remarks.

Okay. Thank you, Operator. Thank everyone for participating in the call this morning. As always, we're available for follow-up questions that you may have today after this call, and at any point in between these earnings calls. Thank you for joining us, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.