LHC Group Inc (LHCG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the LHC Group Q1 2011 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 be given at that time. (Operator Instructions.) As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Eric Elliott, Investor Relations. Please go ahead.

Thank you, Ally, and welcome, everyone, to LHC Group's earning conference call for the first quarter ending March 31st, 2011. 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 [industry] on our website at www.lhcgroup.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 Myers.

Thank you, Eric, and good morning everyone. Since our last earnings call was just a couple of months ago we'll keep our prepared comments even more brief this morning to allow more time for Q and A. In a moment Pete Roman will provide a financial overview and Don Stelly will provide an overview of ongoing operational initiatives. But first I'll provide a brief overview of our first quarter results and our 2011 guidance, and then an update on acquisitions.

Our $0.42 in the first quarter was obviously better than we had projected. As Don will discuss shortly our organic admissions growth rate was, once again, outstanding. This organic admissions growth fueled organic revenue growth of 4.5% as compared to Q1 2010, which is exceptional given that we had the 5.2% cut to Medicare reimbursement in the first quarter of 2011.

As we reported on our last call, we instituted cost control initiatives in the first quarter. Our team has embraced this commitment to cost containment and as a result we experienced a greater benefit in the first quarter than we'd projected. I think it is a great data point that our aggregate G&A expense for the first quarter of 2011 was less than our aggregate G&A expense in the fourth quarter of 2010. If we can continue to keep our G&A expense number flat to down while continuing with strong organic growth, we will be well positioned for the future.

As we announced in our release, we are reaffirming that our full year 2011 guidance for net service revenue 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 includes the impact, if any, from the face-to-face and therapy regulations which Don will discuss.

Now I would like to turn to acquisitions. So far in 2011 we have closed on 7 transactions with $18.5 million in trailing 12-month revenue. At this time we have 11 transactions with $63 million in trailing 12-month revenue in our active pipeline. As I said on the last call, we continue to be very active but very selective with regard to our external growth strategy.

To frame up our pipeline and show just how selective we are, since January 1st we have analyzed and passed on 122 acquisition opportunities either due to pricing or insufficient upside potential to get to the 18 transactions which have either closed or remain active in our pipeline today.

Our acquisition strategy is a major component of our organic growth and return on investment that our shareholders have come to expect. According to Reuters the healthcare service industry 5-year return on investment has been 7% and the S&P at 8% while LHC Group has delivered a 20% return on investment during this same period.

From 2005 to 2009 our acquisition teams completed 67 transactions, acquiring $201 million in trailing 12-month revenue for $152 million in purchase price, averaging better than one transaction per month over the 5-year period. In 2010 these same 67 assets accounted for $367 million of the $635 million reported for the year. This represents a compounded annual growth rate of approximately 30%.

Before I turn it over to Pete I do want to thank our employees and entire management team for their efforts during the first four months of 2011. We have faced many challenges during this period as an industry and despite these challenges our team outperformed expectations once again. I am proud to be part of the LHC Group team and believe that we have assembled a group of dedicated caregivers, employees and leaders who are prepared to succeed regardless of the hurdles that may be put in their way.

Now I'll turn it over to Pete for a review of the financial results. Pete?

Thank you Keith and good morning, everyone. For the first quarter of 2011 our consolidated net service revenue was $161.7 million, an 11.5% increase over the first quarter of last year. Net income attributable to LHC Group was $7.7 million and diluted earnings per share were $0.42.

Home-based segment revenue was $141.8 million, an increase of 10.8% over the first quarter of last year. Home-based segment revenue is made up of $133.7 million in organic revenue and $8.1 million in revenue from acquisitions. Total organic home-based revenue growth was 4.5% and organic Medicare revenue growth was 2.3%. Our home-based segment makes up 87.6% of our total consolidated revenue.

The facility-based segment revenue was $20 million an increase of 16.1% over the first quarter last year, and it consists of $16.1 million in organic revenue and $3.9 million in revenue from acquisitions.

Our consolidated gross margin was 45% in the first quarter which is a decrease of 3.2% from last quarter and 4.0% from the first quarter of last year. These decreases in gross margin were caused primarily by the 5.2% reimbursement rate cut which affected all episodes in this quarter.

G&A expense was 34% of revenue, an increase from 33.1% last quarter and 31.5% in the first quarter last year. These increases were primarily caused by the CMS reimbursement rate cut, costs incurred to complete the conversion of all legacy billing systems to Homecare Homebase, severance expenses and costs to educate our clinicians and caregivers on the face-to-face requirements and the new therapy regulations which became effective April 1, 2011. We discussed each of these items on our last earnings call.

CapEx in the quarter was $3.5 million and is almost entirely related to our billing and general ledger system conversions and other software and IT hardware expenditures. Our free cash flow for the quarter was $14.8 million, or 9% of revenue.

As I mentioned on the last call, for 2011 we expect our gross margins to be in the range of 44% to 45% of revenue and that G&A will be approximately 31% of revenue. We can drill down into these results further in Q & A. Now I'm pleased to turn it over to Don Stelly. Don?

Thank you so much Pete. I'd like to begin, as well, by saying thank you to our over 8,000 employees for their performance during the past few months. As Keith mentioned, as an industry we've faced incredible challenges during these first months. Once again our team's risen to the challenge and they've delivered outstanding results in all aspects of our business. I'm honored to work with such a talented and dedicated group of healthcare professionals.

I'll keep my comments brief this morning and focus on three distinct topics, the first of which is related to our internal growth.

This first quarter of 2011 was strong in terms of organic admissions growth. Total new admissions growth for the first quarter of 2011 was 20.1% as compared to the first quarter of 2010, while organic growth for total new admissions in the first quarter of 2011 was 11.8%. New Medicare admissions growth was 15.1% in the quarter as compared to the first quarter of 2010, while organic growth for new Medicare admissions was 8.5%.

We have now produced, on average, 10% total new admissions growth, quarter over quarter, through the last 6 periods. Our plans to build upon this momentum will center around 4 main initiatives.

First, we will maximize the significant upside potential from recent acquisitions, concentrating especially on those purchased within the last 3 years.

Secondly, we'll enhance our penetration of any market where we are not number one, two or three primary service [area.]

Thirdly, we will control our expansion in the secondary service areas but do so methodically through our greenfield approach.

And lastly, we will differentiate our services and ourselves.

We recognize that there are growth barriers such as those that have been created by face-to-face, but we are extremely pleased with what our sales, our marketing and our operations teams have done to turn these into opportunities and remain focused on the execution of our strategies under these four simple, but yet critical, success initiatives that I've just mentioned.

Because of this focus and even with the face-to-face headwind that we've experienced thus far, we still expect 2011 to yield total new admissions organic growth in the range of 5% to 8%. I can further expand on this subject during Q and A, if necessary, but now I'd like to touch on my second topic which is the face-to-face requirement.

We're now inside of day 35 of this ruling. Quite frankly it has posed significant challenges, but as stated earlier, our team has risen to this challenge. They have planned for, prepared and executed work-flow changes that ensure to date all but 34 patients on our services presently have either had or will imminently have a face-to-face encounter with their physician within the timeframe set forth in the rule. Daily we run exception reports on both Allscripts and Homecare Homebase to ensure that we remain with this clarity and this compliance.

Recent history showed that converting from 6 information systems down to the 2 that I've just mentioned came with its share of tribulation. We firmly believe that our stakeholders are being well served by that decision, however, and are now posed to have the necessary data to deal with to act prudently in regards to this rule.

The third and last topic that I'll discuss is that of Point of Care. Last call I spoke of our reformed approach to converting agencies to Homecare Homebase. We presently have 1,112 users caring for 4,553 patients using this technology inside of the home of our nation's frail and elderly. Going forward we will continue converting to Point of Care, but as previously stated, we are not going to set hard and fast numbers nor time periods.

Instead we've created a schedule that is fluid. This sliding scale approach allows conversion while, at the same time. minimizing the risk of adverse financial or operational impacts on our business as a whole. At the core of this strategy we will use the margin improvement from our existing Homecare Homebase agencies as the pay-for in future rollouts. We remain extremely pleased with the product, our 59 agencies utilizing it and the plan in accordance with our partners at Homecare Homebase that we have in place for the remainder of 2011.

I'll also answer questions regarding any of my prepared comments in a bit, but now we'll turn the call back over to Keith.

Thanks Don. In closing, to our shareholders we want to say thank you once again for your investment, confidence and support. Operator we're ready to take questions at this time.

(Operator Instructions.) Our first question comes from Art Henderson of Jefferies & Company.

Very nice quarter. Pete, could you talk about a little bit about why your minority interest was I think lower than our expectations? And I was just curious how to think about that line item for the remainder of the year.

Sure, thanks Art. As you know, the minority interest is really made up of a bunch of relationships at different levels that we've built over the years as we established joint venture relationships. Over the last, I would say, 18 months, or possibly even 24 months, we've moved from a 67% / 33% relationship to more of a 75% / 25% relationship, so the ownership of the joint venture really has increased in the last couple of years at LHC. And I think that's part of what's going on there. But probably the major driver is the operating results of the individual joint ventures and so we've seen it fluctuate. I think it was all the way as high as 3% at one point in time, 3% of revenue in one quarter or two in the past. I believe going -- and so, consequently, when the ventures themselves make less money as a result of the rate cuts or efficiencies in that particular agency, then that has an impact on the distributions and the expense. I really believe that it's going to normalize back up closer to 2%. And so I think, going forward, I don't think I would predict it to be this low for the rest of the year. In our internal forecast we stay right in the 2% range.

Okay, that's very helpful, thank you for that. And, Don, I know you talked about a couple of issues related to face-to-face and sort of your admissions outlook for the remainder of the year. Can you just talk a little bit more about the challenges with face-to-face that you're seeing so far. I think what's -- and I guess tied to that, the fact that your organic admissions growth was significantly higher than what we've seen in the industry, I'm just wondering if you could elaborate on what you might be doing that's facilitating that kind of growth, so kind of a two-part question there and I'll jump back in the queue. Thanks for your thoughts.

Absolutely, Art. Thank you for the question. I'll actually take the second part first. You know, the modeling and associated initiatives that we have with our sales force, our market development leaders and our operations didn't happen overnight. For the last couple of years I've been alluding to the fact that we've been, what we believe, are [starch] operators but not necessarily always did we have that [complexity] and sophisticated sales approach. So we've modeled that up well and so the wind at our back really was in the first quarter and all those things were coming to fruition. And honestly, it's also had to do with our quality improvement that Keith alluded to in his opening, or in the actual release.

So you had momentum there, thank goodness, because now going into the second part, this has, as your note said, created a G-force headwind. What we believe though is that we've met that. It didn't knock us off kilter in that we're positioned as best, we believe, as we can be, to continue to succeed and turn in that number.

But this has been a multi-tiered issue. For example, we've had physicians that simply used this as the tipping point for them not to refer to home care. A specific example, maybe it didn't make too much financial sense to the taxpayers, but a physician referred a homebound patient that had skilled service and medically necessary coverage requirements -- instead of dealing with this issue, sent that patient to an outpatient rehab and then that patient went to an (inaudible). It didn't make a whole lot sense -- a real example.

We've had family members question this requirement all the way up to the CMS people. In fact we had one family member who actually spoke to a CMS representative and when they questioned about the face-to-face, the representative had not even heard of it. So we have those kinds of barriers out there.

Lastly, in my comment to you, is we have hospitals and discharge planners that are saying -- hey, you know what, we're busy enough. It's not our requirement, we're short staffed. You guys have got to deal with this the best you can.

So the headwind is not just from the physician constituency, it's multifaceted. With that, we started preparing, back in September, education materials and we used this barrier as an opportunity to get with our tier one, two and three doctors and truly make them understand it. There's so much confusion out there. People think check boxes work, they think certain kinds of forms are right and it's been very tortuous.

But I think my summary is that we've modeled our sales force. They understand what we're asking them to do. They're communicating it properly to the people that want to use the benefit and I think we have patients that otherwise may not get to use the service using it with us.

Our next question comes from Newton Juhng of FBR.

We did see your provision for bad debt creep up a little bit this quarter. Is there -- but you also pointed out that you didn't have that many patients that were really falling off due to these, because of the hard work you've been doing on this front with the face-to-face and the therapy regs. So as I look at it, can you tell me about what's causing the provision for bad debt to kind of creep up here a little bit? And also over the course of the year how should we be looking at that number?

You're right. It did go up a little bit in the quarter and I think if you go outside the 1.5% to 2% range you're making a mistake. I really think it just settles into there over the year. In this particular quarter we did have some write-offs related to, primarily, Medicaid claims that were part of a group of claims that were held awaiting a CHOW. And the state authorization came through late and it was beyond timely filing for those claims, and those claims were ultimately written off in this particular quarter.

I know that some of the other agencies and some of the other public companies at some point in time have a full 100% reserve on certain date ranges that are out there. I know I've read that. Our methodology is not exactly like that and so consequently those claims were 85% or 90% reserved, so there's a bad debt expense effect to writing off a claim that's not 100% reserved.

I think that's that little tick up that you saw in the quarter. I don't believe that that's a long-term issue or anything, really, that we're going to have to do in the future. So I think really 1.5% to 2% is a good range for bad debt. We've kind of been vibrating in there for quite some time and I sort of see that as continuing on.

So, Pete, as we're looking forward, and you know, Don was talking about all the challenges that we have here on you guys, is there an expectation that you may have to take up the reserve in order to account for some of the admissions slipping and, or how are you guys accounting for it on your end?

Can you explain what you're asking me now when you say take up the reserve?

Well when you're talking about an admission that you wouldn't necessarily expect to get but then it turns out because of documentation or for whatever reason you're not going to be getting that payment. I would assume that that goes into the bad debt category. Or is that something that's not worth flowing at this point right now?

I got you, okay. It's a relatively mechanical calculation and it's all based on the aging associated with a particular claim. And how you verify the total reserve that you have is based on a look-back, so while you're -- you're looking at a claim on an individual basis and you just can't look at 30,000 claims on that basis. It has to be a methodology and our methodology relates to the aging buckets, estimates on percentages of reserves with each of those aging buckets, and then a comparison of say, like last year end what the reserve was and how many actual write-offs we had on those claims in this year. So it's sort of a look-back verification, but the actual calculation itself has to do with the entire population in those aging buckets. We can't go in on a claim by claim basis and put reserves on those particular claims. I mean it would be impossible to do that, so it has to be kind of an overview look.

Newton, this is Don. Let me chime in. Remember what I said in my prepared comments, out of the approximate 1,500 admissions so far we only have 34 patients that are even at risk for what you are alluding to. Even if we had to put all of those -- and not discharge them, you know, ethically we wouldn't want to just put those patients on the street, of course. But even if we had to put all those as an indigent patient it would be such a de minimis amount of write-off, that would not influence the bad debt as I think maybe where you were thinking. And we're pleased with those 34 out of that number right now.

Sure. I know that there was a lot of hard work that went into getting it down to that kind of a number, which kind of brings me to my next question which is, basically, around the costs associated with that. Obviously that's something that's going up. We saw a particularly strong quarter come out of you guys here relative to where you were originally expecting, but not a move in the guidance. Fair to say that you're contemplating the adjustment associated with that, those additional cost that are coming, to make sure that number stays low, in your forward guidance?

I can take part of that and then kick it over to Don. You know, there are expectations for the second three quarters in the year that you always have to consider and one of them, clearly, is the effect of face-to-face on our admits and census, and you know, how that's going to affect the revenue side of going forward.

There are other things that you have to think about. Gas looks like it's headed north of $4. That adjustment is going to come through in the last three quarters. We have raises coming through for the field people in the last three quarters. We've got the Homecare Homebase costs that as we continue to roll that out, those are coming through in the last three quarters.

So I think part of it has to do with management of our costs. Part of it has to do with things that we react to because they are situations that are faced and I don't know how much we can offset, like for example, the gas price. I don't know how much we can offset that with efficiencies. So that's going to affect the period going forward. That's why I think it's, in our position right now, we believe that we have the right number for guidance out there.

Hey, Pete, I think the only thing that I would add to that cost infrastructure is joint commission. We'll have about -- in with our triennial surveys and our new surveys coming through about 40 agencies. But out of pure transparency, Pete's right, the gas prices, we're going to go up, on an average of all of our states, about $0.3 per mile, at two and a half weeks right now, and that's substantial for us. So I think when you combine all of that and what we looked to guide you all to at the first quarter, we're actually very pleased with that outlook.

That's very helpful. Thanks for the detail on that.

Our next question comes from Darren Lehrich of Deutsche Bank.

Just to follow on the last part of that discussion. The fuel, Peter, what is the anticipated quarterly impact going forward, just based on what you know right now?

The next adjustment is going to come through in May, I think it's May 22. And it's going to affect $0.02 a quarter, as it is. If it goes up to $5 then you're talking about an additional $0.02 coming through on the quarter. So if that happens -- if nothing else happens but it stays where it is, you're talking about $.02, $0.04 -- $0.05 really from May to the end of the year. If it goes up again and we have to go up in the quarter, in the December quarter, throw $0.02 on top and now you're talking about $0.07 impact to the costs on the year. So I think there's a difference this year from other years in that in other years I don't know that we've had this traumatic --

That's correct.

-- of [a peak.] It's just -- on the last call I was talking about thinking it was going to go to $4 and I really thought we were relatively safe. And last week I was filling up for over $4, so it's going up fast.

And, Darren, this is Don. While Pete is extremely accurate there, I also don't want you to just automatically drop that down in the models. Because we do have, as Keith alluded to, we still have cost saving measures, operationally, that we're working through, especially on immature agencies, that are still in that 12 to 18 month mark. So this is -- there are a lot of moving parts in what we're working through right now. It's very complex, but when you add all of that up together with the headwind that we saw, I would say, not necessarily continue to see with admissions growth, we really felt reaffirmation of guidance was the right thing to do for you.

That's helpful. I just wanted to make sure that we were framing the fuel correctly. I guess I wanted to ask maybe a more important question, just strategically around your hospital relationships and, Keith, you've highlighted the strides you guys are making on the quality side of things. In the not too distant future here, readmission is going to be a really important thing for hospitals financially and it should be important right now from a quality perspective. I guess I want to just focus in on that particular part of the quality piece and just hear from you if that's driving any new discussion and what kinds of data can you now bring to the table around the whole quality discussion.

As far as the specific numbers, I'll let Don chime in on that but I can tell you that the conversation with hospital joint venture partners and also hospitals where we have plentiful affiliation agreements, maybe where they're not a joint venture partner, the conversation has clearly shifted. Where it used to be we got into the C-suite to talk about home health operations which were failing financially and they wanted to get the red ink off of their books or just have a better reputation for the agency. But now, you're exactly right, it's not at all about the financial performance now. Now they're really wanting to know how the home health agency can be leveraged to prepare them for the future, to reduce readmissions and all of the quality things that also affect their inpatient experience.

As far as quality, specific quality measurements, Don you want to --

Absolutely. I think we can talk about quality as a broad-brushed term but for the hospitals right now it's about 30 day readmission rates, so that's truly what we've focused on. With partnerships in itself, however, it doesn't just automatically exude increased quality. You've got a lot of people involved from the C-suite all the way to the case managers. But for the partnerships and the clinical affiliations that are working well, we've seen 30 day readmission rates as high as 20% go as low, with our involvement, as 8%. We've seen acute care hospitalization in general as high as 50 in some of our markets go down to the mid 20s, and we've also seen improvement in their core measure results because of what we've done adjunctively with home care.

So I think when we talk about quality certainly all of the things that we're doing with joint commission, core and process measures are working but they still look at their core measures and readmission rates and we've seen both of those improve. So what we're trying to do now is package that and then go to our partnerships and tell them what we've done, for example, in Mobile, Alabama and some of these other places.

I think we're just on the cusp of seeing that push because people don't see this ACO anticipatory model going away. Maybe we don't all see what it's going to look like but we know that it's here in some form or fashion so there attention has certainly peaked.

So, if I'm understanding you, you're on the cusp of basically building out more quality case studies and how you also pitch your acquisition to a prospect hospital.

That's exactly right. My last comment I'll give you one specific example. The industry has used telemonitoring, but truly there were no substantive studies that show an improvement in the patient. It was done as a marketing tool. We've actually taken that outside of the marketing realm and put it as a clinical piece and shown deliverable results that either are based on episode review and visits as well as quality outcomes inside of it. But it's not across the portfolio now. That's what I mean by we're on the cusp. We've really packaged that in the last six months and proven it and now we can go sell it.

Great. And my last question, just so I'm understanding your message, really, on face-to-face. We're all still trying to figure out, for everybody in the sector, how this impact is going to flow through the next several quarters. But, if I'm hearing you right, your ability to get the documentation and get the patient to the doctor, that's all good but what you're still not totally sure of is if for some of these homebound patients that you're going to get that next referral. So is there any way to quantify within all of your admissions where -- how much of that you might think be -- is at risk for that doctor that's reluctant? Maybe it's unquantifiable, but I just want to clarify that that's what you're saying.

Yes. I think the end result is what I said. If you bake in a 5% to 8% growth rate, like I said in the prepared comments, that's the tail of the take. That's going to move all the noise out of the way and that's what I would use to bake into your models.

We had a great quarter, and without that headwind, I would have probably come out -- in fact I would have come out and I'd have had to move off that number and move it into double digits. So when you put all of those things together, use 5% to 8% as the growth rate and that should get you right where you need to be for the 2011 year.

Our next question comes from Ralph Giacobbe of Credit Suisse.

Just wanted to go back to the numbers you had given in terms of -- I guess you had said there's, out of the 1,500, all but 34 -- I just wanted to clarify that -- have or will have had a face-to-face visit or -- I just wanted to clarify what that number exactly was.

Yes, you see what we do is, because we track it every day we put a probability index on it, so to speak,. And because you've got 30 days post, if we admitted that patient on the first, we've already had to make a disposition on that patient. In some cases we were able to discharge it with an HHABN but in the majority of the cases -- and I can give you a specific example that really touches home -- we've actually converted that patient to an indigent status and kept on service.

Right now the 34 that we have, all of them, all of our patients, have either had that face-to-face prior to admission or they've gotten it within the time frames. There are 34 at risk. One of those at-risk patients we just had to make a disposition on, Ralph, and I'll just kind of give you an overview of this patient. This is a patient that we actually had on service, bed-bound, hadn't seen a physician in two to three years. They couldn't afford for an ambulance to take them, and the physician was not willing to go out. It didn't mean that the patient didn't qualify for the service that we were providing. They didn't qualify because they couldn't go get a face-to-face and continue the service.

And it kind of goes back to, I think, the question that either Darren or Newton was asking, do we think we're going to see a substantial number of our patients that we have to flip into that indigent status and the answer is no. And the reason is, is because we only have 34 that are even in that potential out of the 1,500 that we've admitted so far. Does that clarify it for you?

Well, I guess I'm just trying to get at -- so the balance of it, the 1,400 and change, it sounds like, I mean, they've had the face-to-face visit and it's up to you guys to go actually get the documentation for it? Or is the documentation of face-to-face everything's locked and loaded?

It's both. Some patients come, they've had a face-to-face but there's no documentation so our workflow processes gear us toward getting that documentation and affirmation. Some patients come to us and we actually help them schedule that visit and they go get it and then we affirm it. So it's both. It just kind of depends on the circumstances and where the patient originated from, whether it's a hospital or a physician offices, et cetera.

Okay, and then just to go back to the number, the statistic you've given in terms of the new admission we should think of as 5% to 8%. I just want to make sure, is that comparable to -- I think last quarter you guys had said that the number was going to be 8% to 10%, so I just want to be fair and make sure -- is that the comparable number? And maybe, considering that you had good growth in the first quarter, that it still could potentially shake out to the 8% to 10% for the rest of the year, but that we should think of 5% to 8% for the balance of this year?

Yes, I would, the latter. I would think of that as the balance. I don't think, and I'll go back and make sure and get off line with you, I don't think I've ever said an anticipated 10%. Usually that ceiling has been in that 7.5% to 8% range. We really did have a good quarter.

I think we'll have certain weeks that would project toward the top side of that but if you took just our projection of where we stand today, because of the headwind, specifically we were 8.71% off of our Q1 run rate. That's what the effect of April was. So if you took a monthly run rate and compared that to April, April was down 8.71%. Well if you flushed that through you wouldn't even get to the 5% to 8%. But we've seen that headwind move aside and we're really gaining momentum again in the marketplace.

Okay, and then just my last one. Can you maybe talk about whether your hospital relationships have maybe helped you or will help you with the face-to-face maybe more so than others, whether it's competition or the general market?

You know I think it's scattered. In some cases you kind of fuss at the ones you love, and in those cases sometimes us trying to teach them, it's not been fun. In some cases we're a welcomed teacher and it's helped. The bottom line is, there are confusion points around this rule whether they're our partners or whether they're not. Even in our partnerships you all well know we're not the only provider so you have other people coming in there giving them [apparent] information and many cases wrong information, and we've got to go clean that mess. So I would say it's not our partnerships that have helped us but our preparation in standing in front of our partners.

Okay. Thank you.

Our next question comes from Ellen Spivey of Stephens.

Just to piggy-back on that last question. In your prepared comments you'd said that you'd been preparing internally for the face-to-face new regulations since last September. So on the physician front was it your goal to get all of the physicians in compliance, as many physicians as possible, in compliance with the face-to-face rules in terms of documentation ahead of the April 1st enforcement date? And where I'm going with this -- or do you expect a noticeable shift in physician behavior because of this from 1Q to 2Q?

What a great question. It was actually the opposite. It was not our strategy to get in front of the doctors prior to April 1st. We thought -- we felt that if we'd had been the first to start that we would have been absolutely pounded by the doctors, trying to do something that others were not. But what we did do is in our most predictable and stable markets we ran pilots and we got with the physician constituency to find out what they're heartburn factors would be and mitigated our approach from there. So that was a great question. I've never been asked that before. But, no, we did not want to get out before. We thought we'd have gotten beat up pretty badly.

Thanks for that color. Kind of switching gears, last quarter you talked about the fact that you accelerated your IT conversions because you were excited about the benefits that you saw from that initial phase that you did in the fourth quarter. So are you continuing to see those benefits as you push through more of that in the first quarter and are you still as excited about the potential there? Just some color on where you stand with that.

We're extremely excited. Like I said in my prepared comments, our learning curve with the product is really moving forward. We couldn't be more pleased with that. But we bit off a pretty big chunk converting all of those systems. So while we're pleased, we also now have we also have 59 agencies that we predict operational improvements, not only financially but in the throughput of productivity, quality and I could go on and on.

So by us being pleased doesn't necessarily want to make us accelerate that like we did. We knew we had to do that to be in this position with face-to-face. Instead those are also in some of our greatest upside potential acquisitions, and as operators what we want to do is maximize on that, pay for the future rollout and other initiatives. So again, let's not confuse pleased with being --

Not foolish.

-- being foolish and going back into the same mode as we did. We want to be much more systematic.

Not (inaudible - multiple speakers.)

So, being systematic, so is what you're saying -- did you target those agencies in the one to three year timeline to start rolling the stuff in first because you thought that those were the agencies where you could really get the maximized benefit out of all of these changes?

No, Ellen, we didn't. We targeted the ones that were on legacy systems. Now the rollout has several components, and I don't want to get too detailed. If you want to, off line, I can get with you, but the criteria ranges from its profitability to its upside potential.

For example, we certainly wouldn't want to take our largest provider and even though we're attaining the learning curve, go dive into it and see a 5% decrease in margin. Instead we'd want one that has functioned well, is poised to grow, and convert it and then see if it's upside [pays] for the demise in margin of one of our [bigger] ones. Did that help you?

Yes, definitely. Do you think that any of the benefit of the upside we saw in this quarter had to do with that process and the success you've had with those initiatives in the fourth quarter and this quarter?

Absolutely.

Great. And just a quick question. The [LTAC] division looked pretty good this quarter. Could you just give us an update on how that business is going, please?

Yes, and you know what I -- and I was surprised we didn't get a question yet. The business is going good. The fourth quarter was a little worse than it should have been and this first quarter of 2007-- of 2011, a little better than can be expected. I would take the run rate somewhere in the middle and flush that through going forward.

But we have great occupancy according to our standards and bumping on 80%. We have our patient/day mix is good. So we're pleased at where it is, but I wouldn't get ahead of it too much and take this quarter and go forward. Instead I'd take the middle of the road between Q4 and this Q1.

Okay. That's great color. Thank you. That's all for me.

(Operator instructions.) Our next question comes from Dan Stubbs of Avondale Partners.

My first question -- I missed a little part of a question a couple answers back, so I guess I -- did you say volumes have actually declined some in April due to face-to-face? There was something about April and I was trying just to just get a little clarity on that. With regard --

Dan, this is Don. I'm sorry, go ahead for your second part.

Oh just with regard -- when you were talking about the organic growth a couple of questions ago, and so I --

Yes, let me clarify for you. I said exactly that. I said if you took the monthly run rate of admissions through the quarter, the first quarter of 2011, and compared that monthly run rate to that of April, April is decreased by 8.71%. What I didn't probably continue to say there is we see that as that floor per month. Don't know if May will come out -- I mean we're sitting here too early to tell you that. I will say I'm pleased with where May is to date in the first week of May as compared to the first week of April. And we're back on the upswing that would yield that 5% to 8% yearly number I'm talking about.

Thank you. Now, I did have another couple of questions on guidance. I know you guys normally don't provide quarterly but I was just wondering if directionally if you could give us an idea of what you're expecting. If we should expect better than Q1 or modest decline, due to pressures, if we should still see sequential growth. What do you guys just loosely see coming out there?

Dan this is Pete. I mean obviously the first quarter was a little better than we had initially predicted. Some things came through that improved it a little bit. But I really wouldn't get out in front of that. I think that the percentages that we give on operating margin and on G&A are the ones that we think that are going to be there for the year, and that includes the first quarter.

For the last three quarters, I believe that the biggest hurdles that we're going to have are going to be early in the year. So the second quarter I think will be worse than the third and fourth quarters. So probably what I would do is take the guidance and use the percentages that we have, subtract the first quarter, divide it by three and put a couple of pennies in the fourth quarter out of the second quarter, it that makes sense. I mean to me that looks pretty consistent about with what I'm expecting to happen.

Okay, and then, finally, just guidance in general, do you feel like it's sort of actual pressures that you're seeing or just general conservatism? Do you think it better to err on the side of caution? Just a little color on your perspective on it and then I'll jump off.

I think if you think about a car with 11 wheels and they're all turning in different directions, that's what you're having to do when you're trying to figure out guidance. There are absolutely pressures on the operating results of the Company that we have no control over. We were talking about face-to-face. Our ability to manage that situation is much different than your ability to control cost in a particular organization.

You're talking about gas prices affecting the costs associated with what we're doing. If we have a future look where physicians are reluctant to refer into home care because it's an additional burden to them, that's going to affect the numbers. So everything that we put out there sort of blends all of that together, sort of a statistical approach to where you think the year is going to come out, and that the pluses and the minuses will more or less offset each other and we'll get to sort of where we're targeting.

Every quarter we kind of give you guys -- or we talk about in our earnings call and in our Q and A, events that occur in a particular quarter that we didn't anticipate coming in. And sometimes when the quarters are very, very tight those events cause us to go positive or negative compared to consensus at the end -- compared to where we think we're going to do. There's no way to predict that stuff.

So what we do instead is take a look at the year, take our best guesses at growth. Don, I think, has done a good job of talking about admits, talking about organic growth, census, our elective stay, the individual HHRGs that the patients have. And we build all that on an agency by agency basis, accumulate it and then try to think about the things that could affect that.

It's as imprecise a science as you ever want to be involved with. I don't think that we're particularly conservative, but in general, I would say that this management team is not an aggressive management team. I think we're operators. I think we run businesses. And so consequently, how quickly we're able to bring new businesses in and get them to corporate margins, how we're able to manage the census and the admits in a particular agency and in a particular state, and how we maneuver through licensure and regulation, all those things are things we have to deal with on a day-to-day basis. I don't know how you make a more precise estimate than what we have out there.

Great. Thanks, guys.

Our next question comes from Eugene [Goldberg] of BB&T Capital Markets.

Now that we've got a glimpse into the ACO regs coming out, how do you -- how did you guys view those relative to your expectations? And has this changed your positioning at all within your hospital community partners?

This is Keith. I'll take the first (inaudible) at it. It hasn't changed our strategy at all. I mean it's changed some of the -- our strategy to joint venture and to work with hospitals, whether though joint venture or clinical affiliation. It's obviously changed some of the conversations we're having with hospital partners. Daryl Doise that works with us does a lot of the work with the hospitals and he tells us that the meetings he goes to around the country -- I mean, 80% of the conversations are about ACOs and how they're going to deal with it.

As Don said earlier, there's very few people who really have a solid plan together of how they're going to navigate it, but that is the discussion that's taking place. And Don, from an operational side, I know you and Joyce are working a lot. Do you want to give a little detail?

Yes, Keith. I think the number one thing that the clarity has shown is a switch to the conversation about quality and keeping patients inside the confines of the home and getting them out of the hospital. But, Eugene, has it changed anything we're doing? No. What we do believe is our focus on quality, the things that we've talked about through this call and through the two or three years about keeping patients out of the hospital when appropriate are in the fairway of what this is -- entire thing designed to do. So there's still a lot of uncertainty on our part and theirs. But what is certain is that some kind of ACO model seems eminent. What it looks like, we want to be part of that solution and not just let others dictate that.

Thanks for that color. And this is a question more for Pete. The hospice segment continues to perform really nicely and we appreciate the additional operating metrics that you guys provided this quarter. Should we read that as a sign that perhaps the hospice segment is not too far away from being broken out as its own reporting line?

Yes, that's exactly how you should read it. I think it's not there yet. It doesn't meet any of the criteria. And it's far enough away to where I'm not even -- we're thinking about it but not really on the immediate horizon. But to have some numbers with the size of the business right now that you can compare once it does break out I think is helpful. So, yes, I think it's moving in that direction and I certainly think at some point in the future it will break out into another segment.

Great, guys. I'll take the rest of my questions offline. Thank you.

I'm showing no further questions at this time and would like to turn the call back over to Mr. Keith Myers for any closing remarks.

Thank you, Operator. On behalf of all of us here at LHC Group we want to thank you for taking the time to listen in and participate in our call this morning. As always, we're available for any questions that may come up between quarterly earnings calls. Have a great day and thank you your support and belief in the LHC Group family.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.