LHC Group Inc (LHCG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the floor over to Eric Elliott, Senior Vice President of Finance. Please go ahead, sir.

Thank you, Karen. I'd like to welcome everyone to LHC Group's earnings conference call for the fourth quarter and year ended December 31, 2017. Everyone should have received a copy of our earnings release last night. If not, you may obtain a copy, along with other key information about LHC Group and the industry on our website.

In a moment, we'll hear from Keith Myers, Chairman and Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Josh Proffitt, 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 2018 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 Chairman and CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. Thank you for joining us. 2017 was a record year for LHC Group with a record amount of revenue and new joint venture locations, strong operating results, an agreement to merge with Almost Family to create one of the nation's largest in-home health care companies and a number of positive changes from CMS and Congress that have the potential to shape the industry for years to come.

Throughout all of this activity and for nearly 25 years now, the one constant has been the dedication and commitment of our growing family of health care professionals to consistently deliver the highest standards of clinical quality and patient satisfaction driven by a shared culture, core mission and values. I salute each and every one of you this morning for the positive impact you make each and every day in the lives of the many patients, families and communities we are privileged to serve. It's an honor and privilege for me to be part of your team.

Let's turn now to the business at hand. I'll begin by touching on the highlights of 2017 then walk through our thoughts on how 2018 is shaping up. With $114 million of quarterly (inaudible) [transactions with significant upside of] revenue and earnings growth, this was a record-setting year for acquisitions and joint ventures for our company. This is what has made LHC successful for many years, and it will continue to be a significant component of our growth strategy in the future.

As we expected, we continue to see both the quality and patient satisfaction rating of our LifePoint and Baptist acquisitions improve. While the baseline revenue is always attractive, it's working closely with our hospital and health system partners to drive quality and patient satisfaction and efficiency through the creation of innovative, highly coordinated care models that drives organic growth going forward. We expect to achieve similar outcomes with CHRISTUS as we benefit from a full year of contribution in 2018 from both ventures as well as from the new joint venture with Erlanger Health System, the home health and community-based services in Chattanooga in Southeast Tennessee.

We're very pleased with our overall performance in 2017 as we surpassed our initial revenue and earnings targets for the year and created momentum through our successful M&A efforts that will drive organic growth in 2018 and beyond. I believe our industry is uniquely positioned to deliver value-based care that can improve quality and reduce cost. At LHC and collectively with Almost Family, I believe we are uniquely well positioned with a proven model for success that is scalable nationwide across the spectrum of post-acute care.

Let's spend a few moments now on the Almost Family merger. We've made a few presentations on this proposed transaction and held a joint call on November 16. Rather than walk through all the details again, I want to bring you up to speed on what we've been doing in the interim and leading up to the special stockholder meetings on March 29 to approve the transaction. Internally, we've been calling this more of a wedding than a merger because William and I have known each other so long and worked closely together on a number of industry, board and advocacy efforts for more than 20 years. Our companies likewise have as shared culture and vision for serving patients and their families in their homes and what we would call complementary strength. In addition to our similar patient-focused culture and vision, our strategic benefits of the merger that I would like to highlight are there's very little shared geography, and together, we have licensed service area to cover over 60% of the U.S. population, age 65 and over.

In addition to the combined $1.3 billion of home health revenues, we will have approximately $200 million in annual hospice revenues and approximately $200 million in annual personal care services revenue. With regard to hospice, we at LHC Group bring our several years of experience to what will be this larger combined hospice segment. And with regard to personal care services, we are excited about the many years of experience that Almost Family team will bring to that service line.

With regard to home health, I could not be more excited about the complementary combination of industry-leading talent, deep clinical and managerial knowledge and experience and expertise in the area of innovative care delivery and reimbursement models. We believe that combination will be a key differentiator for us that will continue to fuel both organic and M&A growth. With regard to hospital joint venture partnerships, each LHC Group and Almost Family are committed to being the post-acute partner of choice for hospitals and health systems nationwide. And post-merger, we will have a combined 76 joint venture partnerships, which include 336 hospitals.

Lastly, when I think about the continued low leverage we will have post closing, we could not be more well positioned to execute upon our robust pipeline of acquisitions and joint venture opportunities. I mentioned earlier our combined efforts in the area of innovative care delivery and reimbursement models. In that regard, we are very enthusiastic about the Healthcare Innovation segment at Almost Family. Almost Family formed its HCI segment several years ago to pursue complementary innovative strategies, all related to home health care provided at home, but outside of the more traditional home health hospice and personal care operations.

In no particular order, these include Imperium, a leading ACO management services company that helps health systems and physicians enter into and navigate the accountable care organization space. Imperium currently has 30 ACOs and 500,000 Medicare lives on the contract. With many of our hospital partners either involved in or exploring ACOs and population health initiatives, we are excited to be able to bring Imperium's expertise to our growing network of joint venture partners as part of our service offering. An in-home nationwide health assessment business that helps payers better understand the clinical and functional needs of patients better plan and care and protect against inappropriate utilization. The assessment business currently services patients in all 50 states for a variety of managed care payers.

And a coinvestment in CareJourney, an enterprise whose business plan is focused on the development of technology-based tools designed to help health systems anticipate and inform a patient's journey through the health care system. We look forward to continued growth in this segment while leveraging their experience and expertise in HCI to accelerate development of innovative alternative-based payment models that will lower overall cost by helping patients stay at home while improving outcomes and patient satisfaction. In order to be well positioned to capture these strategic benefits of the merger, we must work diligently, combining our 2 companies together into one family. This is never an overnight process, and we won't promise that it will be here.

But as Don will share with you on our integration efforts with our joint venture partners, this is a process that we do very well. Although we are confident in our track record of integrating acquisitions and joint venture successfully, we began focusing on the important aspect of integration planning many months ago. We actually began to focus on our integration planning activities during our comprehensive due diligence efforts we conducted prior to signing the merger agreement back in November, with our third-party advisers at Alston & Bird, FTI Consulting and Ernst & Young.

In addition, in November, we also engaged the Berkeley Research Group, or BRG, to lead the integration process from that day through at a minimum, the first year post closing. Since that time back in November, BRG has established an integration management office at each of our home office locations in Lafayette and at Almost Family's home office in Louisville. Through those rigorous and dedicated efforts, we've been working diligently through 23 separate integration planning work streams, each comprised of members from LHC Group, Almost Family and BRG to plan for the integration of systems, processes and personnel as well as working to educate and encourage the 31,000 combined employees who are the face of the organization among the patient families and communities we are privileged to serve. I would like to personally thank BRG as well as the many LHC Group and Almost Family team members that have been instrumental in these integration planning efforts that have us very well positioned to hit the ground running at closing.

My last point on the Almost Family merger is to provide you with a brief update on the transaction side. As we announced last week, we are now past one of the more important regulatory milestones when the HSR Act waiting period expired. The next significant milestone will be when the stockholders of both companies vote on March 29. Once we get the necessary votes, we'll move quickly to closing, currently projected to be April 1.

Now let's turn to the regulatory front. On February 9, Congress passed 2-year budget legislation that included a Medicare extenders package with substantial provisions, including home health payment system reform. On the whole, we view the Bipartisan Budget Act of 2018 as an incrementally positive package of improvements. We had previously posted a full and detailed statement of our views on the act on our website. I would encourage those who haven't had the opportunity to look through it for details. I'll cover some of the broader strokes.

While CMS's final ruling in November for 2018 cleaned up a lot of uncertainty in the industry about payment reform, with virtually no surprises, there was much left unresolved such as implementation of the Home Health Groupings Model or HHGM. There are several things the act requires CMS to do now as it relates to HHGM such as develop a new case mix model and a transparent process that will involve all stakeholders; consider alternative payment reform recommendations like the risk-based group model; use 30-day payment periods that must be implemented in a budget-neutral way starting in 2020 and not include the use of therapy visits as a determinant; and behavioral adjustments must now be transparent and subject to public notice and comment through the rulemaking process.

The act also had several other changes that will have a positive impact on us and the industry. The 3% rule add-on was fully restored in 2018, with a phase down over 5 years beginning in 2019. This is an important protection for rural America and the timing gives the industry sufficient time to demonstrate the positive impact the add-on payment has on rural Medicare beneficiaries. There was also a specific market basket update percentage of 1.5% for fiscal year 2020, leaving intact the full market basket update through fiscal year 2019. Hospice was included in the hospital post-acute transfer policy and is now a post-acute service subject to the transfer of DRG policy. For LTACHs, there was a 2-year extension of the blended site mutual payment rate for certain long-term care hospital discharges. Physician assistants were also recognized as attending physicians to serve hospice patients effective January 1, 2019. And lastly, there was a required directive to study the feasibility of higher payment rate for providers, including home health providers that engage in the management of patients with chronic conditions.

I would like to thank our many colleagues in the home care industry who worked tirelessly alongside senators, house members, CMS staff and others to help us get to this point. Once again, I believe this combined effort demonstrates the importance of preserving access to home health care for millions of seniors, veterans and others who depend on these vital services.

With that behind us, we believe we have a much clearer runway to work with government health care programs, managed care payers, hospitals and integrated health systems. Their collective goals of quality and patient satisfaction line up squarely with our own, and we are well positioned to lead the industry to the future of value-based reimbursement and coordinated care in home health hospice and community-based settings.

You've seen our revenue and adjusted earnings guidance for 2018 in yesterday afternoon's release. In a minute, Josh will walk through the details, but I wanted to touch on a few things that you should expect to see from us in 2018: a relentless focus on quality and patient satisfaction that will drive our organic growth and value proposition to potential joint venture partners; improved execution on all operations within our segment; pursuit of and execution upon new joint ventures with leading hospitals and health systems to maintain the momentum created by a record-setting year for acquired revenue. In that regard, we have continued to remain laser-focused on our M&A pipeline and over the past few months, have increased momentum in our conversations with potential joint venture partnerships with hospitals and health systems that lead me to be confident that notwithstanding our pending merger with Almost Family, we have the right momentum to once again have another record year in acquisitions and joint ventures in 2018.

We'll continue the pursuit of synergistic hospice and personal care growth opportunities in existing home health markets, and integration and realization of the truly transformative nature of our proposed merger with Almost Family to create a national in-home health care platform to lead the industry's transition to value-based reimbursement and highly coordinated care. Of course, none of this would be possible without the unwavering efforts of our combined best-in-class team of nearly 32,000 dedicated health care professionals across the country. Thank you for the outstanding care you provide to those entrusted to our care and for your dedication and commitment to each community we are privileged to serve.

Now here's Josh to provide some color on our financial results and guidance for 2018. Josh?

Thank you, Keith, and good morning, everyone. Thank you all for joining our call. With all the positive momentum Keith just described and the financial results in 2018 guidance that I'm about to dive into, I must again first pause and begin my prepared remarks by saying how much I appreciate all of our clinical professionals who continue to provide high-quality and exceptional service each and every day to the patients, families and communities we are so blessed to care for and all of LHC Group family members who support them on a daily basis. Because of all that you do, we are able to report another successful year to our shareholders and are truly poised for future success in 28 (sic) [2018] and the coming years. Thanks, team.

With regard to our financial results, net service revenue increased 24.2% in the fourth quarter of 2017 and 17.2% for the 2017 year compared to the same periods of 2016. Net income increased 87.8% in the fourth quarter of 2017 and 37% for the 2017 year compared to the same periods of 2016. Results for the fourth quarter of 2017 include an increase of $0.75 per diluted share for the noncash decrease in the provision for income taxes from the impact of the Tax Cuts and Jobs Act of 2017 on net deferred tax liabilities, which is partially offset by increases in Almost Family merger costs and other costs and expenses of approximately $0.35 per diluted share. Adjusted net income was $0.62 per diluted share for the fourth quarter of 2017 and $2.42 for the 2017 full year.

Home health same-store revenue grew 7.8% in the fourth quarter, and 10% for the year due to our growth in same-store admissions in home health of 5.3% for the quarter and 10.7% for the year. On a consolidated basis, our gross margin was 35.9% of revenue in the fourth quarter as compared to 38.8% in the fourth quarter of 2016. The decrease in gross margin year-over-year is due to a few factors. First, approximately $1 million in additional cost of service related to certain agency closures, relocations and consolidation that we did in the fourth quarter. Second, lower margin contribution from acquisitions that closed in 2017 than the gross margin for our more mature agencies. And third, an $800,000 reduction in revenue from the impact of the home health 2018 reimbursement rule on home health episodes that ended on or after January 1, 2018. Excluding these factors, our consolidated gross margin would be 37.8% for the fourth quarter.

Moving to home health. Home health gross margins were 37.9% for the fourth quarter compared to 40.1% for the same period in 2016. However, again, when you adjust for the items I just mentioned, the adjusted home health gross margin for the fourth quarter was 39.4%. With regard to hospice, gross margin was 33% for the fourth quarter compared to 38.3% for the fourth quarter of 2016. When adjusted, our hospice gross margin for the fourth quarter was 34.8%.

These lower gross margins in hospice are due to lower census on our same-store locations for the fourth quarter compared to 2016. This was something that Don discussed last quarter, but as he will discuss again in a moment, we are already seeing improvement in our hospice service line stemming from leadership changes and other improvement plans that were implemented in the second half of 2017.

Moving on to general and administrative expense, our G&A expense was 30.5% of revenue in the fourth quarter of '17 as compared to 29.3% for the same period in 2016. The increase in G&A as a percent of revenue year-over-year is due to the following factors: $6.4 million in Almost Family merger and acquisition expense that was recorded in G&A; higher G&A expense associated with the acquisitions that we closed in 2017; and again, the $800,000 reduction in revenue from the 2018 reimbursement rule. Excluding these factors, our consolidated G&A expense, as a percent of revenue, would be 27.6% for the fourth quarter, which is down from 29.3% for the same period in 2016.

Next, our bad debt expense represented 0.4% of revenue in the fourth quarter and 0.9% for the year as compared to 1.3% and 1.6%, respectively, in 2016. As I have discussed throughout last year, our lower bad debt expense is the result of continued improvements on home health commercial and managed care collections, improvement in the health of our overall accounts receivable agings and fewer write-offs. We also continue to see good success rates in the appeal process around additional documentation requests, or ADRs, at each stage of the appeal process, oftentimes in cases where the receivables have significantly aged out.

These improvements in 2017 in our outstanding accounts receivable and the resolution of prior year AR has led to healthier receivables, which has improved our overall allowance calculation and lowered the expense. Accounts receivable over 180 days has decreased by 26.2%, from 18% of total AR in 2016 to 14.1% of total AR in 2017, while our accounts receivable over 365 days has decreased by 32.8% from 8.9% of total AR in '16 to 6.7% of total AR in '17. Adjusted free cash flow for 2017, which excludes $41 million of acquired accounts receivable that is pending receipt due to the change in ownership process, is $52.9 million, which is an increase in free cash flow of 25.6% as compared to the $42.1 million in 2016.

As evidenced by our joint ventures with CHRISTUS Health, Baptist Memorial Health Care, LifePoint and Erlanger Health System, we have great momentum rolling into 2018. Between these recent JVs and a couple of our other smaller transactions that came onboard at various times throughout 2017, we have accumulated approximately $180 million in acquired annual revenue that will be fully recognized in 2018, up from approximately $85 million from these transactions that were recognized last year. Additionally, I would echo Keith's comments earlier and cannot be more excited about the momentum we are seeing in our discussions with potential new hospital and health system partners and our overall top line of potential JVs and freestanding opportunities.

Turning now to our annual guidance for 2018. Fiscal year 2018 net service revenue is expected to be in a range of $1.22 billion to $1.25 billion, and adjusted earnings per share is expected to be in the range of $3 to $3.20. This guidance excludes the impact from a completed merger with Almost Family and assumes the following: one, an effective tax rate of 29% to 30%, which reflects the positive impact from a passage of the Tax Cuts and Jobs Act of 2017; and two, the negative impact from the Medicare home health perspective payment system for 2018, which is expected to have an approximate negative 1% impact or $6 million reduction to Medicare home health revenue, and a $0.20 reduction in fully diluted earnings per share for the coming year.

The company's guidance ranges do not take into account the impact of future reimbursement changes if any, future acquisitions if made, de novo locations if opened, or future legal expenses if necessary. Due to the difficulty in estimating the cost of the expected merger with Almost Family and its impact on GAAP earnings, the company is only providing for guidance to an adjusted net income for 2018. Our guidance range also, with regard to net service revenue, does not take into account the company's adoption of ASU 2014-09 in 2018 regarding revenue recognition. Under this new accounting guidance, the company will present the amount that are currently included in the provision for bad debt as a reduction to net service revenue related to an implicit price concession. This reclass of bad debt expense as an offset to revenue will have no effect on net income or earnings per share. When we reissue guidance after the merger with Almost Family, we will bridge to this new accounting policy for you. For the full year of 2018, we expect gross margin to be in the range of 37% to 38%; G&A expense, as a percent of revenue, to be in the range of 27% to 28%; and bad debt, as a percent of revenue, to be in the range of 1.2% to 1.6%.

Because of all the moving pieces in the first quarter of 2018, I will give you a range to help you with your modeling. We are anticipating the first quarter to be in EPS to be in the range of $0.58 to $0.63. This estimate includes the traditional increase in first quarter payroll taxes of approximately $3 million over Q4 '17, lower margin contributions from our acquisitions and joint ventures closed in 2017, which we fully expect to continue to move toward corporate margins over the subsequent quarters in 2018; and the effect from several location closures due to the severe winter weather that we experienced during the first quarter where we had 36 locations closed for an average of 3 days in January and another 15 locations that were closed for an average of 3 days in the month of February.

That concludes my prepared remarks, and I'm happy to discuss further during Q&A. I'm now pleased to turn the call over to Don.

Thank you, Josh, and good morning, everyone. What a strong year for LHC Group and our teams all across the country. As both Keith and Joss have said, I too want to thank and congratulate our team. They've done a fabulous job and continue to do so.

As Keith mentioned earlier, I too will touch on the imminent transaction with Almost Family but before doing so, would like to spend most of my time this morning highlighting key aspects of company operations in all segments of the business. In particular, how we delivered organic growth through our relentless focus on operational excellence and how we have managed the external growth created by recent acquisitions, joint ventures and de novo projects.

Turning to home health first, our organic home health admissions were up 5.3% in the fourth quarter and 10.7% for the year, with higher acuity among these admissions being recognized as well. Same-store home health admissions related to our joint venture agencies increased 8.7% in the fourth quarter of 2017 compared with the same period prior year. Combined with the strong organic growth, the addition of 71 home health hospice and community-based locations in 2017 led to a total increase in admissions of 21.0% for the quarter.

Quality continues to be the #1 factor behind growth in both our organic and nonorganic admissions, and I'm very pleased to report that, once again, we exceeded the industry averages for quality and patient satisfaction. More specifically, with the recent CMS Star ratings for home health quality and patient sat, 98% of our locations have 4 stars or greater. More than 70% of our home health locations have earned home care lead rankings in 2017, and we remain the only national home health provider that is 100% accredited by The Joint Commission.

I can't emphasize enough how much these quality scores and the ability to provide that full and scaled continuum of post-acute care, come up in our discussions with potential joint venture partners. It is quite often the difference maker and the driver of their choice. For the quality rating, we produced a score of 4.55, excluding recent acquisitions for the January report, which is an improvement of over 4.51 from the October report. This compares favorably with a national average that has been within the range of 3.24 to 3.26 for the last 5 quarters. Our most recent patient satisfaction star rating was a score of 4.2 stars compared to the industry average of 3.6.

In our hospice segment, you will note that admissions and census were up year-over-year and up sequentially from the third quarter and as Josh alluded, we're beginning to see the improvements from the divisional leadership changes that we made a few months ago, we return to positive organic admissions growth in the fourth quarter at 2.9%, and we commit that this trend will continue going into 2018.

On the external front, the M&A landscape remains very opportunistic, specifically, in the realm of hospital and system joint ventures. The over $114 million of acquired revenue in 2017 is a record for us and joint ventures were instrumental in setting up our strong 2018. As we closed out the year, we were fully integrated with LifePoint's 28 home health and 13 hospice locations and fully integrated with CHRISTUS' 21 locations. We are now actively pursuing de novo projects and acquisitions with both partners.

I'm pleased with how smoothly the process went on these joint ventures, not to mention the one earlier in the year with Baptist. All told, each is integral just as mentioned and were on time and ahead of schedule in the transition process. This experience in integrating acquisitions will be no more important than over the next few months while we merge with Almost Family. As Keith mentioned, we have been running hard since November. We have rolled up our sleeves and worked in tandem with BRG, and I personally have been participating in business reviews and integration work streams. All told, we are very pleased with how everyone is working together and see the opportunity ahead of something literally transformative.

In closing, we are very well positioned as we go deeper into 2018. We are with eyes wide open, opportunity clear at hand and meeting expectations operationally and transactionally. We will keep you informed of key milestones and successes along the way.

Until then, thanks again to you for all joining. Thanks again to our team. And Karen, we are now ready to answer questions from who is in the queue.

(Operator Instructions) And our first question comes from the line of Brian Tanquilut with Jefferies.

Keith, I'll start with you if you don't mind. Again, just go back to a question that I asked in the last call, but I think as you've spent time with Steve and William and their respective teams, as you think about the merger, I mean, it's obviously a pretty big transaction, especially for your industry. How do you feel or how do you assure investors that this won't be anything like all the other merger blowups that we've seen in the health care space in the last few years?

That's a good question. So I think a few things. I mean, one is I just have a personal view that the cultural fit between 2 organizations is critical. I mean, that's an important first step. I can tell you that had it not been for the cultural fit that existed between the 2 companies and the long-standing relationship we've had, I don't really have to think long and hard to support this. But from that regard, that block got checked really early on. Then beyond that, this is it's quite a task to bring 2 companies together. And the one thing that we talked about in the boardroom was that we could not pursue this if there was risk of it becoming a distraction to our core operations and our growth strategy with joint ventures. And so we began early on down a path of having -- of bringing outside help to help drive the integration process. And so we -- both companies have been involved in that. So BRG has, as we mentioned, offices set up both in Louisville and LHC. So it's not though LHC is driving integration, this is a merger so we have 3 parties involved all pulling in the same direction on this, and BRG driving the process on a day-to-day basis so that we can both stay focused on our core business. So to my -- all of that, when you combine all of those things, I can't think of another transaction that I've seen in my career that had all of those elements. And that's why our confidence is very high. And finally, I would say, now we have the benefit of having worked at this now for 4 months. And so we're really seeing all of the progress and how it's coming together. So we're even more confident than ever. I don't know if that answers your question. But that's...

Yes. No, that's great. I appreciate that. And also to follow up on that. I guess, for Josh, as we think about your guidance, we think about the numbers that you had thrown out in the proxy and your track record of generally being conservative. I mean, how should we be thinking about your strategy or perspective in terms of the projections that you've laid out for the company as a stand-alone and also on a combined basis, once the deal closes?

Yes, Brian, well, that's a great question. I mean, as you know, we tend to be fairly conservative when we give guidance. And I think I would probably take that same approach to how we will be going forward. And as I mentioned in my prepared remarks, the guidance, just to be clear, hope everyone understands, but the guidance that we issued last night and I spoke to is only for stand-alone LHC Group, and we will be, as soon as we announce the confirmation of the merger, we will be issuing refreshed new guidance that will take the combined company into account. So I mean, I wouldn't just simply take numbers in the proxy, add them together and generate guidance. I would kind of wait for us to issue that guidance post-merger. And then the other thing I'll add to, kind of the future combined benefit, is that $25 million of pretax energies that we described back when we did the announcement call in November in addition to all of the integration planning that Keith mentioned that BRG has been driving, they have also been carrying the mantle if you will, confirming and validating those synergies, and we feel very good about being able to harvest and capture them as well.

Josh, just a quick follow-up. As I think about home health organic growth as shown in your guidance for 2018, what is that number?

Yes, I would say somewhere between 5% and 7% for this year.

And our next question comes from the line of Joanna Gajuk with Bank of America.

So actually, on the guidance specifics that you provided, the gross margin and G&A and bad debt, so that implies that you expect the EBIT margin to expand maybe 50 basis points or so? So can you just flesh out how you think it's going to split between the different segments? So you said -- you just said that you expect organic growth of in-home health of 5% to 7%, can you give us more color on the other segments and also on margins for each of these?

Sure. Thanks for the question, Joanna. I would really bucket it in the 2 segments. One, on the home health side, as I mentioned in my prepared remarks, you're going to see continued margin improvement quarter-over-quarter throughout 2018 being driven primarily from the improvements in LifePoint, CHRISTUS, Baptist, Erlanger, all the joint ventures that we brought in last year. As we've said for years, it's about a 12- to 18-month period post closing to get to kind of LHC margin standards. So on the home health side, you're going to see improved margins there. And if you want to think about hospice, I really think you're going to see some of that EBIT improvement over the course of this year being contributed by the hospice segment, and you'll see in first quarter, as Don mentioned, we got some growth kind of behind our sales, if you will, from Q4, we're seeing more positive growth momentum in Q1 and going forward, into Qs 2, 3 and 4, I think, you're going to see that contributing. Don, do you have anything to add?

Back to hospice, Josh is exactly right. We both alluded in our prepared comments that the maturation of the changes is starting to take effect. And case in point, of our 91 locations right now, 24 of those locations have less than 20 average daily census to date. So the investments that we made in the changes are actually producing positive results even in this quarter. So all told, when you add that and then you combine the home health improvement with the recent acquisitions, that's what we think is going to contribute to the accretion in the margin.

Then just to go back on the hospice, so do you have a number in mind in terms of organic growth? I know that, I guess, Q3 this year is going to have an easy comp, but how should we think about organic growth for hospice this year?

I'd bracket the same number as Josh has said for home health in the 5% to 7.5% range.

5% to 7%, okay. And if I may, a follow-up on the -- on your discussion around regulatory updates and specifically, the rule add-on rate was extended for this year, for '18, but then there are some changes. It's going to be phased down over time and if there's going to be difference between the different companies. So can you help us quantify the impact for the company in the out-years over time? One of your peers talk about the 10 to 20 basis points headwind for them in '19 and '20. So is there a number in mind we should be thinking about for LHC Group?

No, we don't have that calculated. We did look at the -- we did do a lot of scoring on it though during the process of this legislation, and it was our impact was not going to be...

If it's goes away – if it had gone away completely, it'd have been $6.5 million in revenue. So the phase-out, I guess, you can kind of figure that into it over the next few years.

Yes. I think the way I'd answer that though is we actually don't believe that the phase-out is going to occur. We think that this was more of a timing issue this year, so we're happy to have the 3% in place for '18 in '19. And we've already begun work with firms to provide the analysis, to prove the value of maintaining the rural safeguard, as we refer to it. It's to guarantee access to patients in rural markets. So we and those that represent us in Washington, D.C., believe that we have a very good chance at continuing this and are happy that we have 2 years to work on it.

Our next question comes from the line of Kevin Ellich with Craig-Hallum.

I guess, Josh, if can you go back and talk a little bit more about your cash flow? You gave some good detail in terms of the changes in ownership, but I guess, what's embedded in your guidance for cash flow assumptions for 2018?

I would go -- I mean, so for 2017, you got the 52.9%, which had that $40 million adjustment in it. I mean, our adjusted EBITDA for 2017 was right in that 89.5%. So for 2018, Eric, what do have for?

Yes, so in our guidance, since you're assuming around about $100 million in EBITDA, less taxes, I would say free cash flow will be right around $80 million.

Yes. Yes, about $80 million.

Got you. And then, Keith, you made some comments about the M&A, you expect to continue the strong acquisitions that we're seeing, wondering if there's any specific segment that you find more attractive given valuations now once the Almost Family merger closes?

Yes. So we still like the strategy of joint venture and partnering with hospitals and health systems and almost always, our lead in those partnerships is with home health, almost always. And then after we establish the relationship, the partnership, we have the opportunity to add hospice and personal care services in those markets. So I think that will continue to be our go-to-market strategy. With regard to hospice and personal care though, there's a tremendous opportunity for us to build out personal care and hospice in all of our joint venture locations where we currently have only home health. And hospice, of course, there's that opportunity, but we're especially excited about the opportunity in personal care. As we see more and more managed Medicaid out in the markets, more or more of the payers that we work with want us to have stronger -- have a stronger position in the personal care space to be able to assist them with dual eligible.

I'll add to that, if you think about it this way, certainly, the trajectory of what we're going to do is not going to change that Almost Family comes in and we merge with them. Case in point, of our 331 home health locations, we're now up to 91 hospice, whereas when Almost Family comes in and we merge, we now only have 16. So when you start looking at the possibilities to overlay what we can do together, not only is it not going to slow down in the base business, we already see opportunities going forward to merge all of this together from a personal care, hospice and home health, and that's all part of this. So that's on course Keith's comment about how excited we are now with 4 months into it.

Got you. And then, Don, since I got you. In your comments about LifePoint, CHRISTUS, Baptist, which is done that's great in terms of the added revenue, what about the de novo expansion? I mean, what's typical and what should we expect in 2018? And what are the costs associated with the de novo expansion strategy as well?

Keith, we have about 40 de novos in queue in totality for 2018. Roughly 1/3 of that are in those assets that you talked about. From a cost standpoint, the math is about $300,000 per annum when you're going to open these up. But the way we have them mapped out, so we don't avoid any dilution is phasing those in so essentially, it's just kind of common sense. Let the early ones that you open pay for the future ones that you're going to so that way we continue the hurdle that we have forward.

And our next question comes from the line of Bill Sutherland with The Benchmark Company.

I was looking at the same-store numbers and wondered if you could provide a little color on the Medicare new admissions and revenue, just the slowdown that appears to have occurred in 4Q relative to the rest of the year?

Well, I'll talk about the admissions, and then Josh can tag along. I think we talked about in my prepared comments showing that earlier in the year '17, we had bracketed that same 5% to 7.5%. We, in fact, exceeded that totality as well as in the organic. So that's kind of why we're bracketing that again. I also talked, I think, a couple of calls previous to this about the infrastructure adds on our account executives or our sales team. In total, we've added 26 of those so that's why we feel that same bracketed number is a pretty good number for that. And then, Josh, tag on to the revenue side of that.

Yes, I mean, 2 things I would add, Don. One is just from a comparable perspective, Q4 of '16 was candidly a real high hurdle and it was such a strong quarter. So when you factor in everything Don just said, when you compare the 2 periods, make the percentage look not as good as you would've expected. But then the other thing I would factor in, Bill, is a little bit of effect of the revenue from the 2018 rule that I mentioned that impacted the revenue for the fourth quarter as well.

Don't those issues continue for the next 2 or 3 quarters?

They will.

As far as tough comps and also the rule?

I mean, the rule, for sure. And on the comp side, I mean, Don, I mean, you can speak to kind of the momentum we've got right now in the first quarter that we're already seeing, I mean, even though we had such a strong first, second, third quarter last year, we're feeling really good about our organic growth pacing today.

Yes, the comps certainly aren't the same. I mean, when you get this big, those hurdles are tremendous. But that's why we look at 5% to 7.5% (inaudible) good number in this industry. Right now just look at everybody else that's went before us. So we're really excited about that. With the other thing of note is as we continue that growth, the marginalization of that business is what we're excited about because that's in a lot of these newer assets so it should trickle down. Differently said, that same 5% to 7% should be more accretive quarter-over-quarter than it was prior.

Absolutely, absolutely.

Okay. And just one more for me. On the M&A front, and I know given your unique -- not unique, but your developed focused on JVs, the valuations maybe aren't as inflated as I've been hearing much of the market. So is there -- has it gotten -- I mean, incrementally, how much more difficult is it to find M&A that makes sense from an ROI point of view at this point for you guys?

I can't say that it's been difficult for us in our strategy. And I think one of the reasons is that our strategy is to do a higher volume of smaller transactions like these joint ventures and all. And so they tend to not be process driven where you have a number of people in competing and everything's about price. When you're dealing with hospitals and health systems, price is usually the last thing you talk about. I mean, they're more interested in the value that we bring to their system and our ability to impact the overall effectiveness of their health system. And then almost a final step, we talk about what the fair market value is, and we usually engage -- we always engage, a third-party firm chosen by both sides to do that fair market valuation. So just by the nature of how we grow in what's in our pipeline, I think that's what keeps us, protects us from getting into a process where we waste a lot of time and energy and resources and then end up just being outbid by someone who overpays at the end of the day.

It sounds like you all just don't get involved with "processes."

We really don't. To be honest, we really don't.

Our next question comes from the line of Matt Larew with William Blair.

I wanted to ask about how the top and bottom line contributions from CHRISTUS stacked up relative to your expectations. In the quarter, you'd mentioned that you're expected to be a little less dilutive here in the fourth quarter, and then what are your expectations for profitability improvements from CHRISTUS throughout 2018?

Yes, Matt, this is Josh. I'll start, and then Don can maybe piggyback in some, operationally, and how we're going to get there. But really, the margins, not just with CHRISTUS, but with CHRISTUS, Baptist and LifePoint, as I mentioned, from a top line perspective, they're right in line and performing well, growing well and we feel really good from a revenue perspective. On the margins, the gross margins in the quarter for the acquisitions were 28.6% as compared to almost 36% for the same store. So I mean, that's 700, 800 basis point difference. And part of our confidence and enthusiasm in the way we're spreading our guidance out throughout the course of 2018 is starting to see some of that momentum improve in the assets like CHRISTUS.

And that -- to underscore what Josh said, remember, CHRISTUS had (inaudible) LTACHs that came with us. And so part of our confidence is about the accretion we've been talking about as we know we have 2 of those in sight that we're going to be doing some different things with immediately will be accretive. And then I would just say, overall, the hospice and home health still have a lot of opportunity. We've come a long way, but we have a long runway to go. So you add all of that together, I think that kind of supports Josh's position.

Yes. And, Matt, the only thing I would add, so I just gave you the number for Q4 for acquisitions and on a gross margin, it was 28.6%. I did go back just to see the trajectory and the momentum, and for Q3, that was 17.6%. So quarter-over-quarter, we improved gross margins on the acquired assets from '17 to 28%. So hopefully, that gives you a little bit of confidence as well that they're going to keep going in that direction, get closer to the corporate margins. I mean, we're seeing the same thing on the G&A side, about a 330 basis-point improvement from Q3 to Q4 on G&A as it relates to acquisitions.

That commentary is really helpful. And then, Don, just on home health acuity, obviously, something you've discussed in the past is pulling patients from SNFs. But I was just wondering if there's a particular patient type or types that you have found as attractive candidates to pull out of SNFs and how you expect that momentum to continue here in the future.

Yes, I think it's the same patient type, certainly with the chronicity of congestive heart failure, COPD and some of those others, but you just alluded to it. They're just sicker and there's a greater need there. But I would say that as we've grown, it's pretty obvious in our patient mix that we're less rural today and so we're getting a lot of post-surgery in these major markets so you add those 2 together and that's why our case mix has trickled up a little bit.

And our next question comes from the line of Dana Hambly with Stephens.

Josh, a couple of housekeeping items. On the gross margin on those acquisitions, how much revenue is that associated with?

For the quarter, it was about $42 million to $43 million of revenue.

Okay. All right. And I think you mentioned in your prepared remarks, I've got jotted down here, $180 million in acquisitions versus $85 million. Does that mean it's a net $95 million in 2018?

Yes, of year-over-year incremental improvement, that's right.

Okay. So if we're -- just for modeling, if we kind of put the 28.6% margin on kind of that difference between the $180 million and the $85 million, and we should hopefully see improvement there, that sound about right?

Yes, yes. That's right.

All right. And then you mentioned a couple of EBITDA numbers. I think it was $89.5 million for '17, and about $100 million for '18, is that before noncontrolling interest, I think?

That's after NCI.

After NCI. Okay. I think, going forward with (inaudible) because I know they break out in adjusted EBITDA every quarter, and I think they maybe define it a little bit differently. Have you -- I'm sure you have. I don't know if you can tell us now if you'll be doing that and how you will be looking at that if that's after NCI, after stock-based comp.

Yes, no, Dana, as you alluded, we are definitely kind of looking at various format differences and conforming different policies and whatnot. And when we come out after the first quarter, we'll give you some more visibility into what we're going to do there.

Okay, all right. Just lastly for me. It sounds like the acquisition pipeline is very strong. It sounds like there's an appetite to continue to do these acquisitions. Keith, I was just wondering with the -- this, you call it a transformative deal, that could add a layer of distraction that I feel you probably wouldn't need, but it sounds like you disagree with me there. I just wonder if you can give me your thoughts on doing deals, while you're going through this integration?

Yes, that's a great question. I'd love to talk about that for a minute. So in this merger, as we contemplated it, leading -- it was part of our discussion early on, we did not want to include any synergies that came from the field level. So the structure at Almost Family now is very similar to ours where there are division presidents that are leading geographic areas and the different service lines. So all of those components and all of those teams are staying in place, just as they are. And we're maintaining a Louisville presence and a Lafayette presence. So we're not disrupting that organization. We're -- there are synergies, of course, coming from both sites at the G&A level but we're not affecting anything at the field level. So this doesn't have any impact on the capacity of LHC, specifically our M&A team. Our M&A team is not involved on a day-to-day basis with this merger. They're out continuing to source our core M&A opportunities, which have been joint ventures and smaller transactions, primarily in (inaudible) need states and you know what our strategy has been. So they continue to focus on that and then our transition teams that transition those acquisitions are also not involved in this merger transaction in that transition. So that's -- we've been very deliberate in our approach to this to ensure that we don't in any way disrupt our core operations and our growth strategy. And as I mentioned early on, that was a key topic early on in the board discussions and really it was a go or no-go item, so we had to have a plan for that and prove that out early on.

And that concludes our question-and-answer session. I'd like to turn the floor back over to Keith Myers for closing comments.

Okay. Well, thanks, everyone, for joining us. And as always, if you have any questions or would like to reach out to management in the interim, please contact Eric Elliott. And Eric will be glad to get any of us on the phone. So thank you for your support of LHC Group, and look forward to talking to you in a couple of months. Thank you.

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