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Almost Family, Inc. (NASDAQ:AFAM)

32nd Annual JPMorgan Healthcare Conference Call

January 16, 2014 10:30 AM ET

Executives

Steve Guenthner – President and Principal Financial Officer

Analysts

Andrew T. Tom – JPMorgan Securities LLC

Andrew T. Tom – JPMorgan Securities LLC

Hello everybody, my name is Andrew Tom. I work with Justin Lake, covering managed care and hospitals here at JPMorgan. Today we have Almost Family presenting and the breakout room will be in Olympic Room 90.

Now I’d like to present Steve, President and Principal and Financial Officer for Almost Family.

Steve Guenthner

Thank you, good morning. And everyone hear me okay. All right, well first let me thank you for getting up at whatever time you had to get up to be here at 7:30 in the morning to hear a story about a company like Almost Family. We do appreciate your interest and hopefully we’ll make it somewhat worthwhile.

We are a home healthcare company, founded in 1976 in Louisville, Kentucky by a gentleman named William Yarmuth, who is currently our CEO, Chairman of the Board, my boss, my mentor and partner in this endeavor.

We think of pretty seasoned management team. William has been our CEO for 30 years. I have been in my role as CFO and now President since 1992. And we’ve also brought some new talent. During the course of this year we bought a gentleman in as our Chief Operating Officer. His name is Daniel Schwartz. He had had a very long career, very successful career in the senior living business and he is now responsible for the day-to-day operations of our business.

With our recent acquisitions during 2013 of Indiana Home Care and particularly of SunCrest, we are operating right about the $0.5 billion revenue mark that makes us the fourth largest home care provider in the country and we currently have 240 branches in 14 states.

This math gives you some idea of our geographic concentration. We do believe that because of the business that we’re in which involves nurses going from our offices to patients homes and back, that geography makes a difference and that tight geographic span of control brings you good operational span of control and makes the business a lot easier to operate.

In addition at least currently most home health regulation is done at the state level. So it gives you a fewer hurdles to clear and it gives you better understanding of how things work in each of the individual states.

Our business model involves two principal segments. We refer to them as visiting nurse or VN, and personal care or PC. So let me talk first about one and actually both have the same goal which is to keep patients in their homes and out of institutional care. The visiting nurse segment provides skilled nursing services predominantly paid by Medicare for patients who have been determined to be homebound, that’s a defined phrase and have a skill need, also a defined phrase, well usually meaning, they’re needing the services of a skilled nurse or a physiotherapist.

That’s about $400 million of our revenue. One of the simplest ways to think about this business is post-discharge sense, patients who have had an acute care episode and are being discharged from the hospital. It’s easy to think about how do we get that patient home earlier and keep them safe in their home and avoid readmission. However a meaningful part of the business is also preadmission or pre-acute and avoiding that hospitalization to start with.

The personal care segment provides services targeted primarily at avoiding nursing home placement and then the services principally hours based, aid services, tends to be less skilled and is paid for in the Medicaid program primarily. We have about $100 million in that segment today. If you like what Addus at their roughly $200 million run rate we have about half of that size of the business tucked to Williams on our personal care segment.

Key strategic elements for Almost Family involve a senior advocacy mission. We are built around geriatric care and how do we provide services and care for the elderly patient population. As we are evolving our business model and learning more about that patient population, we are evolving more and more and I think the industry is as well into chronic care management. I’ll talk at the end of this about some very, very recent developments that have just come out in Washington centered around widen, the new incoming Chairman, the Senate Finance Committee that I think you’ll find very, very interesting. Meanwhile I’ll try to stay on script here for a little bit.

Concentrated development, we talked about and you saw in the map this densification idea. We think compliance is really important. Substantially all of our revenues come from government sources. Government sources sort of want you to play by the rules and we try to do that as best we can. Compliance is important. We have good strong internal audit processes. And while we didn’t enjoy a lot of the scrutiny that we’ve had from the government over the past several years, we are proud at least to say that we emerge from the scrutiny unscathed and better for the process.

Prudent capital management may differentiate us from some of our competitors. We are relatively leverage averse in our business. Others take a view that leverage can dramatically enhance returns. We think in the kind of business that we are in and frankly based on the relatively conservative nature of our management team that we try, we think leverage has a place, but it needs to be managed properly.

We also try to take a very disciplined approach to acquisitions. And that is pricing discipline, its service line discipline and its quality discipline. So if a transaction does not meet our criteria, four of those we will generally let it go to another buyer and continue our process of looking for transactions that fit for us.

A few updates here of some things that had been going on in 2013 which has been a pretty active year for us. In 2013 just right at the end, we made the largest acquisition in the history of our company, the company that we acquired is SunCrest, a provider of home care services that very much fits our profile both in terms of the services they provide, the culture in which they operate and the geography in which they operate.

So I’ll talk more about the specifics of the transaction but along with that we did this earlier transaction in July with Indiana Home Care. We’ve long been an operator in the southern part of Indiana, and most of those operations were in the northern part.

A somewhat sentinel event took place this year with the publishing of the rebasing rules. We’ve been talking about rebasing of Medicare rates for home care and what’s going to happen, what are those rates going to be? We’ve told you it for a while now. We’ve assumed the worst outcome could happen and candidly and simply the worst outcome happened. So CMS published essentially the worst, the lowest rate cut or the largest rate cut, worst outcome that they could have under the statute.

Why we don’t like it, we understand it and we think that it will at a minimum allow capital flows to resume and to eliminate some of the differences in expectations that buyers and sellers have been able to put into the valuations.

The other thing that we did in 2013 is we made an strategic investment in a company called Imperium Health Management. Imperium was founded Louisville by a former humane care management and utilization management executive and another gentleman who had had some significant experience in setting up imaging operations.

This company is targeted on the ACO space. We think of it largely as a research and development activity on our part. And we’ve made a commitment of about $6 million in capital and we are going to pursue engagement in the ACO space. It may produce returns and revenues, it may not. We think that it will definitely broaden our perspectives with regard to the evolution of the healthcare system in particular in the traditional Medicare patient population.

As I mentioned, SunCrest is our largest acquisition. We got the transaction closed right at the end of December. It brings us 75 branches and a $150 million in revenue, adds an important southeast cluster for us. We have not really had any operations in the state of Tennessee or Mississippi or Alabama. It brings us very nice presence in Georgia around the Atlanta area. Expands our clusters in the northeast where we had some small operations in Pennsylvania but it brings us a very nice presence in Pennsylvania. It added $16 million to our personal care segment, most of that is in the Tennessee Medicaid program and pushes that segment over the $100 million mark and it offers a very significant synergy opportunities.

We had published some financial information with our press release when we announced the transaction and we’ve repeated some of that data here. One of the things I do want to point out is that the latest information that we published on this is 2012 numbers. So if you’re thinking about what the implications of all this means to Almost Family in terms of accretion, remember you got to press those numbers all the way through 2013 and 2014 which also include rate cuts as you sort of work through that.

We do expect pretty significant synergies in the $9 million to $10 million range at the home office and then $1 million to $3 million range at the branch level. And we expect it will incur between $7 million and $8 million of transaction and severance costs.

Little bit more about Imperium. As I said earlier this is a development stage enterprise. It has relationships with a small number of ACOs currently. For those who don’t know most of these ACOs are accountable care organizations are managed, where as initiated in our currently managed by groups of primary care physicians who have banded together on to operate under the Medicare, shared savings program. So the ACO forms, lives are attributed if the ACO can drive the spin down below a certain point it shares in the savings to the Medicare program.

The goal here of this is obviously to deliver savings to Medicare. So why does a home care operator get involved in the management of ACOs. We believe that as people look at the spend on traditional Medicare patients and as primary care physicians start to think about how am I going to lower that spin, they are going to get to the conclusion that we need to use more home care. We have to keep that patient in their home, we have to manage their chronic condition and we’re not going to be able to do that by send them to the hospital or just have doctor’s office we’re going to need a care for them in their home.

The other thing that we think we’ll gain out of this is a whole new perspective and I can tell you having with closest transaction right at the beginning of October and we’ve already accomplished some of these goals. Expanding our horizons and broadening our perspectives about what’s going on to manage patient populations, what’s going on with the patient populations, this is already happening. The ACOs get from CMS monthly all of the claims data that CMS is paid on these patients.

And that’s a look we’ve never had into the business, so when you start to see the depth and breath of information, pharmacy claims, lab claims, other physicians being they are seeing the patients. In-patient and out-patient services would be provided it’s a phenomenal eye-opener not only for us as a homecare company, but for the primary care physicians who had no idea that Medicaid providers were seeing their patients.

So we are going to work with this Imperium Health Management to try to help drive coordinated efforts, we talked in our release about this transaction about risk based predictive models. Those things are evolving about earlier and more frequent home health intervention and really about taken all of this data in a much better understanding about the patients condition and trying to bring it to the point of the clinical decision maker. So that clinical decision maker is making a much more informed decision about what’s going on and driving the cost down.

Where are when appropriate, those are important words. We try to avoid hospitalization emergent care and sniffs and I’m going to show you why in this next slide, which I don’t know if you can read from the back of the room. So I’ll give you a little bit of help with it. This slide shows us what the total spend is for all of the Medicare shared savings patients in ACOs across the country.

The middle column is a per person per year amount and it says somewhere around the middle of the page that the Medicare programs spend about $10,000 per Medicare patient per year. In the yellow line and the facility oriented which is a combination of inpatient institutional, I’m sorry hospital out-patient sniffs and the ambulance to get them there. We’re spending almost $6,000 of the $10,000.

The next slide in the middle is Part B physician and suppliers, that’s about $3,000 in the home oriented services, home healthcare, durable medical equipment and hospitals really spending about a $1,000. So if you’re trying to make that $10,000 number go down, you’ve got as we say over in the box hopefully read those arrows at least, we’ve got to decrease the use of high cost services and one of the ways we think we can do that is to increase the use of low cost services as a substitute for those high cost services and thus drive the total spend down.

Just a couple of brief points about the home health industry, I’ll move quickly through these. Where does home health fit, I love this graphic if you put it in a cost and value curve, we are seeking to be a high value low cost service. Keeping patients in their homes, avoiding all of the institutional costs that go along with in patient settings and keeping the patients where they prefer to be which is at home.

Home health is evolving as a broader solution to a lot of health care needs, it’s become so much more than simply the post discharge service to get the patient out of the hospital. We still do that. It’s an important part of what we do, but we’re broadening and evolving to serve more chronically ill patients. And as we evolve our chronic care capabilities, which is frankly where most of the Medicare spend is, very, very substantial part of the spend is going on patients with two, three or four chronic conditions that are not being managed probably.

So those patients tend to purpose in and out of institutions. They go home, they don’t manage their care conditions, their healthcare conditions properly, they have an exhauster base and they want it back in the hospital. So proceeding on you actually got to have bending the cost curve slides, we have one of those, the state is extremely obvious cost difference between a day in a hospital and caring for patients in their home.

On the regulatory frond, as I said earlier the long wait is over. We have people who are interested in the technical aspects of this. We can talk about it in Q&A. It’s a very simple answer they gave us the biggest rate cut they could. I mentioned earlier about the expectations of buyers and sellers and how we believe at least that that had impeded transaction flow. So as a buyer of the business with an uncertain revenue stream from a payer, I’m going to put in the most conservative answer I can when I’m running my DCF model. As a seller of the business particularly maybe if I’m not that crazy about selling it, I’m trying to convene my ownership structure or my capital sources that they should let me live to fight another day. I’m going to put in a number that’s not the worst number.

And so you have a value gap that is created by that – that impedes business transactions. We think at least that part of the gap should be gone. And as buyer and seller value expectations comeback together we should see more rational transaction flow, I don’t think it’s a coincidence that in the second half of 2013 once the rebasing rates where published, we were able to accomplish acquisition volume.

We are continuing to be very active in our M&A development work and we’re continuing to see a flow of transactions and we are not stopping. We are going to slow down a little bit and make sure that we can integrate and absorb and digest the transactions that we completed, but we are continuing to look for additional transactions and we think this will actually in that regard be a little bit helpful to encourage continued consolidation in the industry.

So where are we going now with regulation. There is always something to be fixed. There is always something that we have to pay for. And we think for the last five or six years one of the perceptions in Washington is that one of the things we had to fix was home healthcare. So we fixed home healthcare. We rebated the rates, we put in case mix creep adjustments, we put in new regulations around physician face-to-face requirements, we put in new regulations for therapy, assessment and reassessment, and I think and I believe and I feel that the view in Washington at this point is that we have largely fixed home healthcare.

Now the problem that we have or the challenge that we have, the opportunity that we have is there is something else to be fixed. There is always something else to be fixed. This one is the doc SGR fix. So whenever there is something to be fixed, we start looking for paid for and we start going up and down the line and trying to figure out how much can we get out of each line.

It is our belief and we plan to do everything that we can along with others in the industry. We continue to make the point politically, socially and administratively that home care is done as part of this point for quite a while. We’ve taken a huge amount of the home care spent somewhere close to a third of the projected home health spent out since the days immediately prior to the Affordable Care Act. So at this point, we want to make sure that good ideas are being used, not bad ideas.

One of those bad ideas is the co-pay and you can see this poor fellow here with no money in his pocket. He is going to get turned away and we want to continue to make that point, co-pays are bad idea for the Medicare home care patient population. So lower cost service is the one that patients want and we don’t want to set barriers up in front of that. We want to make sure it’s properly controlled and then we want to encourage people to get into it as opposed to using higher cost service or no service that results in a rehospitalization.

We do think there is some good ideas post rebasing, one of which is limiting the unscrupulous provider’s ability to abuse the system. There has been a great deal of collaboration that’s taken place in the home care industry over the last five or six years, unprecedented collaboration and I think it’s been very positive for our industry and I think it’s been very positive for the Medicare program and for the country.

In the Affordable Care Act, the Congress implemented a limitation, a payment limitation on outlier episodes, these are real high cost episodes where the agency gets additional payment and the program was been abused, been abused pretty dramatically. Industry proposals led to implementation of the 10% limit on those payments and it was just very simple. And it was just programming the computer, if the number exceeds 10% of that agency’s total payment, don’t write the check. So there is no pay and chase, very simply process. It was implemented by CMS in 2010. It saved almost $900 million and if you continue to progress that forward that would be over a $1 billion a year in today’s spend.

There is some similar recommendations or proposals being made, all of the family is supportive of one of them in particular that would put a limit on excessive recertification or essentially length of stay to limit abuse or practices that are happening in very limited geographies. In this map if you can see these little red and little bit pink from here but is the red and orange and black dots, show where the $2 billion savings, now that’s on about a $19 billion program. So these two limits alone would generate about $2 billion in savings and this is where it comes from.

Extremely isolated pockets of bad behaviors and so as we evolve our level of sophistication and understanding of what’s happening, we are able to come back to the program as responsible corporate citizens and as responsible industry with proposals that make sense as opposed to waiting for the bad thing to happen to us.

I’d mentioned certain of these additional regulations and things that have happened to us over the past four or five years, new rules, new requirements, new forums, new certifications and well we haven’t been crazy about them, we’ve done them. And I think at this point, the regulators and policymakers believe that in fact these have largely worked and so we think that improved regulation actually build the confidence and the use of home health services to lower the spend. This little sentence at the bottom here is usually how we try to make our point in Washington, and with MedPAC and with CMS, we needed you to know that we have one of your patients in home care, that they need homecare and that if we don’t have an excess utilizations situation going on.

Why Almost Family? Almost Family advantages we think include a strong history of navigating changes. We’ve been in the business since 1981 as a Medicare provider and since 1976 as a personal care provider. And we tried to take a fairly conservative approach, that’s based on facts and reality and to navigate through significant changes. We do think that we’re reasonably well positioned to capitalize on the clarity now that rebasing is known, and as we are beginning to demonstrate with our Imperium investment, we opened alternative ways to evolve with the healthcare system.

This slide I’ll probably move pretty quickly here because I think I beat this point to death, but a tale of two periods or a tale of three periods and periods of clarity. We’ve been very aggressive with acquisitions relative to our size. In periods of uncertainty, we pull back. And then in period number three, you can see in the bottom of the slide we’ve become much more aggressive again in our acquisition activities.

Share performance, gosh, I don’t know. We’ve put the slide in, value of $10,000 invested in January 2005 when we launched our most recent strategic plan, puts us at about $200,000 value creation in that time frame. When you get through all of this, when all the uncertainty about the evolution of healthcare as it plays through, whoever has the money which is what most of the reforms and discussions are about. Let’s give the money to the managed care organizations, they’ll figure it out. Give them out to hospitals, they’ll figure it out. Let’s put it all in our post-acute bundle, they’ll figure it out. Let’s go give all the patients to the ACOs they will figure it out.

Whoever is doing the figuring, there is no reason to saying conclusion. Wherever that ends up, the people who are responsible for this they’re going to try to drive care into the home. And let me try to just cover for a moment this announcement that took place yesterday, Senator Ron Wyden, who has taken over Senate Finance as the – taking from Max Baucus introduced a bill that calls for better care planning, I think they call it or Better Plans of Care, BPC it’s a new proposed legislation that attempts to do something like ACOs, but to bring together a bundle of physicians and home care and other services and are actually talking about potentially capitating that arrangement on the front-end to provide capital, but it has in it the very specific statement that our goal is to manage chronic care patients and to care for them in the home and community.

So with the turnover in leadership in Senate Finance, which as you know is the committee of jurisdiction. Perhaps we’re seeing now an opening of minds that maybe is the result of some of the progress that we’ve made or maybe it’s just the result of new leadership there that really focuses on a lot of energy on home and community based care as a way to lower cost.

So time is up and we’ll head on to Q&A. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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