Amedisys's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.12.14 | About: AMEDISYS Inc (AMED)

Amedisys Inc (NASDAQ:AMED)

Q4 2013 Results Earnings Conference Call

March 12, 2014, 10:00 am ET

Executives

David Castille - Director, Treasury and Finance

Ronald LaBorde - President, Interim Chief Executive Officer, Chief Financial Officer, Director

Analysts

Kevin Ellich - Piper Jaffray

Ralph Giacobbe - Credit Suisse

Josh Kalenderian - Deutsche Bank

Brian Tanquilut - Jefferies

Operator

Good morning, everyone. My name is Sarah, and I will be your conference operator today. At this time, I like to welcome you all to the Amedisys Q4 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to our host, Mr. David Castille. You may begin your conference.

David Castille

Thank you, Sarah. Good morning, and welcome to the Amedisys investor conference call to discuss the results of the fourth quarter ending December 31, 2013. A copy of our press release is accessible on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Ronnie LaBorde, Interim CEO and President.

Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in our press releases that expresses a belief, estimation, projection, expectation, anticipation, intent or similar expression, as well as those that are not limited to historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today, and the company assumes no obligation to update these statements as circumstances change.

These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our forms 10-K, 10-Q and 8-K. The company disclaims any obligation to update information provided during this call other than as required under applicable securities laws.

Our company website address is amedisys.com. We use our website as a channel of distribution for important information, including press releases, analyst presentations and financial information regarding the company. We may use our website to expedite public access to time-critical information regarding the company in advance or in lieu of distributing a press release or filing with the SEC disclosing the same information.

In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the Investor Relations page under the tab Financial Reports, Non-GAAP.

Thank you, and now I will turn the call over to Ronnie LaBorde.

Ronnie LaBorde

Thank you, David. Good morning and welcome to our fourth quarter earnings call. As you know, Bill Borne who founded Amedisys recently stepped down as chairman and CEO and a member of our Board of Directors. Coincidently, with Bill's departure, Tom Dolan, our SVP of Finance and Treasure, has also decided to pursue a CFO opportunity with another company.

I want to publicly thank Bill for his 33 years of dedication to Amedisys. His vision and boundless energy helped build the company into one of the largest home health and hospice companies in the country. Bill will be missed, but I can assure you that the Amedisys team is committed to our future success. I am personally committed to the turnaround of this company. We have a lot to do and it will take time and intense effort, but the commitment is unwavering.

Before discussing our path forward, it is important that we review our results from the last quarter. I will remind everyone that our financial and operating statistics are presented on a continuing operations basis. In our earnings release, you will find updated financial results and metrics for each quarter back through 2012 based on what is our current continuing operations as of December 31, 2013. The changes to prior periods are immaterial as only one additional care center qualified discontinued ops treatment in the fourth quarter. During the fourth quarter, we closed or sold 26 care centers and consolidated 15. Again, only one additional care center was included disc ops in the fourth quarter.

We incurred a loss of $0.30 per share for the quarter. This loss includes the following charges, $0.11 for the impairment of intangible assets, $0.05 for severance and lease termination costs associated with consolidations and closures, $0.04 for discontinued operations, $0.02 associated with credit facility amendment cost and finally, $0.01 associated with the loss on sale of our corporate aircraft.

For the fourth quarter, we lost $0.07 on an adjusted continuing operations basis below the low end of our guidance. Our miss from the low end of our guidance was driven by three factors, higher cost per visit in our home health segment, higher-than-expected employee healthcare cost throughout the company and an accrual of approximately $450,000 related to a disclosure we made to the OIG under the OIG provider self-disclosure protocol related to one of our care centers. This issue was previously noted in our September 30, 2013, 10-Q.

Our comments going forward will be on an adjusted continuing ops basis and I will focus on fourth quarter sequential performance. During the quarter, we generated $303 million in revenue, an increase of $2 million sequentially. Adjusted EBITDA was $6.8 million with a margin of 2.2%. This is a decrease from $7.9 million or 2.6% in the third quarter. We ended the year with $17 million of cash on the balance sheet, down $26 million from $43 million at the end of the third quarter.

During this fourth quarter, cash flow from operations was $8 million. Cash uses included $11 million in capital expenditures and $23 million in principle repayments during the quarter, which included the final $20 million of our senior notes. At quarter end, our DSO was 32 days, flat from the end of the third quarter and a reduction of over nine days from the end of 2012.

Turning to our segment performance. Home health revenue was $238.4 million or a $1.6 million increase. Home health contribution was $15.1 million or 6.3%, down $1.4 million sequentially. The growth in revenue was mainly due to an increase in non-Medicare revenue. Medicare admissions were flat as was our recertification rate to 37.1%.

Increases in our cost of revenue drove down gross profit by $2 million. Our gross margin in home health declined 110 basis points to 39.4%. This was driven largely by higher cost per visit, which increased 3% sequentially to $9.21. The increase was mainly due to three factors of approximately equal impact. First, while lowering total, our fixed cost did not decline proportionally with the decline in business, resulting in increased per visit cost. Second, our utilization of contractors was higher than anticipated in the quarter. Third we experienced higher-than-expected employee health insurance costs.

G&A expenses in home health were down $600,000 for the quarter. Hospice revenue was $65.1 million, an increase of $600,000 sequentially. Hospice contribution was $13.3 million or 20.4%, up from $13.2 million in the third quarter. This increase in revenue was due in large part to an increase reimbursement that took effect in October. Admission volume is flat and average daily census declined by 1%. Gross profit was $30.2 million, an increase of $200,000 on a 10 basis point drop in gross margin. G&A expenses were also flat. Finally corporate G&A expenses, exclusive of depreciation and amortization, were up slightly.

Turning to our preliminary DOJ settlement. We hope to finalize our settlement agreement in the near term. As a reminder, we will pay $115 million plus accrued interest at the time that the settlement agreement is executed and the remaining $35 million with interest will be paid six months later. Our current plan will allow us to fund these things with cash on hand and drawals under our revolving credit facility.

With the amendment of our credit facility, certain add backs were provided for. Even with those add backs, we anticipate our covenants will be tight on a go forward basis. As our year progresses, we will continue to evaluate our capital structure and future capital needs of the company.

We have missed guidance and street estimates over the last several quarters and that has to change. I am working closely with our Board of Directors, management team and others to develop a plan that will transform our company and return our performance to a level consistent with our peers. While it may take several quarter to achieve our goal. I am confident we will make progress and see results in the near-term. In fact, initiatives already are underway that will positively impact our operating margins and they include the rationalization of underperforming care centers and the reduction of G&A expenses.

Without defining specific strategies today, I can tell you that our plan will include the following, a focusing of our efforts including a portfolio review, a better defined and standardized clinical quality model, organic growth in our core business and a focus on core operating excellence. This will result in continued high quality care for our patients, revenue growth, increased EBITDA margins and consistent and predictable gross margins.

I anticipate providing more specific comments on 2014 during our first quarter call, which is a little over a month away. I want to reiterate that we are focused on transforming this company. We do not think it will happen overnight. Much work is to be done. However, I can assure you that we will have unwavering commitment to growing our business achieving operational excellence and increasing value for shareholders.

In closing, 2013 was a challenging year, but I remain optimistic about the future. The Amedisys team is up to the challenge. I like to thank our dedicated workforce of employees who are making real differences in the lives of over 55,000 patients every day. Throughout recent challenges, they have remain focused on our top priority to provide superior quality care to those patients in their preferred setting, their own homes.

This concludes my prepared remarks. I have time for a couple of questions. So, Sarah, would you please open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions).The first question comes from Kevin Ellich of Piper Jaffray. Your line is now open.

Kevin Ellich - Piper Jaffray

Hi, Ronnie. Thanks for taking the questions. Got a couple here. I guess starting off with the lower gross margins in home health. You gave us three reasons why it was down. I had a question about the use of contractors. Do you think you have cut too much? What was the need? And can you quantify how much use of contractors impacted gross margins?

Ronnie LaBorde

Thanks for calling us for the question, Kevin. There was a little bit of uptick in the use of contractors. I don't think we have cut too much. I think just generally we are trying to be more consistent in our cost of revenue on home health side, certainly. So the three items that we talked about, it's up about a little over $3 sequentially, just about $3 sequentially, I guess. In there, about equal impact in makeup line share the difference, the items that I mentioned. So it is just part of the equation. We have work to do. I think we certainly are in a position that going forward we will get to a point where we are more consistent and predictable and it is just part of the management of cost revenue that we have before us.

Kevin Ellich - Piper Jaffray

Got it, and then with the healthcare costs, was there anything one time in nature about that? Or was that that related to changes with healthcare reform?

Ronnie LaBorde

No, just we had fairly good results going into the fourth quarter and then while we always anticipate the kind of the seasonality of that, it was really quite an uptick from that point. So it was a bit of a surprise to us in the fourth quarter. Even though we anticipated some increase, it was beyond that. It was a case of a broad-based increase in claims plus some large claims that came in at the end of the year.

Kevin Ellich - Piper Jaffray

Okay, got it, and as per guidance, you didn't provide anything in the press release. Wondering if you guys plan on providing guidance this year? And to that point with your EBITDA, this quarter of $6.8 million, not adding back the legal expense, can we use that as a run rate for 2014? We have seen the trajectory coming down. Just wondering how we should think about that for 2014?

Ronnie LaBorde

Sure. I obviously did not provide 2014 guidance and I would look to the end of or the first quarter call about a month later to kind of update you on that. I would say, and part of that is just as we were here in transition. So I am sitting in the seat now for a couple weeks and so we have a little work to do and a couple of big initiatives are underway right now as I mentioned. That's the review of care centers that will bring to some level of definition here by the end of the first quarter, as well as the reduction G&A expenses. I think those two items that are underway now combined with some of the planning that's going on as we sit will help frame 2014 a little bit more precisely and I look forward to updating you in about a month.

Kevin Ellich - Piper Jaffray

Okay, and then lastly on the capital needs for the company. I guess when you look out over 2014, and as you guys look to make another transformation for Amedisys, I guess what are your requirements or needs as you think about 2014 and beyond?

Ronnie LaBorde

Well, first, we are looking at a reduced level of capital expenditures from prior periods. The development of AMS3 is substantially done and we are looking to scale back and we will provide more guidance on that, again, in about a month. But with that, we knew in our amended credit facility accommodating the DOJ settlement, we knew it would be tight. We don't have a lot of room in this structure to do many things, but it's okay because we are focused on improving performance. When that performance improves, which we are confident that it will, that will allow us to better respond to any future needs and have an appropriate facility that's consistent with that. So in the near-term, I think we are certainly in a position to have access to the capital access that we need. I think that will develop going forward and our performance will help drive that.

Kevin Ellich - Piper Jaffray

Okay, sounds good. Thank you.

Ronnie LaBorde

Thank you, Kevin.

Operator

Your next question comes from Ralph Giacobbe with Credit Suisse. Your line is now open.

Ralph Giacobbe - Credit Suisse

Thanks. Good morning. I was wondering if any updated thoughts on or timeline in terms of the CEO search? And maybe can you discuss turnover at the corporate management level below CEO and maybe even within field operations and whether that had an influence on you having to use temp staffing.

Ronnie LaBorde

No. Ralph, thanks for the question. The CEO search, it's obviously just started and so that underway now and the Board will undertake that and it will be vigorous and it's something that they all hope will move along at an accelerated pace, but it's just getting started. Beyond that, we are trying to be efficient with our G&A expenses, both at corporate and in the field. We are working and have been working through to make sure that's a consistent fit with our current size, our current volumes.

And Tom's departure, which you all knew was completely independent of anything that's going on here, any other changes. While Tom was just, he came about this opportunity, and so it was a great opportunity for Tom and we certainly wish him well. It's a good step for him, but those are completely independent. Beyond that, it's relatively stable and I think the team, obviously, you know it goes without saying what we have been through in these changes but I think the team is focused and committed and no other kind of executive turnover in field leadership turnover to speak to. It's really pretty stable.

Ralph Giacobbe - Credit Suisse

Okay, and then when you presented the numbers, you talked more in sequential terms as opposed to year-over-year. So I am just trying to get a sense exactly why you sort of did it that way? Do you think that's a better way to think about the business in terms of a stabilization point at this stage of the game versus year-over-year, because obviously there is some level of seasonality in the business. So just your presentation of looking at sequential, do you think we have sort of stabilized and should look at the quarterly results from a total aggregate level as a jumping off point as we stat to think about 2014?

Ronnie LaBorde

Exactly. The shift to or the focus on sequential just changed the dialogue. Certainly it's the way I look at it because of the changes that have happened over the last two years -- excuse me, last year that made year-over-year with some big gaps primarily as we work through and we are now getting close to anniversary, as we all remember, the change of our Humana contract that we talked about a year ago. So we are cycling through that and the anniversary of that now will cycle through that.

The other piece that happened, began in the fourth quarter that we are getting to the end of the anniversary, well beyond the anniversary but getting beyond the year-over-year effect of that is the drop in our recert rate.

Those two things made year-over-year, if you talk about the differences which we all knew about, and if we look at the reset with that and just quickly gave better visibility on how we are performing. The difference then from that point, is now I would say, beyond that, it's been really in our cost per visit. That's been the big change probably in the second half of 2013 in our performance. The uptick in our cost per visit.

Ralph Giacobbe - Credit Suisse

Okay, that's helpful, and then, just the last one. In terms of some of the things you are going to focus on going forward. I guess can you give us a sense at all in terms of the magnitude of what's still left because a lot of things that you talked about, whether it's portfolio rationalization, focus on core, G&A cost cuts are sort of themes that we have heard over the last several years, and we have seen essentially come out of the business. So I guess I am just struggling a little bit with the incremental opportunity to take away a lot of what's already been done over the last several years now and try to think about that on a go forward basis from a standpoint of what the magnitude is there to help us frame that aspect?

Ronnie LaBorde

Well, portfolio is a meaningful piece of this. If I have to frame it and I will give more visibility into this, certainly, on the first quarter call. But as a general comment, we have stated publicly that we have a good number of care centers that either are low-volume or underperforming and so a part that is a response to that and we have to deal with that and makes some decisions around that, and we are doing that here as we sit.

The second thing is just like that in G&A, doing a better job of that.

The third piece is then how do we really get back our core business and operate in a fashion that's consistent with our peers, that is more at a level consistent with our peers and that we perform more consistently.

So if we get to it and get our 2014 plan and look to what will share in that guidance for 2014 on the first quarter call, I think some of that will frame up. Hopefully we can do a good job of framing up that better for you and for our shareholders and investors.

Ralph Giacobbe - Credit Suisse

Okay. Thank you.

Ronnie LaBorde

Thank you, Ralph.

Operator

Your next question comes from Darren Lehrich from Deutsche Bank. Your line is now open.

Josh Kalenderian - Deutsche Bank

Good morning. This is Josh Kalenderian, in for Darren. First question was, what type of operational analysis is the Boston Consulting Group focused on, in its review of your business?

Ronnie LaBorde

The Boston Consulting Group is working with the team, with me and the team and it is a comprehensive review. The goal line is to really get deeper insight and to help us transform this company. So it's a broad-based approach that we will focus on and develop really some type strategies and initiatives that will help us achieve the desired results.

Josh Kalenderian - Deutsche Bank

Okay, great. That's helpful. Then can you talk about what you are seeing in hospice trends, in terms a failure to thrive admits, any cap exposure and any investigation developments on the hospice side?

Ronnie LaBorde

So the big disruption with respect to failure to thrive and debility unspecified, that really happened for us when we stopped using those or allowing those diagnosis as primary diagnosis for admits in May of 2013. So in the third and fourth quarter, we have had zero admits with those of primary diagnosis. So we have been through it. We have absorbed that change and dealing with the change, although all our hospice operations have been pretty safe and so if we look at the contribution from hospice, they are relatively stable over the four quarters of the year. We have been looking at hospice with respect to cap, we have now just three years open, 2012, 2013, 2014, about $4 million of cap reserves established, 75% is probably related to 2013 at this point.

Josh Kalenderian - Deutsche Bank

Okay, thank you.

Ronnie LaBorde

You are welcome. Operator, Sarah, we have time for one more question, if you will.

Operator

Your last question comes from Brian Tanquilut of Jefferies. Your line is now open.

Brian Tanquilut - Jefferies

Hi, good morning, Ronnie. So you have been with Amedisys for a while, first as a member of the Board and then CFO and President, and now interim CEO. So taking a step back and just thinking about what the big things are where you could potentially put your stamp on Amedisys or were you always thought there was room for improvement, whether on care delivery cost side or on the revenue side or how you did things, market it to physicians or referral sources? What would you do now that you are running Amedisys?

Ronnie LaBorde

Good morning, Brian. Great question. I think that in my view would be this. First we would look to sustain and we would like to achieve certainly low single-digit growth on all business lines in all segments, in both home health and hospice. Our peers are doing it. I think the marketplace is growing at that rate. We will see the change in providers now that rebate has been established. We certainly believe, I believe that we can achieve sustained growth. So that's the first step. We have to continue to work on that and really optimize our sales force and our efforts to achieve that. So that's the first part.

The second part that impacts gross margin is, look, in this year in 2013, in which we had a 2% rate cut through sequestration, we had a 5.5% increase in our cost per visit. So while we are always working on utilization and being the most efficient in the providing of care, we certainly want to make sure that our unit cost, our operating cost on a cost per visit basis is, we are achieving the outcomes that we want. So we have had some slippage in the second half of this year that we crept above $84 per visit. We have the dynamic of the lower visits and lower volume and fixed cost that are embedded in our cost revenue, but we need to be able to and we will certainly endeavor to achieve sustained and predictable gross margins. I think that's very much what we can do.

The rest is how we structure ourselves, how we were most efficient with our G&A costs and get consistent performance on our EBITDA margins. So to summarize, some level of growth and more consistent and setting gross margins.

Brian Tanquilut - Jefferies

Then, Ronnie, just to follow up on that, on the G&A side, how much of the AMS development or just the IP side is running through the P&L right now? Because I guess I am looking at with the opportunity is for the G&A to decline over time.

Ronnie LaBorde

Sure. Well again, I will provide a little bit more visibility into that, think about doing that in the first quarter call when we talk about 2014 in general, but a comment would be yes, we are about to pivot, we are about to go into our first beta site with AMS3. Plan is to start rolling that out this year. So there is going to be a shift in our expenditure from a heavy dose of capitalize cost from development now shift to some level of cost we will have to roll out and implement AMS3 over the next couple years. I will give, again, on the first quarter call in April, I guess. We will give some more visibility into that.

Brian Tanquilut - Jefferies

Last question for you, Ronnie. The weather, is that an impact to you guys? Or is the demand for your services too acute that the weather shouldn't have an impact in Q1?

Ronnie LaBorde

No, unfortunately we had a weather impact also. The last half of February, first week of March, most significantly. Lot of closed care centers. Just a tough, tough winter. I would say, at this point we are looking at a $0.03 to $0.04 per share impact from it.

Brian Tanquilut - Jefferies

Got it, all right. Thank you.

Ronnie LaBorde

Brian, thank you. Sarah that's all the time we have this morning. I appreciate all the questions. Thanks to everyone who joined us on the call today. I am sincerely appreciating your interest in our company. We look forward to updating you on our next quarterly earnings call. Have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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Amedisys  (AMED): Q4 EPS of -$0.07 misses by $0.04. Revenue of $303.5M (-13.7% Y/Y) beats by $8.48M.