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Amedisys (NASDAQ:AMED)

Q1 2014 Earnings Call

May 08, 2014 10:00 am ET

Executives

David Castille - Director of Treasury/Finance

Ronald A. LaBorde - Interim Chief Executive Officer, President and Director

Dale E. Redman - Interim Chief Financial Officer

Analysts

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Brian Tanquilut - Jefferies LLC, Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amedisys First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. David Castille, Director of Treasury and Finance. Sir, you may begin.

David Castille

Thank you, Regina. Good morning, and welcome to the Amedisys investor conference call to discuss the results of the first quarter ended March 31, 2014. 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 President and Interim CEO; and Dale Redman, Interim CFO.

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 express 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 a 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 turn the call over to Ronnie LaBorde.

Ronald A. LaBorde

Thank you, David. Good morning, and welcome to our first quarter earnings call. Let me start by taking a step back and talking about where we are today as a company and what we are focused on.

First, I want to touch on the most fundamental element of what we do. This company continues to be a leader in the quality care delivered to our 60,000 patients every day. We are incredibly grateful for the enormous contribution that our caregivers out in the field make to their patients, communities and to this company every day.

While we are pleased with our improvement in clinical outcomes, and we are extremely proud of our dedicated teams in the field, our adjusted loss for the quarter was $0.07, which included a $0.04 impact for weather-related costs. We have clearly fallen short in translating that clinical focus to consistent operating results.

Our commitment to you as investors is to hold Amedisys to the same high standard of excellence and operating results that our caregivers in the field hold themselves to every day. So what does that mean? First, it means continuing to deliver clinical excellence. That will always be our primary focus. Second, it means consistent and sustainable top line growth. Third, it means excellence in our core operations. We are getting back to the basics of driving focus and efficiency throughout our organization every day. And finally, it means a prudent and rigorous approach to capital allocation strategies, where we are only deploying capital that will produce a clear return on investment to our shareholders.

Before I get into some specifics on these points, I want to make one more high-level comment. While we remain aware of the potential future changes in health care delivery, we are focusing our efforts 100% on how we operate successfully today based on the current regulatory regime and delivery model.

Now I want to drill into the key areas of focus that I described. Let me begin with clinical quality. In the most recent CMS home health compare data set, we exceeded or met the levels of 7 out of 9 measured outcomes when compared to home health operators in our geographic footprint. Over the last 5 quarters, we have maintained or improved our performance for all 9 measurements.

To drive organic growth, we must effectively differentiate ourselves from market competition using our business development staff and specialized care transition coordinators to communicate continued improvement in hospital readmissions and in other important quality metric.

As for operations, we are in the midst of a meaningful turnaround of Amedisys, and in this process are addressing 3 primary issues: organic growth for both business units, effectively managing our direct costs and rightsizing G&A.

On the cost side, we have made some progress, and we see more opportunity ahead of us. We expect to see short-term financial improvements associated with some of the decisions in the coming quarters. We also expect to continue to incur onetime costs as we drive efficiency through our organization for the long term. Our intent is to provide transparency on the actions taken as well as their impact on operations and result.

With that said, we are still in the early phase of this turnaround. And while we indicated on our fourth quarter call that we would be providing 2014 guidance, we are not providing annual guidance at this time. We are committed, however, to providing visibility around where the business is trending as we implement the restructuring.

Dale will walk you through the detail of onetime costs in the quarter, the ongoing impact of the operational changes we have made and how we view the full run rate of the business in that context. We believe that Amedisys should and will operate at margins consistent with the very best operators in home health and hospice, and our efforts are focused on achieving this goal.

So let me tell you what we've done so far. The first issue is portfolio rationalization. In late March, we identified 54 care centers that will be closed or consolidated. By the end of May, these actions will be completed. However, there will still be negative financial impact from this group in the second quarter. During the portfolio review, care centers were identified as candidates for closure or consolidation due to lower volume base, financial underperformance, geographic location and/or the geographic proximity to another care center.

During the first quarter, these care centers, as well as the care centers previously identified for closure, generated losses of approximately $4 million, and these losses are included in our adjusted results. We expect to see a full run rate of EBITDA improvement associated with these care centers beginning in the third quarter.

During our portfolio review, we also decided to retain a small number of lower-volume care centers that currently have a slightly negative contribution, as they have strategic value and attractive market dynamics. Additionally, in April we sold 10 care centers located in Idaho and Wyoming and have exited those markets completely.

We have undergone significant G&A reductions appropriate for our reduced geographic and operational footprint. While this review is ongoing, we anticipate that the decisions made in the first quarter will generate annualized cost savings of $10 million. Some of these savings will be realized in the second quarter, with a full run rate of cost savings to come in the third quarter.

If we adjust EBITDA for all of these initiatives, on a pro forma basis, an indicative quarterly run rate is $14 million. Dale will provide details in his remarks.

Some of our operational initiatives are aimed at performance improvement and have a longer-term focus. As I noted on the last call, we are undergoing a review of our operating model with the help of Boston Consulting Group. The focus of our work with them is around driving improved volume growth and operational efficiency of our care delivery. We are pleased with the early progress here. When we are further along, we will be able to share what this means for us.

Our first beta site is underway for our AMS3 operating system rollout. Our second site will begin in August. While the implementation time may change based on the beta testing results, we currently believe the rollout will be completed within a 2-year period. During this implementation, we are carrying approximately $12 million in annualized costs. Once fully implemented, eliminating these operating expenses will reduce our G&A cost.

Last month, we finalized our settlement agreement with the Department of Justice and also finalized our corporate integrity agreement. In connection with the CIA, we do not anticipate incremental cost until 2015 at the earliest. And this cost should be in the order of $1 million annually.

We were pleased to announce that Nat Zilkha has joined our board. Nat's background, particularly as it relates to the health care industry, will be helpful as the company continues through this transition. Additionally, I can assure you our board is highly engaged and continues the search process for a permanent CEO.

Finally, to our employees. I want to personally thank you for your dedication during this time of transition. It is important that we remember our primary goal: to meet the needs of our patients and referral sources.

With that, I'll now turn the call over to Dale Redman, our Interim Chief Financial Officer.

Dale E. Redman

Thanks, Ronnie. Before discussing the financial results, I want to call attention to the operating statistics that are key to how we think about our business. We made numerous operational changes over the past year, including closing and consolidating 140 care centers. Therefore, while we remain intensely focused on year-over-year results, we believe the best way to think about our progress is on a sequential adjusted basis.

Medicare admissions in home health grew 2.5% from the fourth quarter, and Medicare recertifications were up 1%. Revenue per episode was down 2%, and cost per visit was flat. Revenue per episode was lower in the quarter due to Medicare reimbursement rate reductions in 2014 and normal first quarter seasonal impacts reducing revenue per episode, including a higher LUPA rate and lower therapy utilization.

In hospice, average daily census was down 3%, and admissions were up 5%. Revenue per day was up slightly, while cost per day was down slightly. Treatment clear of admission disruptions associated with the primary diagnosis of Debility, Adult Failure To Thrive, as you may recall, we discontinued accepting these diagnosis codes in the second quarter of last year.

As for G&A expenditures, the classification of some of our expenses has changed during the comparison period, so we believe the most appropriate comparison to previous periods is G&A in total. Consolidated G&A expenses, excluding bad debt and depreciation and amortization, were down $2 million.

Year-over-year, adjusted first quarter consolidated G&A expenses were $10 million lower. For the quarter, we incurred a loss of $0.38 on a continuing operations GAAP basis, which was heavily impacted by $0.19 of restructuring costs, including severance and lease terminations.

In addition, the quarter's results were impacted by $0.08 for playing as legal fees associated with the Department of Justice settlement and $0.04 for impairment of intangible assets. After these adjustments, we lost $0.04 for the quarter.

During the quarter, we generated $299 million dollars in revenue, a decrease of $5 million. Adjusted EBITDA was $5.5 million with a margin of 1.8%. During the quarter, EBITDA was impacted by $2 million in weather-related costs. In addition, the care centers identified foreclosure consolidation reduced EBITDA by $4 million. And the G&A decisions we made in the first quarter will impact future quarters by $2.5 million. The pro forma impact of these items on the first quarter implies an EBITDA run rate of $14 million.

We ended the quarter with $3 million in cash on the balance sheet compared to $17 million at the end of 2013. During the quarter, cash flow from operations were negative $6 million. There was a lot of noise associated with noncash items in the quarter, but the fundamental issue is that accounts receivable increased by about $5 million, we believe on a temporary basis. But the increase in accounts -- but for the increase in accounts receivable, we would basically break even on an operating cash flow basis. In addition, we had $5 million in capital expenditures and $3 million in principal debt repayments during the quarter.

At the end of the quarter, availability under our revolving credit facility was $143 million. Although, we're drawing $120 million on the revolver to fund the first DOJ payment, we continue to have access to additional liquidity. The second DOJ payment of $35 million plus interest is due in late October. We currently anticipate that this payment will be funded under our existing credit facility. However, we continue to evaluate our capital structure. We're in compliance with our financial covenants as of the end of the period, with a leverage ratio of 3.2 and a fixed charge coverage ratio of 1.4. At quarter end, DSO was 34 days, up 2 days from the end of 2013.

Turning to our second segment performance. Home health revenue was $237 million, a $1.7 million decrease. Gross margin was $93.5 million or 39.5%, up slightly from the fourth quarter. The full impact of the $2 million in weather-related costs this quarter was felt in this segment and drove an increase in direct costs. Hospice revenue was $62 million, a decrease of $3 million. The decrease in revenue was due to a 3% decrease in average daily census and the impact of 2 fewer days in the period compared to the fourth quarter. Gross margin was $29 million or 46.8%, a 30 basis points increase from the fourth quarter.

In conclusion, the issues we have discussed should position us to generate positive adjusted earnings in the second quarter. However, many of these initiatives are still ongoing and the associated financial impact for the year has not been realized. Rather than make any full year forecast at this time, we believe it will be more meaningful to share our operating results as the year progresses.

This concludes our prepared remarks. Regina, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Kevin Ellich with Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

So just going back to the portfolio rationalization efforts. Over the years, I think you guys have been doing this for a while now. And you're still going to shut down another 54 centers. Can you tell us how those centers performed over the last couple of years? And even let's go back to '08, '09, I mean, do they just recently start to underperform, and why was it? Is it reimbursement cuts, or is it competition in those markets? What's going on?

Ronald A. LaBorde

Kevin, it's a good question. I think it's -- primarily, it's going to be a volume issue, a revenue issue. The -- in our volume, we have not had consistent and sustained growth. And, certainly, these care centers that have been closed did not experience it. You combine that with the rate cuts and some of the volume impact has been our lower recertification rate that impacted these. So what we've done is -- through this, is try to work with them where we thought we had good market opportunities to try and rebuild that volume. And given the profile of our performance and where we are, we thought it was advisable at this time to make the hard call and then close these care centers and leave us with just a very small group that we would -- I would characterize as low volume. And to the other side, if you look at -- absent this small group, our average care center revenue, kind of annual run rate is just shy of $3 million. So we think we have a good healthy portfolio going forward.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. So $3 million per center, okay, that's helpful. And then the Idaho and Wyoming centers, the 10 that you've mentioned, was that included in the 54, or is that additional?

Ronald A. LaBorde

Addition to.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And were they losing money as well?

Ronald A. LaBorde

Yes. Well, they had some -- there is a different strategic opportunity there. We had some low-volume in that, but we thought packaged just in our geographic footprint and where we're focused, an opportunity presented itself and so we did sell those. So it's a little bit of a mixed bag on their performance levels.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then are there other markets, or have you identified other kind of strategic markets that you plan to exit?

Ronald A. LaBorde

For the most part, I think our footprint is intact. We'll certainly be open to other opportunities going forward, but you know what we've got is the heavy concentration certainly in the eastern United States. We see operations along the Pacific Coast, if you will, the Pacific Coast states, but we think the footprint is in pretty good shape. We'll entertain strategic opportunities going forward, but I think we're happy with our portfolio at this time.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And that actually segues into the next question I had, was, you identified some nice cost saving initiatives but what else strategically are you looking at and what can you do to grow the business? It seems like others in the industry have been making some sizable acquisitions and consolidating, seems like your hands are a little tied on the capital front, but what are you looking at these days?

Ronald A. LaBorde

Certainly, as we've been -- attempts to be clear about the credit facility as we said, certainly accommodates -- we believe accommodates the payment of our settlement and does not provide us a lot of excess liquidity. And so we think in the near term here that, that certainly fits with our view of the opportunities in front of us, acquisition opportunities. And we want to shift more to focus on really restoring our operations to the performance levels that we think we can achieve, as I said. So that's our primary focus. And we get that done, that will open up the opportunities. We'll certainly review capital structure and the sources of capital to entertain opportunities going forward, but it's a primary focus on reestablishing performance in our core operations. And we think we have the capital structure now to fit that, so it's our focus on organic growth. And we clearly see that with the contraction of the industry that I think is before us, we think that we should benefit from that. We see what our peers are doing. So we think the landscape is that we should grow organically, and while we're doing that, improve the operating performance. And, of course, just to add on, that's part of the BCG group. The BCG team's coming in to help us really rethink our strategy and our plans for that and hopefully ensure our success there.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then just one last one for Dale, and since we talked about capital structure. I guess, what sorts of things are you looking at? You kind of alluded to you've got the liquidity available, but you're looking at maybe some other options, I guess, what might that be?

Dale E. Redman

As you know and anybody that's a finance guy would look at capital structure on a continuous basis. We're continuing to do that. Obviously, with the DOJ payment, we do not have as much liquidity as we had before the DOJ payment. So we're reviewing all the options that we have out there and I think we're comfortable with where we are. But there's always opportunities to provide a longer and more robust runway for the company and additional liquidity as we go forward. So I'm not going to give you specifics at this point, but understand that on a continuous basis, we're always looking for opportunities to build that runway.

Operator

Our next question will come from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I want to go back to the capital position. Your debt covenants, maybe help us on the flexibility on some of the amendments. Maybe I'm just not doing the math right, or maybe there's adjustments that I'm not factoring in, because it looks like you're going to trip covenants as soon as potentially next quarter. So just trying to, again, understand your options there in terms of how you're thinking about that, whether or not there's adjustments, again, that we need to think about that gives maybe more flexibility than what my math is showing. And the last part of that is sort of your appetite and potential thoughts on debt versus equity raise specifically.

Dale E. Redman

Well, the first part of that issue is, I mentioned, in my comments is we're in compliance with our debt covenants at this point. The second thing I would point out to you is that we made -- I made the statement that we believe -- with the thing -- the initiatives that we have underway and decisions we have already made, we will be adjusted GAAP positive in the second quarter. So we see no reason at this point that we should be in a position with our covenants to have a problem with those. What we see is opportunities to build a runway that we talked about, so that the company can focus on its operations and not be concerned about capital issues per se. So I think that's where we probably need to leave it. We're looking at all the options that are out there, as we do on a regular basis. This is not unusual for any company to be doing on a very regular basis, perhaps a little more pointed, obviously, because of the DOJ settlement. But that's where we are, we'll keep you posted as that goes along.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And just to be clear, I mean, there is a big step down. When you calculate the formula, it's a trailing 4-quarter base, right? So I mean, the year ago in terms of the 2Q number was pretty high, which, obviously, puts you in compliance this quarter. Am I not thinking about that right in terms of -- you have a big sort of step down, which would -- I believe, it's 3.5x, which would trigger that. Again, am I not doing the math right? I understand you're in compliance now, but the big step down would suggest that you may not be in next quarter.

Dale E. Redman

As I recall, we have a step down of 25 basis points coming. We do not believe that's going to be an issue for us going forward as we sit and look at it today. And I'm happy to talk to you offline about any specifics associated with that.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay, fair enough. Can you give us the length of stay on the non-Medicare home health piece and the trend there versus fee-for-service piece? And maybe just remind us how the non-Medicare is -- is that all reimbursed on a per visit basis?

Ronald A. LaBorde

Ralph, no, it is -- it's not all reimbursed on a per visit, some of it is episodic. It's -- probably more than half is per visit, but there's some episodic in that.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. Is the length of stay lower in non-Medicare than it would be in the fee-for-service side?

Ronald A. LaBorde

Yes. General statement, yes, it could be slightly lower.

Dale E. Redman

It would be lower.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then last one. Can you just maybe talk a little bit more about the economics of the trade-off of sort of fee-for-service patient versus MA. If I look at it on a revenue per visit basis, it looks like there's about a 20% discount on non-Medicare, is that the right way to think about it? And I guess is there a margin difference on that as well?

Ronald A. LaBorde

Well, certainly looking at our trends here, the revenue per visit, one way we look at it, on the non-Medicare portion, is in the low 120s. And in fact, for the -- this third quarter is $123. On the Medicare side, it is higher than that, it's about...

Ralph Giacobbe - Crédit Suisse AG, Research Division

$156.

Ronald A. LaBorde

Let me think. Yes, exactly, 160-some-odd for the quarter. And so there's no question it's a lower margin on that business, but we still think it's a healthy margin -- in the mid-20s. We're attentive on that business line. We certainly have -- generally speaking, that's where our bad debt exposure comes from. I think we're improving on that, and we get -- that gets us into the mid-20s on a gross margin basis.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And mid-20s, is that sort of comparable to the fee for service? So I guess what I'm -- the concern that I would have is there's more of a push toward MA. So if you're seeing the step down in the revenue and the margin is the same, then that's sort of a profitability drag as you continue to get more movement into MA. Is that the right way? So I know it's...

Ronald A. LaBorde

If I'm understanding, you're saying directionally, if Medicare business moves to MA and that rate is lower, will that be a compression on the margin?

Ralph Giacobbe - Crédit Suisse AG, Research Division

Compression on profitability.

Ronald A. LaBorde

Yes, well, to the extent that's happening, absolutely. That movement to that -- will certainly, will have that impact.

Operator

Your next question will come from the line of Sheryl Skolnick with CRT Capital Group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

I'm wondering if you can give us some details, please, on some of these add backs that generate a pretty significant step up on the run rate. And I get the weather piece, but I'm much more interested in the cost savings, so what -- so first of all, what exactly have you done to cut the cost and specifically, which line items were affected by some of the add backs that were already in there to get to the $5.5 million of EBITDA. Because I'm trying to understand exactly how we can diligence this run rate of $14 million, which gets you to a run rate of $56 million, which would obviously ease up an awful lot of things. If you're really thinking that your real run rate as of today is $14 million, that's a pretty big step up. Forgive me, but I'm just not sure how you're getting there, given that we heard all of these cost -- about all of these kinds of cost cuts before, and they haven't really generated a higher EBITDA, much less a higher EBITDA run rate. So some specifics behind that would be helpful, and then I have a follow-up question, please.

Dale E. Redman

Sure. And I'll start, and Ronnie, you may want to weigh in here, too. Our $5.5 million is a base to start from. We know we had $2 million in weather-related issues in the first quarter. The $4 million that comes from closures or consolidation is basically operating losses that those care centers generated that we are now exiting. Now that won't happen immediately, and we do have some lease-offs and severance costs that will be associated with that as we go forward, most of which we have already accrued. The $2.5 million on G&A is primarily salaries associated with lower headcount. Ronnie, do you want to comment more to that?

Ronald A. LaBorde

No. Well, those reductions happened both at corporate and at field G&A levels, so -- in both fronts. And it is headcount, and it was done through the quarter. And, again, that $2.5 million or $10 million a year -- so we had pretty much a full impact of that cost, the $2.5 million in the first quarter, there'll be -- a good part of that will come out the second quarter, but about third quarter, it should all be gone from our operating results.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So second quarter's not going to benefit fully from this, so we shouldn't get too excited, as we move from first quarter to second quarter that you'll go from $5.5 million to $14 million, other things equal?

Ronald A. LaBorde

Well, Sheryl, it's a good point. I'm certainly not trying to get anyone too excited. At this point, we have a lot of work to do. And it's just trying to give some visibility in this transition that -- and you seize right on the point. From these decisions, it's kind of, all of the things being equal, the third quarter will be clean and the second quarter still have a little transition in it.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So when you go to talk to your lenders, are they going to accept that $14 million run rate number for quarterly EBITDA as -- or when you apply your test, is that the right number we should think about for the covenant? Does that reflect the add backs you're allowed?

Dale E. Redman

No, well, since we are not forecasting the actual numbers or giving guidance for the rest of the year, we, actually -- we will share these same numbers with our credit partners. And, yes, I think the answer is they should accept those because that's what we believe. So we will have -- and we're transparent with them. And we talk to them about our plans and our opportunities and we talk to them about our capital plans, so those issues are certainly part of what we will share with them and part of our -- plan of turning our company around as we go forward.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So I know that you prefer that we look at the sequential numbers, but my understanding is that you've restated the volume -- all the metrics for the closures that you've had to date. So I'm not sure why sequential makes sense when we don't have a restated fourth quarter, but we do have a restated first quarter. And if I look at the year-over-year, I'm still seeing your cost per visit for your home health business go up. So I'm very confused by the sequential comparisons when there's been some restatements, when the costs are going up on an apples-to-apples, season-to-season basis. Maybe some of that weather and dislocation, but I can't help having the feeling that even the agencies that you have left are still suffering from a lack of scale. Your costs are going up, your volumes are still going down, the recert rate is still -- the recert decline is still 3x out of your admissions, just within the quarter, never mind year-over-year, which tells me that you're still having -- maybe that's part of the quality issue you're still having issues with generating recert, maybe that's appropriate or not, but when you start looking at the numbers year-over-year, they certainly do tell a very, very different story than the sequential numbers. And in the health care business, where you're comparing a winter to a winter, it just seems to make a whole lot more sense, especially if you've been kind enough to restate the past. So tell me why we shouldn't be worried about the year-over-year increases in costs, the continuing year-over-year declines in volumes and the pressures that it's putting on the business, because that's how I model the company. And unfortunately, I'm coming up with numbers that are closer to what you're reporting than what maybe people would like to see from the company, and when it's finally healed. So how can you help me understand that?

Ronald A. LaBorde

Sheryl, point taken, certainly. Let me try to respond to that and tell me if I leave anything out here. But on the cost side, certainly, the year-over-year increase is something that we certainly were experiencing in the second half of 2013. It's still present in the first quarter. We're operating at a higher cost with the $90.28 on a per visit basis, and so that's our commentary of certainly what we are working on to bring that back down. We think there are opportunities to improve our direct costs there. And that's what's meant by that focus. So acknowledge, year-over-year, it's up, it's been up. And if we look at 2013 as a whole, we certainly acknowledge that we experienced for the most part, 9 months of a 2% rate cut, and we had a 5.5% increase in cost per visit. That's not the trajectory of those 2 lines that we want. So we want to do a better job of managing that and acknowledging year-over-year. Just from a -- okay, how are we doing just from a maybe stabilization point of view then from the fourth to the first quarter, in that case, some seasonality, but still a little bit more stable with only a $0.07 per share increase. So we're not -- we certainly acknowledge the year-over-year change and want to get that kind of on a more understandable and sustained basis. And with respect to the volume, again, we know, as we've talked about on previous quarters, the change, let me talk about the recert rate first, so we know that change that we experienced, it dropped, beginning in the first quarter of '13. And now this -- this first quarter was the highest rate since then. It was at 38.2%. So we've seen the change. And I know sometimes, certainly, negative is -- it changes negative change but -- so we've got to first stop the severe negative and get less negative hopefully to flat and positive. So, hopefully, we're on that path and we're focused on that. On the admissions side, we had -- we enjoyed early part of last year some growth. This year, we're down 2% against a 2% increase in Medicare admissions last year. So our focus certainly remains on year-over-year metrics and the improvement in operations. And we don't ignore that. We just think with all the change, with the care centers that have closed in that portfolio, that just -- at least we want to stabilize first and show sequential improvement. And I think as we -- if we're successful in that, then the year-over-year comparisons will certainly -- they're still there and we'll be able to talk about them more directly.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

I understand that. And then one final question. And, with the understanding that everything that's in the qui tam complaint is not truth, and that it is an allegation, one of the more concerning things that was alleged in those cases was that the point-of-care and clinical information system may have led therapists to a position where they perceived pressure to code one way or another to deliver to -- recommend more services than another, both therapists and clinicians. To what extent have you had to -- or is it in the AMS3 rollout, the changes in programming that need to be made to remove that perception that your clinicians may have had, of these edits and coding questions as being pressure as opposed to simply being careful to deliver the appropriate care to the patient? And what impact do you think that, that has had on your business to date and your business going forward?

Ronald A. LaBorde

Sheryl, I have no comment on allegations in any qui tam suit. We've settled the issue in total with no admission of wrongdoing, so that's the only comment I would have specific to that. Generally, I would say both our AMS2 and AMS3 systems, there is no -- I think they serve us, and we operate our business in a sound and in a fashion that is in compliance with regulatory measures. So I think on both of those, I don't think there's anything that is changing in our business. We always are focused on doing the right thing for our patients. And so we give ample opportunities, I just want to -- as an aside, let me tell you, through our compliance program and hotline, we give ample opportunities for any of our clinicians to report, anonymously, any pressure, any assertion of such as that and we will investigate that thoroughly. So we think we have a good, robust, open opportunity to have that kind of dialogue should it exist.

Operator

Your next question will come from the line of Brian Tanquilut with Jefferies.

Brian Tanquilut - Jefferies LLC, Research Division

Ronnie, first question for you. I know we're going through a transition phase right now, but under the old strategy, I guess, you guys were spending some money on -- put it, pilot programs and things that were more forward-looking, a lot of money spent on trying to go into value-based and then performance-based care and contract structures. So are those -- and from your remarks you mentioned that your focus is on today instead of looking way too far ahead, so is it safe to assume that those initiatives will be put on hold and the costs related to those are under review? And are they part of the, put it, $2.5 million in G&A that we're saving?

Ronald A. LaBorde

At this point, that is a small part of that. I would say that -- and primarily, Brian --, first of all, thank you for your question. I would say that the bundled payment program, perhaps, one of the items you were in -- in the areas of different reimbursements you're referring to, we have scaled that back. We have 2 live bundle sites, so 1 in South Carolina and 1 in Louisville, Kentucky. And we have -- and quite frankly, that's about -- we have about 600, 650 patients on census collectively in those 2 bundle sites. And so we'll continue to work with that and make that efficient and work with that reimbursement opportunity, so it's kind of a measured approach now, one that we think we have is a fair bite to work through that. And that's what we'll go live with. We have certainly entertained and at one point, elected to go through with 3 additional bundle sites and that's the part we have scaled back, we have withdrawn from that. And we'll just go with the 2 at this time. Pulling back on those other 3 does allow us to get a little more efficient in those care centers and that operation, so we'll see some of that going forward.

Dale E. Redman

Brian, this is Dale. I've been back working with Ronnie and the rest of these folks for a little more than a month now. And what I have seen over that month is a significant focus on the basic business. Let's be good at our blocking and tackling, let's make sure we're doing the right things when we're supporting our field operations, and let's make sure that we rightsize our corporate infrastructure. So I think our primary focus right now is let's make sure we're doing everything we can to make our basic businesses as efficient as it possibly can be, and let's grow our business. And that's the part that excited me and one of the reasons I actually agreed to come back and take this interim position.

Brian Tanquilut - Jefferies LLC, Research Division

And to that point, so as we think about all the restructuring or the transition initiatives that you guys are putting in play, am I right in thinking that basically this is, at least, for now, this is a shrinking of the business kind of activity set, and then maybe the growth aspect is there, too, but, obviously, that's a much harder component. Is that the right way to think about this?

Ronald A. LaBorde

Well, certainly, we're shrinking by closing care centers and getting it down to what I consider and we would think of as the healthy part of our portfolio. It's a good healthy portfolio with average volumes just shy of $3 million, so -- on a run-rate basis. So now we have to improve performance. And part of that is, as you know, restoring the margins to where I think we can, as we say, with very best operators. We think that's achievable, and we'll be focused on getting to that level of performance. That will, and we think the opportunity to grow organically, so we'll continue to focus on that within our care centers and our portfolio and then downstream without timing this, then it's an opportunity to grow in another fashion, continued organic growth, with layering on other, perhaps acquisitions and other strategic opportunities. But we're going to get that in the right order. And we're certainly focused on building the sound foundation to build on.

Brian Tanquilut - Jefferies LLC, Research Division

Ronnie, not to hit on the same topic over and over again, but on the [indiscernible] side and just on the peer volume side, what exactly do you think you need to do considering that your referral sources are seeing their admission trends decline as well. I mean, the hospitals are under pressure on the volume side. So is this more a broader issue that is hard to fight? Or is this more -- is there something that you can do as a company? And then the other part of this question is, are you hearing anything from the referral sources right now, considering that it's pretty public that you guys are going through a transition.

Ronald A. LaBorde

I think our -- I'm going to respond to the latter part of that first. And yes, I think, there's but no question that our business development folks and our field operations, they hear some of this at a certain level. I don't think it's pervasive. I think -- and it's generally understood. I think we certainly try to then just convey a positive message and what we really believe in and the really the high quality of care that we do deliver as evidenced by the outcomes that are measured. So we certainly try to communicate in that fashion, but I don't think it's -- it's a little bit of noise, obviously, with being in the news. And so we just want to work through that, so that's the first part. On the -- and I want to make sure understand -- on our recertification rate, is that your question?

Brian Tanquilut - Jefferies LLC, Research Division

Just admissions, in general, because obviously, most of your referrals are coming from the hospitals, and the hospitals are seeing volume pressure. So it feels like there is a broader headwind on volumes to begin with that, I guess, you can only throw so much resources into the volume issue and actually get a certain amount of return in that if the whole industry utilization's coming down. So I'm just trying to get a sense of, is it realistic to think that we can reaccelerate volumes up to 5%, 6%, or whatever the number is? And it probably will have to come from market share gains, but I'm not sure if that's something that is reasonable to think of at least for the near term.

Ronald A. LaBorde

Well, okay. On the admission front, I certainly don't want to forecast that we have clear visibility into mid-single-digit growth, but I think we're focused on having efficient and effective BD staff and getting -- turning this back to positive. Our plan for the year is starting to achieve low single-digit growth. We think that is achievable. We have BCG working with us, kind of stress testing our plans to help ensure our success, so that's the first step. I'll be happy when we -- if we achieve what you're trying -- but I think we've got to turn back positive and do that on a consistent basis. And we certainly think that's achievable. We have to do it.

Operator

Your next question will come from the line of Whit Mayo with Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Ronnie, can you just maybe elaborate a little bit further on the comments you made around prudent capital deployment comments? Just what specifically has changed beyond the bundle strategy that you alluded to earlier? Just anything -- any other areas we need to be aware of?

Ronald A. LaBorde

Whit, good question. Nothing specific. I think what I would -- in saying that, what I want to respond to, our shareholders and our investors, is look, we built a platform that, at the end of the day, we spent a lot of money on. And we think it's going to be a good platform for us. We're in beta testing now, but I just want to assure our shareholders and investors that we will go forward on a disciplined basis. We want to take care of the cash we generate, employ it wisely and, hopefully, we're effective in doing that. So just a comment that Amedisys in our history, we've made investments, done some things, and we want to tend to our core business and be very judicious in how we deploy capital.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Music to my ears. And I guess that's kind of a good segue into maybe a broader conversation around the IT platform at Amedisys. Is there an opportunity to potentially monetize some of the investments that have been made over the 5, 10 years? Do you and the board have conversations about that? Is this a viable commercial product? Or do you think that there's a time to potentially abandon certain parts of the IT strategy altogether, just sort of thinking through the "do we own versus rent" theory?

Ronald A. LaBorde

Right. Whit, again, that's pretty insightful. We -- we're at the stage, we're in beta. And we've got a platform. We're trying to bring it to life and making some early progress here in doing that, so that'll be telling. And then the opportunities of that and having such a robust platform, we'll certainly try to fairly evaluate as we go forward, but there's -- there are no commitments or no firm plans on that front at this time.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. But to be clear, you're thinking about both the opportunity to monetize it and/or the opportunity to potentially abandon it?

Ronald A. LaBorde

I'd say that at this point, we're committed to installing our platform, as we move forward. We'll certainly evaluate that plan, and make sure that's the right answer for Amedisys.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. And Dale, just remind me, do you guys actually own the corporate office and the campus that it sits on? And if so, does it make sense to continue to own that asset?

Dale E. Redman

The short answer is yes. We own the building where our corporate offices are. And obviously, that's an asset that we could do something with if we chose, and so it's a part of our thinking about capital. And although a comment I would make long term about capital is that we do husband our resources very carefully. And on a go-forward basis, as I mentioned earlier, we want to build a runway that gets the whole capital issue off the table in terms of focusing on running an efficient and growing business. So those kinds of issues are all part of our discussion and our thought process.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. Sorry, I blinked when you talked about AMS. What did you say the quarterly or the annual P&L drag was? Just want to make sure I had that correct.

Dale E. Redman

It's about $12 million a year, so $3 million a quarter.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. And where is that allocated on your income statement? Is that in the home health G&A, cost of services, or both? I'm just trying to think, are there some areas that are inflating the cost per treatment versus some of the progress that you're making operationally.

Dale E. Redman

Yes, it's in corporate. And one of the issues that you have to think about in comparing us to other folks in the industry, is that there are some classifications that are different between different companies. And if you -- the reason we went down the road of saying, look, one of the ways to compare us to the rest of the industry is to talk about total G&A, both field and corporate. And our situation now, if we compare first quarter numbers, we're about 1% off of the industry average in total G&A. There's differences in corporate. We're worse in corporate and we're better in field. So the point is there's classification issues, and you can't necessarily compare these -- the downstream pieces of that without looking at the total.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

And maybe just 2 quick ones. Dale, just can you remind me when you perform your next impairment test, and any expectations there? And my last one would be just for Ronnie, I don't know if you guys would be willing to share this or collect it, but just where you are in terms of clinician turnover and also employee satisfaction scores?

Dale E. Redman

We do an annual impairment test that usually happens in the fall. But we're looking at those issues on a quarterly basis, so it's not like everything happens in October and we don't know what's going on. So we look at that on a regular basis in terms of potential impairment.

Ronald A. LaBorde

And so, Whit, it's Ronnie. On the turnover and employee satisfaction, I think we're still in good shape, there's -- but, no, question in this period of transition that it filters into your workforce and people are mindful of that and respond in their own way to that. I don't think -- I think we're working to stabilize that. I don't think we've gotten into a precarious situation at all. But it's certainly real, and we're attentive to it.

Operator

Our final question will come from the line of David MacDonald with SunTrust.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Just a handful of questions left. First, just a couple of numbers question. Dale, can you give us a sense in terms of percentage of facilities that "small group" that is left, that is low volume, I mean, is that 5% of facilities, 10%? Can you just size that a little bit for us?

Dale E. Redman

It's pretty small at this point. I don't know that I have a percentage for you, but it's pretty small. I don't know, Ronnie, you want to comment on that?

Ronald A. LaBorde

Yes, Dave, it's less than 20%.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, guys, can you also just give us a sense of what the revenue impact will be of the 54 centers that were closed and the additional 1 sold?

Dale E. Redman

Yes. One minute, we'll, look it up. I don't remember the number at the top of my head.

Ronald A. LaBorde

I think it's going to be in the neighborhood of about $28 million -- excuse me, about $17 million, $18 million.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, guys, just last 2 questions. One on organic growth. If you x out weather, and you x out the 54 centers that you're closing, can could you give us a sense of what the balance of the portfolio did in the first quarter in terms of organic growth? And then I realize you'll get some lift just from closing those center, but are there any initiatives in terms of comp changes or whatever? Give us a sense of anything that you guys are doing to try to kind of help juice the organic growth on a go-forward basis.

Ronald A. LaBorde

David, I don't have firm numbers on the kind of the core portfolio, if you will. We've looked at that, I don't have those in front of me, but it's a little better profile, I will say, directionally than the portfolio as a whole. So I think it's a healthier group -- and year-over-year and sequential trends kind of reflect that. So that's not specific, but that's generally what we're looking at. I want to make sure that what I said about 18-or-so million on the close, that's quarterly. So just to make sure that's a quarterly number.

Dale E. Redman

And the other thing I would comment on is our portfolio stabilizes on both a sequential and, ultimately, obviously, on a year-over-year basis. It's going to be much easier to compare those numbers, even though we have done adjustments and all that. The actual reported numbers should stabilize as we go forward.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And then just, Dale, last question. With some of these things that are going on, just thinking about cash flows and EBITDA converting to cash flow, any opportunities other than the $5 million that you talked about, AR being up in the quarter in terms of working capital management and potentially accelerating EBITDA pushed through to free cash?

Dale E. Redman

I don't know that there are any other big pieces. We're always looking at those kinds of issues, but it's clear that the accounts receivable swings, since we're collecting $3 million, $4 million a day, can be a pretty good big impact on that. We do anticipate with some of the changes that we've made, that our cash flow will improve as we go through the rest of the year. And that's a part of our capital thinking also.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. But there's absolutely no reason to think that the working capital drag would get heavier. If anything, it should improve modestly, is that fair?

Dale E. Redman

That's kind of our thought process. And the other thing to think about is we also -- we're going to have less CapEx this year than last year, and that will continue to improve on a regular basis. One other thing I would point out as I think about it is we will -- we have accrued some severance and lease payouts in the first quarter -- at the end of the first quarter. Those will occur over a part of the second quarter and, potentially, even a little bit into the third quarter. So there will be some cash drag from some of those severance and lease payments that we accrued on a noncash basis at the end of the first quarter.

Operator

At this time, I will turn the conference back over to Mr. LaBorde for any closing comments.

Ronald A. LaBorde

We thank you, all, for your time this morning, your interest in the company. We certainly appreciate the questions to further understand our results. So with that, we'll close the call and look forward to speaking with you in about 90 days. Have a good day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you, all, for joining, and you may now disconnect.

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Source: Amedisys' (AMED) CEO Ronald LaBorde on Q1 2014 Results - Earnings Call Transcript

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