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Amedisys, Inc. (NASDAQ:AMED)

Q1 2008 Earnings Call

April 30, 2008 10:00 am ET

Executives

Kevin Leblanc - Director of Investor Relations

William F. Borne - Chairman and Chief Executive Officer

Dale E. Redman - Chief Financial Officer

Larry R. Graham - President and Chief Operating Officer

Analysts

Darren Lehrich - Deutsche Bank

John Ransom - Raymond James

David MacDonald – SunTrust

Brian Tanquilut - Jefferies

Whit Mayo - Stephens

Greg Williams – Sidoti

Ralph Giacobbe - Credit Suisse

Bill Bonello – Wachovia

Newton Juhng - BB&T Capital Markets

Donald Hooker - UBS

Operator

Welcome to the Amedisys first quarter 2008 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Kevin Leblanc.

Kevin Leblanc

Thank you for joining us today for the Amedisys investor conference call to discuss this morning’s first quarter 2008 earnings announcement and related matters. By now you should have received a copy of our earnings press release. If you have not received the press release, you may access it on the Investor Relations page on our website at www.amedisys.com.

Joining me on today’s call from Amedisys are Bill Borne, Chairman, and Chief Executive Officer; Larry Graham, President and Chief Operating Officer; and Dale Redman, Chief Financial Officer.

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, expectation, or intent as well as those that are not 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 the 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 to differ materially from such statements.

These risk and uncertainties include factors detailed in our SEC filings including our Forms 10-K and 10-Q. 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 at www.amedisys.com on the Investor Relations page under the link “Press Releases”.

Now I’ll turn the call over to Bill Borne.

William F. Borne

We appreciate the opportunity to update you regarding the company’s performance for the quarter and share our vision for Amedisys. We had excellent results for the first quarter, recording net revenue of $213 million and earnings per share of $0.62. This represents growth of 39% and 22%, respectively, over the first quarter of ‘07.

The first quarter was a milestone for the company regarding acquisitions. On January 1, we acquired an agency and a certificate of need territory of Puerto Rico. This represents our first location outside of the Continental United States. On February 28, we acquired a business with 24 locations in Kentucky and Tennessee. This significantly expands our footprint in the CON states particularly in Kentucky. Finally, at the end of the quarter, we completed the acquisition of TLC, by far the largest acquisition ever done by Amedisys.

With 92 home heath and 11 hospice agencies located in 22 states in the District of Columbia, and approximately $300 million in revenue, this acquisition adds significantly to the scope of Amedisys. We believe this acquisition will be an outstanding investment for the company. We have already integrated the Puerto Rico agency and the agencies in Kentucky and Tennessee. We have begun the integration of TLC agencies and we anticipate concluding this process no later than the fourth quarter of this year.

As I stated previously, the addition of TLC is a significant and exciting milestone for Amedisys. In addition to these acquisitions, we opened nine new home health agencies and one new hospice agency. As a result of acquisitions and de novo growth, we ended the quarter with 442 home health locations, a 169 more agencies than the first quarter of ‘07. In addition, we owned 38 hospice agencies at the end of the first quarter of ‘08, 21 more hospice agencies than the prior year.

With these acquisitions and startups, we now provide services in 35 states. In addition to this geographic expansion, we are also focused on growing our care management capabilities to better strategically position Amedisys for the future.

We are announcing today a rollout of our new specialty division. Larry will provide additional comments on this rollout in a moment. But the focus is on better meeting the needs of the chronic, comorbid patients within our care. From a demographic perspective, the number of Medicare beneficiaries is expected to almost double by 2030 to 79 million people.

Our country needs to develop a more efficient process for handling the health issues of this aging population in general, and more specifically for the chronic, comorbid population, which are expected to require an increasing portion of our healthcare resources. Our core business is developing high quality, cost-effective care to elderly patients with chronic conditions.

With a nationwide footprint, our highly skilled and compassionate team of clinicians, best practices care management programs, and a best-in-class technology platform, Amedisys shows the great promise as part of this solution to the healthcare crisis in our country.

I would like to extend a warm welcome to all of the new employees of the agencies we have acquired since our last earnings call, including the employees from Comprehensive and Family Home Health, the businesses we acquired in Kentucky and Tennessee, and all the employees from the TLC acquisition. We are very excited that you are part of the Amedisys family.

In conclusion, our competitive advantage is driven by the talented employees, who individually and collectively make it possible both to carry out our mission each and every day of providing cost-effective, quality healthcare services to the patients entrusted to our care. We have a culture of hard work, a passion for service and a commitment to our core values, and that intangible separates us from our competition.

I will now pass this call to Dale for his financial overview.

Dale E. Redman

We began 2008 with another strong quarter for Amedisys, which included our successful completion of three acquisitions that resulted in the addition of 114 home health and eight hospice locations. Our first quarter revenue grew 39% over the first quarter of 2007 to $213 million. Acquisitions accounted for approximately $24 million of this increase.

Our net income of $16.5 million, or $0.62 per share, surpassed the $13.3 million for the first quarter of 2007, or $0.51 per share, an increase of 22%. Operating income increased 35% to $28 million, or 13.1%, of revenue for the quarter, compared to $21 million, or 13.5%, of revenue for the first quarter of ‘07.

Our G&A expense, including depreciation and amortization, as a percent of revenue remains flat at 40%. Our gross margin was 52.7% for the first quarter of 2008, compared to 53.4% for the same quarter of 2007.The decrease in gross margin is primarily related to our acquisition activity since Q1 ‘07.

Effective for the first quarter of 2008, we have reclassified certain benefit-related expenses from G&A to cost of service to better reflect our direct cost of providing service to our patients. The amount of expenses reclassified in Q1 ‘08 was $5.9 million and the gross margin would have been 55.5% without the reclassification. $4.5 million of expenses previously reported in G&A, or Q1 ‘07, have been reclassified to cost of service and our previously reported gross margin was 56.4%.

EBITDA for the quarter was $32.3 million, 15.2% of revenue versus $23.6 million or 15.4% of revenue during the first quarter of 2007. Bad debt expense for the quarter was $3.6 million, or 1.7% of revenue, compared to $2.6 million, or 1.7%, of revenue for the first quarter of last year. We generated cash flow from operations of $26 million during the first quarter of 2008. We spent $436 million on acquisitions and $5 million on capital expenditures and issued $395 million of new debt.

Cash flow from operations was down $9 million from the prior year. Approximately $14 million of the decrease is related to the increase in accounts receivable, net of recent acquisition activity, which was partially offset by an increase in our results of operations. Days’ revenue outstanding at quarter-end remained flat with the fourth quarter of 2007 at 51 days.

As I mentioned, during the quarter we issued $395 million of new debt. This new debt was issued under new credit facilities totaling $500 million in three tranches: a $100 million unsecured private placement of term debt with an average maturity of six years from three insurance companies, a $150 million amortizing five-year unsecured term loan from 10 banks, and a $250 million five-year unsecured revolving credit agreement with the same 10 banks. At present, the average interest rate on all of this debt is 5.05%. Including amortization of deferred financing costs, the all end rate at present is about 5.35%.

This morning we’re increasing our 2008 guidance to the range of $1.05 billion to $1.1 billion in revenue, and earnings per share guidance to the range of $2.70 to $2.80 based on an estimated 26.9 million shares. This guidance includes the anticipated results of our two recently completed acquisitions, after adding back certain integration costs related to the acquisition of TLC. And it does not include any other future acquisitions.

We made these changes to our 2008 guidance primarily for the following reasons. Since our last conference call, we completed the TLC acquisition and the related financing. The financing was affected during an extraordinarily difficult time in the credit markets, and at what we believe are very attractive terms. As Larry will discuss in more detail, thus far the TLC integration is going well.

Going forward, we believe that our revenue per episode would be positively impacted for the following reasons, TLC has a higher revenue per episode then Amedisys’ historical numbers, and the impact of the new reimbursement on TLC appears to be better than we previously believed. In addition, as we announced in our press release today, we are in the process of rolling out our new specialty division, which Larry will update you on as well.

Now, I would like to turn it over to Larry for some operational comments.

Larry R. Graham

Overall, I’m very pleased with our bottom line results for the first quarter. Our strategic focus continues to be on growing the business both internally and through acquisitions, becoming as efficient as possible, and delivering high-quality home healthcare to our patients. This focus continues to generate strong results for the company.

For the quarter, our internal growth rate over last year and episodic-based admissions was 7%. As discussed before, we define internal growth as growth coming from agencies we have owned over 12 months and all start-ups we have opened in the last 12 months. We refer to this group of agencies as our base start-up agencies.

This is the first time in a long while that our internal growth rate was in single digits. A contributing factor is the regulatory delays we have experienced in opening startups over the last few quarters. The first quarter showed this trend reversing with the opening of nine new home health agencies, putting us on track to open our target of 40 agencies for the year.

We have also taken steps to improve growth at our mature agencies. We have made adjustments to our incentive plans to better emphasize growth to the agency staff and have had numerous conference calls with our business development teams to make sure their focus is where it should be on growing episodic admissions. We are beginning to see improvement.

Indications are that April will finish in excess of a 10% internal growth rate. With startups rebounding, and our renewed emphasis on mature agency growth, we continue to believe we can hit our target of internal growth of 10% for the year. We also want to point out that our internal growth rate of episodic-based revenue grew 26% year-over-year. We believe this is more indicative of the true performance.

We will add this stat to our discussion on internal growth in the future. Regarding hospice, we opened one new hospice agency in the quarter and continue to target five hospice startups for the year. We are pleased with respect to first quarter acquisition. On March 26, we completed the acquisition of TLC, our largest acquisition ever. I will provide an update on our integration efforts in a moment. We also acquired a business with 24 home health locations in Kentucky and Tennessee.

This was a great opportunity to significantly grow our coverage in these certificate of need states. In the near term, our focus is on the successful integration of these businesses with Amedisys. Longer term, I’m very excited with the footprint expansion these acquisitions bring to us, making us truly a national company and a leader in the home healthcare business.

In an effort to allow investors to more easily measure our progress and operational strength, we have broken our quarterly revenue and contribution margin down as follows. As a reminder, contribution margin is pre-tax and pre-corporate overhead. $171 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 33%. $8 million in home health and hospice startup revenue related to startups opened less than 12 months with a 10% contribution margin.

Also in the quarter, we incurred approximately $2 million in additional costs associated with agencies we plan to open in the future. $10 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 16%. $24 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 3%.

With respect to our TLC integration efforts, our wind-down of the TLC corporate offices is ahead of schedule. The payroll and accounts payable departments have already been transitioned to Amedisys and much of the human resources department as well. Our other corporate departments are in various stages of transition, with work being shifted to Amedisys as TLC agencies are converted to Amedisys systems.

Our systems integration efforts have four components. Human resource conversion of TLC employees into our system, this was completed on April 15. Accounts payable conversion of TLC vendors into our system, this was also completed on April 15. Payroll conversion of TLC employees into our system, this was completed on April 16. Agency conversion to put the TLC agencies onto our operating platforms, we began the conversion process on 22 agencies the first week of April. We will convert between 16 and 20 agencies per month dependent upon census size, and are scheduled to complete the conversion in October.

The technical integration remains on track. When we announced the TLC transaction, we discussed our expectation that TLC would be negatively impacted by the CMS reimbursement changes in 2008 and estimated this negative impact to be initially in the 4% to 5% range. We have been tracking the impact of the reimbursement changes, as actual data has become available, and now believe the impact will be less negative. This has contributed to the favorable variance to our previous guidance, as Dale discussed. With TLC’s greater presence and higher-wage markets, like the Northeast and California, their average revenue per episode is higher than Amedisys.

I would like to take a moment to introduce to our investors the launch of our specialty division. This division will be comprised of special care management programs. We have introduced and are rolling out to our agencies the first program, which is ‘Balance for Life’. Our press release also includes additional details related to this program.

Some highlights include, last year we launched a specialty care program in 33 pilot locations. The programs are generally targeted to higher acuity patients. It is not uncommon for these patients to have multiple comorbidities and illnesses more long-term in nature. The program has yielded impressive outcomes to date, substantially reducing our patients’ fall and injury risk.

Our plan is to formally launch the dedicated division, continue to generate and study outcomes on this patient subset, and launch this service system wide. As we have stated in the past, you will continue to see Amedisys migrate our services in the area of care management to that chronic patient with increased needs. We expect to continue to see an impact on our revenue for episode throughout the year as a result of changing our care mix and servicing a larger percentage of higher acuity patients.

In conclusion, I would like to extend my thanks to all the operations management and staff for their efforts during the quarter. They have been very busy integrating our acquisitions, getting us prepared for TLC and achieving great results for the company. I’m also very appreciative of the TLC, now Amedisys, management and operations staff as they have positively embraced our culture and moved forward without hesitation.

We remain focused on being the premier low-cost, high-quality provider in home health. We believe that focus, execution and commitment to clinical outcomes will continue to separate us from our competition. I would like to express our appreciation for the support of our shareholders, customers, employees and vendors.

At this time, we will open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Lehrich - Deutsche Bank.

Darren Lehrich - Deutsche Bank

Dale, what is the outlook for cash flow from operations in ‘08? And really what I am trying to understand is how you think cash taxes may compare to accrued taxes on a GAAP basis, just anything you can help us out there with your cash flow outlook.

Dale E. Redman

In the first quarter we had an increase in accounts receivable net of acquisitions, and we believe that’s going to come down over time and that affected our cash flow. As I think we mentioned on previous conference calls, there are some significant NOLs that we adsorbed from the TLC acquisition that will have a positive impact on our cash taxes this year. It’ll have no impact on our GAAP taxes.

Darren Lehrich - Deutsche Bank

Do you care to make any outlook of cash flow from operations?

Dale E. Redman

Well, you see what it is in the first quarter and we talked about the issue of increasing accounts receivable, I would anticipate that it would improve because of a general decline in the increase in accounts receivable over time.

Darren Lehrich - Deutsche Bank

It sounds like there is really three reasons for the change to guidance. One would be your view on revenue per episode, your view on the financing relative to what it was when you established that guidance, and third bucket would be based on what your are seeing in TLC. Is that fair putting it in those three broad categories? And I’d love to get some additional commentary, Larry, from you about what exactly you think TLC’s revenue per episode may come out at?

Larry R. Graham

First, really it’s two broad areas one is the financing. The rates we ended up getting actually ended up being very attractive for us as compared to what we initially though might happen. The second one is I articulated during my comments that we thought the case mix to TLC was going to be 4% to 5% negative based on historical data.

It’s actually improved to ours, and as far as revenue for episode that’s going to be combined with Amedisys agencies. I can tell you that it’s higher than what we’ve historically seen with the Amedisys. I talk about the Northeast and California issue, which will combine with ours to make ours higher going forward. But guidance really is wrapped up in the financing and the case mix. That’s why we increased it.

Darren Lehrich - Deutsche Bank

So it would improve to yours, 4% to 5% negative and you were originally targeting 1%. Are you now flat to slightly up and they are at that level?

Larry R. Graham

TLC is more in line with the 1% negative.

Darren Lehrich - Deutsche Bank

And you are better than that at this point, given what you’re seeing?

Larry R. Graham

With the case mix going forward now that we are in the New Year and we actually have change in care mix. We have ‘08 data and going to try to recalculate ‘08 as of ‘07 was in effect is a little bit difficult and time consuming, so we will probably steer away from giving specific care mix or case mix guidance in terms of percentages. But we will disclose our revenue per episode, and we clearly articulated that our revenue per episode was going to improve throughout the year.

Operator

Your next question comes from John Ransom - Raymond James.

John Ransom - Raymond James

Clearly, despite the fact that the organic volumes are a little but down, your revenues were clearly better than what I think most of us had modeled. Is it that the PPS was a pretty big net positive this quarter? What other reasons can we think about that the revenues are just so much larger than what was forecasted?

Larry R. Graham

Well, you have a couple of things. I think we talked about $24 million in acquisition revenue in quarter one, so that’s one reason. And I articulated the internal growth rate in terms of admission growth rate, which was 7%. And we also articulated now the revenue growth rate in terms of dollars, and it was 26%. Putting in that perspective, last year at quarter one it was 21%.

And revenue growth is made up of admissions. It’s made up of revenue per episode changes, which includes market basket and things of that nature, and also recertifications. And when you do a lot of startups, historically, you start out with admissions and then over time you began to gather recertifications.

A lot of acquisitions we have done, historically, have started off with low admission volume, and maybe we’ve increased them a year or two later and correspondingly increased the recertification. All of those factors lead to the actual revenue growth in dollars being greater.

John Ransom - Raymond James

So it wasn’t just the rate. And would it be fair to say, though, that the PPS was not a negative in the first quarter but it looked like it was maybe a slight positive?

Larry R. Graham

Well, January and February was really under a transition reimbursement methodology, and March was the only month under the ‘08, if you will, reimburse the methodology. And again, we’re not going to get into the specifics of percentages related to the case mix, but we will tell you that revenue per episode is trending upward, mainly due to our Balance for Life program in the higher acuity patients that we are servicing.

John Ransom - Raymond James

So, your case mix apples-to-apples is up year-over-year.

Larry R. Graham

Well, you can see that. I think many analysts articulated what our revenue per episode was quarter one quarter two, so, yes.

John Ransom - Raymond James

TLC when you announced that deal, you mentioned that their branch margins, contribution margins are running in the low 20% range. Is that still an accurate statistic going into the acquisition?

Larry R. Graham

We acquired them on March 26. So we have April data. Haven’t closed out a month, but I have no reason to believe that’s not still accurate at this point in time.

John Ransom - Raymond James

You ran a 33% margin this quarter on your mature agencies, is there a structural reason why those branches over time can’t get to the company average in low 30s?

Larry R. Graham

I would suspect that over time that they will migrate more to company averages. I don’t know if they’ll get all the way up to 33%, which is our all-in average, and that includes agencies we’ve owned for four, five or six years. So it may take a while. But over time, you will see improvement. That being said, historically, when we do acquisitions, the first few quarters out of the gate you don’t see that. And that’s clear when I went over the $24 million in acquisition revenue this quarter with acquisitions we’ve had less than 12% that has only a 3% contribution margin.

John Ransom - Raymond James

If I recall, Housecall started out in the mid teens and did it not close out at about 29% on your last quarter before it rolled into the same-store base. So you are able to improve those margins something like 1500 basis points over five quarters.

Larry R. Graham

I can’t remember the specific number, but I do recall it being north of 25%.

Operator

Your next question comes from David MacDonald - SunTrust.

David MacDonald - SunTrust

Larry, on the specialty program, can you talk a little bit in more detail about are there other disease states we should expect over time, just some broad comments on what the feedback has been from some of the pilot locations from both the patients and from a clinical standpoint.

Larry R. Graham

Sure, with this pilot program Balance for Life, we have actually selected the first 33 locations, hired specialty directors. We train our clinicians, as well as our sales staff, on the protocols associated with improving fall and risk management. We are very excited about this program because if you read literature, one of the major causes of hospitalizations, as well as major dollars spent in the healthcare system, is due to the geriatric elderly population falling and breaking a hip, and that’s caused by many different factors.

Isolating the factor that’s causing that, and developing a program around that to improve that, is what we are doing. And we’re seeing quantifiable results in what’s called [inaudible] assessment, which is something that therapists used to quantify if someone is a high risk for fall or low risk. And we’ve been able to migrate people from high risk to low risk using this. So from a clinical perspective, it is a very exciting program.

Now, I have stated for years that wound care, cardiac, diabetic, therapy patients are the main patients you will see in home care. Developing specialty programs, specifically training clinicians to a deeper level, hiring specialty clinicians in areas, training the sales force is something you will see Amedisys continue to do and evolve. I am not ready to articulate in what order we will rollout programs, but we will focus this year on the Balance for Life.

David MacDonald - SunTrust

On the internal growth with some of the regulatory delays on the de novo side, is that completely behind us now? It looks like that reaccelerated this quarter. And then we talked about 10% for the full year still looking like a pretty good number so, which would suggest that internal growth will actually accelerate from April levels. Am I reading that correctly?

Larry R. Graham

I actually gave you that April was running north of 10% in internal growth rate. One month does not make a year, but we feel pretty good about the traction we have made. While it’s impossible for me to predict the bureaucracy that goes into the approval process of startups, I do believe with our pipeline and what we are projecting to open with the rest of the year, we still have a very good shot of hitting that 40 number, which is why I feel strongly that we will be able to reach close to the 10% internal growth rate.

David MacDonald - SunTrust

Dale, on the collections, was there a little bit of choppiness also from Medicare just given the reimbursement changes, or it was a lot of that acquisition driven.

Dale E. Redman

Yes, there was a little bit of difficulty early in January and maybe throughout part of January. That has been resolved, and we really don’t see any problem with that going forward at this point.

Operator

Your next question comes from Brian Tanquilut - Jefferies.

Brian Tanquilut - Jefferies

Larry, on the integration of TLC, how much more is left of the back office in New York? And then if you can give us just an initial read on how the integration is going at the agency level, especially with the rollout of the point-of-care.

Larry R. Graham

We did 22 agencies in the month of April, and then we’ll start a new batch in May. That has gone according to plan very similar to what we have seen historically with the acquisitions. Obviously, by doing all the acquisitions we have done historically, as well as rolling point-of-care out to over 300 agencies internally, we have got some highly trained people that do that now. So I feel very good about the initial start of rolling out these agencies.

And far as the TLC corporate wind-down, they have four regional billing centers, one corporate office in Lake Success. April is the big wind-down month, but then it will slow over the next four to five months, meaning about half of their corporate employees will finish their employment at the end of April.

Brian Tanquilut - Jefferies

So, how are the clinicians receiving the transition from paper-based to point-of-care?

Larry R. Graham

It varies, but overall positively. It helps tremendously that we already had 8000 clinicians on the point-of-care. They have people they can call and ask questions to. We had training programs for everyone, including someone that has never turned on a computer before all the way to someone that has used the device in the past. And we’re constantly getting feedback and reprogramming things to improve the ease and use of our point-of-care. So I feel pretty good about how they will receive it. Now, you’ll have individuals that will struggle, but overall it’s going quite well.

Brian Tanquilut - Jefferies

Your view on the PPS, I know we have only had one full month in Q1, how different is that from what you had thought at the beginning of the year?

Larry R. Graham

Again, we’re not going to get into specifics on that, because we got a lot of moving parts, we got Balance for Life rolling into our program. We got TLC’s revenue per episode, which is higher. But we are clearly sending the message that revenue per episode is going up through the remainder of the year.

Operator

Your next question comes from Whit Mayo - Stephens.

Whit Mayo - Stephens

The revenue per episode a little bit, I think we hear that it’s trending upwards, but can you give us a sense for how maybe the visits per episode. Did that change at all on an apples-to-apples basis with this transition through PPS in the quarter?

Larry R. Graham

This quarter no, but I would say it’s within one visit of what we’ve historically been running about. It may trend up one visit upward, but that’s an early indication, it’s not definitive.

Whit Mayo - Stephens

So that’s clearly that the case mix that’s driving that up. Can you give a little more color on the reclassification of some costs in the quarter? It looks like there were some numbers that shifted from G&A to cost of services and can you confirm that indeed was a net wash in terms of the P&L impact?

Dale E. Redman

It had absolutely no P&L impact. All we did was move $5.9 million from general overhead, or G&A, up into cost of revenue. And that shifted the gross margin down by about 3%. But absolutely no P&L impact, no impact on EBITDA, none of those things.

Whit Mayo - Stephens

Was that a decision on the auditors to do that?

Dale E. Redman

No, absolutely not. That was a decision on our part. We think it’s probably the better way to approach it. TLC has been doing it that way, and we think that’s generally what the industry is doing.

Whit Mayo - Stephens

Larry, can you give us how many agencies you have right now that are waiting approval right now for provider numbers.

Larry R. Graham

Depending on how you quantify what stages they’re in, it’s between 20 and 25. Some are real close, all they’re waiting on is basically the go-ahead, and some are very, very close to that process. Depending on what state the regulations are different. Sometimes you have to get onsite surveys, sometimes you have to get [inaudible] but about 20 to 25.

Whit Mayo - Stephens

Do you feel that’s a little bit less of a pressure point than it was at least what you saw in the first quarter in terms of getting these opened?

Larry R. Graham

Well, for me personally, it’s something I’m continually focused on. I do feel better that some agencies opened in the first quarter. And again, you are asking me to predict how fast CMS, a bureaucratic body, is going to move on things. But again, I do feel that it’s opened up in the first quarter.

Operator

Your next question comes from Greg Williams - Sidoti.

Greg Williams - Sidoti

Can you talk a little bit about the specialty division and how you operationalize this, are you training everybody in Baton Rouge or you are going on a agency-by-agency basis?

Larry R. Graham

Yes, I will give an overview. I don’t want to get too specific. I believe some of it is proprietary. But it is at the agency level, we send people onsite, and we do training down to the individual clinician providing the care, down to the sales person calling on the physician office. So it is at the agency level.

Greg Williams - Sidoti

So, it would be a slower rollout. When do you think it would be complete, or how many agencies per month or something?

Larry R. Graham

We haven’t quantified how many, but to give you some indication, toward the back half of last year, we rolled out 33. So that will give you some indication, and we will be aggressive with our rollout.

Greg Williams - Sidoti

Larry, you mentioned in the scripted comments that you’ve implemented some programs to better incentivize agency directors to grow episodic numbers per agency. Can you talk a little specifically about what you are doing there?

Larry R. Graham

It mainly has to do with their individual incentives. I had a lot weighted to the agency making their quota, and I shifted more of the incentive to the individual making their quota, because anytime you might be down a sales person and different things of that nature, and we believe that individual accountability will drive performance.

Operator

Your next question comes from Ralph Giacobbe - Credit Suisse.

Ralph Giacobbe - Credit Suisse

So, just going back to the same-store or to the internal growth rate, the volume this quarter 7% same-store or internal revenue 26% would obviously imply pricing mix of roughly 19%. And given that TLC really isn’t much in the numbers in 1Q and given sort that you’re just starting some of these specialty programs, help me understand the growth of that number and the sustainability of that type of figure, given that you expect volume growth to tick up again?

Larry R. Graham

If you compare the first quarter of ‘07 to the first quarter of ‘06, that number was 21%. And now that we’re comparing the first quarter of ‘08 to the first quarter of ‘07 it’s 26%. And you hit it, it is due to mix, it is due to admissions, it is due to revenue per episode and it is due to recertification. A combination of those factors all lead into the ultimate revenue generation on internal growth.

Ralph Giacobbe - Credit Suisse

But going forward the sustainability that number, are you saying that that number is a sustainable number and on top of that we’re adding even more because of a better mix or higher rev episode.

Larry R. Graham

The only guidance we have ever given in relation to our growth is trying to sustain an internal growth rate in admissions of 10%. We have not given individual guidance in terms of revenue percentage internal growth. It may be something we consider the future, but right now, I’m not prepared to give that guidance.

Ralph Giacobbe - Credit Suisse

Can you remind us again of the difference between the CMS implied hit to your revenue and what you are actually seeing? You mentioned TLC originally thought of as a hit of 4% to 5% of revenue and now down to 1% of revenue. Just help us understand what, you all are doing to help mitigate the top line. I understand, obviously, there is cost mitigation efforts, but in terms of the top line, just help me understand how you can go from negative 4% to 5% down to 1%, and in your case on the base level. You’ve talked about it before, but maybe you can refresh our memory a little bit about how CMS is implied.

Larry R. Graham

As a reminder, when you initially estimate the impact, you’re going back to ‘07, ‘06 data and you’re calculating what you would have gotten reimbursed had that reimbursement methodology been in effect back then. And there is a lot of complications because it goes from 80 home health resource groups to 153. It matters not only what your primary diagnosis is, but your secondary diagnosis, and it matters which episode of care you’re in.

All of those factors combined ultimately influence your revenue per episode. So going back historically trying to estimate the impact may be worse than the impact actually is by the time you’re educated on primary and secondary diagnosis you understand, first, second, third and fourth reimbursement and you’re operating under the new reimbursement methodology.

We are seeing that very same thing with TLC. They’ve gone through a very extensive education process on primary and secondary diagnosis. And I point that out because historically you were not required to put a secondary diagnosis, now you are. So sometimes when you look at old data, which six months ago a lot of the analysts were called and I would tell them that them trying to go back and calculate what the impact would be is almost impossible, because they didn’t have the ability to at least estimate what that secondary diagnosis would be, we did.

The other thing is, Mike, your case mix migration, Amedisys is always taking care of a very highest acuity patients. Means they have a lot of things wrong with them, and they stay on service longer because of that. Under the new reimbursement methodology, that is where the dollars went to for high-acuity, long-length-of-stay patients because that’s where the resources are going, which makes logical sense to us, and we will continue to migrate to that high acuity, comorbid patient.

Operator

Your next question comes from Bill Bonello - Wachovia.

Bill Bonello - Wachovia

The Medicare impact, could you explain just how admissions and recertifications impact the growth. I am not sure I understand technically how they are contributing?

Larry R. Graham

And you may hear some of our competitors talk about revenue growth. When you admit a patient, obviously that initial admission has an episode of care with revenue associated with that. If that patient goes on to a second episode of care, because they are still ill or still sick and still need care, based on the doctor’s signature, well then you start over with a new revenue per episode. So you have to take the admit plus the recert to get the total dollars associated with that patient that it’s ultimately going to generate.

Bill Bonello - Wachovia

So you are saying that patient isn’t being counted in your episode growth?

Larry R. Graham

The only thing we count in our internal growth rate is new admissions. So, just the initial admissions grew 7% year-over-year.

Bill Bonello - Wachovia

So if we think about your episodic growth when you consider patients coming into more than one episode, your episodic growth organically may be greater than 7%.

Larry R. Graham

That is correct. And, Bill, you have another good point that I want to make clear. Amedisys has always chosen to articulate to the market our admission growth, because we believe that is a key indicator. But from a financial modeling standpoint, and a real performance issue, the 26% internal growth in revenue dollars is much more significant. And that’s why we will probably articulate both in the future to you.

Bill Bonello - Wachovia

The DSO what’s that like at TLC.

Larry R. Graham

Historically, it’s comparable to ours. During the transition it may migrate our DSO up, but their DSO was in pretty good shape.

Dale E. Redman

And our Medicare revenue is very similar ours.

Operator

Your next question comes from Newton Juhng - BB&T Capital Markets.

Newton Juhng - BB&T Capital Markets

It seems like the recertification that you have emphasized a few times there is extremely important towards this internal revenue growth that you have put out today. Can you give us an idea as to how that portion breaks out for you, or you can hold off on that for right now?

Larry R. Graham

When you talk about recertification, it’s a phenomenon that has always been in effect for all home care providers. Keep in mind when I do a startup, the first month I do a startup, they’re all just pure admissions. Six months down the road, I’ll have admissions and recerts.

If at any time I grow my admissions, ultimately I am going to grow my recertifications. And again, we had 21% internal growth rate in dollars year-over-year last year, and we have 26% year-over-year this year. And my goal is to drive the admission growth rate to 10% and, obviously, it will lead into double-digit internal growth rate in dollars.

Operator

Your last question comes from Donald Hooker - UBS.

Donald Hooker - UBS

In terms of CapEx, that’s being trending down. I know you have a lot of point-of-care systems to rollout or so far to rollout. Can you give us any sense of where CapEx is going play out for the remainder of the year?

Dale E. Redman

Long term, we are still anticipating that CapEx will be somewhere in the neighborhood of 2% of revenue. There will be some additional CapEx this year as we roll out our point-of-care to all of the TLC agencies and the Kentucky and Tennessee agencies.

Donald Hooker - UBS

In the past in terms we are under this new reimbursement system, and the therapy visit thresholds have changed. I know in the past you had given us some sense as to where you were in terms of the different therapy thresholds. Has that changed or is there any color you can provide around that?

Larry R. Graham

It’s a lot more complicated now because under the old methodology it was just 10 visits or more. Now it matters first, second, third and fourth episode 6, 14, 20 you get reimbursed for every visit in between. That’s a long winded to say that we probably will not be breaking that stat out between four different episodes 6, 14, and 20.

Donald Hooker - UBS

Yes, if you are under the older system it’s much easier, I think you’ve talked about 35% or so in the past, is it right around there?

Larry R. Graham

Our percentage of therapy patients, as far as those receiving therapies, generally about the same as it’s been running maybe a little higher.

William F. Borne

We appreciate everybody for calling in this morning. Obviously, we are very excited about the performance over the past quarter, and we are looking forward to sharing the results of the future quarters. We are equally as excited about TLC and the information that we see today in reference to their performance and potential to the company. We look forward to hearing back from everybody next quarter and thanks for everybody calling in.

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Source: Amedisys, Inc. Q1 2008 Earnings Call Transcript
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