Almost Family's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 8.12 | About: Almost Family (AFAM)

Almost Family Inc. (NASDAQ:AFAM)

Q2 2012 Earnings Call

August 8, 2012 11:00 am ET

Executives

Nick Laudico – Investor Relations- The Ruth Group

William B. Yarmuth – Chairman and Chief Executive Officer

Steven Guenthner – President, Principal Financial Officer, Secretary and Treasurer

Analysts

Arthur I. Henderson – Jefferies & Company, Inc.

Whit Mayo – Robert W. Baird & Co.

Kevin Ellich – Piper Jaffray

Wes Huffman – Avondale Partners

Kerry Nelson – Skystone Capital Management

Operator

Greetings and welcome to the Almost Family, Inc. Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It’s now my pleasure to introduce your host, Mr. Nick Laudico of The Ruth Group. Thank you, you may begin.

Nick Laudico

Thanks, operator. Speaking on the call today will be William Yarmuth, Chairman and CEO; and Steve Guenthner, President and Principal Financial Officer.

To remind listeners that our statements other than statements of historical facts included in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, believe, estimate, project, anticipate, continue or similar terms, variations of those terms or the negative of those terms.

These forward-looking statements are based on the company’s current plans, expectations and projections about future events. Because forward-looking statements involve risks and uncertainties, the company’s actual results could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

The potential risks and uncertainties, which could cause actual results to differ materially include: regulatory approvals or third party consents may not be obtained, the impact of further changes in healthcare reimbursement systems, including the ultimate outcome of potential changes to the Medicare reimbursement for home health services and to Medicaid reimbursement due to state budget shortfalls; the ability of the Company to maintain its level of operating performance and achieve its cost control objectives; changes in our relationships with referral sources; the ability of the Company to integrate acquired operations; including obtaining synergies, integration objectives and anticipated timelines; government regulation; health care reform; pricing pressures from Medicare, and Medicaid and other third-party payers; changes in laws and interpretations of laws relating to the healthcare industry; and the Company's self-insurance risks.

For a more complete discussion regarding these and other factors which could affect the Company's financial performance, refer to the Company's various filings with the Securities and Exchange Commission, including its filing on Form 10-K for the year ended December 31, 2011, in particular information under the headings "Special Caution Regarding Forward-Looking Statements" and "Risk Factors." The Company undertakes no obligation to update or revise its forward-looking statements.

I would now like to turn the call over to William.

William B. Yarmuth

Thanks, Nick. Good morning and welcome to our second quarter 2012 earnings call. I’d like to be able to say, I'm excited about presenting our results for this quarter, and talk about all the great things we've accomplished. Although I do think we had some accomplishments we’re talking about and we’ll do so in a minute, clearly this quarter's results lack something that I was most proud of over the past few years, meeting full Medicare admission growth. It's the one number that I have concerns with.

This is an area that I believe we've excelled in over the past years and although our rate of growth has been slowing along with the market, I’ve maintained confidence in our business model and focus on our core development principles. The positive relating to this belief is, I still have that confidence. We've talked over the past few calls that given the changing environment driven by the meaningful rate cuts our industry has experienced, and exacerbated by significant regulatory changes such as phase to phase and therapy reassessments.

I view that the world called for a slowing in the home health industries growth rate. The evidence coming in from the Federal government confirms that view. We have talked about learning expectations of what is a sustainable Medicare admission growth rate for the future. On one hand, I think our assessment was correct. But on the other, our Medicare admissions relative to this changing macro environment clearly missed our expectation for the quarter.

One might ask, so how does this happen? My answer generally is that, we lost balance in our focus. We historically have heavily weighted our focus on growing admissions. The one common denominator in our management process over the years has been the recurring question of how do we achieve exceptional Medicare admission growth.

Given the ceramic for our industry over the past few years and the ongoing pressures from rate cuts and regulator changes, we have continued to push the growth button. Starting at the end of last year and as we planned for 2012, we recognized that there was an opportunity or should I say a need to shift our focus to aligning cost with the changing environment and future outlook for reimbursement. We did that and to be quite honest, I think we did a really good job. This shift in focus shows in the numbers that we present to you today.

With regard to our Medicare admissions, I could give you a number of things that have happened to rationalize results for the quarter, but I can’t bring myself to try to do so. I could explain what we did and how it probably caused the results that we achieved, but the bottom line from my view point is that our focus probably shifted too far towards cost control at the expense of continued growth.

That makes the question, what are you going to do about it, easy to answer. We are making the appropriate adjustments as we speak. These changes are not radical because I have the upmost confidence in our organization’s ability to adapt. The answer is that we need to modulate the things we focus on within the company back towards distinguishing ourselves in the area of Medicare admissions growth without losing the benefit of our emphasis on effectively managing our costs.

Our second quarter margin improvement indicates we’re pretty good at achieving positive results in the areas on which we focus. The trick is not going too far in either direction and balancing our management and operational teams focus to optimize overall performance. We are doing this and I expect that over the next few quarters, you will see the trends in admission growth reversing in a positive way. You may not see anything dramatic as we pursue this objective, but I’m confident you will see the results of our rebalanced focus. I do think things are looking up for the home health industry over the long-term and opportunities for significant growth continue.

Our work in Washington is making a difference in the industry’s long-term prospects and that we will continue to move towards a more stable rate in regulatory environment. Demographics are demographics and they’re on our side. Home health remains the lowest cost way to provide skilled care and consolidation opportunities are and will continue to come our way. We did accomplish a lot in the quarter and our financial performance in many ways should be viewed as a very positive.

Steve will talk about this in a bit more detail as he reviews the financials, and we will address any other questions you have in our Q&A. Steve?

Steve Guenthner

Thanks, William. By now, all of you should have our earnings release. We also filed our 10-Q this morning. And I’ll touch on some highlights, and then we’ll move to the Q&A. Diluted earnings per share for the quarter was $0.49 as compared to $0.53 for the same quarter of last year. During the second quarter, we incurred about $0.01 in M&A related costs related to transactions that did not get done, without which EPS would have been about $0.50.

Total revenues were just a touch under $87 million. Visiting Nurse segment revenues is $68 million on 2% admission growth overall, including about 4% admission growth in Florida. In our Personal Care segment revenues, net revenues grew to $19 million from a combination of the Cambridge acquisition and about 5% organic volume growth.

With regard to earnings per share, EPS was down about $0.04 over the same quarter last year with an $0.18 negative impact from the 2012 Medicare rate cut, about $0.04 negative from higher than normal workers’ compensation and health insurance costs during the quarter and in our corporate expenses, incentive accruals of about $400,000 in the second quarter of this year compared to incentive reversals of about $400,000 in the same quarter of last year for a change of about $800,000 in incentive accruals, also about the same as the change in the total corporate expense and about $0.05 negative in comparison year-over-year. so we have combination of $0.18, $0.04 and $0.05 for $0.27 negative, EPS was down about $0.04, so we have about $0.23 positive from other factors.

in the Visiting Nurse segment, our efforts to improve our operational efficiencies, predominately reducing our labor cost added about $0.15 a share, and in our Personal Care segment, growth of our business, predominantly, the Cambridge acquisition that also organic growth added about $0.09 a share, and we had about a $0.01 of all other causes.

Within the Visiting Nurse segment, we had small total admissions growth of about 1%, a decline in Medicare admissions, which includes Medicare advantage plans that payout historically and essentially flat [result] episodes. in Florida, our Visiting Nurse total admissions grew about 4.3%, Medicare admissions grew about 2.8% on a year-over-year basis. This is the first time in five quarters that we have generated positive admissions growth in Florida.

In the North, our VN total admissions shrink just under 1% and Medicare admissions shrink about 5% on a year-over-year basis. A shift to significant Medicare advantage plans from episodic per visit reimbursement caused about 3.5 percentage points to the decline. And without this change, Medicare admissions are still going about 2% down year-over-year in the North.

As I mentioned in our Personal Care segment, most of the improvement in PC operations from the second quarter of last year was a result of the inclusion in Cambridge for three months this year and not in the prior year.

Cash flows, accounts receivable DSOs was about 50 days at the end of the second quarter of 2012 compared to 49 days at the end of the first quarter 2012 and 46 days at the end of the fourth quarter of 2011. This increase is primarily related to slower Medicare claims processing internally and systems transition issues associated with Cambridge as we've discussed in the past.

The second quarter operating cash flow was $2.1 million compared to net income of $4.6 million due primarily to the timing and amount of income tax payments, best in cash flows consisted of $0.5 million capital expenditures while we use $1.2 million of cash in payment of an acquisition now payable.

Balance sheet at June 30, 2012 reflected cash on hand of about $38 million, up slightly from the first quarter of 2012, and up about $4 million from Q4 2011. Total receivables were $47.9 million, down $0.5 million from the first quarter. We had no outstanding balance on the revolving credit facility. Net of insurance letters of credit about $117 million was fully available for use.

Total assets were $258 million including about $153 million of goodwill and intangibles, book equity was $215 million. William?

William B. Yarmuth

Thanks, Steve. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

We will now be conducting a question-and-answer session. (Operating Instructions) Our first question comes from the line of Art Henderson with Jefferies & Company. Please proceed with your question.

Arthur I. Henderson – Jefferies & Company, Inc.

Thanks for taking the question. Bill, I appreciate your comments at the start and you are being candid about your frustrations here. What do you sort of view is kind of next steps in the process to kind of sign that balance between cost reduction and top line volume increases. What do you sort of – what are you kind of pushing for starting now?

William B. Yarmuth

Thanks, Art, nice to talk with you. I think there is a combination of things. One is, to some degree, when you are trying to manage your operations, it’s what senior management focuses are and we’ve been pretty focused on trying to manage get across in line. And we’ve now to some degree shifted our communication, our efforts and the activities that we are speaking about with our operators and having them speak them to the operations about sort of moving a little bit more towards, what are the opportunities in the marketplace to continue to grow the business. And it’s not rocket science, it’s really a matter of emphasis and my comments were really around I think we might have – de-emphasized a little bit of the talks internally and the emphasis internally on continuing to get the Medicare admission growth that we have historically gotten. So it’s not – my comments were meant to say, the machine is not broken. We just need to fine tune it, and we’re doing that. I can’t – it’s way too early to tell you that we’re seeing any change, any dramatic change. but I’m confident that if I look at the history of being in the business as long as I have and our company’s performance over the past, company’s performance and the way we operate over the long-term is that, we’ll get back into the marketplace and little bit energy will be introduced into the sales process and we’ll see those results.

Arthur I. Henderson – Jefferies & Company, Inc.

Should we expect any sort of increase in expense maybe around these efforts in terms of sales? I guess my question is, do you feel like the cost cutting that you’ve done maybe kind of cut into the balloon a little bit. You got to go back to the other direction?

William B. Yarmuth

Well, I think I would describe it in two ways. One is there’s two ways to do this. As we said out at the beginning of the year and established goals for the sales force and admission growth as we talked about sort of what we internally view it as our performance for the year. We did experience where our average sales force was a little bit less than what our budgeted sales force was in the first two quarters. So the first step is to say, let’s get our sales force up to speed, and then see what we could – see what we get from just keeping add budget. Sometimes when people deal with costs, and cost sort of alignments, a symptoms think about it maybe a little bit too broadly.

So, what we’ve realized as we were going to the quarter, we weren’t fill in open sales positions as quickly as we had hoped to or should have done, And so the first step is to fill those position. At that point, we would then look and say, okay now how are we doing with the fully utilized sales force and would it cause us to increase costs. I would not anticipate it today in terms of our sales efforts, our sales cost growing. If they grew, they were only grow back initially to where our budget expectations were. And then we may determine that we would spend some more money on it. But it’s based upon the utilization and realization or the effectiveness of the sales force that we construct it.

Arthur I. Henderson – Jefferies & Company, Inc.

Okay, that’s helpful. One last question, I’ll get back in the queue. Obviously, wanted to get your thoughts on reimbursement looking forward. We got potentially (inaudible) showdown in the first quarter of next year. How do you feel about the environment around home nursing at this moment? I know we’ve got a rebalance, rephrasing that’s going to come in 2014. But is there a possibility that the sector could get hit in sooner than that?

William B. Yarmuth

Well, if your question is, could something happen that my – be different than what we know today? I guess the answer to that question is always it could. I can tell you that Steve and I have spent a fair amount of time in Washington of late, and the positive side of it, I would say is that I think there is a recognition that the industry has been hit pretty hard with rate cuts over the past few years and I think people are recognizing that the growth rate in the industry is slowing a bit and margins are despite what Med Pack might say margins are sort of getting more in line with what may be expectations might be, and before we were may be on the top of the chopping block. I think we may be moving down in the pecking order and I view that as a positive.

So I think our efforts in Washington have been positive in terms of, what's the right word – in terms of sensitizing members of Congress and to some degree getting some recognition from CMS that, a lot of the things that they have done have had the impact that they wanted to achieve, and maybe we're not the highest and the most prominent sector of healthcare to lack. And so I’m – we’re overall optimistic, I don’t know Steve if you have any comments.

Steve Guenthner

I would tend to echo that. I think all of this has to be viewed in the context of the broad environment. We’ve rate cuts in 2011 of about 5.5 in 2012 of about 4.5, and absent congregational intervention, they sunk on long regulation. We got about 2.7 something coming again in January. So you know you‘re talking about 13% worth of rate cuts that makes a huge dent, I don't care how you measure margins and I do think that our interaction with the partnership and industry coalition in our interaction as an individual company suggest that there is probably some realization that, there is only some much more you’re getting out of this one. We’re talking about a 10 year spend from the CBO perspective that was $318 billion when the Affordable Care Act discussions began, the same ten year period is now about $250 billion. So you got about 28% reduction that's already happened. And on top all of that, the rebase in law that has been enacted hasn’t really even taken effect yet.

So I do think we're not out of the woods here, but – and I think that all of us in the industry are doing – spending a lot of resources, including this management team of trying to get that message out and we’re just cautiously optimistic as you can be in an environment that didn’t sound very optimistic frankly when I get through all of that. But it is what it is, and I think our job is to steer your way through that in such a way to William’s opening comments to balance the overall performance of the business, and optimize and I think things that were met internally or sort of just modulation of as we continue to negotiate those rough waters.

Arthur I. Henderson – Jefferies & Company, Inc.

Okay, that's fair. That's good color. Thank you so much.

William B. Yarmuth

Thank you.

Operator

Our next question comes from the line of Whit Mayo of Robert W. Baird. Please proceed with your question.

Whit Mayo – Robert W. Baird & Co.

Hey, thanks. Good morning. I was just kind of curious the status of Ohio and the dual rollout what the timetables are there and really curious as they shift those lives over to managed care. Do you have an understanding for how the payers will work with you, do they honor the state rates and contracts and then longer term I'm just curious if you could give us a sense of what the conversations are you having with the payers in that particular market?

William B. Yarmuth

Well, I think that whenever you get into a managed care world, your conversations with the individual providers are somewhat different. We have been in discussions and contracted with all of the providers to my knowledge in this project to be able to provide care to the dually eligible, and it’s still a little bit in the early stages with. so I’m not sure that we have a whole lot of detail, because it’s not fully implemented and we would anticipate that our position in Ohio, and we’re kind of getting some sort of our feedback in that, generally when managed care gets involved, they are interested in dealing with fewer providers as opposed to more providers and with our coverage throughout the state. We sort of stack up as one that is a more attractive provider for the managed care organizations to deal with, because of our breadth of coverage and our ability to meet the needs of the population as a whole.

So there’ll be kind of more coming out on that in terms of, as the demonstration project sort of evolves. but we feel pretty good about where we are, and we think we’re well-positioned to capitalize on that and learn a lot from it, because we think it’s probably something that will be Ohio kind of this state that a lot of other states look to, to say what are they doing and how is it working, and if we can be successful in that area. We can end up they were newer to our benefit as an organization to participate in the kinds of projects as they go into other states in which we operate.

Whit Mayo – Robert W. Baird & Co.

Yeah. I mean give a sense for just inside of Ohio, what percent of your Personal Care patients would be do all, is it kind of an 80% number, I guess that’s sort of a little somewhat I’ve already saw, but that might be wrong.

William B. Yarmuth

Yeah. I mean it’s way up there. So precisely what it is, I don’t forget to give you the number, but I think your number is probably a reasonable estimate.

Whit Mayo – Robert W. Baird & Co.

Yeah. Can you remind me the date for the rollout of the demo, I just can’t recall?

William B. Yarmuth

I don't know, if I’ve had that for you. I think it’s a little bit later this year.

Whit Mayo – Robert W. Baird & Co.

Okay. and then other question on the Ohio before I get all, but I know talking to some other states so where they were restructuring the RFP process or the initial rollout was that the payers had to basically acknowledge that that the previous contracts are in place between the state and the home care providers would be honored for a period of time, and you don’t know if that’s the case in Ohio?

William B. Yarmuth

I don't know if I had that information.

Whit Mayo – Robert W. Baird & Co.

Okay.

William B. Yarmuth

I do understand that I’ve been correct, it’s not later this year, it’s January of next year that perhaps that the program initiates. So with next quarter, if you like or between now and then, we’ll get a little more information on that and get back to you.

Whit Mayo – Robert W. Baird & Co.

Yeah, it’s just interesting.

William B. Yarmuth

Yes.

Whit Mayo – Robert W. Baird & Co.

And maybe just William, thoughts around Medicare Advantage now and just the world seems to be moving more towards this sort of payer agnostic environment. Just kind of curious how you view Medicare Advantage in kind of your business now, and maybe any thoughts around what percent of your patients now are MA versus fee-for-services that changed or has your appetite all took one way of the other?

William B. Yarmuth

Well, I’ll let Steve talk a little bit about some of the details. I can tell you that, I know there is a lot of emphasis in some areas about moving to the Medicare Advantage programs and contracting with providers. We’ve seen and part of our concern is that I’m not sure that Medicare Advantage yet has decided that it views home care as a real value-added. I think their talk from that conversation was some of the managed care organizations. I think they are recognizing its value in the long-term effort to control healthcare costs.

But on the short-term, they’re kind of gyrating back and forth between the way they contract for it, and the way they pay for it. And it’s 24% – 27% of the Medicare population, so it’s becoming a bigger part. So we are certainly exploring that, but the way that it’s paid for and the changes in the way they paid for it, some time can be problematic, and therefore we’re kind of go and added at a slower pace than maybe others in the industry are.

But my long-term view on it is, that they will come to the same realization that others have that home health care is the low-cost alternative, and it’s a way to care for individuals in their home at a lower cost, and they will pay appropriately for it. And as that goes, we’ll end up pursuing it. I’m not rushing out there because the one thing we have learned for managed care in my experience is that your relationship with them sometimes can change pretty dramatically, pretty quickly. And so, we don’t want to end up with facing too much of our business on 27% of the market when we can pursue growth in the other 73% of the market, which is traditional Medicare. But I don't mean to minimize the impact ever because I think they are – managed care is an area where we need to deal with it. But I think we will go about it in a relatively slow and measured way as we kind of go about everything, right, wrong or indifferent, but that is just kind of the way we go about it.

Whit Mayo – Robert W. Baird & Co.

No, I think that's consistent historically with the way you guys have viewed that business. And Steve I guess may be one last question just may be you mentioned this in the prepared remarks and I missed it, the DSO is just up a little can you may be kind of flesh out anything that is going on in there?

Steve Guenthner

Sure, I think probably the biggest jump, certainly sequentially from March 31 to June has been the transition systems transition to the Cambridge business from their legacy system into our personal care management system. And as we sort moved through the quarter and a foot on one of each notes and now we’re going to taking our foot off the old system boat. We’ll have a little cleanup to do there and I think that training time and up to speed time in learning curve for those folks. We will see some progress in that area. That’s really were most of it is.

There is also always an issue sort of seasonally in June around the end of the Medicaid fiscal years so there is some number in there maybe a day or two, or you get the – a day or two in terms of DSO as were the states. I’ll sort of shut off payments in the last few days of the year. Just a kind of balance in the fiscal year end books and that’s – I don’t think there is any thing in here, after saying lot of words here, I don’t think there is in here, in terms of AR they were particularly worry about. I think from a little bit longer term may be six month perspective, we may have incurred something of a little more permanent increase in our DSO in the DN side, as part of the trade-off for the revisions to our staffing model that we talked about, and that's a pretty easy trade when you look at the labor savings versus the DSO, and in particular when you look at the cost of capital right now, and kind of where our balance sheet sits. And so I think we’re in pretty good shape there.

Whit Mayo – Robert W. Baird & Co.

Okay, thanks a lot guys.

William B. Yarmuth

Thanks.

Steve Guenthner

Thanks.

Operator

Our next question comes from the line of Kevin Ellich with Piper Jaffray. Please proceed with your question.

Kevin Ellich – Piper Jaffray

Good morning guys. Just a couple of questions. First, starting off maybe Steve, just want to check was the $0.01 impact from transaction costs this quarter related to the Cambridge Home Health office wind down that you expect?

Steve Guenthner

No, that was really dollars that we spent in diligence and other activities on deals we can get done.

Kevin Ellich – Piper Jaffray

So, okay. And that’s kind of what I was trying to push out. So I guess, is that mean we should expect the deal to close relatively soon or is that kind of written into it too much?

Steve Guenthner

I think, that's written into it too much.

Kevin Ellich – Piper Jaffray

Okay. Can you guys give an update on how the pipeline looks and what the deal environment looks like?

William B. Yarmuth

I would be pleased to do that. I think and it’s going to sound a little bit like broken record, the macro environment is what the macro environment is, all of the discussion that I was going through earlier about historical and forward-looking rate cuts and rebasing continues to drive a dearth of transactions in the Visiting Nurse part of our business nationwide. There continues to be a valuation gap between buyers and sellers. We continue to see incrementally interest in sellers starting to come to market. And having said that, we don’t have a deal that we’re telling you about today. So we’re continuing to work that. We continue to see opportunities in the personal care side of the business. As we mentioned a couple quarters ago, we did add some internal resources to continue to surface more transactions and we’re continuing to do that.

But we’re being pretty careful, and pretty deliberate about how we proceed with that, and we’ll continue as we always have done. We’ve always been very deliberate and from time-to-time, we see transactions that we look at, and either we don’t hit the bid button and as excited a fashion as maybe other people do and a deal happens the other way. Somebody else takes the deal or some might have decides maybe they won’t take your business of the market or maybe we see some things diligent. They cause us to pullback and we’re going to continue to be conservative and diligent in our approach to all of that.

Kevin Ellich – Piper Jaffray

Got it. That’s good color. But we’ve been talking about those valuation GAAP between selling and buyer expectations. I think for the last at least couple years on that 2009, I think is for example I remember hearing about it. I guess why do you think selling expectations are still higher? They haven’t changed or have they come down as buyer expectations?

William B. Yarmuth

Well, I think you’re just dealing with macro environment of uncertainty. So what’s our reimbursement going to be? What’s the Congress going to do? How we’re going to do deal with the fiscal cliff, as a nation? How we’re going to deal with the doc fix? Is the frustration going to happen? And when you have that kind of uncertainty, you have buyers on one-side of the table and sellers on the other side of the table, putting into their own valuation models about what they think value is. They take different ranges, very opposite ends of the range of the assumptions I think it could happen. We have a lot of sellers betting is don’t come out better, and a lot of buyers betting is don’t come out worse and there is a result you get not much happened in there.

Kevin Ellich – Piper Jaffray

Got it.

Steve Guenthner

And it’s the gap more than the absolute value. Is that gap in expectations, it’s arguably compounded by Williams’ comments, not by his comments, but his observation of the reality in the external...

William B. Yarmuth

I wish I could influence the market...

Steve Guenthner

Well, that would be great. Could you just make the better comment...

William B. Yarmuth

I think it would be better.

Steve Guenthner

But the observation that he made about the overall slowing rate of growth and you see that everywhere. You see it in some of your analysts work about where you guys have done some surveys, you see it in the peer group, you see it in the day that comes out of the DC, and so we’re just going through a period of change and uncertainty in this part of the economy, in health care and home health care that just creates this gap of expectations. And I know, it sounds like a long story frankly, no one said he tried of hearing, we say it that I’m saying it.

Kevin Ellich – Piper Jaffray

Yeah.

Steve Guenthner

Because we like that capital to work, what we won’t to do is put the capital to work recklessly. What we want to as a transaction for the sake of doing the transaction.

Kevin Ellich – Piper Jaffray

I think that’s not going to help.

William B. Yarmuth

That’s not going to help.

Kevin Ellich – Piper Jaffray

Okay. That makes a lot of sense. And then I guess, Bill just going back your prepared comments, maybe I missed it. But given what we’ve seen with utilization in hospitals and physician offices and the comparing to the back half of the year being little weak. Is that what you are talking about what the slowdown in admissions? And if so, what type of things are you putting in place to kind of offset that weakness or potential weakness?

William B. Yarmuth

Well, I think you have to kind of look at the sales in two components. There’s one which is where is the market, and how is the market growing, at what rate is it growing, is it sort of flat or is it declining? And then you have the market, when we talked about demographics. But sort of home health utilization appears to be declining as a result of a number of factors. So, I don’t want to really get into that. But where the market is, is an important component to the equation.

And then from our standpoint, it’s sort of how do we operate and how do we perform relative to where the market is? So, if the market used to be growing at 8%, then we would basically say, we need to beat the market. We need to do better than the market if we’re really offering care that people would want and should want, and we’re doing an effective job of communicating to the marketplace about our capabilities and the quality of the care that we provide.

So, we kind of look at things as a growth rate relative to where the markets growing as best we know. So that the growth rates we believe in the market as I think I said in my remarks is slowing, and we’ve said for a number of quarters that you all should be thinking about ongoing year-over-year Medicare admission growth at a declining rate.

And so, we would continue to say that, as we get more data from the federal government, indeed that the spend in Medicare home health is declining pretty dramatically over the past few years. And actually, CBO came out and said that in the estimates that the market declined by 3.6% between 2010 and 2011. Some of that’s rate and some of that’s volume. So, we have to take that data and kind of evaluate our performance relative to that.

The point that I was making in a comments was essentially that in the current environment, we’ve thought the real need to kind of focus our operations on getting our cost in alignment, and by doing that we may have over emphasize that at the expense continuing to emphasize sales, and being out in the marketplace and that’s really where our shift is. It’s not dramatic. This is not transformational. This is really more of what I use the word, we kind of talk about modulating.

It’s reemphasizing, when we talking to our operators and they talk to their people that work for them on getting back out there, and being able to get back into the marketplace. And some of it could the lack of being the fact that we didn’t have our salespeople up to – we didn’t have the number of salespeople that we budgeted to have. That’s been fixed. Those are things that are being fixed right now, and we think we’ll get positive results from it.

So it’s a disappointment. I may have to say, I’m disappointed in the numbers for the quarter for Medicare admission growth. But I think I’m pretty proud of the fact that we were able to go out and focus on getting our cost in alignment and working on maintaining our margins, and I think we did a fabulous job of doing that.

Kevin Ellich – Piper Jaffray

Absolutely.

William B. Yarmuth

So, it’s just a little movement and without trying to over promise, I just wanted to say to the Investor group that was listening to the call that we recognized that we need to kind of move our focus directionally back towards sales over the long run, and do so without losing the attention to cost management that I think we had over the long-term, but we felt the need to try to become more efficient as we dealt with and looked at the future reimbursement that it’s on the table for us.

Kevin Ellich – Piper Jaffray

Yeah. That’s helpful, Bill. And then just two quick ones for Steve maybe in the 10-Q that came out this morning, you guys indicated that the Medicare rate cut in ‘13 could have 2% to 2.7% impact. I guess obviously that includes sequestration over the 2% cut. Is the remainder do the geographic in wage adjustments then?

Steve Guenthner

Yeah. I think when you look at the 2013 proposed rates from CMS that came out in July. They have a market basket update and probably these numbers are little bit off. so anyone is trying to put me on this part, I’ll refer to the rates. But I think it’s about 2.5% market basket update, minus about 1% for the statutory reduction from the Affordable Care Act, and then minus about 1.32% for case mix creep adjustment kind of get you all down to about that number. Price we got rounding somewhere in there.

Kevin Ellich – Piper Jaffray

Yeah, okay.

William B. Yarmuth

There’s a lot of talk about whether sequestration happens or it doesn’t happen. our view on it is based on current, law and regulation. We’re anticipating a 2.7% rate cut in January. so, we’ve not handicapped whether something better than that happens or something worse than that happens, so that that’s where the current loss stands today.

Kevin Ellich – Piper Jaffray

Understood, and then just lastly, oh sorry Steve...

Steve Guenthner

Okay. This current loss is 2.7% negative.

Kevin Ellich – Piper Jaffray

Got it. And then with the higher health in workers’ comp cost that you saw this quarter, was there any continuation in Q3, and I guess on top of that the G&A level that we’re in as percent of revenue, is that sustainable do you think?

William B. Yarmuth

Gotcha, I don’t mean to be flip it, but thanks for the opportunity to forecast earnings I guess and I’m going to have to hold to not doing that. I think our comment with regard to the workers comp thing in health insurance is that our history shows us that they’re unusually high. Sometimes you don’t know when a new event is an aberration and when it’s changing trend, time will tell by our analysis of historical claims performance would suggest that this quarter is usually high.

Kevin Ellich – Piper Jaffray

Got it, okay. Thanks guys.

William B. Yarmuth

Thanks.

Operator

Our next question comes from Wes Huffman of Avondale Partners. Please proceed with your question.

Wes Huffman – Avondale Partners

Hey, good morning. Thanks for taking my questions. Just wanted to ask you Steve, a quick on cash flow, the cash flow from ops was a little lower than we’re seeing recently. I think you’ve touched on your comments that it was mainly related to the timing of income tax payments. I was wondering if you could try and give us an idea of going forward should we expect sort of a return to normal season there.

Steve Guenthner

Yes.

Wes Huffman – Avondale Partners

Okay. And as far as free cash flow, what you guys preferences right now for deploying that?

Steve Guenthner

Will?

William B. Yarmuth

I think on our stated preference is to deploy that cash in acquisition of other businesses to meet our investment criteria that I was talking about earlier. I believe that we’ve talked about on past calls that time-to-time we may evaluate other uses as we and our board doing necessary. Now they could include, if ultimately we are not able to deploy that cash in the growth of our business. We like to figure out what to do with it, and that might at some point in the future include the stock buyback program or other. Another short of thing, but right now we’re continuing our stated strategy to finding other companies to buy.

Wes Huffman – Avondale Partners

Okay, great. That’s it from me. Thanks.

Steve Guenthner

Thank you.

Operator

Our next question comes from [Darrell Davis], a Private Investor. Please proceed with your question.

Unidentified Analyst

Good morning, gentlemen.

Steve Guenthner

Good morning.

Unidentified Analyst

As always the great work. Big picture questions and inverting the earlier question regarding M&A. In a realistic term, what sort of scenario we’ll have to present itself for Almost Family to considered going emerging and do a larger entity?

William B. Yarmuth

Well, we’re in the business of providing home health care to as many people as we can and develop our company to the size that we can and we have no plans or intentions to try to move in that direction. Our focus is on building the company to the size that we think that we can grow it, and that is our only focus.

Unidentified Analyst

Very good, and as Steve noted that’s not an outcome [for that year] not being bought. Thanks for the clarification. That’s it from me.

Steve Guenthner

Thank you.

William B. Yarmuth

Thank you.

Operator

Our next question comes from the line of Kerry Nelson with Skystone Capital. Please proceed with your question.

Kerry Nelson – Skystone Capital Management

Hi, thanks for taking my question.

William B. Yarmuth

(Inaudible)

Kerry Nelson – Skystone Capital Management

I have a couple of different questions. First is, it looks like you know about a lot of the pressures on volume that you have last year. So if you think about face-to-face, the reserve pressure, and then the Florida issue, the management changed issue from last year. Can you just talk about as you look out in the second half, what sort of benefit or year-over-year lacking, do you think we’re going to see on volume, just from those three things alone.

Steve Guenthner

Yeah, I don't know, that’s a question Kerry that we are prepared to go out on a [lemon] the history is the history, I think our William’s statements clearing on cubical statements during his prepared remarks, we’re not happy with our admission numbers. I’ll tell you that, we don’t like where we are, and we are going to try to redirect some of our energy here in a balanced way towards driving more admissions. We have normally seeing as we’ve always said in our – I guess from past 10 years probably in our public documents Q3 is always a tough one from the sequential perspective particularly in Florida, I think it’s a tough, I mean all of healthcare sequentially for disease states, and conditions at least in the Northern Hemisphere, and we’re going to do what we can to put some numbers together here that can reverse this trend, but I don’t think we’re in a position of projecting for you what those numbers are going be specifically.

Kerry Nelson – Skystone Capital Management

Okay, can you give us a little bit more color on just Florida, specifically the progress that you are seeing there, I know that was a big issue a year ago. I’m not sure, if you commented though not hiring enough nurses as specific to Florida or more national in scope, but can you give us a little bit more color on what your plans specifically for the Florida turnaround is?

William B. Yarmuth

This is William, I don’t think we made any comments about hiring nurses, I thinking the comment remain was about sales people, our sales force.

Kerry Nelson – Skystone Capital Management

Okay.

William B. Yarmuth

So we have, and I think it was really around filling budgeted positions, and relative to sort of maybe a little bit from our operator standpoint, a little bit of hesitancy in filling sales people, sales positions in a timely fashion, so yes, that that’s my answer to that, that part of your question.

the other part of your question around Florida is that we have seen a bit of a turnaround in terms of our Medicare admission growth and our overall admission growth. our Medicare admission growth was a little south of 3%, and it was the first in five quarters where we had positive year-over-year admission growth. so one quarter does not a trend make, but it is certainly something that we thought we would begin to achieve, and I’d probably prefer to answer the question next quarter or the quarter after that. So when we’ve been able to establish your trend. But we are optimistic in terms of the progress that we’ve made in Florida and hopeful, which I don't really like, but one that, I will use as we think it will continue, and but I couldn’t give you any guidance on what we think that answer is going to be.

Kerry Nelson – Skystone Capital Management

Okay, that’s helpful. I guess since you guys [have done], and I will see my opinion really good job on costs. I guess my concern is just trying to understand, as you talked about shifting or modulating towards the sales side. can you just remind us what is the payback period for the sales force hires? How quickly would a new hire get to break-even?

William B. Yarmuth

I don’t think we’ve ever talked about that. I think that the generally, a sales person can, the numbers, which are probably not going to go into too much detail on it, but essentially the payback numbers are not particularly large. But the timeframe within which it takes a salesperson to get to the numbers where they begin to pay for themselves can be somewhat protracted. So, obviously the goal is to try to have a stable sales force environment where people have been in their jobs for a while, so your turnover is a big number. It’s a big variable in terms of the profitability if you would use it of a salesperson.

Florida is a very, very unstable market, and that’s one of the things that we’ve experienced, in terms of – because there are a significant number of providers, and there’s a small number of large providers, and a significant – large providers, small number of large providers, and a significant number of small providers. So, there is a dynamic that exists in Florida with the new guy on the block is going to turnaround and try to pay up for a salesperson again to come their way with the hope that they bring some admissions, because that maybe their only pathway to grow their business.

And so there is a little bit of velocity that takes place in Florida in that regard. So, you have a tendency in our goal obviously is to try to retain those salespeople that are effective and have developed meaningful books of business at admission flow, and we’re doing a better job of that. But I think that’s the instability in Florida that I would say exist. The rest of them – world is not quite, at least the rest of what we operate and it is not quite as volatile as in Florida. So it’s basically getting the basics. I mean getting back to basics and keeping people and get the matter on educating the community on what we can do. So it’s not as a long way did answer – probably not a lot of information for you, but – I don’t know if I would sit there and be able to tell you, I would tell you what the pay back is on the investment and the sales person.

Kerry Nelson – Skystone Capital Management

Thank you.

William B. Yarmuth

Thank you.

Operator

There are no further questions at this time. I’d like to hand the floor back over to management for closing comments.

William B. Yarmuth

Thank you. We appreciate the opportunity to speak with you today, and as always I want to thank the 6000 plus employees of our company and our management team for what they do for the people we care for. And look forward to speaking with you on our third quarter call. Thank you very much.

Operator

Ladies and gentlemen, this concludes the teleconference. You may disconnect your lines at this time. And thank you for your participation.

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