Amedisys, Inc. Q2 2008 Earnings Call Transcript

Jul.31.08 | About: AMEDISYS Inc (AMED)

Amedisys, Inc. (NASDAQ:AMED)

Q2 2008 Earnings Call Transcript

July 29, 2008 10:00 am ET

Executives

Kevin LeBlanc – Director of IR

Bill Borne – Chairman and CEO

Dale Redman – CFO

Larry Graham – President and COO

Analysts

Darren Lehrich – Deutsche Bank

John Ransom – Raymond James

David MacDonald – SunTrust

Brian Tanquilut – Jefferies

Derrick Dagnan – Avondale Partners

Newton Juhng – BB&T Capital Markets

Ralph Giacobbe – Credit Suisse

Whit Mayo – Robert W. Baird

Operator

Good day and welcome to the Amedisys second quarter 2008 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Kevin LeBlanc. Please go ahead sir.

Kevin LeBlanc

Good morning and thank you for joining us today for the Amedisys investor conference call to discuss this morning’s second quarter 2008 earnings announcement and related matters. By now, you should have received the 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 information available to Amedisys today, and the copy 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 risks and uncertainties include factors detailed in our SEC filings including our forms 10-K and 10-Q.

Also, the company urges caution in considering any current trends or guidance that may be discussed in this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks, and influences which are described in the company’s reports and registration statements filed with the SEC. The company disclaims any obligations to update information on trends or targets other than in its periodic filings with the SEC. 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.

Thank you. Now I’ll turn the call over to Bill Borne. Please go ahead, Mr. Borne.

Bill Borne

Thank you, Kevin, and good morning. First, let me welcome each of you to this call. We appreciate the opportunity to update you regarding the company’s performance for the quarter and share our vision for Amedisys.

Overall, we are happy with both our presentation and our preparation related to the new payment system and the timing of our strategic purchase of TLC. The new payment system is fundamentally based upon patient acuity and the level of services required to service a more chronic population. In addition, the purchase of TLC has helped us to expand our national coverage network and migrate our services significantly in both the West and Northeast.

We had outstanding results for the second quarter reporting net service revenue of $313 million and earnings per share of $0.82 after adjusting for certain TLC integration costs. This represents growth of 85% and 44% respectively over the second quarter of 2007. Based on this performance and our expectation for the remainder of the year, we recently increased guidance for 2008. As stated in our July 17 guidance update press release, our increased expectation for the year are based largely on three factors. Our integration of TLC is ahead of schedule, our revenue per episode is increasing, and our rollout of our clinical program is progressing very well.

During the quarter, we made one strategic acquisition which included five home health locations from a national hospital chain. The acquisition expanded our coverage in two CON states and furthered our presence in a third state. During the quarter, we also opened four new home health agencies and three new hospice agencies. As a result of acquisitions and de novo growth, we ended the quarter with 458 home health locations, 162 more agencies than the second quarter of 2007. In addition, we owned 46 hospice agencies at the end of the second quarter of 2008, 29 more hospice agencies than the prior year. With these acquisitions and startups, we provide services in 504 agencies covering 35 states.

On the legislative front, both chambers of commerce have overridden the President’s detail of House Medicare Bill H.R.6331, The Medicare Improvement for Patients and Providers Act of 2008. The home health industry fared well with the passage of this legislation as our market basket increase was preserved through the end of 2009. The focus of our company is on better meeting the needs of our chronic comorbid patients within our care. The number of Medicare beneficiaries is expected to almost double by 2030 to 79 million people.

As I have stated on previous calls, our nation needs to develop a more efficient process for handling the health issues of the aging population in general and most specifically, for the chronic comorbid population which are expected to require an increasing portion of our healthcare resources. Even today, this chronic comorbid patient group that consists just 12% of our Medicare beneficiaries accounts for 69% of our Medicare spending.

Delivering high quality, cost effective care to elderly patients with chronic conditions is our core business. With a nationwide footprint, a highly-skilled and compassionate team of clinicians, best practices care management programs, and a best in class technology platform, our focus at Amedisys is to be a key part of a 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 acquired this quarter. We are very excited that you are a part of the Amedisys family.

In conclusion, our competitive advantage is driven by the talented employees who individually and collectively make it possible for us 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, 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 review. Thank you.

Dale Redman

Thank you, Bill, and good morning. We followed first quarter of 2008 with another excellent quarter highlighted by record revenue and earnings. Our second quarter revenue grew 85% over the second quarter of 2007 to $313 million and for the six-month period grew 63% over the same period of 2007 to $526 million. Acquisitions accounted for approximately $101 million of this increase for the second quarter and $125 million for the six-month period.

Our net income for the second quarter is $20.4 million or $0.76 per share. This was a 33% increase over the $14.9 million for the second quarter of 2007 or $0.57. Net income for the six-month period was 36.8 million or $1.38 per share while 2007 was $28.2 million or $1.08 per share, an increase of 28%.

Included in the three-month period ended June 30th, 2008 are certain TLC integration costs. These costs totaled $2.7 million or $0.06 per share and primarily consisted of severance costs and costs related to the conversion of the TLC agencies to our operating systems. After adding back these integration costs, our adjusted earning per share is $0.82 for the second quarter and $1.44 for the six-month period.

Our gross margin was 52.4% for the second quarter of 2008 compared to 52.9% for the same quarter of 2007 and 52.5% for the six-month period compared to 53.2% for the same period in 2007.

As we previously disclosed, effective for the first quarter of 2008, we have reclassified certain benefit related expenses from G&A to cost of service. Operating income increased 61% to $39 million or 12.4% of revenue for the quarter and increased 49% to $67 million or 12.7% of revenue for the six-month period. This compares to $24 million or 14.2% of revenue for the second quarter of 2007 and $45 million or 13.8% of revenue for the six-month period of 2007. Our G&A expense including depreciation and amortization as a percent of revenue remained flat at 40% for the second quarter and for the six-month period of 2008.

EBITDA for the quarter was $44.3 million, 14.2% of revenue versus 26.3 million or 15.5% of revenue during the second quarter of 2007. EBITDA for the six-month period was $76.6 million, 14.6% of revenue versus $49.9 million or 15.4% of revenue for the same period of 2007.

Bad debt expense for the quarter was $5.7 million or 1.8% of revenue compared to $2.8 million or 1.7% of revenue for the second quarter of last year. Bad debt expense for the six-month period was $9.3 million or 1.8% of revenue compared to $5.4 million or 1.7% of revenue for the same period of 2007. We generated cash flow from operations of $58 million during the first half of 2008. We spent $447 million on acquisitions and $12 million on capital expenditures and issued $395 million in new debt.

During the second quarter of 2008, we reduced our acquisition-related notes payable by $40 million with cash generated from operations. This debt reduction in our strong earnings for the second quarter caused our leverage ratio and our bank debt agreements to decline and will result in a 25-basis point reduction in our interest rate margin on our floating-rate debt.

After that reduction, the increased rate on this floating-rate debt will stand at just under 4%. At June 30th, our leverage ratio was 2.05 times and our fixed-charge coverage ratio was 2.71 times. We have $138 million available under our revolving credit facility at June 30. Days revenue outstanding at quarter-end remained flat from the fourth quarter of 2007 at 51 days.

As you know, on July 17th, we increased our revenue guidance to the range of $1.1 billion to $1.15 billion and earnings per share guidance to the range of $3 to $3.10 per share based on an estimated 26.9 million shares. This guidance includes the anticipated results of our recently completed acquisitions after adding back the TLC integration cost. It does not include any future acquisitions.

We made these changes to our 2008 guidance primarily for the following reasons. First, the integration of TLC continues to be ahead of schedule, thus creating synergies sooner than we have projected. Second, as we shared with you in our first quarter conference call, TLC’s revenue per episode has proven to be higher than we originally projected. As a reminder, TLC’s coverage area of the West and Northeast expands our geographic footprint in the higher wage index markets. And lastly, the rollout of our clinical programs under our new specialty division is ahead of schedule and producing positive early results.

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

Larry Graham

Thank you, Dale. The hard work and dedication of our entire work force is certainly paying off with the excellent results we reported today. Growing the business both internally and through acquisition, becoming as efficient as possible, and delivering high-quality home healthcare continues to be our strategic focus. This focus has consistently generated strong results for the company.

For the quarter, our internal growth rate over last year and episodic-based admissions was 13%. We define internal growth as growth from start-ups and agencies we have owned over 12 months. We refer to this group of agencies as our base start-up agencies. We are very pleased with the rebound in our internal growth rate metric compared to the last few quarters. We put a more concentrated focus on admission growth this quarter including revamping our incentive comp plans, increasing the use of sales promotions, and holding company wide conference calls to keep our business development staff focused on building the business.

On the other hand, we are disappointed in the number of startups for the quarter. We continue to have a large number of startups in the pipeline but are experiencing third-party application processing delays in seeing them opened. However, we continue to target 40 new home health agencies for the year and are maintaining our internal growth rate target of 10% for the year.

Our internal growth rate of episodic-based revenue grew 28% year over year. We believe this metric is more indicative of the company’s true growth performance. The components of this metric include internal admission growth, revenue per episode growth, and internal recertification growth.

We are growing hospice. We opened three new hospice agencies in the quarter and continue to target five to six hospice startups for the year. During the second quarter, we made a strategic acquisition that expanded our footprint in two CON states, Mississippi and South Carolina, and furthered our presence in the non-CON state of Missouri. These agencies were converted to our operational platform including point-of-care technology in June.

Our acquisition pipeline is robust and we will continue to analyze potential opportunities as they become available. However, in the near term, our focus is on the successful integration of the businesses we acquired in the first half of this year with a clear emphasis on TLC.

Our quarterly revenue and contribution margin are broken down as follows. Contribution margin is pre-tax and pre-corporate overhead. $194 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 9% contribution margin.

Also in the quarter, we incurred approximately $3 million in cost associated with home health and hospice 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 19%. $101 million in home health and hospice acquisitions revenue associated with acquisitions completed during the last 12 months with a contribution margin of 20%.

As Bill referenced, the integration of TLC is ahead of schedule. The wind-down of TLC corporate staff is going quicker than planned. From approximately 210 employees at the time of acquisition, TLC’s corporate staff was 69 at quarter end. The schedule to convert TLC's agencies to Amedisys systems remained on track. We have converted 47 agencies through the first week of July. We expect to convert all agencies by October.

As agencies are converted, they are rolled on to our billing system. As this occurs, we will sequentially close the four billing centers TLC operated. The first of these billing centers located in Florida was closed in July. We expect to close the California billing center in August. Additionally, the impact of the 2008 reimbursement changes on TLC’s business has been less negative than expected. During the quarter, revenue from TLC’s home health and hospice agencies totaled $75 million and contributed a 22% NIFO margin.

TLC’s average revenue per episode has historically been significantly higher than Amedisys due to its presence in higher rate index areas of the country like the Northeast and California. As a result, the acquisition of TLC contributed significantly to the higher average revenue per episode we witnessed in the second quarter. The expansion of our specialty division with its higher average revenue per episode also contributed positively to this growth. In total, our average revenue per episode increased to $2,852 per episode or a 7% increase compared to the second quarter of 2007.

Regarding the specialty division, we have successful launched the specialty care program in 96 locations through the end of June. As a reminder, Balance for Life is the first program in this division. It helps the elderly with their balance through more intensive therapy sessions and as a result, reimburses at a higher rate than our average episode. The goal of this division is to provide patients with a better quality of life and to reduce fall incidences that often resulted in admittance to higher cost care facilities.

We are very excited about the clinical outcomes associated with this program. 70% of patients studied reduced their fall risk functional category from high moderate to moderate to low levels, and 99.3% of patients studied demonstrated a reduction in fall risk upon discharge. This clinical program is very important to our population. As a reminder, our average patient age is between 80 and 82 years old. The statistics on patient’s falls is significant in our population. People 75 and over who fall are four to five times more likely to be admitted to a long-term care facility. Nearly 85% of deaths from falls in 2004 were among people 75 and older.

In conclusion, I would like to extend my thanks to all of the operations management, and staff for their efforts during the quarter. They have continued to generate great results for the company even as we are deep in the integration of our largest (inaudible) acquisition to date.

I would also like to single out the TLC, now Amedisys, management and operation staff. Being acquired is no easy task, but this group has shown great character by positively embracing the changes they are going through and continuing to generate strong operating performance. 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 my appreciation for the support of our shareholders, customers, employees, and vendors.

At this time, we will open the call to your questions. Please limit yourself to two questions so that we may allow question time for everyone. Time permitting, we will allow for follow-up questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And we will go first to Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. Good morning everyone. Just a couple of things here, I wanted to just drill a little bit further into the internal revenue growth rate that you’re disclosing. Obviously, a very strong result and I heard what you had to say, Larry, about on the volume side some of the things you’ve done there. Can you just maybe shed a little bit more light on the 15% pricing side I guess sort of related to re-certifications and higher mix. Can you give us a little bit of a sense for how that splits and maybe if you could just comment anecdotally about the pricing that you’re seeing, the revenue per episode you’re seeing in the 96 locations that you’ve implemented specialty by the end of June.

Larry Graham

Sure Dan. This is Larry. Thanks for your questions. A couple of stats just to remind everybody, our internal growth rate in admissions was 30%, so that’s volume. Our internal growth rate in episodic base revenue was 28%, so that’s revenue. Again, that is made up of three categories; admission growth, revenue per episode growth, and re-certification growth. On the re-certification growth, as a reminder, when we do startups, obviously they don’t have re-certifications at the beginning and maybe a year later they are doing significant re-certifications, so a lot of our re-certification growth is due to that. Also a lot of the acquisitions we do, do not have the clinical protocols or the point-of-care technology that make sure we are providing consistent care and at the end of the discharge, if the patient has had a change in medication, a change in doctor’s orders, or variance in clinical tracks; then they are appropriate for re-certification. So at times, we see recertification rates go up with our acquisitions.

On the revenue per episode, we have homed in on three areas that we’ve hit upon that has increased our revenue per episode. I won’t go over them again because I think Dale went over them and I also went over them. Darren, what other follow-up would you like me to articulate?

Darren Lehrich – Deutsche Bank

Okay, well, I guess just maybe if you could shed a little a bit of light on the revenue per episode differential that you’re seeing in the 96 locations that have some specialty, maybe just tell me there. And then I just want to clarify something you said in your prepared remarks, the revenue run rate for TLC is $300 million and I think I thought you heard you say 22% contribution margin. Are you still targeting 30% ultimately there?

Larry Graham

You are correct. We did $75 million of TLC revenue in the second quarter with a 22% contribution margin. Ultimately, we plan to drive TLC closer to our company average, but as a reminder at the back half of this year, we’re still converting agencies, we’re still unwinding corporate headquarters. So, I think that margin improvement is more of ‘09 story than a back half of ‘08 story. On the revenue per episode, on the higher acuity patients in the Balance for Life program, obviously, that plays a part in driving our revenue per episode up. It has always been an initiative of Amedisys to have internal initiatives to drive acuity and we have always taken care of higher acuity patients and we will continue to do so.

Darren Lehrich – Deutsche Bank

Alright, thanks a lot.

Operator

We will take the next question from John Ransom with Raymond James.

John Ransom – Raymond James

Hi. Good morning. Larry, can you see any difference in the TLC branches that have gone through the conversion? I know it’s only been a month or two, but can you see any difference kind of pre and post conversion in their revenue picture?

Larry Graham

We have got an interesting phenomenon going on because we have got half of the agencies on TLC's system and half of the agencies newly converted to our system, so it is probably too early to articulate a difference in revenue per episode pre and post. We will probably get more clarity on that as the year goes on. I will say that we have learned a lot from past acquisitions, we are much more structured on the time frame of delivering agencies to what I'll call our staffing model converting appropriate people to the per-visit model. So, we are doing things more timely than we may have in the past. In the past, we focused on just the point-of-care conversion and making sure that happens. Now, we are also focused on the staffing model and the per-visit pay model and simultaneously, we have added some resources and we are aggressively tracking admissions on a monthly basis on the TLC agencies which they were used to doing and very comfortable with, and we have given them a target number to hit on a monthly basis and weekly reminders of where they are at, and I think that has helped focus the sales force and kept the volume at TLC even during the conversion.

John Ransom – Raymond James

Great. And then, I guess my other question, looking at your revenue – just thinking about your revenue per admission which is the higher re-certifications, where are you running now in terms of episodes per patient? I know, historically, it was kind of in a 1.6 range, has that number gone up, I would assume?

Larry Graham

Give me one second so I can give you an accurate number. Can anybody get that? I think it is about – I think it is about 1.75 but we are looking for it right now.

John Ransom – Raymond James

And I guess the real question is how high can that go? I mean, at some point, when your revenue per episode levels off without a constant feed from new acquisition (inaudible), it’s logical to expect your internal revenue growth can't sustain the numbers that you have now. So, how high you think you can – how high can that go?

Larry Graham

Well, historically, it has not moved sequentially year over year. Obviously, when you do acquisitions, there are a lot of startups. That moves itself is a slow growth, so I do not think it is going to move that significantly. It is about 1.9.

John Ransom – Raymond James

Okay. So this moved up from 1.6 to 1.9. But is it reasonable to assume wherever that number levels off, then that is when your episodic revenue growth should slow, I would expect at that point?

Larry Graham

If we stop doing acquisitions and stop doing startups, you would see that level off. And as a reminder, under the new payment system, it matters whether you are in the first, second, third, or fourth episode and how many therapy visits you do in each. So, in my mind, the new payment system recognizes higher acuity patients and longer length of stay and the appropriate reimbursement for those patients.

John Ransom – Raymond James

Okay. Thank you.

Operator

We will take our next question from David MacDonald with SunTrust.

David MacDonald – SunTrust

Good morning, guys. Just a couple of questions on the specialty program. Larry, can you talk a little bit about, I know it's at 96 right now, what we can kind of target towards the year end and should we expect the rollout of any additional clinical programs in 2008?

Larry Graham

I will answer the first part. Around 150 by year end, give or take a few, so we are at 96 now so you can do the math over the next six months, and we are constantly studying and evaluating clinical protocols whether that has to do with wound care or diabetic patients or CHF patients and we have not articulated when we will rollout. I’d rather wait so we will have a formulated plan so I can put some numbers around that so we will constantly and continually roll out clinical programs in our company.

David MacDonald – SunTrust

Okay. And then just, Larry, when I look at – or Dale, I guess, when I look at just the second quarter runway and I look at the four-year guidance, should we think about the back half of the year just kind of – has that integration cost and some things to do with TLC, just because if I run rate out the $0.82 towards the high end of your guidance already.

Dale Redman

Well, where we are, as you know, we get very positive results to this point. We've got a long way to go with TLC and we are continuing to roll out our clinical programs. So, at this point, I think we are comfortable where our guidance is and as time and circumstances change, we will think about it at that point.

David MacDonald – SunTrust

Okay. Thanks guys.

Operator

We will take our next question from Brian Tanquilut.

Brian Tanquilut – Jefferies

Hey, congratulations on the great quarter, guys. Dale, just a followup to David’s question, is there any reason why the revenue progression in the back half will be different from historical trends, where it sequentially goes up? You did 312 obviously in Q2. How should we think of the revenue progression or what would be the driver for that to decline sequentially in the back half of the year?

Dale Redman

Well, I think the revenue sequentially often has to do with the timing and integration of acquisitions, so we have got one quarter of it, we fully have TLC HMA onboard and I think our revenue progression probably will pick up to some extent as we go into the last half of the year but not, I don’t think it’s going to be a great deal, with the caveat that we don’t do anymore acquisitions.

Larry Graham

Brian, this is Larry, let me just kind of add. Historically, we haven’t given guidance or forecasted our revenue per episode, but what I can tell you is you’re seeing our clinical migration to our chronic care management provider. We have told investors over the last few years that we were trying to migrate in that direction. And last year as you recall, we brought up 33 beta sites in our Balance for Life program. We studied that population extensively. We tracked the outcomes. We published our outcomes and you will continue to see us roll out [ph] our systems and infrastructure programs to support the most chronic Medicare beneficiary.

Brian Tanquilut – Jefferies

So, I guess here, that means that the guidance appeared – there is still upside to the guidance I guess is what we are –

Larry Graham

We don’t forecast the revenue per episode, but I am telling you that we will continue to focus on the chronic population.

Brian Tanquilut – Jefferies

Okay, and then, Larry just question, gas prices, are you seeing an impact on that and what percentage of your cost structure does fuel represent?

Larry Graham

As a reminder, we pay per visit mileage rate.

Brian Tanquilut – Jefferies

Yes.

Larry Graham

So gas prices affect us when we decide to up our mileage rate. In the second quarter, we did up our mileage rate from $0.37 to $0.42, so we will continue to monitor that throughout the remainder of the year, but the only time it affects us on a quarterly basis is when we increase our mileage rate.

Brian Tanquilut – Jefferies

Okay, thanks guys.

Operator

We will take our next question from Derrick Dagnan with Avondale Partners.

Derrick Dagnan – Avondale Partners

Good morning and great quarter here. I wanted to ask a couple questions. One, on the G&A, with the changes you made to how you are structuring the items in your G&A, has that changed anything with respect to your acquisitions? I think historically when you did an acquisition, you saw that the incremental revenue would add about 7% incremental G&A there as far as percentage of revenue and so with the changes you made to the G&A structures, did that changed that dynamic at all?

Larry Graham

A couple for points there. We look at larger acquisitions on an individualized basis and actually estimate how many FEs we’re going to add here at our corporate headquarters versus the reduction and their expenses. As a generic rule, your 7% or about half of what our G&A has been running is what we have used to model out on the smaller acquisitions. But anything larger, we actually take a look and do forensics on that particular acquisition. And I can tell you TLC, we had estimated $30 million in corporate overhead and we were going to add up to $15 million. We are running slightly better than that right now.

Derrick Dagnan – Avondale Partners

Okay. And talking a little bit about cash from ops and CapEx, looks like you generated around $25 million of free cash in the quarter and could you give us a run down of kind of your plans for uses of cash and thinking about the target leverage ratio that you’d like to be at and maybe a view on timing of that?

Dale Redman

A view of the uses of cash, basically we are going to focus on the TLC integration as our major theme for the rest of this year. That does not mean we won’t do some small acquisitions and those happen when they happen. Absent acquisitions, our highest and best use of cash is to pay down the floating rate debt that we currently have out there. So we will continue to focus on that. We are at about two times leverage right now. We tend to have that number decline potentially over the rest of this year and we are not uncomfortable at all with the leverage ratio in that range.

Derrick Dagnan – Avondale Partners

Okay, and one other quick one – when you talk about the rollout of the specialty programs with the 96 you completed so far, is there a strategy that you have as to where you go. Is it a regional focus? Is it a market size focus?

Larry Graham

It has more to do with the operational strength of the agency and the market demographics. So that's a mature agency and they are ready for specialty director and full training on it and fully staffed, we look at that heavily as well as the market demographics of that particular agency.

Derrick Dagnan – Avondale Partners

Okay. Thanks. I’ll jump back in the queue.

Operator

We will take our next question from Newton Juhng with BB&T Capital Markets.

Newton Juhng – BB&T Capital Markets

Good morning, gentlemen. Wanted to ask you a quick question on the revenue per episode, this year-over-year sequential uptick here. Could you provide us a breakout of how much of that is coming from the addition of TLC versus the other factors that you cited?

Larry Graham

We haven’t given granularity and nor we plan to give granularity further than we have already given on revenue per episode which is a three macro results. We just don’t see the internal benefit of trying to break down revenue per episode, how much is coming from an acquisition versus internally. So, we’ll just stick with the specialty programs. TLC's has historically been higher as a common theme.

Newton Juhng – BB&T Capital Markets

Okay. I guess we were looking at it from a perspective that the specialty programs won’t anniversary but TLC will at some point, and which point, we would like to get a better idea as what kind of growth you have going forward from that point on. But, I understand if you don’t want to provide that right now.

Larry Graham

Yes, it will take a little while for us to convert all the agencies and get a better understanding of post-conversion where TLC revenue per episode is going to be in totality.

Dale Redman

Without putting numbers on and I think there is upside through our specialty program, as Larry has talked about; and with TLC NIFO at 22%, we believe that over time there is upside in those numbers.

Newton Juhng – BB&T Capital Markets

Okay, that’s very helpful. Then, with regard to – you’ve got 458 agencies now. You talked about the 96 or so that you have that are currently with the Balance for Life. Can you talk a little about what kind of penetration you can get within that 458? I know you’re probably evaluating all of them.

Larry Graham

It’s too hard to tell exactly how many of the 458. I can tell you that we plan to have at least 150 up and running by year-end and a rollout will continue in '09. I’m sorry, I can’t give you a magic number. Again it is based on market demographics and the operational readiness of the agency.

Newton Juhng – BB&T Capital Markets

Okay, so no target at this time?

Larry Graham

That’s it.

Newton Juhng – BB&T Capital Markets

Okay. Thanks for the answer.

Operator

We’ll take our next question from Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Good morning. Thank you. Just real quick one back to the revenue per episode here, I guess, I just want to get a sense for and maybe in the context of just pure price. In the past, you had talked about the reimbursement change, having a sort of less than or right around 1% sort of pure price impact. Is there any change to that number?

Larry Graham

We haven’t updated the impact from ‘07 reimbursement to ‘08. Last call, we said that would be the last time we got it into that because literally you have to run July under ‘08 reimbursement and then re-run it under ‘07 reimbursement. We don’t see the value in that. Obviously, you can see the uptick and we have given the reasons why we believe that we’ve increased revenue per episode. So obviously, it is better than a minus one but we haven’t updated and we won’t update in the future.

Ralph Giacobbe – Credit Suisse

Okay and then I think you talked about – you are on track for your new startups in terms of the number 40, but you talked about some delays or some issues there. Can you maybe just provide a little more details on that?

Larry Graham

Sure, it’s really regulatory processing delays. We have a pipeline full of startups and we will continue to add to that pipeline. What we can't articulate is exactly what quarter they will open. I spoke about $3 million in cost in the second quarter related to agencies we haven’t opened yet, and we are still targeting 40. A lot of the times, we’re waiting on surveyors, sometimes we’re waiting on the fiscal intermediary to go through their paperwork, sometimes they have changes in personnel. If not, in our minds, it is not a question of if, it is a question of when; and we think we’ll get to 40 or somewhere around there by year end.

Ralph Giacobbe – Credit Suisse

And then this is my last one. You talked about the TLC employees getting cut off [ph], I guess, 210 down – the corporate staff from 210 down to 69. Has that been sort of a process since the beginning of the integration or has more been done recently? Can you give any timing on that?

Larry Graham

That was the exact number. We met with all of those employees at the four regional billing centers and the corporate headquarters the very first day we announced and we have individually given them time frames and severances, so that has always been the number, so that hasn’t been changed. It has happened a little more rapidly than we initially anticipated because we mapped out which month we thought people would exit, some have exited a little quicker, but the numbers haven’t changed since we started.

Ralph Giacobbe – Credit Suisse

Okay, thank you.

Operator

We take our next question from Whit Mayo with Robert W. Baird.

Whit Mayo – Robert W. Baird

Thanks, good morning. Larry, just any sense for how your same-store Medicare visits trended in the second quarter. I mean, I would think clearly that that should be higher than your same-store admission statistics just given the recertification rate.

Larry Graham

I think our business per episode are running in the 17.5 range. In the last call, I said they would stay within a visit or so of that, and that’s a slight uptick, not too significant. So (inaudible) business per episode. And again, we got a lot of moving parts because you got a huge acquisition in there that is affecting that number.

Whit Mayo – Robert W. Baird

Okay, all right. We will talk about that offline a little bit. But just – I was just thinking about TLC a little bit. How would you characterize the turnover in your clinicians so far at their legacy agencies? Has that been surprising one way or the other?

Larry Graham

The short answer is no. Obviously, in certain markets with the conversion of point of care, you had some turnover but nothing too alarming to date. TLC, as you guys know, was owned by private equity, so most people in their organization knew that eventually they would be sold. And I believe on totality, they’re happy they have been sold to someone that is an industry leader and is going to stay around for awhile.

Whit Mayo – Robert W. Baird

If I could just ask one quick one. Dale, with the interest rates where they are, have you guys locked in any of your floating rate debts with swaps at this point?

Larry Graham

The floating rate debt swap, did we swap a lot?

Dale Redman

No, we have not at this point. It is something we will continue to evaluate.

Whit Mayo – Robert W. Baird

Okay, perfect. Thanks guys.

Operator

This concludes the question-and-answer session today. At this time, I would like to turn the conference back over to Bill Borne for any additional or closing remarks.

Bill Borne

Thank you. We certainly appreciate everybody calling for our second quarter results and we look forward to sharing the third quarter. We are excited about the operations and the progress of the company and we look forward to chatting in several months. Thanks for calling.

Operator

This concludes today’s conference. We thank everyone for their participations. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!