Amedisys, Inc.

Thank you, Lea. Good morning, and welcome to the Amedisys Investor Conference Call to discuss the results of the first quarter ended March 31, 2012.

A copy of our press release is accessible on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer; and Ronnie LaBorde, President and 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, estimation, projection, expectation, anticipation, intent or similar expression, as well as those that are not limited to historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Amedisys today, and the company assumes no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties which may cause the company's results or actual outcomes to differ materially from such statements.

These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q and 8-K.

The company disclaims any obligation to update information provided during this call other than as required under applicable security laws. Our company website address is amedisys.com.

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

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

Thank you. And I'll turn the call over to Bill Borne.

Thanks, Kevin. Good morning, and welcome to our earnings call to discuss first quarter results.

We appreciate the opportunity to update you regarding the company's performance. Results for the quarter met our expectations, and we are on track to meet our plans for the year.

We saw improvement in Home Health admissions, with episodic admits up 5% sequentially, while on the same store year-over-year basis, episodic admissions were down 1%. This is an improvement over our previous quarters.

Non-episodic Home Health volume was up significantly, 30% sequentially and 38% on a same store year-over-year basis.

Our Hospice business continues to perform well, with 6% same-store admission growth for the quarter, leading to year-over-year and sequential improvements in revenue and margins. We believe the organizational changes we implemented in the second half of 2011 have produced positive results.

The closing of underperforming care centers has allowed us to better focus on continuing operations. The realignment of care centers geographically instead of by business unit is allowing us to better coordinate our Home Health and Hospice divisions.

And field operations are responding positively to our new structure and leadership.

Regarding our Managed Care business, the growth we are experiencing in this area reflects the additional focus we announced last year and the management we brought in at that time to lead this effort. Earlier this quarter, we announced entering into 2 new contracts covering a significant number of new beneficiaries in the Southeast.

This added to the numerous smaller contracts we entered into in 2011, resulting in both sequential and year-over-year growth.

Expanding our Managed Care business has a number of benefits. We are a better partner to our referral sources when we can serve more of their patients.

We are diversifying our payor mix. Serving managed care companies is furthering our operational capabilities in the areas of non-Medicare collections, co-pays, in particular, and utilization management.

Finally, this business helps to offset our fixed overhead costs.

As you know, we are in the midst of significant changes to the health care industry. Home Health experienced substantial Medicare reimbursement cuts in 2011 and 2012, and we'll continue to face reimbursement pressure in 2013 and beyond.

Health care reform passed in 2010 is accelerating that change. Regardless of how the Supreme Court rules regarding this legislation, our delivery system and how we provide care need serious reform.

We see opportunity in these changes and are working to position the company for the industry's long-term favorable trends, including patient preference for care delivered at home, the lowest cost setting for care, and significant demographic growth.

We have an ongoing effort to enhance our technology, which will drive clinical innovation and efficiency. This multiyear plan began in the fourth quarter of 2010, with the upgrade or replacement of all of our point-of-care equipment with new wireless and enhanced capabilities.

In the third quarter of 2011, we began rolling out to our home care centers an automated direct-to-home medical supply module. All care centers will have this functionality by the end of the month.

We have just started the rollout of our point-of-care technology to our Hospice care centers, which we expect to be complete by the end of this year. Going forward, our focus will be on completing our new AMS/3 operation system, which is an addition.

And many of enhancements will upgrade our billing processes and clinical management architecture. We plan to begin implementing this upgrade towards the end of next year.

As we continue to involve into a more robust care management company, we're developing partnerships with other providers, hospital systems and managed care companies. We are exploring numerous clinical care delivery models through innovation challenge grants, the bundled payment for care improvement initiatives and the innovation advisors project.

We expect to successfully demonstrate the value of our clinical capabilities as we work through these opportunities.

As our company transitions, we need to have a voice in Washington. We do this independently and through our participation with the National Association of Home Care and Hospice, the Alliance of Quality Health Care and Innovation and the partnership for home health quality.

Through the partnership efforts, we have drafted proposed legislation which targets fraud and abuse as a major component, and we are very supportive of these types of efforts.

Before commenting further on our operations and taking questions, I'd like to turn the call over to Ronnie, who will discuss more specifically our quarter financial results.

Thanks, Bill. As we discussed on our fourth quarter call, in accordance with accounting guidance, we are now separating into discontinued operations, those care centers that we have been -- that have been identified for closure, including 29 care centers in the fourth quarter of 2011 and 3 more this quarter.

My comments on this call, my discussion will be based on continuing operations.

During the first quarter, we generated revenue of $371 million compared to $359 million in the first quarter of 2011, and net income of $7 million or $0.22 per share compared to net income of $17 million or $0.59 per share last year. Sequentially, our revenue was essentially flat, and earnings per share decreased $0.03.

Our Home Health division experienced a year-over-year decline in revenue of $19 million or 6%. It was essentially flat on a sequential basis.

Our episodic revenue, we experienced a $25 million decline year-over-year or 8%. This reflects a 4% reimbursement cut we experienced from the 2012 Medicare reimbursement changes and a 4% volume reduction.

Volume decline is attributable to a 2% reduction in episodic admission and a 6% reduction in research. Our research rate for the quarter of 43% was down approximately 1 percentage point on both a year-over-year and sequential basis.

In contrast, non-episodic revenue increased $6 million or 33% to $24 million. As Bill mentioned, this increase was driven by the new managed care contracts we have entered into over the last year.

Our Hospice division experienced an increase in revenue of $31 million or 80% versus last year and up slightly on a sequential basis. The acquisition of Beacon Hospice, which closed in the second quarter of last year, contributed $22 million to the year-over-year growth.

The remainder was organic, driven by a 6% growth in same-store admissions.

Our gross margin was 43.8% for the quarter, a 410-basis-point decrease from the first quarter of 2011. Our Hospice gross margin was relatively flat at 47.5%, while our Home Health gross margin declined by 500 basis points to 42.9%.

A number of factors contribute to this gross margin decline in Home Health, including the reimbursement cut, a slight increase in cost per visit and face-to-face write-offs. Sequentially, our gross margin fell by 170 basis points, largely due to the reimbursement cut in our Home Health business.

During the quarter, we had a favorable impact of $600,000 due to functional assessment. This occurred as our current run rate of negative $1 million was offset by a $1.6 million increase to revenue, as system changes we implemented in the first quarter allowed us to bill visits we considered non-billable in previous quarters.

General and administrative expenses increased $4 million year-over-year, which is largely a result of the Beacon acquisition. Sequentially, general and administrative costs were flat.

Our provision for doubtful accounts was $5.9 million, up from $3.1 million year-over-year and up $2 million sequentially. The increased provision is caused by a combination of growth in our Managed Care business and favorable adjustments to doubtful accounts we booked in the first and fourth quarters of 2011 due to better-than-anticipated collections.

EBITDA for the quarter totaled $23 million or 6% of revenue compared to $39 million or 11% for the same period last year. The majority of this decline is attributable to the 2012 rate cut.

Turning to our balance sheet. We ended the quarter with $41 million in cash, $137 million in debt, a leverage ratio of 1.1 and $230 million in availability under our revolving credit facility.

We generated $12 million cash flow from operations during the quarter. However, after capital expenditures of $10 million and debt principal payments of $9 million, we saw our cash balance decreased by $7 million.

We experienced an increase in DSOs during the quarter of 3 days to 38 days. The increase was primarily the result of required system changes, some of our peers experienced with the adoption of new billing standards mandated by the government as of the first of the year.

These issues have been resolved, and we are experiencing pickup in cash collection during the current quarter.

This morning, we are reaffirming revenue and earnings guidance for 2012. We anticipate revenue to be in the range of $1,475,000,000 and -- to $1,525,000,000, and earnings to be in the range of $0.95 to $1.10 per share from continuing operations or an estimated 30.2 million fully diluted shares outstanding.

And now I'll turn the call back over to Bill.

Thanks, Ronnie. Before opening the calls to questions, I'd like to briefly discuss our operations as it relates to our business fundamentals of clinical excellence, operational efficiency and growth.

I'll start with clinical excellence. During the quarter, our clinical teams provided more than 2 million patient visits and over 125,000 patients.

As a reminder, on average, our Medicare patients are 81 years of age and on 13 medications. The clinical services and care coordination we provide to these patients are critical to their ongoing well-being, and we are passionate about delivering excellent clinical care.

In the latest CMS outcome score, we again achieved very good results, meeting or exceeding the average outcomes of our competitors in our footprint in each of the 8 categories currently being reported.

Starting this quarter, CMS is publishing the results of patient satisfaction surveys for Home Health providers. The results cover a 12-month period and include 19 questions that are grouped into 5 domains.

Like outcomes, this information is reported on CMS' Home Health Compare website. We are pleased to report that compared to competitors in our footprint, we exceeded the average survey scores in each of these 5 domains for the 12 months reporting period ending September of 2011.

As I mentioned earlier, during the current quarter, we began rolling out our point-of-care to Hospice business. There are a number of benefits this technology will bring to our Hospice operations, including improved documentation and compliance, improved clinical management as visit and patient data will exist electronically, a significant enhancement given the importance of sharing patient information 24 hours a day and 7 days a week.

Our point-of-care technology facilitates adding Hospice to our Mercury Doc physician portal, which is scheduled for implementation in 2013. Future plans for enhanced care management solution requires more intensive clinical oversight and data sharing, both internally and with external caregivers.

Point-of-care for all of our positions is a key component to this care.

Turning to business efficiencies. As discussed earlier, we closed 3 care centers this quarter.

These locations clearly were not progressing according to plan and are not in key markets for us. We continue to have underperforming care centers, and we'll make ongoing operational adjustments to improve performance.

In addition, we will maintain efforts to reduce operating costs company-wide.

Turning to growth. We continue to expect low single-digit same-store growth for the year.

As mentioned earlier, we are pleased with the growth in our Managed Care business. We continue to have discussions with managed care companies and expect to further expand this business over the year.

We have a strong focus on growing our Medicare business. We are enhancing sales accountability and outreach.

We are cross-training between Home Health and Hospice and are seeing positive results. We are focused on developing client relationships with hospitals and health systems.

Medicare will start penalizing hospitals for diagnosis-specific readmissions starting in the fourth quarter. Of note for the quarter, our company-wide 30-day readmission rate, as measured by OCS, was 16%.

This compares to hospital's historical 30-day readmission rate on Medicare patients of approximately 20%.

In closing, we are encouraged by our first quarter results. We're trying to corner on growth and operational performance while investing for the changes that are undoubtedly coming to our industry.

We have passionate employees who are understanding the importance of providing great care to our patients and do so with integrity. Given that this week is National Nurses Week, I'd like to recognize our 6,500 nurses who provide excellent clinical care to our patients and thank them for their service.

With the spirit for caring of all of our employees, I can't help but be positive about the future for Amedisys.

I will now open up the call for questions. Thank you.

This is Brad in for Kevin. Just a quick question on the possible readmission, when it's going into effect pretty soon here.

Do you guys have preferences for JVs or hospital partners? Or do you have more of a preference for kind of a tier acquisition strategy?

Kevin, this is Bill. It's really hard to hear your question, but I thought I heard you ask if there was a preference in the relationships we have with hospitals.

What we've done is we've taken a look at hospitals across our service area and identified what hospitals have readmissions or higher readmissions in the 3 categories of concern, which are on pneumonia, CHF and MIs. And we have a reporting mechanism that we're sharing with hospitals to give a comparative and reference to our readmissions for those particular patients.

And we think that initially, it's a relationship. As I mentioned, we're trying to move from a customer to a client relationship and move into preferred partnership with hospitals over a period of time, but we're early in that stage.

And we see all hospitals in general right now really getting interested in looking at these metrics and finding a way to manage this population. So I think it's going to start slowly and evolve into -- overall eventually into partnerships and deeper relationships.

And then next question. In terms of valuations, have those changed at all recently for Home Health or Hospice?

I think Hospice is about the same, but we've seen several opportunities in the Home Health area that has really lowered valuation for Home Health. At one time, we'll be paying 1x to 1.2x revenue for Home Health of the deals that we saw that have come across the tables.

Recently, there have been several of them that range from $10 million to a couple of hundred million, we feel are in the value range of about 50%. Although the sellers of revenue, the sellers are expecting more than that in some cases.

We think about a 50% is a good target going forward.

Okay. And then a quick question on the provision.

As you mentioned, that ticked up in the first quarter, it looks like about 1.6% of revenues. Is that a good run rate or could that possibly tick up even further here and throughout 2012?

Kevin, ask again that provision you're speaking to.

Right. Yes.

I'm sorry, which one? Are you talking about the [indiscernible] account?

Yes, yes.

Okay. The -- what you see is there's a pretty good run rate, we think, going forward.

It compares favorably or not as favorably to the prior year and to the sequential because of some positive adjustments from collections in those 2 periods, but we think the first quarter here is a pretty good run rate going forward, reflecting higher managed care, higher non-episodic business.

So Bill, it sounded like you said that the sellers were still expecting sort of more. So do you have a sense, is that gap at least narrowing at all or is there still a pretty decent discrepancy between buyers' and sellers' expectations on the M&A side?

Kevin, the gap is narrowing very quickly in some circumstances. We've seen several distressed agencies over the -- probably over the quarter, and the seller expectations for our distressed agencies has come down to that 50% and even lower in some cases range.

Some of the businesses, I understand, are going out of business. So the expectations get put in the check pretty quickly.

The large agencies are probably not there yet. I would think the expectations are between 50% and 100% of revenue.

But I think over the next coming quarters, that we're going to see expectations come down for sellers, just as more of them have distress and start realizing the impact of the 2012 reimbursement cuts. So we're looking forward towards the middle and the end of the year of really seeing some activity again in the Home Health division.

Okay, great. And on the Hospice side, your gross margins look like they improved sequentially.

And last year, there was a lot of sort of moving parts with the Beacon acquisition. And so gross margins, I think, contracted from Q1 to Q2.

Going forward, as we think about Hospice margins, should we think that they will improve from this Q1 level? Or how -- if not, how might they change on a sort of sequential basis or a quarterly basis over the course of the year?

I think -- this is Ronnie. I think we're in a pretty good spot.

I would not be looking for -- we're not looking for any improvement, material improvement going forward. So we think a lot of the noise is gone, and this is a pretty good run rate for us to go forward.

Okay, great. And just last question on the salaries and benefits line for G&A.

Should we expect a lot of leverage there and also, I guess, the other expenses line? Or are those going to sort of, as a percentage of revenue, stay relatively flat from where they are today?

Well, if we accomplish plan, we'll hope to see some leverage there. So we wouldn't expect that to go up as a percentage, if we achieve our growth that we're talking about of low single-digit growth for the year that we'd experience some kind of the leverage there that we would get and not have that track proportionally.

And can you give us a sense in terms of magnitude of -- you expect 20 basis points, 30 basis points, 100 basis points of leverage or some sort of range?

I don't have that. I don't have that range for you.

There are several moving pieces in the AR in the revenue this quarter. I just wanted to go back and maybe take one at a time.

Ronnie, you mentioned that there was, I guess, a pickup from rebilling some prior unbillable visits. Can you comment on maybe how much revenue and I guess corresponding EBITDA that, that contributed in the quarter?

The -- we think we have -- we've gotten 2 on the functional assessment. We think that we have a good run rate going forward that really was present in this quarter, it's about $1 million per quarter.

Of course, we're still working on that to improve performance there as we try to better operationalize the requirements of functional assessment, but $1 million is a good run rate. In this quarter, we had about $1.6 million, right at $1.6 million of positive impact, and that came from prior clarification of the 30-day logic surrounding that requirement.

We finally got that into our system, and the effect of that was a $1.6 million benefit. We were able to go back and bill business previously thought to be non-billable.

Got it. So the $1.6 million is prior period, and then you said $1 million is a good run rate to go forward on -- I guess I didn't follow what the $1 million represents.

Yes, it's a run rate. That's correct.

The run rate for what you'll expect to book on prior-year revenue?

No, no. From this quarter on, we think we're operating now as kind of a with $1 million per quarter impact.

Okay, okay. All right, I follow you now.

And then on face-to-face, I think you mentioned that you wrote off some AR. Can we go back over that for a second?

Well, on the face-to-face, again, we're right up -- we'll be just shy -- again, we think our current operations, the run rate will be about $900,000 per quarter. So right at -- just for $1 million.

But between the 2 actually, function assessment and face-to-face, we're looking at $2 million a quarter or $1.9 million. In this quarter, we also had a little bit more expense in there, an additional $900,000.

That resulted from yet further changes we implemented in the fourth quarter due to audits of files of episodes. And so we add to that provision in the fourth quarter, and we picked up a little bit more here in the first quarter due to those audits.

We think that's now fully reflected, and the $900,000 is a good run rate going forward.

Got it. And maybe just backing into the corporate G&A, it looks like it was a little higher than our model.

Can -- you kind of talked about what a normalized run rate. It looks like if I take corporate overhead, plus the D&A, you were maybe $57 million or so in the quarter.

Is that a reasonable run rate to expect as we progress over the balance of the year? And I guess let me ask the question a different way, too, is that were there any legal costs that were unusual in the quarter or any reserves that were added that may have impacted that as well?

Let me address the latter first. Yes, we did have legal costs in the quarter.

As we stated, we have a -- we estimate an expenditure this year of approximately $7 million, consistent with last year. We have spent some of that projection here in the first quarter, but it wasn't unusual.

Yes, it is -- so we did that. Overall, I think the first quarter gives us a pretty good run rate going forward.

Okay. That's helpful.

And maybe one last one here, Ronnie. Just your term note is due over the next year.

I think it matures March of 2013. And can you maybe talk about plans for refinancing or rolling that debt and what -- if there are any events when we could just sort of expect you to come to market with that refi?

Well, it's our revolving facility that expires in March of next year. And we think that from a liquidity standpoint, we're in good shape to execute on our plan, but, of course, it's prudent to have that facility available.

And we are and we'll continue to have our discussion with our bank group and prepare for that, to deal with that expiration.

Can you maybe talk a little bit about where you stand on the specialty programs? Are you still marking them?

Is that still part of the strategy? Any details there?

We are. It is part of the strategy.

We are actually looking to consolidate the specialty programs. As a reminder, we have the wound care program, the cardiovascular program, behavioral health, we have the respiratory, diabetes, med-surg and rehab.

And we're taking a hard look at programs, making sure that the clinical profiles are all refreshed and we use evidence-based care. We have a new clinical strategy team, which includes Dr.

Fleming, Dr. Henning, Bridget Montana and Kate Jones, that are working very diligently on updating all of our programs.

And likewise, we're taking these programs and doing targeted marketings for demographics that makes sense. So we're excited about the offering.

It dove tails into the new clinical architecture we talked about in AMS/3. And this allows us to take a fresh look at how we manage those patients with the expectation to get the best possible outcomes for each individual patient, and it gives us flexibility for the caregivers to design personal care plans as well.

So we'll be coming out with those. And we're having a lot of activity right now in our behavioral health program.

We make a lot of headway there, and we're excited about that. And then, of course, we're focusing on the 3 diagnoses that are going to create hospitals' concern on readmissions, which is the CHF and MI, which falls under our cardiovascular piece, and then pneumonia, which falls under our respiratory piece.

Okay. And just to be clear, when you say consolidate them, what exactly does that mean?

Are you going to give statistics in terms of consolidated sort of specialty programs or [indiscernible] amount? Or what does that mean?

As a reminder, we had 13 programs. And so what we're doing is taking some of the smaller pieces and rolling them up into like COPD.

In pneumonia, we're rolling it up to respiratory. So we're creating broader categories versus specific categories to move forward, to make it a little simpler to implement, oversee the patient care.

And will you be reporting on sort of the growth in that or is that not something you're going to be doing going forward?

We -- again, we are refreshing everything. At some point in time, we may consider reporting the growth, but we probably are not going to move forward and set a precedent to report growth on particular care management programs going forward.

Okay. And then can you help us -- what percentage of volumes would you say now come from the physician office today maybe versus a year ago before the face-to-face rules?

Is there a meaningful difference?

I don't think there's anything significant we're commenting on that's different. We're seeing -- again, I think when face-to-face first came out, we saw a little pullback in general.

I think the whole market was a little shocked. But physicians are moving forward, understanding that Home Health is a critical part of the care continuum, and we're starting to see that normalize as evidenced by the adjustments that Ronnie talked about earlier.

So I think given a little more time and continued education, we'll see the resources and the references, in reference to admissions come in about the same percentages.

Okay. And then just my last one.

In terms of the Hospice on the length of stay side, it was up a little bit and drove the days higher on kind of a same-store basis. When I look sequentially, it's actually lower, and that number has kind of bounced around a bit.

Is there anything to note there or is that just the volatility we should expect just given the sort of relatively smaller base?

Just what you said, it's nothing really of note there. It moves around a little bit, but it's just a result of that base.

Well, we thank everyone for calling in this morning. And I want to, again, thank all the caregivers for the excellent care they give, and I want to thank our shareholders for their continued support.

And I look forward to sharing the results of our second quarter results to the shareholders. And everybody, have a great day.