Mar 10, 2008
Executives
William Borne – Chairman and Chief Executive Officer Larry Graham – President and Chief Operating Officer Dale Redman – Chief Financial Officer Kevin Leblanc – Director of Investor Relations
Analysts
Darren Lehrich - Deutsche Bank John Ransom - Raymond James Newton Juhng - BB&T Capital Markets Eric Gommel - Stifel Nicolaus William Bonello - Wachovia Donald Hooker - UBS Ralph Giacobbe - Credit Suisse Art Henderson - Jefferies & Company
Operator
Thank you for joining us today for today’s Amedisys’ announcement of the acquisition of TLC Health Care Services, Inc. Speaking on the call will be the management team of Amedisys.
We will have a question-and-answer session after management concludes their statements. As a reminder today’s call is being recorded.
I would now like to turn the call over to Kevin Leblanc, Director of Investor Relations.
Kevin Leblanc
Thank you, Dana. And today we’re going to be talking about our fourth quarter and year-end earnings.
Good morning and thank you for joining us today for the Amedisys investor conference call to discuss this morning’s fourth quarter and full-year 2007 earnings announcement and related matters. By now you should have received a copy of our earnings press release.
If you have not received the press release, you may access it on the Investor Relations page on our website at www.amedisys.com. Joining me on today’s call from Amedisys are Bill Borne, Chairman and Chief Executive Officer; Larry Graham, President and Chief Operating Officer; and Dale Redman, Chief Financial Officer.
Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation, or intent as well as those that are not historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on the information available to Amedisys today and the company assumes no obligation to update these statements as circumstances change.
These forward-looking statements may involve a number of risks and uncertainties which may cause the company’s results to differ materially from such statements. These risk and uncertainties include factors detailed in our SEC filings including our Forms 10-K and 10-Q.
In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website at www.amedisys.com on the Investor Relations page under the link, Press Releases. Thank you, and now I’ll turn the call over to Bill Borne.
William F. Borne
Thank you, Kevin, and good morning. First, let me welcome each of you to this call.
We appreciate being given the opportunity to update you regarding the company’s performance and share the Amedisys vision with the investing public. Our results for the fourth quarter and full year were outstanding.
For the fourth quarter, we recorded net revenue of $194 million and earnings per share of $0.63, growth of 35% and 31% respectively over the fourth quarter of 2006. For the full year we recorded net revenue of $698 million and earnings per share of $2.32, growth of 29% and 35% respectively.
In addition to these financial results, numerous other accomplishments in 2007 helped make Amedisys further progress towards our objectives of becoming the leading provider of high-quality, low-cost home health services to the chronic, co-morbid aging population. We completed the rollout of our point-of-care system.
We completed 10 acquisitions adding 38 home health locations and 11 hospice locations and over $100 million in annualized revenue. We started 32 new home health agencies and 4 new hospice agencies over the course of the year.
We have updated our clinical care coordination platform to prepare for the new payment systems. Finally, we prepared ourselves for future acquisition opportunities through prudent balance sheet management.
On that note we have significantly increased our acquisition pace since the end of the year. On January 1, we acquired a Puerto Rico agency, which is a CON territory.
On February 8, we announced the signing of a definitive agreement to acquire a home health business with 21 locations in Kentucky and 3 locations in Tennessee. Both of these states require CONs to operate.
On February 19, we announced the signing of a definitive agreement to acquire TLC Health Care Services which has 92 home health and 11 hospice agencies located in 22 states and in the District of Colombia. The combination with TLC is a significant and exciting milestone and a transaction we believe will be transformative for Amedisys.
The three acquisitions expand our geographic footprint in highly complementary lines of business, and strong cultures focused on high-quality cost-effective patient care. They strengthen our penetration in some existing markets; extend our geographic reach; provide us with operations in regions with solid population growth; and operate in markets we consider very attractive.
In total, the acquisitions we have announced so far in 2008 will add 117 home health and 11 hospice agencies to our footprint and increase our annualized revenue by almost 50%. With these acquisitions Amedisys becomes a national company with a footprint that extends from coast to coast.
We believe the future of Amedisys is promising. In just three years the first Baby Boomers will turn 65 and become eligible for Medicare.
That generation represents the Silver Tsunami that will place tremendous additional pressure on the nation’s healthcare system. Our collective need to find lower-cost alternatives to provide care for the nation’s elderly is driving many healthcare professionals and lawmakers to focus on coordinated care management instead of the more prevalent symptom-based care that is today provided in higher-cost settings such as emergency rooms and hospitals.
Our national footprint, highly trained and compassionate caregivers, and best-of-class technology platform positions us perfectly to support our care management approach to healthcare. We can coordinate communication between care providers and patients, manage and monitor comprehensive plans of care and interact with caregivers.
As the pressure on the healthcare system evolves we will continue to monitor these changes and strengthen our business model. Our goal is not only to strengthen our position as a leading provider of high-quality, low-cost home health services but also to play a lead role in the management of care for the chronic, co-morbid aging population that we serve so well.
As I have done on previous conference calls, I would like to extend a warm welcome to all the new employees of the agencies we have acquired since our last earnings calls, including the West Virginia agencies of IntegriCare, Estancia Home Health in Puerto Rico and Memorial One in Savannah, Georgia. We look forward to welcoming even more new employees on future calls from Comprehensive Home Health Services, Family Home Health Care, Inc., the businesses we are acquiring in Kentucky and Tennessee, and TLC Health Care Services.
We are very excited that the employees of these great companies will soon be in the Amedisys family. I continue to marvel at the transformation of this company we started over 25 years ago.
Amedisys has grown because of the great 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 in our care. We have a culture of hard work, a passion for service and a commitment to core values.
That intangible separates us from our competition. I will now turn this call to Dale for his financial overview.
Thank you.
Dale E. Redman
Thank you, Bill. As Bill stated, we completed our exceptional 2007 performance with another strong quarter for Amedisys.
Our fourth quarter revenue grew 35% over the fourth quarter of 2006 to $194 million. Our record revenue for 2007 of $698 million represents a 29% increase over the prior year.
Our net income of $16.7 million or $0.63 per share surpassed the $11.4 million for the fourth quarter of 2006. Our 2007 earnings per share increased 35% to $2.32 from $1.72 last year.
The 2007 amounts are exclusive of the Alliance matter finalized in the third quarter which added $4.2 million or $0.16 per share. And the rest of my comments related to 2007, I have excluded the impact of Alliance.
Operating income increased 37% to $26 million or 13.5% of revenue for the quarter, compared to $19 million or 13.3% of revenue for the fourth quarter of 2006. Our G&A expense, including depreciation and amortization as a percentage of revenue, decreased from 43% for the fourth quarter of 2006 to 41% for the fourth quarter of 2007.
For the full year, our G&A expenses decreased from 44% of revenue in 2006 to 42%. The significant decrease is due to the revenue growth associated with our acquisition in start-up activity during 2007 combined with the successful integration of our Housecall acquisition.
Our gross margin was 54.8% of revenue for the fourth quarter compared to 56.2% for the same quarter in 2006. This decrease is due to the increase in acquisition activity during the last two quarters of 2007.
EBITDA for the quarter was $30.4 million, 15.7% of revenue versus $21.9 million, or 15.2% of revenue during the fourth quarter of 2006. Bad debt expense for the quarter was $2.9 million or 1.5% of revenue compared to $3.6 million or 2.5% of revenue in the fourth quarter of last year.
The increase in other income compared to the fourth quarter of 2006 is due to the reduction in outstanding debt and increased interest income. We generated cash flow from operations of $93 million during 2007.
We spent $29 million on capital expenditures and $102 million on acquisitions. Therefore, our cash decreased approximately $28 million.
Cash flow from operations was up $50 million from the prior year and our cash position at the end of 2007 is $56 million. We continue to have minimal debt on the balance sheet which totaled about $24 million at quarter-end consisting mainly of acquisition notes payable.
Days’ revenue outstanding at quarter-end was 51 days compared to 53 days at the end of 2006. This morning we are providing our guidance for 2008.
We anticipate that revenue will be in the range of $1.025 billion to $1.075 billion and earnings per share will be in the range of $2.50 to $2.60 based on an estimated 26.9 million shares outstanding. This guidance includes the anticipated results of our two recently announced definitive agreements and does not include the anticipated one-time costs associated with those acquisitions.
It also does not include any other future acquisitions. As we discussed last week, we anticipate that the TLC acquisition will have a materially positive impact on earnings per share in 2009.
Now I’d like to turn it over to Larry for some operational comments.
Larry R. Graham
Thank you, Dale. I’m very pleased with our results in the fourth quarter and for the full year of 2007.
Our strategic focus on growing the business both internally and through acquisitions, becoming as efficient as possible, and delivering high-quality home healthcare continues to generate strong results for the company. This focus generated a fourth-quarter internal growth rate over last year in episodic-based admissions of 10%.
Our total growth rate over the fourth quarter of last year in episodic admissions was 21%. Longer-term, our internal growth rate at episodic-based admissions is expected to remain in the 10% range.
To achieve this level of internal growth, we will maintain our focus on same-store sales growth and start-ups. During the fourth quarter, we opened 4 new home health agencies and 2 new hospice agencies.
During 2007, we opened 32 home health agencies and 4 hospice agencies. These figures came in short of our projections of 40 home health and 5 hospice openings.
We are stacked up to accomplish these projections but we have seen a delay by CMS in the approval process. Our plan in 2008 is to continue with our strategic branch expansion based upon local market opportunities and we will again target opening approximately 40 home health and 5 hospice start-up locations.
However, the timing of these openings is contingent upon the approval of CMS. Regarding acquisitions, we signed an agreement to acquire 6 home health agencies in Georgia and South Carolina at the end of the fourth quarter.
With the transactions completed during 2007, we now have locations in 30 states. Since the end of 2007, we have made three announcements that we have signed agreements to purchase 117 home health agencies and 11 hospice agencies located in the 23 states, Puerto Rico and the District of Columbia.
The companies that we are acquiring had annualized revenue of approximately $340 million. Once closed, we will have locations in 35 states.
As we stated on our conference call last week, we anticipate that all locations will be fully integrated into Amedisys within six months after the close of the transactions. In an effort to allow investors to more easily gauge our progress and operational strength, we have broken our quarterly revenue and contribution margin down as follows (again, contribution margin is pre-tax and pre-corporate overhead): $158 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 31%; $10 million in home health and hospice start-up revenue related to start-ups opened less than 12 months with a 15% contribution margin.
Also in the quarter, we incurred approximately $3 million in additional costs associated with agencies we plan to open in the future; $9 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 23%; $17 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 2%. Technology is a key reason why Amedisys is a leader in the home health industry.
Our point-of-care systems significantly expanded our care coordination platform. This strategic programming saved countless hours of staff training and accelerated our speed-to-market preparation in the new payment environment.
Again we are very pleased with the performance during the quarter and the full year of 2007. And I certainly want to thank all of the operations management and staff for their efforts in achieving these results.
We remain focused on being the premier low-cost high-quality provider in home health. We believe that focus, execution and commitment to clinical outcomes will continue to separate us from our competition.
I would like to express our appreciation for the support of our shareholders, customers, employees and vendors. At this time, we will open the call to your questions.
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
(Operator Instructions). We’ll go first today to Art Henderson - Jefferies & Company.
Art Henderson - Jefferies & Company
Larry, could you remind us how many agencies now have point-of-care systems in place?
Larry Graham
All of the agencies that we had at the end of 2007, short of Savannah, Georgia had been fully converted. So it’s about 350-ish.
Art Henderson - Jefferies & Company
Okay. And then can you give your latest thoughts on the way in which you’re going to integrate TLC, the steps you’re going to take.?
Have you given some more thought as to how you are going to do that? And is there anything you can share with us on that?
Larry Graham
Sure. Not knowing exactly when the transaction will close but for this discussion assuming it closes on or around April 1, we have prepared that month to convert up to 25 agencies of TLC and continue that process month after month until we are completed, which puts us in the 4 to 6 month timeframe.
In the month of March we will convert the 22 agencies that we acquired in Kentucky. And we have teams fully deployed and trained.
And I want to remind everybody, these are the same teams that converted our agencies to the point-of-care all of last year as well as converted any acquisitions or start-ups that we did. And we now have about 8,000 clinicians that have the laptop point-of-care.
Art Henderson - Jefferies & Company
So, when you do those 25 per month that includes putting the point-of-care system into those locations?
Larry Graham
That’s correct.
Operator
And we’ll take our next question from John Ransom - Raymond James.
John Ransom - Raymond James
I was wondering if Bill could expand a little bit on the Encore program and some of the statistical differences you see in the patients that you’re following post-discharge versus the ones that you don’t follow?
William Borne
The Encore program is in development and it will allow us to provide care extension services to follow the patient post-discharge for a very short period of time. And it’s really a care management program.
It allows us to track all the critical issues for a patient to help to coordinate their services to prevent exacerbation of the illnesses that we treated them for. So with periodic follow-ups, we help the patient to become more compliant with the medication as well as the education we provide to them and their family during the episode of care.
And the results in the reduction of emergency rooms and hospitalization in our follow-up period has been statistically significant. So, we’re excited about that.
We think it’s actually a platform. If you look at a lot of legislative issues, physician groups, as well as many of the special interest groups are focusing in on care management and we think Amedisys is caring for that exact population in our existing benefit.
Through the development of this care infrastructure, we’ll be perfectly positioned for where the healthcare industry has to go.
John Ransom - Raymond James
Do you have a number for what the apples-to-apples cost difference is between the ones you’re following and the ones you’re not following?
William Borne
The reduction in emergency room visits post-discharge from home care and hospitalization is, as I mentioned, significant. I really don’t want to get into specifics at this time, John.
But in the near future, we will be giving more and more information to the public in reference to the achievements.
John Ransom - Raymond James
Okay, and then my other question is for Larry and I’ll get back in the queue. I think you mentioned, on the conference call relative to TLC, that their branch contribution margin was in the low 20’s.
As you’ve delved further into this transaction, is there any structural reason why the contribution margin can’t approach your 31% that you have now from mature agencies?
Larry Graham
I think it will over time; it may not get all the way to 31% and that’s part of the point-of-care conversion. I think we also articulated that their raw negative case mix was around 4% negative and they are going through paper-based training and hopefully will eat into that.
But obviously, after they go into our point-of-care we feel confident that we will bring that more closely in line with our agencies. So, that’s part of potential 2009 upside.
And, John, I will take this opportunity to further expand on Art Henderson’s question to give you a sense of what we’ve done in the last week. We have visited their corporate headquarters in Lake Success as well as their 4 regional billing centers in person to talk about what the next six months looks like for their corporate headquarters.
We have visited 22 sites in person in 10 different states. I personally have been visited 7.
By the end of March we will have visited all 100 sites in person and have staff meetings to educate them. So, we feel pretty good about out-of-the-gate progress and obviously, our IS team is well along in being able to help transfer data over to our systems so we’ll be able to start the point-of-care conversions beginning in April.
Operator
We’ll take our next question from Darren Lehrich - Deutsche Bank.
Darren Lehrich - Deutsche Bank
I have two questions. One’s regarding the guidance; the other is with regard to cash flow.
As far as the guidance question goes, I know you’re not providing any quarterly guidance for 2008 but just hoping you can give us a sense for how you’d expect TLC to impact second quarter and third quarter, and would you anticipate second quarter to be lower than the first quarter EPS, and then, not pick up again sequentially until we get into the fourth quarter? Just wanted to get your ideas on that.
And then, as far as first quarter goes, do you have a rough guide for us on how you think EBITDA margins will shake out with the case mix refinement? I think most street estimates are pointing to a low 14%; you just did mid-15% so do you think the street’s thinking about that the right way?
William Borne
Let’s start with your first issue which I think was related to the case mix issue?
Darren Lehrich - Deutsche Bank
The second question was just really the case mix impact of margins in first quarter and just thinking and putting that in a context versus what you just did.
William Borne
On the guidance issue, we put out guidance today. We know that’s a lot of moving parts going on with us for 2008.
When we close TLC, as we move into 2008, we will also get better information related to the case mix impact, and that will give us a better view of where that is. We told you last fall that we thought it was -1% approximately.
Our current view is, given all of the things that are going on and the fact that we would develop better information in 2008, the impact is no worse than -1%. We don’t see major impacts on our EBITDA going forward given the caveat that we believe the case mix is no worse than negative one.
Larry Graham
I want to give a little bit more color on TLC and what the first couple of quarters which for our discussions will be our quarter two and quarter three. Clearly, we’re having to unwind their corporate headquarters which has about 210 people and we’re having to wind up, if you will, here; hire up here.
The net of that we’ve articulated as their corporate overhead is around $31 million and we think, when all the dust settles, it will only be $15 million. So, an accretion of $15 million, but that’s going to occurring quarter two, quarter three, and quarter four.
Also we’ve articulated how they have north of a minus 4 raw case mix looking at 2007 episodes. As we convert that point-of-care, 25 agencies or so a month, we believe that will come more in line to what we’ve articulated our anticipation of the case mix which is no more than a minus one.
And we will have that negative trend that we see in there. Also you will have interest expense related to the debt that we haven’t finalized what that number’s going to be but when we will, we’ll clear that up.
Also I have a lot of severance that I will be giving out and that we will articulate as one-time costs when that happens. But to try to pinpoint that number on the front-end, it’s a moving number and it’s a little difficult.
We’ve learned some lessons from some prior large acquisitions and one is to clearly articulate that the first couple of quarters are transition quarters, which we’ve done. Two is to quantify, as we know them, the one-time costs, which we will.
But if you look past that and go into 2009 and you look at $300 million in revenue and you look at John’s statement about their contribution margins already being in the low 20s, and my statement about eventually trying to improve that, you get quite an accretion story. It’s just not going to happen six months out of the gate, is what we’re trying to say.
Darren Lehrich - Deutsche Bank
That helpful. And then just my cash flow question here: we’ve heard that the FIs have been a little bit slower with the changeover in the case mix refinement in early 2008.
Have things returned to normal there? And can you just give us some comments on your AR days picking up a little bit also in the fourth quarter?
Larry Graham
I want to talk about the CMS transition and not to get too granular but to remember that every patient that’s on service December 31 are considered 2007 to 2008 straddle patients. They have their own set of reimbursement guidelines.
It’s not the 2008 guideline; it’s not fully the 2007; it’s less than the 2007 guidelines. I tell you that story because you are asking first quarter, second quarter, third quarter, fourth quarter.
I think it will continually get better as we move into 2008 episodes. So that’s one thing that might have been missed that’s going to be true for the entire industry.
We are now beginning to see cash payments on not only those straddle episodes but some episodes that have begun in 2008 and ended in 2008. So, as they’ve gone along, they’ve had bumps in the road but they’ve been relatively good about making those corrections as we point them out to them.
And then I can’t remember the follow-up, Darren.
Darren Lehrich - Deutsche Bank
About the fourth quarter DSOs. I think that’s M&A related.
But should we expect first quarter cash flow from operations to just be a little lighter given what you just said about CMS’s implementation of this?
William Borne
I don’t really see any impact because of the mechanical operations of CMS. But remember what Larry was talking to you, Darren, in terms of the straddle payments which obviously, from a GAAP standpoint could affect cash flow from operations.
Mechanically, we think we are in pretty good shape at this point. That was not true in early January when there were some issues; those appear to have been resolved at this point.
Larry Graham
Yes.
Operator
And we’ll take our next question from Ralph Giacobbe - Credit Suisse.
Ralph Giacobbe - Credit Suisse
I just wanted to follow up a little bit more on Art’s question. Can you talk about some of the specific things you need to do when you go in to integrate the acquisition, aside from installing the point-of-care, in terms of referral sources, nurse retention efforts, along those lines?
Larry Graham
Certainly and keep in mind, we have a long track record of acquiring individual agencies. It starts with an employee meeting which we do in person and we answer all their questions about transitioning to our benefits; that their pay is not going to change, that eventually they may go to pay per visit, but we’ll go over that individually.
Also, we have a countdown a month prior to acquiring an agency, educating on steps they need to take inside the agencies, preparing their agency for the point-of-care. We have online training where they get to see the laptop; we send at least a minimum of two people, one operations, one clinical, to be on-site at full-month, their month of conversion, to both train the office staff and the clinicians.
We try to partner their Directors with Directors within our agencies to become a mentor, if you will, someone that can answer questions. We have a multitude of conference calls to go over benefit, payroll transition, all the things that you would normally think of.
I feel pretty solid about our process. It is obviously still disruptive and a difficult time but we give plenty of resources to the acquisition agencies.
And we have known about this, obviously, for several months and have staffed up appropriately. And we have a rollout plan defined by month that I feel solid that we will maintain and adhere to.
Ralph Giacobbe - Credit Suisse
Okay, that’s helpful. And then, can you talk about operating some of these agencies across new states?
Is there any differences between operations or that we should think about state-to-state as you enter new territories?
Larry Graham
I’ll carve out California as totally separate. Those of you that have done business in California know that their HR laws are a little different; workers’ comp is a little different.
Obviously, the pay scale is going to be different across the country depending on rural or urban or where they’re at. We have always and are now in 30 states prior to this transaction, have done pay scales differently based on the geographic individual markets.
But as far as the nuts and bolts of operating the agencies and what the sales people do, which you had mentioned that as a previous question, obviously, we send the salespeople out to educate the referral sources on the transaction. Let them know the same people answering the phones, same people providing the service.
So, we spent a lot of effort on making sure we articulate to the market what’s going on. But as far as nuts and bolts, it’s still home care, who they call on, the procedures inside the agencies are still are same.
Keep it in mind, TLC is 85% Medicare. We’re a little over 90%.
So that’s very comparable to us.
Operator
(Operator Instructions). And we’ll go next to Donald Hooker - UBS.
Donald Hooker - UBS
You were talking about delays in approvals for new de novos. Can you elaborate on that a bit and talk about, are there risks that those delays might expand?
Larry Graham
I’ll elaborate on it. We have probably about 25 start-ups that we’ve done everything on our end; meaning, got the location, got the lease, hired whoever we need to hire.
And we’re waiting on someone to come up to the agency and do a site survey. They have started doing some more frequently here recently.
In our mind, it’s not a matter of if, it’s a matter of when so it becomes difficult for me to articulate which quarter those will be opening. I gave you a $3 million cost number associated with agencies we have yet to open.
And the reason I want you to be fully aware of that is because I believe that the start-ups are going to happen between now and year-end. I just can’t tell you exactly when.
Donald Hooker - UBS
Okay, thank you. And then, in terms of the balance sheet, now that we’re into 2008 with the new reimbursement structure and you have some acquisitions coming on, do you have a different target debt ratio perhaps, as you look into 2009 and beyond strategically as you look at the company?
William Borne
We, first of all have a conservative approach to the balance sheet to begin with. But obviously, when we do the TLC transaction, we will be taking on additional debt, in the neighborhood of $400 million.
That’s not a final number but it’s in that neighborhood. And we anticipate on a pro forma basis that our leverage ratios are going to be around 2.5 times and coming down relatively rapidly.
As you’re well aware, this business and Amedisys in particular, are high cash flow generators. So, we anticipate using a significant portion of that at least in the short run, to bring the debt levels down.
We’re obviously going to be focused in 2008 on the integration of TLC. As Larry mentioned, the next two quarters, our second and third quarters, will be transition quarters for us and integration quarter focused for us.
So, we’re going to have a continuing conservative approach to balance sheet leverage but we think there is a good opportunity for us to have some amount of debt on the balance sheet and ultimately to better serve our shareholders because of that issue.
Operator
And we’ll take our next question from William Bonello - Wachovia.
William Bonello - Wachovia
Just two questions if I can. Larry, you gave a lot of commentary on the impact of TLC in 2008 and the time it takes to integrate it.
I just want to be crystal clear. Does your guidance for 2008 assume that TLC will be dilutive to earnings in 2008?
Larry Graham
The guidance was 2.50 to 2.60 prior to announcing it, and it’s 2.50 to 2.60 after announcing but it does exclude the one-time transition cost.
Dale Redman
We believe that the one-time transition costs which would be legacy costs, leases, severance, those kinds of things, have no long-term impact at all on the intrinsic earnings power of Amedisys.
William Bonello - Wachovia
Sure, okay. What I’m trying to get a better feel for then is, if we simply annualize the Q4 results we’d be a little bit above the low end of your guidance.
You’re saying the Medicare change isn’t really going to end up being all that significantly negative. I’m not quite sure what it is you’re seeing that suggests you wouldn’t have any growth over run-rate?
Larry Graham
I think the negative is minus 1% on the case mix that we’ve articulated in the past. I talked about how the straddle episodes on the front-end convert into the first quarter and they’re reimbursed at a lower rate.
I don’t know if that further clarifies your question. I think it’s a back-end 2009 story as we grow and transition TLC but with all of the transition costs and the things I talked about of them having a 4% negative and having to roll out the point-of-care to get him down to our level is probably why you’re seeing the conservatism in our estimates.
William Bonello - Wachovia
Okay, and then you lowered your internal growth rate target. In the past you’d always talked about 10% to 15% range and now you’re saying about 10% which is consistent with where you’ve been the past couple of quarters.
Did you do that just because of the experience you’ve been having? Or is there something that you see out there that’s causing you to have a more conservative view on how fast you can grow internally?
Larry Graham
That’s a good question. If you followed Amedisys over the years, when we were real small, I used to say 20 plus percent and then I would say 15 to 20 and then I would say at least 15 and then 10 to 15.
With the law of large numbers and the size we are, I think 10% and stating that if you’re projecting out, is more reasonable. I do think the delay in start-ups has caused my internal growth to slow down a little bit.
I think that’ll pick back up as they come on board. But I think longer-term the 10% is still a healthy growth rate and mainly about you modeling and keeping you all in check.
Operator
And we will go next to Eric Gommel - Stifel Nicolaus.
Eric Gommel - Stifel Nicolaus
You have a small hospice business but it is growing. I’m curious what you think of this business.
It’s not really core to your home health and given some of the talk about adjusting wage indexes and maybe scaling back again cost of living updates. Is this a business that you still are interested in growing?
Or is it just an adjunct to existing home health operations for you?
Larry Graham
It’s definitely a business we’re interested in growing. We’ve backed into the size of our hospice through the acquisitions.
We bought a lot of home care agencies that have hospices associated with it. We have re-written their software and rolled it out.
We’ve internally talked about continually to upgrade their technology. And I believe that if there is a change in reimbursement in the next two to three years, that may be an inflection point for Amedisys to take advantage of.
So, we will continue to do some start-ups. Acquisitions, I think we’re going to be real busy over the next six months transitioning this.
In some of our markets that we do extremely well in home care, it might make sense to add a hospice agency down the road. And keep in mind, the average patient age of Amedisys currently is 82.
So, hospice is a service while separate and distinct and separate reimbursement is very complimentary to what we’re doing in home care.
Operator
And we’ll take our next question from Newton Juhng - BB&T Capital Markets.
Newton Juhng - BB&T Capital Markets
Gentlemen, I was wondering about the gross margin level being down, understanding the add-ons that you’ve brought on board, but I’m thinking about it more in terms of as we look out into 2008 and exiting 2008. Can you give me some idea as to what you’re really targeting for the combined entity to produce on the gross margin side?
Dale Redman
I think over time the numbers are not going to be anything different than what we’ve seen historically, at least in the short run. You’re going to have these kinds of changes from a quarter-to-quarter basis as we saw in the fourth quarter.
When we do significant acquisition transactions in the short run, our cost per visit sometimes goes up; our revenue numbers are sometimes impacted. And largely what you’re seeing in the fourth quarter is the impact of those things.
But I don’t see any material differences going forward than what we’ve seen in the past.
Newton Juhng - BB&T Capital Markets
Okay, Dale. And then in terms of the de novos you staff up in anticipation of and these approvals taking a little bit longer, is there anything you can do to mitigate that extra cost at least in the near-term?
Larry Graham
We’ve talked about that a lot internally. I’m not willing to broaden my future and slow down on the start-up process because there’s some delays.
And if you followed the start-up accretion story, very accretive, very wise move for us to continue on. So we’ve got some things as far as the timing of when we sign a lease or when we hire personnel and looked at squeezing that number a little bit but we’re willing to carry that burden if you will, because we know it’s going to have a huge return in the future.
Newton Juhng - BB&T Capital Markets
Thanks for that, Larry. Last question here is just around the tax rate.
It’s been bouncing around a little bit and I was just wondering from a modeling perspective how we should look at that going forward?
Dale Redman
You probably ought to be looking at about 39%. It was lower than last year, particularly because of the Alliance matter in the fourth quarter which is a non-taxable event, so looking forward, probably something in the 39% range is where you need to be.
Operator
And we’ll take a follow-up question from John Ransom - Raymond James.
John Ransom - Raymond James
Wanted to get a little more detail on the straddle reimbursement. What’s the apples-to-apples difference between fourth quarter and the straddle reimbursement?
Larry Graham
I don’t have that specific dollar amount. It varies by episode but I can tell you, it’s lower than our average revenue per episode for 2007.
Obviously, in the first quarter we’ll give you clarity on the revenue per episode. But I just wanted to point that out.
And again, that affects everybody in the industry equally.
John Ransom - Raymond James
Is it 5%, 10%, 2%? I’m just trying to get an order of magnitude.
Larry Graham
I don’t know the exact answer right now.
John Ransom - Raymond James
Okay.
Larry Graham
And I’m scared to speculate and then you use that speculation. But we will give you clarity in the first quarter.
John Ransom - Raymond James
Okay. And then my other question is the timing of overhead wind-down for TLC, when does that number drop to zero, if you will?
Larry Graham
I think the last legacy costs would probably in the fourth quarter but substantial in the second quarter; maybe a little less substantial in the third quarter; probably a bigger drop-off third to fourth quarter; and by the end of the fourth quarter, it’d be zero.
William Borne
And as you’re obviously aware, John, there’s our wind-up of some of the expenses that we believe we’re going to have to incur and their wind-down may not absolutely coincide.
John Ransom - Raymond James
I understand, but when you say substantial in the second quarter, so let’s say the run-rate is $31 million. So that would be almost $8 million a quarter.
You’re saying by the second quarter the run-rate could be less than $8 million? Or should we model a full $8 million then dropping from there?
Dale Redman
I’m saying the one-time costs will be big because that’s when a lot of severance packages and those type of things. As far as modeling when you’re going to get to the net $15 million, that’s going to be more towards the fourth quarter and going into the first quarter of next year.
John Ransom - Raymond James
Right. So, we should assume in the second quarter of wind-up in the AMED overhead and probably some number between $8 million and zero for the TLC overhead.
We’re netting out the severance of course. But just ongoing costs you think it’d be less than $5 million or so by the second quarter?
William Borne
I don’t know that we can give you a specific answer at this point, John. But you’re on the right track in terms of their costs coming down and our costs going up.
And, until we get there and are able to talk about that a little more, it’s going to be difficult for us to tell you precisely what those numbers are going to look like.
John Ransom - Raymond James
And when would your wind-up process be completed? Is that also linear through the fourth quarter or is that more of a front-end hiring process?
Dale Redman
It’s probably more front-loaded but linear, probably by the end of the third quarter, beginning of the fourth, we’ll be fully staffed.
John Ransom - Raymond James
Okay, so just based on your comments and looking through the severance, this transaction should be accretive beginning in the fourth quarter, just given what you’re saying?
Dale Redman
We don’t give quarterly guidance but it is back-end loaded as far as us making progress.
John Ransom
Okay, thanks a lot.
William Borne
Operator, we’ll just take one more question.
Operator
We’ll take our final question from Darren Lehrich - Deutsche Bank.
Darren Lehrich - Deutsche Bank
So, I know you filed a SEC filing with regard to the pricing grid and I just wanted to confirm. Dale, you said you’d start out around 2.5 times leverage.
So, if I’m looking at this right, should we assume that your spread over LIBOR starting out would be roughly 150 basis points on the TLC debt that you’re taking on? Is that correct?
Dale Redman
Darren, we can’t really comment on that at this point because what we have right now in hand is a commitment on the part of three banks, J.P. Morgan, UBS and CIBC to fund the transaction.
We are in the process of syndicating the various portions of the transaction at this point and we’re not going to know what the interest rates are until that syndication process is complete.
Darren Lehrich - Deutsche Bank
Okay but that grid is a rough way to think about the pricing.
Dale Redman
The grid is one place that we may end up but we’re not sure of that and I want to caution you that we’re just not in a position where we can comment on that at this point.
Darren Lehrich - Deutsche Bank
Okay, and my last question here. The cash balances that you have, I just wanted to get some commentary from you about the kinds of short-term securities that you hold with cash and can you just confirm whether you have any auction-rate securities in that cash balance?
Thanks.
Dale Redman
We absolutely do not have any auction-rate securities. We had some last year but we came out of those about six months ago and have not re-entered that market.
Darren Lehrich
Okay, thank you.
William F. Borne
I want to thank everybody for calling in this morning. We had a wonderful 2007.
We’re looking forward to a great 2008. I want to give a special thanks to all the Amedisys employees and all the help that we received throughout the year from the investment market as well.
And I look forward to our first quarter conference call and sharing the update on Amedisys’ activity and I hope everybody has a great day. Thank you all for calling.