May 6, 2017
Executives
David Castille - Managing Director of Finance Paul Kusserow - President and CEO Gary Willis - CFO Chris Gerard - COO Scott Ginn - CAO Stephen Seim - Chief Strategy Officer Dave Kemmerly - SVP of Government Affairs and General Counsel
Analysts
Brian Tanquilut - Jefferies Sheryl Skolnick - Mizuho Securities Kevin Ellich - Craig-Hallum Dana Hambly - Stephens
Operator
Greetings, and welcome to the Amedisys First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. David Castille, Managing Director of Finance for Amedisys.
Thank you, Mr. Castille.
You may now begin.
David Castille
Thank you, operator. Welcome to the Amedisys investor conference call to discuss the results of the first quarter ended March 31, 2017.
A copy of our press release, supplemental slides and related Form 8-K filing with the SEC are available on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Paul Kusserow, President and Chief Executive Officer; and Gary Willis, Chief Financial Officer.
Before we get started with our call, I would like to remind everyone that statements made on this conference call today may constitute 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.
The company assumes no obligation to update information provided on this call to reflect subsequent events other than as required under applicable securities laws. 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. 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 also be available in our Forms 10-K, 10-Q and 8-K.
Thank you. And now I'll turn the call over to Paul Kusserow.
Paul Kusserow
Thank you, David, and welcome to the Amedisys First Quarter 2017 Earnings Conference Call. For the quarter, we generated $370 million in revenue, adjusted EBITDA of $32 million and adjusted earnings per share of $0.47.
In our Home Health segment, revenue was $271 million for the quarter, down just over $1 million compared to the prior year. This was primarily due to the 2017 CMS reimbursement cut.
Same-store Medicare admissions were soft, down 1% in the quarter, but were offset by same-store, non-Medicare episodic admission growth of 35%. On a combined basis, total same-store episodic admission growth was up 3% compared to the first quarter of 2016.
Segment EBITDA was $37 million. In our Hospice segment, revenue increased $13 million or 17% as compared to the first quarter of 2016.
Same-store admissions grew 20%. Gross margins were also up due to a combination of rate increases and reduced cost per day.
Segment EBITDA was $23 million, an increase of 36% from the prior year. The growth in our Hospice segment continues to outperform our internal projections.
To put our Hospice growth into perspective, the Hospice segment has delivered eight straight quarters of double-digit, same-store admissions growth. Our Hospice average daily census has grown 40% since the first quarter of 2015, and this growth has been all organic.
In that same time period, our average daily census per hospice care center has gone from just under 60 to over 80. The segment has also expanded both gross margin and EBITDA margins by leveraging a disciplined staffing model and G&A expenses.
We are extremely proud of what our Hospice team has accomplished. They're singularly focused on providing quality, compassionate care to every referral.
It is a privilege and a pleasure to watch our team continuously set higher bars and constantly clear them. Our new and emerging Personal Care segment continue to grow its revenue as well, both organically and through acquisition.
Personal Care will expand for the first time outside of Massachusetts with the acquisition of East Tennessee Personal Care, which is expected to close on June 1. Billable hours grew by over 50% as compared to the first quarter of last year.
Keep in mind, this is not reflected in our financial statements since we closed the AHC acquisition on March 1 of last year. We are now the largest personal care provider and largest provider of pay services in Massachusetts.
We are also a very significant provider of SNPs, or special needs programs, in the state. These service offerings round out our capabilities in the market and give Amedisys a unique skill set to serve patients across the continuum of care.
We will also learn much more about risk-based models of care, which is important for our future. With that being said, we have more work to do on organic growth in Home Health, and it has the attention of the entire team.
Our Home Health operational leaders are implementing detailed action plans at the regional level to get our growth back up to par. As you may recall, we restructured our business development function in Home Health starting late last year with an initiative called Project Redwood.
The results have largely been encouraging, and we're working hard to adjust the areas that are not performing as expected. Our Home Health business development staff now have much better data, allowing us to target the right referral sources so we can increase our market penetration and grow our volumes.
Project Redwood has markedly increased the productivity of our business development employees. In our businesses, organic volume growth is driven by a combination of clinical and caregiver quality, relationships and brand strength.
It is important to understand that this is largely a feet on the street effort. Unfortunately, during our restructuring and realignment efforts, we lost some productive business development staff that we would have liked to have retained.
In short, our Home Health sales team has become more productive, but the loss of productive staff members offset much of our productivity gains. So what are we doing about it?
To start, we're targeting higher-quality business development staff and we're recruiting more of them. We also are focusing on driving better employee retention to drive down BD turnover.
We are monitoring net changes in our sales force daily. We have also instituted a more disciplined onboarding process, enhanced incentive programs for those new employees that are not fully productive and a robust exit interview process to help us understand any underlying issues that are driving turnover.
We are encouraged by our early progress in this area. Given our prior experience in onboarding and recruitment and the current trends we're seeing, we believe we can quickly fill this shortfall.
As we work towards our growth targets, we have remained disciplined on cost and operational efficiency, allowing us to beat our internal estimates for EBITDA and earnings for the quarter. However, we must produce consistent levels of higher organic growth in Home Health in order to continue to outperform expectations and to be at the top of the industry.
We get that. Having already discussed growth, I'd like to update you on the three other strategic focuses of our company, achieving clinical distinction, becoming the employer of choice and demonstrating operational efficiency.
First, we're making great progress towards achieving a high level of clinical distinction. In the July 2017 preview of Quality of Patient Care Star Ratings, 82% of our Home Health agencies were rated 4 stars or better compared to 36% in July 2016.
Our average Star rating is 4.13 in the same July preview, representing the seventh straight quarter of sequential improvement. Our patient satisfaction average score was 3.82, about 5% above the industry average.
In Hospice, clinical quality and family satisfaction ratings are also ahead of the industry, as evidenced by the Hospice Item Set indicators. Our Hospice segment also performed at or better than industry averages in all eight measures of family satisfaction.
We believe this continued strong clinical performance is a significant contributor to both growth and profitability. Second, to be the employer of choice, we must continue to attract and retain the highest-caliber clinicians and caregivers.
Engagement and turnover are a key focus of our team. And although overall voluntary turnover did tick up slightly, as it does in the first quarter, full-time voluntary turnover remains well below the industry average at 18.3%.
As we mentioned earlier, we are paying particular attention to Home Health business development turnover. Turning to operational efficiency.
This was the first full quarter that our entire company was live on the HomeCare HomeBase platform. We are on target to achieve our full run rate of $46 million in operating efficiencies by the end of the year with some incremental gains still to be achieved.
To date, we have achieved almost 75% of the targeted cost efficiencies we identified at the beginning of 2016. On the inorganic growth side, on May 1, we closed on the acquisition of Tenet home health and hospice care centers in four states for a purchase price of $20 million.
Our goal is to demonstrate our value and leverage this acquisition into a larger future opportunity with Tenet. Our pipeline of potential M&A opportunities remains full.
Our balance sheet is under-leveraged, and our cash flow is increasingly strong. The capital markets are also very accessible.
This allows us the flexibility to continue executing on strategic transactions, including some that would be transformative. While we will be opportunistic around smaller transactions, our proactive prospecting efforts are focused on transactions that will deploy larger chunks of capital, $100 million and up.
Given how strongly we're performing in the segment, we are particularly interested in looking at hospice opportunities. We are also very open to larger, strong regional home health targets to boost our market presence and personal care in regions overlapping with our existing home health and hospice footprint.
Before turning the call over to Gary, I have a few updates I'd like to share on Amedisys and the industry overall. First, you've likely noticed a new logo and branding on our website and investor materials.
When I first came to Amedisys a little over two years ago, I explored the possibility of a name change. However, the research we conducted showed that to patients and referral sources, the name Amedisys represented quality clinical services, but the research also showed that we had an opportunity to use a branding change to signal a larger cultural shift in how Amedisys is doing business.
So this morning, we unveiled our new, more contemporary logo, along with our updated website. As we continue to deliver on our strategy and on our future vision of owning the home, we believe the new brand is more representative of who we are and what we do, providing high-quality compassionate care in the home.
We believe our new logo and branding will help create a more positive awareness and emotional connection to the services Amedisys provides to our patients today and into the future. The feedback has been great, and we hope you like it too.
On the regulatory front, the 2018 proposed rule for Hospice was issued last week, and the industry will see a 1% increase in payments next year, as we expected. A comment period will be open until the end of June, and the payment rule will go into effect on October 1.
There are also some changes to the Hospice Quality Reporting Program that we will be digging into, but we have not identified any surprises at this time. Along with our peers, we are encouraged by recent encounters with CMS and a few of their most recent actions.
We're pleased to see the delay in Pre-Claim Review in Florida and Illinois and a delay in the implementation of the Home Health Conditions of Participation. While it is still early, the leaders in this administration appear to be much more interested in feedback and new ideas from practitioners in the industry.
We're having good dialogs about reducing burdensome regulations that drive increased administrative costs but don't help us deliver better care. It's nice to be at the table as we have been away for so long.
We sit in an enviable position with good clinical and financial performance, low leverage and strong cash flow. We will focus on improvement in four areas for the remainder of the year: First, organic growth in Home Health.
It's nonnegotiable; second, deploying capital towards acquisition targets that are the right strategic fit; third, reducing our backlog of accounts receivable that grew throughout 2016; and last, working with CMS and other payers to focus on decluttering our delivery of care. In closing, thanks to our tremendous team of employees, over 16,000 strong who continue to demonstrate the value of high-quality care in the home.
Congratulations on a strong start to the year. With that, I'll turn it over to our CFO, Gary Willis.
Gary?
Gary Willis
Thank you, Paul. During the first quarter of 2017, we generated $370 million in revenue, an increase of $22 million or 6% as compared to 2016.
Diluted earnings per share were $0.44 in the first quarter of 2017 compared to $0.19 per diluted share in 2016. Slide 17 of our supplemental slides provides detail regarding income or expense items, adjusting our GAAP results that we have categorized as noncore, temporary or onetime in nature.
This schedule also details the income statement line items that each adjustment impacts. As it relates to these non-GAAP adjustments in the first quarter of 2017, we incurred net pretax adjustments of $1.5 million, as detailed in our slides and 8-K filing, as compared to non-GAAP adjustment of $7.8 million in the first quarter of 2016.
Adjusted EBITDA for the first quarter of 2017 was $32 million, an increase of $8 million from the first quarter of 2016. Our adjusted EBITDA margin was 8.6% in the first quarter as compared to 6.9% in 2016.
Adjusted diluted earnings per share were $0.47 per share, an increase of $0.14 from the prior year. In our Home Health segment during the first quarter of 2017, revenue was $271 million, down $1 million compared to the prior year.
Our Medicare same-store admissions were down 1% as compared to '16 with total same-store episodic admissions up 3% over the same period. Our Medicare recertification rate was 35%.
Same-store non-Medicare per visit admissions were down 1%. Our segment EBITDA for Home Health was $37 million in the first quarter of 2017, down approximately $2 million from 2016, and our cost per visit increased $2.16 compared to the first quarter of 2016.
This increase was primarily driven by raises and increased health insurance cost, offset by a reduction in contractor utilization. As Paul mentioned, our Hospice segment produced strong operating results this quarter.
For the first quarter of 2017, our Hospice revenue was $86 million, up $13 million over 2016 or an increase of 17%. Our same-store admissions were up 20% this quarter with same-store average daily census up 16% to 6,365 in the first quarter.
Our Hospice segment EBITDA was $23 million, an increase of $6 million over the first quarter of last year. Net revenue per day was up approximately 3% to $149.41, and our cost of service per day was down 4% to $74.08.
In our Personal Care segment, we generated approximately $14 million in revenue in the first quarter of 2017 with approximately 588,000 billable hours. Our Personal Care segment incurred an operating loss of $0.2 million this quarter as a result of increased general and administrative expenses.
This growth in G&A is due to some of the recent acquisitions in our Personal Care segment as this segment builds out its infrastructure for future growth. Turning now to our general and administrative expenses.
I'd like to refer you to slide 6 in our supplemental slides. This quarter, we performed very well at controlling our G&A spend and driving our operational efficiencies.
On an adjusted basis, total G&A was $117 million or 31.6% of total revenue. Total G&A was down 270 basis points as a percentage of revenue compared to the first quarter of 2016 and down sequentially 50 basis points from the fourth quarter of 2016.
Our Home Health G&A was down $2 million from the first quarter of '16 to $68 million or 25.1% of home health revenue, down 70 basis points year-over-year. Our Hospice G&A was up $1 million to $18 million or 21% of hospice revenue.
This was a 210-basis point decrease compared to last year. Our corporate G&A was $28 million, which was down $4 million over prior year.
As a percentage of total revenue, total corporate expense was down 160 basis points from the prior year. Our cash flows from operations for the first quarter were solid at $27 million based upon strong operating performance.
This is up $15 million from the first quarter of 2016. Our capital expenditures were $4 million, down $2 million over the prior year.
Our balance sheet remains in great shape with debt, net of cash, of $47 million or 0.4 times our last 12 months' adjusted EBITDA. Our provision for doubtful accounts increased $2.4 million in the first quarter of '17.
This elevated level of provision for doubtful accounts results from the backlog of our accounts receivable during the HomeCare HomeBase implementation and the application of our bad debt policy based upon the aging of these accounts receivable. Our days sales outstanding in accounts receivable remained consistent at 40 days during the first quarter as compared to our DSO level at the end of last year.
As Home Health revenues grow from non-Medicare episodic payers, we need to be increasingly focused on collecting our accounts receivable as these payers generally require higher administrative and collection efforts. We're piloting the use of technology tools, such as Availity, to automate some of the frequent manual steps in our current revenue cycle processes.
Availity is a technology platform that connects health care providers and payers to automate business office processes with real-time coordination with payers. Currently, we're piloting this platform with Humana and have seen some early promising results.
We expect to expand the use of Availity with other payers in the near future. We've added some additional resources to drive down our DSO levels, and our business office and revenue cycle teams are hard at work to reach these goals.
We expect our provision for doubtful accounts to return to more historically appropriate levels and a return of our DSOs to the mid-30s later this year. Finally, on March 31, 2017, we had a cash balance of $48 million and $170 million available under our revolving credit line, providing total available liquidity of $218 million.
At this time, we're prepared to take your questions. So operator, if you'll please open the call for questions.
Operator
[Operator Instructions] Our first question is from Brian Tanquilut of Jefferies. Please go ahead.
Brian Tanquilut
Paul, just a question, first, on the organic growth on the home nursing side of the business. I mean, how - well, first, exactly what are you guys rolling out?
What are you trying to do to turn that around? I know you said you're very focused on it.
And then second, I know in the past you've talked about HomeCare HomeBase being a potential contributor to driving organic growth. So how do you tie all that in and how should we think about the timing of the - just the uplift that we should expect from you guys on organic growth?
Paul Kusserow
Sure. Thanks, Brian.
I appreciate it, good question. So in - as we've referenced it, I think we understand that this is - that we've done most of what we promised, and this is one area where we think we really need to step up our efforts and prove that we can grow the business.
We're confident we can. What happened is in late fall, we initiated Project Redwood.
Project Redwood delivered on most fronts. One of the things that was unanticipated, though, with this is we lost some folks in business development and sales.
We lost about 50 to 60 of these folks that were kind of in the middle, but they were contributing, they were profitable, but they were in the middle area. And so what we've actually done is we - the folks we have left are actually more productive, so we're very encouraged by that.
But we need to get back those 50 to 60 people as quickly as possible because we believe that, once we get these folks up and running, they'll initially start delivering, let's say, 5 accounts, 5 per month. Then we'll get them up to 10 after about 3 months, and then we can get them up to 15.
And then we believe in a couple years, we can get them up to 20 per rep. So it's a numbers game, and we understand.
And so when we were looking at this and we saw where we shed some people, we saw it in very, very specific areas, generally, in our account executives, not in our CTCs and hospitals, but generally, those people calling on physicians. And we were quite encouraged by actually understanding where these occur.
They were in a couple of regions, which can get them through these - the 10 to 20 group, which tends to occur. They tend to hit a plateau and stay in that plateau for about six months.
So we're very encouraged by what we've seen so far. We've really increased our recruitment efforts.
We've spent a lot of time on retention of the BD staff, particularly where it's been higher. And so all the folks out there that - they're being measured for this.
It's part of their incentives as well. So we're starting to see some very good results from that perspective.
So we think it's largely a numbers game. We think once we get our numbers up to standard, we'll start to deliver at a very good rate.
The - I think the thing that people should also think about is if you look at Hospice, which is currently performing very well and clearly growing, we did this very similar transformation. Our hospice folks did this about two years ago, and they also went through HomeCare HomeBase.
They were the first ones in on HomeCare HomeBase, and you've seen obviously the growth that we're producing there, the organic growth that we're producing there. And so what we saw there was two things.
One, when they went through HomeCare HomeBase, they started to create - they created more capacity with the existing staff, clinical staff, so that they could make more calls. And then what they did is, very smartly, they restructured - they didn't lose anybody in the restructure, but they added more people, and they were, therefore, able to eat up that capacity in organic growth.
So we're looking at Hospice here as our model, and we think if we follow that route, that we'll end up in a good position. We're trying to do this, obviously, as quickly as possible.
We believe that in the third quarter this year, that's when you'll start to see all this come to effect. Chris?
I'll let Chris Gerard, our Chief Operating Officer, who's been living and breathing this every day, add anything, if you're...
Chris Gerard
Well, thanks, Paul, and thanks, Brian, for the question. I think Paul covered a good deal of it.
And just really kind of the nuts and bolts is that we're going to invest heavily in onboarding additional reps, getting them up to productivity as quickly as possible. As Paul mentioned, kind of taking the playbook from hospice and applying that on the home care side.
And from a capacity perspective, I've been a utilizer of HomeCare HomeBase in past companies for almost 10 years now. And the way I look at it on the home care side, there's many more moving parts for a care center to really work within the system.
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Brian Tanquilut
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Paul Kusserow
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Brian Tanquilut
Yes. That's right, yes.
Paul, last question really to follow up on that point. About 3 months from now, we'll talk about this.
Gary, just wondering if you could provide some color on your thoughts on current consensus. I know you don't give guidance.
But in the past, you've given your opinion on current consensus for Q2.
Gary Willis
Sure, Brian. Happy to, and thanks for the question.
We continue to be comfortable with the current range of analyst estimates for adjusted EBITDA for this year 2017 that are out there. But as we've discussed, we expect to see accelerating home health revenue and that growth in the second half of this year.
So as we have thought about that, we have contingency plans we want to deliver on that and believe we will deliver. But if we, for some reason, did not achieve our target for home health revenue growth, we plan to make some adjustments to our cost structure that will allow us to deliver on our promised adjusted EBITDA levels for this year.
Operator
Thank you. The next question is from Sheryl Skolnick of Mizuho Securities.
Please go ahead.
Sheryl Skolnick
So Gary, that's a pretty powerful statement you just made. So my first question is, where is the room in the cost structure to make those kinds of changes, given that you would be investing in the sales force or the business development force and you've got your IT-related cost savings and organizational-related cost savings under control?
Can you give us a little color on that?
Gary Willis
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Paul Kusserow
Yes. It's an option we don't want to, obviously, have to...
Gary Willis
Absolutely.
Paul Kusserow
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Sheryl Skolnick
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Gary Willis
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Paul Kusserow
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Sheryl Skolnick
Right, okay. So I would take it from what you just said that the 35% growth is off a relatively small base, but still meaningful growth is likely to be sustained through this year in that segment.
Gary Willis
It is off of a relatively small base, Sheryl. But it did also help us drive 3% overall growth in the quarter in total episodic, yes.
Sheryl Skolnick
Yes, okay. So not that small.
All right. I'm just trying to...
Gary Willis
Right. It impacted our quarter for sure.
Sheryl Skolnick
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Stephen Seim
Yes. This is Steve Seim, Sheryl.
I think it's focused really on the right accounts, so we really understand the ones that are per-visit payers, and we want to make sure that when we're looking at sending our salespeople into specific places that part of the targeting efforts we've been focusing on is getting them into the right.
Sheryl Skolnick
Okay, that makes sense. Please indulge me for a second.
Let me go back to the comment that we started with, which was Gary's basically we intend to get to our home health organic Medicare growth targets, but if we don't, rest assured, we're going to make every effort to achieve our EBITDA targets. We shouldn't interpret that, should we, as hedging in the sense of that there's more than a reasonable amount of caution around hitting those growth targets, i.e., you're not there today, you have work to do before you get there at the end of the year.
You're not backing off from those targets in that comment, right?
Gary Willis
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Chris Gerard
Sheryl, so this is Chris. I just like to add that we put a lot of effort and a lot of thought into this plan and the strategy, and we have a high level of confidence in our ability to execute on the plan.
So that's plan A, and that's where we're headed. And we feel like we're going to be having discussions later on this year about significant growth in the organization on the Medicare side.
But I think to Gary's point is we also want the investor community to understand that we see it from all fronts. And a plan is a plan until it's actually performed, and so we always have a backup.
But today, we feel very strongly about our strategy.
Sheryl Skolnick
Got it. And just one final question.
So given how strongly you feel about the strategy and given where the business is today and echoing a previous question, when will you feel comfortable enough to give us forward guidance? What has to happen?
Gary Willis
Yes. Sheryl, from my perspective, it's really about us seeing this growth on the top line that we're talking about in the second half, and we're making progress there.
But once we have good visibility into that, we will be prepared to do that. I don't want us to be in a position where we are overpromising and under-delivering, and that's why we have continued to take the approach we have.
Operator
Thank you. The next question is from Kevin Ellich of Craig-Hallum.
Please go ahead.
Kevin Ellich
Just going back to Project Redwood and the turnover that you saw in business development. Wondering if it had much, if any, impact on your lower operating cost for the quarter.
And what should we expect in terms of the cost structure in home health for the rest of the year?
Paul Kusserow
Great question. Scott?
Scott Ginn
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Kevin Ellich
Sure. And then I guess, Paul, just on Project Redwood itself, I guess, what stage or inning would you say we're at with that initiative?
And how long will it take?
Paul Kusserow
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Kevin Ellich
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Chris Gerard
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Paul Kusserow
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Kevin Ellich
Understood. And then one quick one for Gary.
Just thinking about your free cash flow. Even though you give don't give guidance, have you talked at all about expectations for capital expenditures for the year?
Gary Willis
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Paul Kusserow
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Operator
Thank you. The next question is from Dana Hambly of Stephens.
Please go ahead.
Dana Hambly
Paul, your comments on the M&A targeting more of the hospice, is that because you feel the hospice operations are a little more mature and ready to handle larger deals? Or are you just seeing better valuations in the hospice space?
Paul Kusserow
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Chris Gerard
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Dana Hambly
Okay, that's helpful. And then my second and last is just looking at your scorecard here on Slide 7.
In reimbursement, you talked about the Home Health Groupings Model being the next to address. I wonder, as an industry, how big a challenge is that?
And would you check to see any language on that in the proposed rule?
Paul Kusserow
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David Kemmerly
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Operator
At this time, I would like to turn the conference back over to management for closing remarks.
Paul Kusserow
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Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.