Nicholas Muscato - Chief Of Staff Paul Kusserow - President and CEO Scott Ginn - CFO Chris Gerard - COO David Kemmerly - General Counsel and SVP of Government Affairs Susan Sender - SVP and Chief Clinical Officer.

Brian Tanquilut - Jefferies & Company, Inc. Kevin Ellich - Craig Hallum Capital Group LLC Matt Larew - William Blair Frank Morgan - RBC Capital Markets Matthew Gillmor - Robert W. Baird & Co. William Sutherland - The Benchmark Company Joanna Gajuk - Bank of America Merrill Lynch.

Greetings and welcome to the Amedisys First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Nick Muscato, Chief of Staff. Please go ahead..

Thank you, operator, and welcome to the Amedisys investor conference call to discuss the results of the first quarter ended March 31, 2018. A copy of our press release, supplemental slides, and related Form 8-K filings with the SEC are available on the Investor Relations page of our Web-site.

Speaking on today's call from Amedisys will be Paul Kusserow, President and Chief Executive Officer, and Scott Ginn, Chief Financial Officer. Also joining us are Chris Gerard, Chief Operating Officer, and Dave Kemmerly, General Counsel and Senior Vice President of Government Affairs.

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 on the 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..

Thanks, Nick, and welcome to the Amedisys First Quarter 2018 Earnings Call. We are very pleased with our results for the quarter. We generated $399 million in revenue, up 9% year-over-year; adjusted EBITDA of $42 million, up 30% year-over-year; and adjusted earnings per share of $0.79, up 68% year-over-year.

Another impressive quarter delivered by our nearly 18,000 employees. Let's dive right in to the progress that we have made within our four strategic areas of focus, starting with clinical distinction.

Our unwavering focus on clinical quality has once again paid dividends as our July 2018 STARs score preview puts us at an average of 4.38, up from 4.3 in the April release. We now have 72 care centers rated at 5 stars, up 33% from last quarter, and 93% of our overall portfolio is rated at 4 stars or better.

This is now the 12th straight quarter of sequential improvement in stars. We are committed to continuing to improve our star ratings and further differentiating ourselves as an industry leader in quality.

This focus on clinical quality is also beginning to generate financial returns as our performance in the Home Health Value-Based Purchasing pilot program indicates. For the quarter, we received approximately $250,000 in bonus payments from CMS.

This year is the first year of bonus payments, and the CMS pilot is limited to nine states, seven of which we operate in. As the percentage of payments in VBP grows from 3% to 8% by 2022, we will see meaningful revenue upside for our continued quality performance.

As I've stated before, we believe that reimbursement should be tied to quality and outcomes. As such, we again encourage CMS to expand the Value-Based Purchasing program nationwide. If quality is important, those who deliver it should be rewarded.

For our Hospice business, the Hospice Compare May 2018 release of quality metrics shows Amedisys outperforming the national average in all seven measurement categories. We are very pleased with these initial results and fully expect our Hospice quality performance to lead the industry.

Moving on to the employer of choice, as you know, we are a people business. As we discussed throughout 2017, we are focused on hiring and retaining best-in-class talents, whether clinicians, operators, or business development staff. We ended the first quarter with 755 BD FTEs and have steadily increased this number the past four quarters.

We have also worked tirelessly to improve our retention, with full-time voluntary turnover at approximately 22%. We will continue to focus on lowering turnover further in 2018. Anticipating a tighter clinical labor market, we have specifically identified nursing turnover as an area of focus.

We believe that retaining our clinical staff has a direct impact on our ability to drive down readmission rates, increase productivity, and ultimately provide better care to our patients. Now let's discuss operational efficiency.

Last quarter, we discussed the productivity improvements we are seeing from the rollout of our labor and productivity and staffing tool. As you may recall, this tool helps our care centers to predict clinician demand and then optimize clinician scheduling.

We continue to see its impact on productivity across all disciplines, with skilled nursing productivity improving nearly 8% and PT productivity improving nearly 11% since February of 2017. These productivity improvements have made a material impact on our cost per visit, which is down $1.28 year-over-year.

We also think we have additional margin upside, specifically through clinician mix optimization, having the right ratio of RNs to LPNs and PTs to PTAs, or as we call it, having clinicians work at the top of their licenses.

As we continue to refine our scheduling process and utilize our proprietary staffing tool, we fully expect to continue improving productivity. Our focus on efficiency is also reflected in the operating leverage we are achieving in our segments. Hospice continues to show significant segment EBITDA margin expansion, up 100 basis points over prior year.

Our Home Health segment EBITDA margins expanded 90 basis points over prior year, all in the face of a Home Health reimbursement cut of approximately 0.7% for the quarter. Finally, driving growth; Hospice continues to build ADC at an impressive pace, growing at 12% to 7,214 for the quarter.

Admits were up 5%, and we expect this number to build throughout the year. Also, in April, we launched our first de novo location, which is pending regulatory approval and licensure. As we discussed previously, de novos are part of our three-pronged Hospice growth strategy.

Our goal is to end the year with additional de novo locations and we look to ramp up our efforts from there. In our Home Health division, we continue to make improvements on our growth efforts, ending the quarter at 7% same-store total volume growth, which is admissions plus recertifications. Finally, our total same-store admission growth was 4%.

We are still confident that we will meet the 5% total admission growth target we laid out in our 2018 guidance. In Personal Care, total hours per quarter grew approximately 27%.

For the first half of 2018, the Personal Care team will focus on optimizing their current operational infrastructure and finishing the integration of the two assets we acquired in 2017. On the M&A front, our strategy is unchanged.

We remain very interested in Hospice assets, though market pricing has been relatively unattractive and we have seen some recent deals get done at very lofty multiples. The entry of financial sponsors interested in Hospice has increased the competition and driven higher valuations.

As we mentioned, we have launched our Hospice de novo strategy and are looking at several midsized deals in strategic geographies. In Personal Care, we continue to focus on good value tuck-ins where we have a strong Home Health and Hospice presence.

This is evidenced by our Personal Care expansion in Tennessee as we received final regulatory approval and closed in on our acquisition of East Tennessee Personal Care Services just last week. In Home Health, we are focused on strategic assets in priority geographies.

During the quarter, we closed on our acquisition of Christian Care Communities, giving us Certificate of Need access in six new counties in Western Kentucky. These new counties will be serviced by our currently established high-quality care centers in Owensboro and Bowling Green, which earned 4 and 4.5-star quality ratings respectively.

We are excited by the opportunity this acquisition offers our Home Health operators in Kentucky and look forward to seeing growth in these new counties. We would also like to take a moment to welcome our new Christian Care and East Tennessee Personal Care Services employees to the Amedisys family.

Overall, the MA pipeline for all three lines of business continues to remain strong and we look forward to putting our capital to use in the coming year, but we'll continue to be disciplined with regard to valuation.

Finally, on the regulatory front, at the end of April, CMS issued the proposed 2019 Hospice Wage Index and payment rate update, which will increase Hospice payments by 1.8% beginning in October 1, 2018. The proposed rate increase and corresponding 1.8% increase in the Hospice aggregate cap are a positive for the hospice industry at Amedisys.

Finally, CMS is also seeking input on a variety of quality reporting measures that we are currently studying. The public comment period for this proposed rule is open until late June and Amedisys looks forward to submitting our comments to CMS on these proposals.

Given the recent technical advisory panel convened by CMS, language in the Bipartisan Budget Act of 2018, the 1.8% Hospice update for 2019, conversations with members of Congress around red tape and burden reduction, CMS' allowance of Personal Care in the MA benefit, and the recent clear recognition by private payors of the value of care in the home, we feel quite positive about the current regulatory and reimbursement environment for all three lines of our businesses.

As you can see, we had another great quarter and are poised to continue the momentum going into Q2. With that, I'll turn it over to Scott, who will take us through a more detailed review of our financial performance for the quarter.

Scott?.

Thanks, Paul. I'm very pleased to report on another excellent quarter of financial results. For the first quarter of 2018, on a GAAP basis, we generated $399 million in revenue, an increase of $35 million or 9% compared to 2017. We had net income of $0.79 per diluted share, an increase of $0.35 or 80% compared to 2017.

For the quarter, our results were minimally impacted by income or expense items, adjusting our GAAP results that we have characterized as non-core, temporary, or one-time in nature. Slide 14 of our supplemental slides provides the detail regarding these items and details of income statement line items each adjustment impacts.

For the quarter, on an adjusted basis, our results were as follows. Revenue grew $35 million or 9% to $399 million. EBITDA increased nearly $10 million or 30% to $42 million. EPS increased $0.32 or 68% to $0.79 per share. Our EBITDA as a percentage of revenue was 10.4% for the quarter, which is the highest EBITDA margin since the second quarter of 2015.

We achieved this margin improvement in the face of net reimbursement cuts in both 2016 and 2017. Now, turning to our first quarter adjusted segment performance, in Home Health, revenue was $284 million, up $16.6 million compared to prior year.

Revenue growth was driven by a 7% increase in same-store total volumes, which includes both admissions and recertifications from all payor sources. Same-store total admissions were up 4%. Same-store episodic volumes were up 6%. Same-store episodic admissions were up 3%.

Our Medicare recertification rate was 37.4%, a 260 basis point improvement from prior year. Segment EBITDA was $42 million, up $5 million, with an adjusted EBITDA margin of 14.6%. Visiting staff cost per visit decreased $0.74 compared to prior year, with overall cost per visit down $1.28 or 1.4% decrease.

Increases in commission productivity helped to offset the impact of planned wage increases that went to effect during the third quarter of 2017. Other items impacting the first quarter results of our Home Health segment included a reduction in reimbursement of approximately $2 million, impacting revenue and gross margin.

Inclement weather added approximately $700,000 in salary costs for the quarter, which is up $500,000 from prior year. We estimate that the weather accounted for a loss of approximately 750 episodic admits during the quarter. Revenue per episode increased $10 despite the 70 basis point rate cut. This was driven by the acuity level of our patients.

G&A was relatively flat compared to 2017 and was at 24% of Home Health revenue for the quarter, which is the lowest for the trailing six quarters. As expected, our health expense for the segment dropped approximately $6 million sequentially and is flat year-over-year.

Now turning to our Hospice segment for the first quarter, revenue was $97 million, up $14 million over prior year, an increase of 16%. Same-store average daily census was up 12% and same-store admissions were up 5%. Segment EBITDA was $27 million, an increase of $5 million or 20% versus prior year.

Net revenue per day was up approximately 3% to $149.80, and cost of service per day was up 3% to $77.17. The Hospice segment benefited from an increase in reimbursement of approximately $1 million.

The segment expanded EBITDA margin by 100 basis points despite additional G&A investments in our business development staff and administrative employees to drive and support continued growth. Additionally, we added commissions late in Q4, which increased our cost per day. This was a planned increase to support growth in census.

We expect this comp to moderate as we reach our census targets. Our Personal Care segment generated approximately $18 million in revenue in the first quarter, representing growth of 32% with over 749,000 billable hours.

Included in these results are approximately $6 million in revenue from our Home Staff and Intercity acquisitions that were not in prior year results. Additionally, these acquisitions contributed slightly over $1 million in G&A costs during the period.

Because of the rapid pace of acquisition in the Personal Care segment, we're spending the first half of this year investing in the platform's infrastructure to allow for future growth and are pleased with the progress we have made thus far.

Turning to our general and administrative expenses, on an adjusted basis, total G&A was $120 million or 30.2% of total revenue. Total G&A was down 190 basis points as a percentage of revenue compared to prior year.

Sequentially, G&A decreased $2.2 million, primarily due to lower health [indiscernible], offset by increases in business development and office staff to drive and support continued growth.

From a cash flow perspective, we generated $40 million in cash flows from operations for the quarter, and we spent approximately $2 million on the Christian Care acquisition and over $1 million in capital expenditures. We ended the quarter with $120 million in cash and debt of approximately $88 million.

Days sales outstanding were 41.4 days, which is a decrease of 2.6 days sequentially. Our cash balance, combined with the $162 million available on our revolving credit line, provides us total available liquidity of approximately $282 million under existing credit facilities.

Our strong cash generation and low debt levels provide us with ample flexibility for M&A and other strategic capital deployment opportunities.

Finally, as you can see on Page 16 of our supplemental slide deck, we are reiterating our 2018 guidance ranges, which are; revenue of $1.6 billion to $1.64 billion, EBITDA of $158 million to $163 million, and EPS of $2.97 to $3.08 per share. This will conclude our prepared remarks. Operator, please open the line for questions..

[Operator Instructions] Our first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question..

Congrats. Solid quarter.

Paul, first question for you, as I think about the growth rate that you put up this quarter, I'm really looking at 4% same-store admissions, where does that land in terms of where you think this should be or where you think you can push that growth to, given all the moving parts on macro and all the initiatives that you've put in place?.

Sure. Thanks Brian. Yes, we feel very good about growth. We feel that we've been building up a good head of steam. If you look at what we've been doing over the past three quarters, each quarter has been getting better and better. As we said in the comments, we expect that we will meet the 5% growth target.

I think if there was any little [miss] [ph] that occurred on this quarter potentially was that we came in at 4% versus 5%. But I feel very good about it. The team feels very good about it. We are tracking very well with the new BD folks. We expect to be up at 800 by the end of the year.

We are filling in, in terms of where we need capacity of clinicians so that we can continue to take the business. The [indiscernible] are down. So we feel very good about it.

I don't know, Chris, any further on the growth side?.

Sure. I'd also say that we carried in incremental 88 additional BD heads Q1 this year versus Q1 last year. As you guys recall, we brought in about 200 reps into this year that were hired in 2017 that are on a nice ramp. They are ramping as we expected based on historical trends.

So, as we continue to bring those up to higher productivity, we expect to also see that result in improved growth as the year goes along. This is our third consecutive quarter of improved growth year-over-year, Medicare and episodic. So, we also expect to see that continue throughout this year as well..

Yes, one of the things, Brian, that we talked a bit about is pitching and catching here. We think we've got enough pitchers who are throwing stuff to us. We're very cognizant and have put a lot of efforts in into making sure we're building enough capacity to support higher levels of growth.

And so, we've been putting a lot of time in, in what's becoming a tougher labor market. So, we feel very good about that side as well..

That sounds good. Paul, I guess for you and Scott, as I think about the balance sheet, you're now in a net cash position and I hear you loud and clear that we're maintaining discipline in terms of the acquisition strategy.

So, how are you thinking about capital structure optimization given the limits that valuations in the market are putting on your M&A?.

I'll let Scott dig into that.

As you know, I'm a deal guy, so I love to – I've been very frustrated with the market, but I think Scott and team have been very disciplined, and we've been holding ourselves in check on some of the things that go out there, that have been going on out there that fundamentally we don't believe can pencil out in any environment, particularly if there is any downturns.

So, we feel confident that we've got a good pipeline. So, we feel confident, at some point things will pop. We also in the Hospice area feel very good about our three-pronged strategy. We're looking at all the big deals like everybody else. We're putting in realistic bids. Those haven't worked thus far.

We're doing sole sourcing of good midsized assets that we feel very good about our pipeline there. We've got quite a bit of deals in that pipeline. We're relatively uncontested or completely uncontested. And then we're starting to do de novos. So we feel good about that.

And then the Home Health, with our growth coming back in a way that we like, we're open to more Home Health and are looking at very specific strategic plays there. In terms of the optimization on the balance sheet, I'll just turn it over to Scott..

Sure. Thanks, Brian. I think Paul summed up a lot of the issues we're dealing with out there. I mean, if having a lot of cash on your balance sheet is an issue, we certainly have it, I mean $120 million right now. And we'll continue to pursue the acquisition opportunities that are out there.

As Paul said, we'll invest in de novo, but we'll look at anything else. We'll have to weigh what's our ability to close on some things versus what we are generating in cash versus what other things we potentially can do with our cash on our balance sheet.

So, pretty much everything is open to us right now, which is a good thing, but we would love to do some acquisitions, but we will stay disciplined and be mindful that we need to make sure that any acquisition we do, it makes financial and operational sense for us.

So, I don't think you'll see us pull back from discipline, but we are working hard to turn over everything we can to get a deal done..

Yes. Actually the last thing just from a macro perspective, Brian, is we've worked so hard to get here in terms of generate, and I do think we're excellent operators in all three business lines.

And my responsibility is to make sure that we continue to work and build the cadence we have from an organic perspective, which I think there's a lot more juice in the orange. So, we think there's a lot there. So, we aren't going to do a deal where we – where that knocks us off our game. And so, we're maintaining that discipline too.

We got a really good management team in place. They are executing extremely well. We see a lot of potential. We're going to do things that fit with us and that fit into our system and that fit into our business. And so that's where we're taking very much that mentality, which makes deals harder to do..

Scott, if I may squeeze one last quick question, just on the guidance, pretty good beat in the quarter, but you are maintaining the guidance range for the year.

How should we be thinking about that, is that simple conservatism at this point?.

As we talked about in the last call, this is the first time we've given guidance in five years. We just gave guidance in February. So, we're very excited about Q1 results. Things hit where we were kind of expecting, but there's some headwinds into the second half of the year and things we need to get moving on the growth front.

So, we came in at 4%, we are guiding to 5%, so we need to get that going. So, we're cautiously optimistic. We'll re-evaluate the Q2 and see where we're headed.

But I would say, conservatism certainly does come into play, but second half of the year, as we talked, health insurance, we've spent less than 18% of what our projected health insurance spend will be for the year in Q1. We had some good results there but we'll continue to add some BD heads throughout the year.

As we talked to, we'll incrementally add about 45 heads over the year. So, those are issues we'll deal with. And then, we get raises in the second half of the year. So, those are some kind of the things we're looking for from a cost perspective that we think will come into the organization, and we've got to cover that with growth.

So, we're watching it closely, but very pleased with where we are, and we'll look to talk about guidance again in Q2..

Yes, I think, Brian, we're extremely pleased where we are. I think given the fact that we haven't given guidance for five years, and it's something that's it's important for us to make sure we hit the numbers.

And I guess the only point I would add is, regardless I don't think, if we were to raise guidance, I don't think we would under any circumstances do that until the second quarter..

All right, sounds good. Thanks guys..

Our next question comes from the line of Kevin Ellich with Craig Hallum. Please proceed with your question..

I guess, just following up on the second half things that Scott talked about with the planned wage increases, are you seeing much in terms of wage inflation in terms of how tight the labor market is getting right now?.

I'd say, just from my perspective, no. I'd say, we're seeing pockets where it's harder to recruit people. We have done a very nice job of really preparing ourselves through the – and being very consistent in terms of understanding where the market is, being with the market. And then every year, we have been giving wage increases.

So, we do it on a – it's just part of our system right now. Every August, we do this. And so, we feel we're bringing up people. Our employees understand we pay fairly, that we do give raises on an annual basis. But are there definitely pockets where it's harder to find nurses? Yes.

But also, as you know, Chris, in some of his efforts is working to change mix to drive more of our work towards paraprofessionals. So, we think by increasing our mix, we'll alleviate some of that pressure. Thus far, I'd say it's not been extraordinary.

But Chris and Scott, anything?.

No, I think that's fair. It's a pocket issue. We're standing in front of it. We still have an ability to hire people. We're focused on turnover. We do look at our cost per visit metrics to be down year-over-year and a lot of given raises. That's pretty impressive in our view. And a lot of that goes to clinician productivity as that continues to expand.

So, a lot of things we'll work on, but we are certainly mindful of areas that have tight labor markets for us and what that means from an ability to hire as well as cost..

Yes, Scott brought up a really good point, Kevin. We're really obsessed with turnover. And in a tight labor market, the answer to that and getting that done right and getting way below industry average, which is what we will do and we are doing, getting that below industry average just solves a lot of problems for us.

And so, we see this – we don't have to go out and recruit as heavily, we get better productivity, we get a better culture. So, we're looking for that, and Chris and Susan Sender are very, very focused on these efforts in terms of nurse turnover and clinician [turnover] [ph]..

That's fantastic. And then one of the things Scott mentioned as well, and you talked about it in your prepared remarks, is productivity. You've seen a nice improvement. I think you said 8% in skilled and nursing productivity is up 11%.

How much more can you get or how much more do you expect to get? And on top of that, with EBITDA margins increasing nicely, where do we think normalized EBITDA margin goes and how long will it take to get there?.

Probably as you'll recall, when I first showed up here, I said we were going to get to 12%. That's still our dream.

Despite all the cuts that have happened, I'm getting a lot of people rolling their eyes at me right now, but that's where our ambition is, and we think there's – I've been just really encouraged with Chris and his team, how they've gone out, who are real Homecare Homebase experts, and have been able to do – as well as Chris and his team under [indiscernible] [Covington] [ph] have just done a fantastic job of just going over and over and over again our training so that we deliver just fantastic results in Homecare Homebase.

I believe there's still a long way to go. Chris can talk a bit about it..

I'd say there's a little bit more on the productivity side. I think that we had some nice improvement over the last year. I think more of our opportunity on the margin side is still going to be around working and improving our retention.

If you noticed that on Slide 10, we had about a $0.58 increase in our contractor costs, and that's due to some tight labor markets that we're in or specific geographies. We get that back normalized. That's going to help on the margin side. And then I think the best opportunity, as Paul mentioned, is really on the paraprofessional mix.

We are moving in the right direction but I think we still have quite a bit of room to improve on that..

Excellent. And then two last quick ones for me. Paul, you talked about midsized deals.

I guess, how do you define midsized and how much growth should we think that it will add? And then for Scott, who I think might be your good luck charm since he's taken over the CFO role, any guidance on operating cash or free cash for the year?.

First on the M&A piece, this was an idea that Chris brought forward on. And so we have some specific firms that are out there working, sole sourcing for us to find deals kind of between the $20 million and $50 million range. And this is Hospice. So, we've got a very nice pipeline there. And so those are the size deals we're looking at.

There's still some big deals out there, and so we're working through that. They are more complex. I think the clean deals got done, but we're willing to dig in on some of these other ones which were more complex to look for a big deal, again if we get good valuations.

We've got such a nice pipeline that the M&A team has generated on the midsized deals and we are going to have a real effort towards de novos. We expect to really grow the de novo group.

We're going to be assigning people to just be doing de novos and their lives will be solely devoted to driving out good de novos, particularly where there's overlap with Home Health..

On the cash flow, as I'm thinking through it, we did about $40 million in this quarter. There's really some good development there. The DSO came down, so that was helpful. But from a range, from just thinking through cash flow from ops, probably that $40 million we think is a good quarterly run rate for us.

So, you're thinking cash flow from ops around $160 million. Probably free cash flow, if you take down what's out there, probably takes you down about to $140 million-ish range. I think that's based on our current guidance numbers, that's where we are comfortable viewing that..

Thanks guys..

Our next question comes from the line of Matt Larew with William Blair. Please proceed with your question..

Congrats on what's been meaningful progress here over the last few quarters. I wanted to ask about some of the investments on the Home Health side that you're making.

And Chris, could you just maybe detail for us some of the areas of focus that you'll have over the balance of the year and then also update us on the progress you've made with improving your underperforming care centers? I think you talked about in Q4 they underperformed to the tune of $2.7 million on the EBITDA line and you had 13% of care centers below benchmark.

So, could you update us both on the underperforming care centers and then some of the broader efforts to continue the improvement on the Home Health side?.

Sure. On the investment side, it's really around, again, the BD, feet on the street, as we call it, out there. We have the 88 incremental that we have – or not incremental, year-over-year increase in reps Q1 this year versus last year. We added 23 throughout the first quarter.

We expect we'll add another 40 to 45 over the next two quarters and probably level out in the fourth quarter at around 800. So that's the investment and kind of the opportunity for us to call on more accounts, get more referrals, convert those referrals, and hit our growth trajectory.

And on the underperforming care centers, I'm glad you asked about that. So what we did is, as a reminder, is we focused and we identified our underperformers and we had an internal definition of what an underperformer is. Doesn't mean they are not profitable, but they're just basically not performing to their peers based on their agency size.

We carried 41 of those into Q1 based on Q4 performance. 18 of those graduated off of that list. We had a sequential $1.25 million improvement in EBITDA related to our focus on this. So, this is a new initiative for us this year. That's our first quarter. It generated nice results.

We expect to continue to focus on that until we have basically everybody in line with our peers..

Okay, thanks for that. And then, Paul, you alluded to the non-skilled Medicare Advantage opportunity. And obviously, I noted that you had published a paper in February related to your heart failure program.

So, just wanted to ask about any additional plans you had to either publish data or put together pilot programs with payors? And then more broadly, how you think you are competitively positioned for this potentially evolving market?.

Yes, I'd love to answer it, but I'm going to let Dave Kemmerly, who's in charge of this, talk a bit about it. I'd just overview on this. We feel delighted that CMS is looking at this and that they believe that this can be an integral part of MA. They are expanding it.

I think we're a little – we don't know if there's enough meat on the bones to hang on for us to figure out how to monetize this, but we're hopeful. Dave's going through paperwork every day to try to figure out how we're going to do this.

So, Dave?.

I mean, I don't think there's a whole lot more to add. I mean, CMS alone, MA plans include personal care as part of the benefit. There's a real opportunity we think for our Personal Care line of business and especially for our current and future patient population.

We think this announcement by CMS, the largest payor in the country, is for the recognition that the best place of care for chronic patients is in the home. So, we look forward to conversations with our MA partners, our current ones and others, and see if we can bring our quality and our care, our personal care to their enrollees.

So, we're looking through CMS' released more and more – released a couple of memorandums and some guidance around this, so we're digging into that to fully understand the opportunity. But we don't see any downside certainly to this. We're excited about it. I'll throw it back to Paul. I think you asked about our specialty programs..

I think it plays into our overall theme, which is why we got into personal care in the first place, and what it's doing is it's going to – I think it's going to be encouraging for people, the people that can show up with a full slate of or a full menu of Personal Care, Home Health and Hospice palliative. I think that's very important.

On the specialty side, I'll turn that over to Susan Sender, our Chief Clinical Officer, and she can talk a bit about what her focus is there..

Sure, absolutely, and thanks for the question. In terms of our heart failure program, we've been very pleased with the quality outcomes as it relates to that. And those best practices have become the standard of practice here at Amedisys. We do have another program called COPD that has hit.

We expect to start seeing some outcomes for that later this summer. And again, these best practices will become our standard of practice as we move forward. Those two programs hit approximately 80% of our patients. And so, where it makes sense, we will be layering in additional best practices where it makes sense from a clinical perspective.

We're right now working on reducing our patients' risk for falls, as we know that that's one of the high touch-points in terms of hospitalizations for those elderly patients. So, we're excited about the quality that we're seeing from these specialized clinical programs. But again, they become our standard of practice as we roll them out..

Okay. Thanks for all the comments..

Our next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed with your question..

Wanted to go back to the issue on margins, obviously that margin improvement, it looks like it was mainly generated off of leveraging your G&A.

So, when you look at the gross margin, my question was, you did call out some things that would have affected that, but I'm just curious, how much of an impact was, say, new acquisitions as part of that in that margin decline that you saw, was that just a small component or were there some of these other issues that you talked about?.

I would say that anything around any acquisitions would be minimal. I mean, mainly the decline would be around the rate cut, which is probably around net of everything about 40 basis points really and primarily in the Home Health area.

So, a little bit of impact on Hospice because we did add up some staff in the back end in order to get prepared for more growth this year. But I would say that any acquisition activity has kind of been minimal in there..

Got you. And when you think about the opportunity to improve that, I think it sounded like maybe one of the primary areas was this clinical optimization of getting that right mix.

My question is, how long a process is that and over what period of time can we actually start to see some in the margin profile, how long will it take before we can actually see that?.

I'll let Chris kind of talk timeline, but just overall from a margin perspective, so certainly optimizing the right staff is important for us. If you look at our cost per visit overview in our earnings call deck, contract utilization is one, and that kind of speaks to reducing turnover. We've got some opportunity to reduce that spend.

So, there's some margin expansion at the gross margin line. The biggest rest of where our margin expansion can come from is really frankly just top line growth. We built a platform. We decided in late 2015 to put Homecare Homebase in. We came out and talked about all these other cost savings initiatives that we run through. We achieved those in 2017.

So, you're seeing now our operating structure, our cost structure, where we expected it to be. So now it's about leverage from a top line perspective. And as you see that growth continue to move forward, that's I think our greatest large opportunity to expand overall EBITDA margin with some opportunities within gross margin.

I'll let Chris talk about timing around clinicians..

We're already seeing some incremental improvement on our PTA utilization, a little bit more so than on the LPN utilization, but we're seeing incremental improvements in both of those lines. So, I think they are just kind of gradually starting to show up in our margins and will continue to do so.

There's one kind of significant initiative that we're working on internally. It's around a care center staffing design remodel that really is going to kind of emphasize the scheduling aspect of Homecare Homebase.

When I got here, it didn't seem like we really had the right structure at the care center level to empower the schedulers to really kind of assign the visits in the right manner. So, that's a Q3 initiative for us. We expect coming out of Q4 we'll have that fully done and we should start to see kind of improvement in those two metrics..

Got you.

And maybe switching over to some of the de novo developments that you're now talking about, just curious if we could get some more color around kind of the specific market profile that you're looking at, what are your screens, what are your criteria for saying, this is a market where we want to go? I know you mentioned, do we have a home healthcare asset there, but is there anything else that you're looking at that influences your ability to go after these de novos?.

I would just say, some of the factors are CON versus non-CON. Obviously, doing a CON de novo is going to be a challenge and time consuming. So we got to have compelling reason to do that. Also again, we're looking where we do have Home Health and do not have Hospice, so we can create some of the synergies across those lines of business.

We utilize some outside data to really kind of identify the competitive environment. We created what we call kind of a market attractiveness score that helps us prioritize where we're looking.

And then the last piece that is a real close focus for us is really how fragmented is that particular market, and if that seems to be a fragmented market, that creates an opportunity for us to go in and cobble up some market share..

Okay.

And one last and I'll hop, just on the subject of turnover since that is an important topic and it's part of the margin expansion story, is there much variation in turnover about sort of the clinical category? I'm guessing, maybe it's higher with lower-waged workers, I don't know, but is that the case? And is there any regional, so beyond just clinical categories, are there any regional influences that you see? You talked about spotty markets.

I don't know if that also applies to turnover or if that's the wage pressure. That's it. Thanks.

This is Susan Sender. Yes, we do see pockets of turnover from a geographic perspective. We see some areas have higher turnover than others. Probably the greatest category of turnover among our clinicians is among our registered nurses.

And like Paul mentioned earlier, Chris and our operators and our clinical teams are working very hard at identifying areas where we can improve. We've recently conducted a number of surveys among our registered nurses and we learned quite a few things that we can do to make their lives easier.

And we're, as Paul said, obsessed with making sure that those things happen..

So we know the drivers and the levers of nurse turnover. I still think whoever really cracks this code is going to win a Nobel Prize. But we're trying hard. We know the four or five key things that's driving it and Susan has programs in place that we're putting in place that's going to take care of this.

The key is, we're a company of nurses and clinicians and PTs, but we really need these folks with us with the right tools so that we can drive the right productivity and achieve the right quality. And if we do all that, then obviously the referrals will come.

So, we think we have some of the right answers there and we're quickly moving to implement them..

Our next question comes from the line of Matthew Gillmor with Baird. Please proceed with your question..

Wanted to follow up on the Value-Based Purchasing program, obviously great STARs performance and you mentioned the revenue contribution from the CMS pilot, I was curious sort of how and if that connects back to your volumes and if you're able to educate the referral sources so you get more referrals and better volumes from those higher-quality agencies..

So, I think quality is the one thing we lead with. We think the other thing, when you look at what determines referrals and then how referrals are generated and what discharge planners look at, quality is key, it's the one metric that everybody have to live by. The other one is ACH, so that's readmissions.

And so we're focused, Susan and her team are focused on making sure we drive a lot of distinction that way and get several points below any of our competitors. So, that's an area where we have focused on and that we've done very well. So yes, it does correlate.

The other thing is, it also correlates with when you have high quality, you generally have good leadership, you generally have a stable workforce, and then you generally have outsized profitability, particularly in EBITDA.

So, that to us, when we see that scores go up, we see better contribution, we see better financial performance, and that's from a variety of factors that are driving it, but it drives our volume, it drives our growth, and it drives our margins..

That's helpful. And then one more on the nurse turnover, I think you said it was 22%, which is I mean obviously a great number, but you expect it can go lower. And I was curious if you had a target to share with us in terms of where you think that can go ultimately..

Overall Company turnover, we don't break it out, but overall Company turnover is 22%. Actually, the turnover for full-time employees is 18%. So, we look at those two numbers, 18% and 22%. The clinician turnover and nurse turnover is higher than 22%, and that's what we're using to drive that down.

But in general, we believe those numbers are, if not the best, pretty close to the best in the industry. But we still believe we need to do better. I don't like the fact that one out of five people are leaving our Company every year. I think we need to lock more people down and that's what we're working on..

Okay. Thanks Paul..

Our next question comes from the line of Bill Sutherland with The Benchmark Company. Please proceed with your question..

I just had a couple at this point.

I noticed the average length of stay up quite notably in Hospice, and I guess I wanted to just see what you guys thought about that, and does that impact the economics in some way?.

Yes, Chris can talk to you about it..

The risk associated with the average length of stay going up, as you know, as I'm sure you're aware, is kind of like if you run into a cap situation. We're not seeing that exposure right now.

What we did is we looked at our relatively low length of stay care centers and really dove into kind of where our referrals were coming from, and we found that a majority of them were coming from hospitals, which were typically lower length of stay patients.

So, we kind of put an initiative in place to focus on kind of rounding out or balancing out our referral sources coming from community physicians. And those agencies went from an average length of stay of 50 to 60 days to 70 to 80 days, and that's what drove us up to I believe we're at 94 days today. But as far as the economics, we like where it is.

We don't see the exposure but we're always monitoring our cap situation as well..

We were at 97, yes, 97 for the quarter, so that is up. And remember, that's a discharge length of stay number. So, that's kind of a lower number coming through. Our average length of stay is what we are actively really focused on. We haven't disclosed that number. And to Chris' point around the cap issues, we're very comfortable where we are..

Okay. And just curious, you've made a lot of progress in clinical turnover.

What's kind of the – is there an ultimate level that you think is attainable from here?.

Zero is what our goal is. I don't think we're going to get there, but we're going to try pretty hard. So, yes, I think I'd love – and I'm not going to give a timeline, and once again, they are all ready to kill me, but I'd love 15%.

I think that's a really tough one to get to, but I think if we do the right things and we treat people right and take care of our people in the right way and they believe that there's no other places to go if they want to be in this business, I think we can achieve that..

And you've seen something in that territory as you look around at the really good players that you guys looked at?.

Yes, we've seen it in some of the smaller, more regional players, which have bigger, more sophisticated, very highly invested mom-and-pop shops, we've seen it. So we know it can be done. But it's tough. It's rare in a company of our size. I think we're very good, but I think we could be better. And again, we're just a company of people.

If people don't come to work every day, then we don't have a company. So, we recognize that, and I think if we can increase our gravitational pull through a variety of things that we're doing and keep people with us.

And we know what those things are, which you all should be pushing us on is, how well are you executing on some of these initiatives, and we'll be talking about those in the future, Susan will be talking about those..

We all know it's a huge challenge with the nursing shortage, so good work. Thanks everybody..

Our next question comes from the line of Joanna Gajuk with Bank of America Merrill Lynch. Please proceed with your question..

So I guess I have a few minutes left. A couple of follow-ups.

So on the discussion around I guess turnover and some areas where you see maybe increased rates of that happening, but when we think about your wage increases, what kind of level you kind of project for this year and how does it compare to, say, a year ago, a couple of years ago in terms of year-over-year sort of wage increases that you give to your employees?.

In our guidance number, we guided to about 2% wage increase year-over-year..

Okay.

And has that changed over the last two, three years?.

It's been fairly consistent. I mean, it doesn't always come in exactly at that same number, but that's from a guidance perspective where we're looking to be at. And it's pretty specific, and we'll go through care center by care center, employee by employee, but that's kind of where we're looking at for this year..

Yes, so we've been doing this consistently, and I think that's what's caused – that's been very good for our employees. I think they've come to appreciate the fact that we're doing this, that every year we increase their wages, and I think that's important..

All right.

And then all-in sort of labor cost, because I guess you talked about some maybe areas where there's higher employee turnover, how does that impact when you think about all-in labor cost inflation for your Company?.

I think there are selected areas in the country where obviously the operators and Chris' team and Susan's team are out working very diligently.

So, the good thing about I think where our Company is at this point is there's a couple of spots that we were doing mop-up work in, and I think we're going to those spots and I anticipate we're going to straighten them out.

And therefore, I think the labor costs are going to get better because we aren't dealing – we're just dealing with a couple of spots where we're going in and using our resources to drive those numbers down. So, we feel it's very controllable.

We feel in much better control of where things are now that we've gotten things to a point where the majority of the Company is just doing really well. And yes, there are always a couple of spots, but there's a lot less spots than there were two years ago, for example..

Yes, Joanna, and we just, the way we look at it, so just to be totally clear, our guidance we said 2% to 3%, I told you 2%, and right now we have opportunity on [indiscernible] down year-over-year in cost per visit.

As we see more opportunities in reducing contractor costs, increasing productivity, getting the clinician mix right, we're less concerned. That's why we think the 2% to 3% number as an increase in just salaries is a good number to use because we have opportunities to offset that. In outer years, we'll have to be better focused.

Hopefully this retention, we continue to focus on that, that will help us [indiscernible] that will reduce costs. But that's kind of how we're thinking about it and believe from 2018 the numbers we are talking about make sense to us..

It's great color.

And on the Hospice acquisition, so I guess you said that you're not willing to pay these lofty multiples, but how high are you willing to go in terms of multiples that you would be paying for these mid-sized acquisitions that you're considering?.

It is often with us it depends on synergies, so if we can make things pencil out. But we always look for things. We look in the Hospice arena. We think fair prices are in the 11x is kind of the highest we go, and then post synergy, we'd hope to be below 10x. We like that zone. We think it's doable.

And a lot of times, we do have, as I said, I think we're really, if not the best, very good, up with the best hospice operators there. And so, I think we can generate a lot of synergies more than most. So, we think that gives us an advantage to maybe go up.

But that's why we look at that synergy number, and we also spend a lot of time making sure that we aren't going to get stung with any quality issues that are out there or any quality of earnings issues. So, we've got it down. We're going to keep our discipline on the big ones. That's going to be harder.

Not keeping our discipline, but getting a deal done on the medium ones, we don't think it will be as hard. And on the de novos, we're just going to pop them out..

That's helpful. And if I may squeeze the last one, I guess a detailed question, just modeling almost the equity and earnings from unconsolidated JVs line was I guess positive $2 million versus it was for the full year $17.3 million.

So, is the $2 million a good kind of run rate per quarter for the year for that line item?.

If you look at that, Joanna, we added about $1.2 million. We had a gain on investment in our add-backs. Probably about $600,000 is probably closer to a fair run rate per quarter..

Okay, got it. Helpful. Great. Thank you so much..

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Paul Kusserow, CEO, for closing remarks..

Thank you very much, and thanks to everyone who joined us on our call today. We really appreciate your interest in Amedisys. We would also and I would also like to thank all of our employees who continue and will continue to deliver all these fantastic results.

We hope everybody has a great day and we look forward to updating you on our progress out on the road and on our next earnings call in August. Take care, everybody..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..