Nick Muscato - Vice President, Strategic Finance Paul Kusserow - President and Chief Executive Officer Scott Ginn - Chief Financial Officer Chris Gerard - Chief Operating Officer Dave Kemmerly - General Counsel and Senior Vice President, Government Affairs.

Brian Tanquilut - Jefferies Matt Larew - William Blair David MacDonald - SunTrust Kevin Ellich - Craig-Hallum Frank Morgan - RBC Joanna Gajuk - Bank of America/Merrill Lynch Matthew Gillmor - Robert W. Baird.

Greetings and welcome to the Amedisys Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Nick Muscato, Vice President of Strategic Finance. Thank you, sir. You may begin..

Thank you, operator and welcome to the Amedisys investor conference call to discuss the results of the second quarter ended June 30, 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 website.

Speaking today 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 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 will turn the call over to Amedisys’ CEO, Paul Kusserow..

Thanks, Nick and welcome to the Amedisys second quarter 2018 earnings call. It has been another very strong quarter for Amedisys and we are extremely pleased with our results, the progress we have made and the progress we are continuing to make.

First, I want to thank all of my colleagues at Amedisys over 18,000 strong who delivered these great results. As I keep saying, we are nothing, but people and our people keep raising the bar, which drives our ultimate goal, taking care of our employees and providing better care for our patients wherever they call home.

Now, for the second quarter results. For the quarter, we generated $413 million in adjusted revenue, up 10% year-over-year, adjusted EBITDA of $50 million, up 38% year-over-year, and adjusted earnings per share of $1, up 61% year-over-year. During the quarter, we were able to accretively buyback 7.1% of our common stock from our partners at KKR.

We doubled our borrowing capacity by over $250 million to $550 million. And we saw another quarter of strong growth in all three lines of business. I am also happy to announce that our continued outperformance has led us to increase our full year guidance ranges to better reflect how we see the rest of the year shaping up.

Scott will discuss the details of our revised guidance later, but by any measure this is a performance our employees and shareholders should feel good about and be very proud of. Now, let’s review how we are doing in our four strategic areas of focus, starting with clinical excellence and distinction.

Once again, our unwavering focus on clinical quality has paid dividends as our October 2018 STARs score preview puts us at an average of 4.41 stars, up from 4.38 in the July preview. We now have 73 care centers rated at 5 stars, with 94% of our overall portfolio rated at 4 stars or better.

This is now the 13th straight quarter of sequential improvement in stars. I would like to acknowledge all of our clinicians who were constantly providing outstanding care and always trying to best our already impressive results.

Great care equals great business and our focus on clinical quality also continues to generate financial returns as our performance in the home health value-based purchasing, VBP pilot indicates. For the second quarter, we have 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 have operations in. As the percentage of payments in VBP grows from 3% to 8% by 2022, we will see meaningful revenue upside from our continued industry leading quality performance.

Again we hope CMS will use VBP more widely as a way to continually drive quality and reward quality players in our industry. 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 results and expect to see more of the same when the updated metrics are released in August. Moving on to employer of choice, we surpassed our goal of hiring 800 home health BD employees ending the second quarter with 808 employees and have now increased our BD headcount for five consecutive quarters.

As we have consistently stated, equally as important as hiring is retaining the talent we bring in. To that point, we have improved our full-time voluntary turnover, again ending the second quarter at 18.1%. I am very pleased with our efforts here, but believe we still have room for further improvement especially within our key nursing workforce.

Again, we are a people business and retaining our people underpins many of our strategic priorities, such as readmission reductions and continued industry leading quality scores, further reducing turnover will be a theme we will continue to focus on for the remainder of 2018 and beyond. Now let’s discuss operational efficiency.

Our focus on maximizing the efficiency of our operations is reflected in operating leverage we are achieving throughout our organization. For the quarter our total adjusted EBITDA margin was 12%, up 240 basis points year-over-year. As you will recall a 12% EBITDA margin was our stated goal back in early 2015.

And I am extremely proud that we have achieved this margin. Keep in mind we did this in spite of larger than anticipated cumulative rate cuts since that time. The main driver our margin expansion has been continued productivity improvement.

In fact we have once again improved our skilled nursing productivity, increasing 0.6 weighted visits per week sequentially or a 1.9% productivity increase over the 7% year-over-year we reported last quarter.

Finally driving growth, in our Home Health division, we continue to make improvements on our growth efforts ending the quarter at 8% same-store total volume growth which is admissions plus re-certifications. This is the growth number we would really focus on as this metric shows all sources of growth.

Our total same-store admission growth was 6%, 1% above the total admission growth target we laid out in our 2018 guidance. We continued to focus on Medicare fee for service growth, which has been increasing quarter-over-quarter for the past five quarters.

We still think there is ample opportunity to increase our home health growth and are working hard to drive it higher. Hospice continues to build ADC at an impressive pace growing at 12% to 7,554 for the quarter. Admissions were up 7%, both impressive numbers given the year-over-year comps our hospice business faces.

In personal care total hours per quarter grew approximately 29%. We are very pleased with the progress our personal care team has made integrating the assets we have acquired since 2017. And we plan to continue to scale, grow and expand the business both organically and inorganically across our footprint.

To that point, I am also pleased to announce that last night we signed a definitive agreement to acquire Bring Care Home, a personal care provider in Northeastern Massachusetts. Bring Care Home adds even more density to our Massachusetts personal care presence.

And I would like to extend a heartfelt welcome to the newest member of the Amedisys caregiver family. On the M&A front multiples for bigger deals continue to be challenging for us. And we continue to see financial sponsors desperate to put dollars to work and willing to pay nosebleed multiples for deals.

We remain very interested in hospice assets and are focusing on tuck-ins and deals with size that we have internally sourced. As we mentioned last quarter in prior – priority geographies where there are no or low quality tuck-ins we plan to supplement our acquisition strategy with de novos.

As we continued to assess market priority and asset availability, we will update you with our de novo goals for 2019. In personal care, we continue to focus on good value tuck-ins where we have a strong home health and hospice presence, much like the Bring Care Home acquisition and our recently closed deal in Knoxville, Tennessee.

In home health, we remain interested in strategic assets in priority geographies and where we can get a good deal. The further evaluation of the proposed rule recently issued by CMS will undoubtedly influence what types of deals and where we focus our M&A at priorities in home health moving forward.

We will continue to evaluate opportunities as more clarity around 2020 payment reform emerges and settles into final form.

Overall our M&A message remains the same, we will continue to be disciplined with regard to valuations, however the pipeline for all three lines of business is variable and we look forward to deploying the substantial capital we have access to through our new credit facility.

Finally on the regulatory front, on July 2 CMS released the calendar year 2019 proposed rule for home health that included a 2.1 payment update for 2019 and proposed a revised case mix adjustment methodology for calendar year 2020.

The payment increase for 2019 is naturally welcome news for our industry as this is the first positive payment update for home health since 2009. Amedisys is also well positioned with our hospice business as the full year 2019 preliminary rule for hospice released in early April included a plus 1.8% update and is set to take effect on October 1.

We expect the hospice final rule to be released by CMS within the coming days. As it relates to the new case mix model for home health or the patient driven groupings model, PDGM this is something that we at Amedisys have been expecting, since CMS did not finalize the home care health groupings model or HHGM in November of 2017.

As you will recall in the Bipartisan Budget Act of 2018 Congress mandated home health payment reform be implemented January 1, 2020. This inclusion of PDGM in the proposed rule was not surprising. In February we applauded Congress for mandating budget neutrality for any transition to a 30 day payment period and a 2020 start date.

I cannot overstate how significant those two changes are from last year’s HHGM proposal. Our team and consultants are still modeling and analyzing the structural changes proposed in PDGM how will it impact our patients, how will we provide the same quality of care going forward.

We have significant time to understand the impact, provide formal comments to CMS, work with CMS and Congress to improve upon the model and transition and prepare to operationalize this new payment system across the entire Amedisys footprint.

Over the next 17 months, we will be extremely focused and diligent on successfully moving to the new payment system with minimal disruption to the business. We will keep you updated on our progress as things move forward.

As you all can see we had another great quarter and are riding the wave of a very positive momentum going into what has traditionally been a more difficult back half of the year. Again, thank you to all the Amedisys employees for all they did to drive the success. It’s well worked.

With that, I will turn it over to Scott Ginn who will take us through a more detailed review of our financial performance for the quarter.

Scott?.

revenue of $1.63 billion to $1.65 billion, EBITDA of $168 million to $172 million, and EPS of $3.32 to $3.41. This will conclude our prepared remarks. Operator, please open the line for questions..

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

Hey, good morning guys. Congrats on a really strong quarter..

Thanks, Brian..

Paul, I guess the first question for you, as I think about the growth rate, organic growth that you see in the company, I mean, obviously it’s been accelerating picking up and a lot of it has been in the non-Medicare side of the business or the non-fee-for-service.

So, how should we think about the breakdown of the growth, where you think that can go and then how much room do you have to push organic growth going forward?.

Sure. I think well, we have seen that, obviously I think there is more penetration in terms of Medicare Advantage. So, this is an area we are looking at and moving towards trying to create some more, but we are having a lot of conversations actually with the focus on some of the larger players in Medicare Advantage.

It’s something we want to change the game on. As you know, Medicare advantage now is not as good of businesses as fee-for-service. We don’t make as much. It’s slow pay. We have some bad debt issues there.

So we are having conversations with most of the major payers and saying what can we do to change the game? And I think the interest there is in producing high-quality driving down ACH rates and then finding ways that we can start to take keep some of their chronically ill patients at home. So we are watching that are really carefully.

On the fee-for-service side, we did a nice job. We are growing. We have had sequential growth over the past three quarters. I still think there is a lot of juice in the orange there. I think there is a lot of things we can be doing to increase that. We expect to be increasing that over the next few quarters.

I would like Chris, I don’t know Chris if you have anything to add on in terms of what we have been doing..

Yes. Just to add to support that we all know about the BD FTE initiative that we started last April. We came out of Q2 with 808 full-time reps out for our home health side. We added about – we added 76 in Q2 which was actually our largest incremental add since we started this last April.

42% of those reps were 2017 and 2018 hired, so as we are looking at it and we are working on focusing ramping these reps to full productivity that’s where we see the opportunity for the organic fee for service client..

And on the other side of that Brian, I think the key is are we going to be able to hire enough clinicians and we have – our recruitment team has done a very nice job bringing in the clinicians where we need them.

There is a couple of rough spots out there, but we haven’t been really that affected by what people perceive as the tightening labor market. So we feel good about our abilities there and our turnover is an area we are clearly focusing on so that once we bring in men, we don’t lose them..

I guess, this is a follow-up question that I was thinking about is, as I think about cost per visit, you are talking about how productivity is driving that and all that stuff, but how much room do you have there to drive productivity, drive margins higher and I noticed on the slide deck, there is the increase in contract labor, what’s driving that and how much can you really bring that down by over the next few quarters?.

Sure. I mean, Scott….

Yes. I think just we – the good thing is we – just this quarter we had a 1.9% productivity increase over what has been this year-to-date 7%, so that’s close to 9% productivity growth. So we are still – our folks are still doing a wonderful job there. And we are still starting. We are at stage 1.0 moving to 2.0 in terms of optimizing homecare home base.

So we still believe there is a lot more that can be done from a productivity perspective..

And I think that’s correct. We focus on that, if you look at the salary line which is the biggest driver gave raises that’s where that would show up, but to Paul’s point, productivity has driven that that ability to improve, so we are excited about that. There is some fixed cost in there.

So as we continue and we are hitting on better growth numbers, we are certainly getting leverage there to your point on contractors that’s something that last year late ‘16 was a big project for us to pull back and we did that successfully.

What we have been focused on now is making sure we have the bodies we need and the clinicians we need to take all growth that we can get, so that’s we have kind of shifted away from, but we have got room to pull that back on that as well as work on LPN and orange shifts.

So still a lot to work on there, it will still give some rate increases effective in August, so that will impact that metric a bit, but we still think there is room to continue to moderate that growth from wage increases..

Yes. We do this purposely Brian. We want to – we are pushing the growth element and we are finding that recruitment can keep up with our growth. We are – and then we are very focused on turnover and obviously we have brought that down. We are obviously focused on clinician turnover.

And so we continue to hire upon BD and we continued to make sure that when we picked we catch with having enough clinicians to fulfill what the orders that are coming in..

Got it. Thank you guys..

Appreciate it, Brian. Thanks Brian..

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

Hi, good morning guys. Thanks for taking the question. A couple of questions on EBITDA margin, first of all Scott if you could walk us through some of the puts and takes in the back half of the year, what things will carry through in terms of strong performance from one half versus the incremental headwinds in the second half.

And then Paul you obviously alluded to hitting the 12% target that you laid out several years ago and this one quarter not a full year number, but if you have any thoughts on what potentially you look at 3 years or 4 years maybe that next margin target that you think about?.

Sure. I will just he is talking to the second half and just from a gross margin if we had normalized things I think certainly we are at a sustainable level. But we do have and you can see in our chart we have added to the back of the guidance section there is some second half costs that come through. The largest one Matt is around health insurance.

We are going to spend somewhere around $70 million of health insurance we think for the full year. We would only spend up to 40% of that in the first half, so the balance will come in the second half. So that’s something we are mindful of. We also have rises, as we mentioned it go into effect in August of this year. We have two additional holidays.

Those are some of the things that we traditionally see and then just from a top line perspective Q3 is the more difficult quarter for us just from additional holidays as well as the summer months. So that’s kind of the back half pressures that we see and we are kind of contemplating as we give you all the guidance for the full year update..

On the 12% Matt I think we are very happy to have gotten there clearly, it’s something that we had been aspiring to do over the past 3.5 years and to get here feels very good. I think a lot of that has been done on margin management as we continued to grow particularly in fee for service Medicare. We are going to expect some margin expansion.

We are very tight on the costs. We are still running. We still run this place like we are and from a cost perspective and I think we need – probably need to rethink it like we are back in 2015 like we are still turning things around, so we are very, very tight on costs. We understand how we can lose margin and we don’t want to go back there again.

I think the idea that was there is a certain point where you have to start to reinvest. And I think what we are starting to do is look at some of these places where we need to be investing and I think that’s what will be you will start to see some areas we want to take very good care of our employees.

We want to make sure that we pay for some of the things that are important for us quality, turnover, some of the things that are operational excellence. So we are looking at that.

And also I think one of the things we are starting to look at where we could put some efforts is in some – in innovating some of the capabilities that we are going to need to be the most attractive source prepared to turn to, because MA is growing, we do need to change the game.

We think we understand the elements that we need to build that change the game. We have started on a lot of these. But we need to bring them to fruition, so that in the next six months or so we can have a good deal and show that we actually are changing the game with payers, I think that’s important..

Okay. Thanks for those comments.

And then a follow-up actually on personal care, the business today is now about double what it was in 2016 and you have been focused on building regional scale in Tennessee and Massachusetts, just wondering Paul you mentioned there both organic and inorganic opportunity is there, can you just update on what the longer term strategy, are there other additional states like North Carolina, Georgia, South Carolina where you have scale in home health that you might look to build out scale, just be curious to hear the updated thoughts there Paul?.

Yes. This is a very important element for us as you saw with – CMS came out basically saying that they are going to start paying for some of the services or that will be – that can be included in the MA benefit. So we think that’s a smart thing to do.

We are getting a lot more of our payer friends asking about these types of services, how do they – how do we start to work both having good clinicians coming into the home and then having personal care taking care of activities of daily living. How does that combination work so that we can really attack some of their high cost chronically ill people.

So I would say we are pretty focused on this point is expanding in Pennsylvania, continuing in Florida, we like Georgia, also Tennessee. I think those are the types of areas where we have very good overlap where we are strong and we believe that – we believe also we need that full package.

We need to do this in a coordinated way and we need to be able to offer those benefits of having personal care, home health and hospice. We believe if we are going to do that as well as a little palliative, we are expanding our palliative as well. We have expanded that into two other areas.

So we believe if we have all that, that will be very attractive, that will be very attractive to start to drive different conversations with some of the managed care companies..

Okay. Thanks for the questions and congrats on the quarter..

Thanks a lot. I appreciate it..

Our next question comes from the line of David MacDonald with SunTrust. Please proceed with your question..

Good morning, guys.

Just want to come back to the MA conversation for a minute, look we are hearing all of these sizable payers talk about value based care, so I was wondering if you can just give us some sense around contracting, just conversations you are having, does value based care kind of provide a gateway in terms of potentially better contracting, more collaborative relationships with some of these payers? And then in the same vein just what is kind of the industry trying to do at the government level with regards to further pushing the value-based concept with regards to Medicare?.

So, I will answer your last question first, Dave. I think the governments we clearly – we are doing very well in value-based purchasing. Our numbers there have done well. We have gotten a nice bonus. The problem is it’s in 9 states we are in 7 of those, but we got $0.25 million this quarter for that.

Obviously, that’s going to ratchet up in these states, so we are excited about what’s going to happen when it’s 8% versus 3%. We think that this is a way that that the government can call the fragmented industry a bit in terms of Home Health.

We think that if you can actually reward the quality and quality delivery in value-based care, that’s going to push the proportion of rewards to those people who are delivering it and take away from those people who aren’t.

We believe this is the right indication for the government to sense and we have been as active as we can trying to say this needs to go out across the country. We are hoping that it comes out of CMMI and is actually implemented. We haven’t heard anything about it, but that’s something we really believe.

So, we are quite – we would love to see that occur obviously, it benefits us, because we focus on quality just religiously so and we are going to continue to, because it’s good – it’s the right thing to do and it’s good business. And we hope the government starts to see that.

On the value-based care in general with payers, the types of conversations that the world has changed since Humana bought Kindred and I think there is a lot of payers who are trying to see what they saw and they believe that the home is a place where particularly if they are going to be involved in Medicare Advantage and if they are going to want to grow Medicare Advantage, this is something the consumer of MA really wants.

They want to be able to be taken care of in their home. They want to be able to stay in their homes and so we have had the level of interest and the type of conversations have really changed. We have got a couple of very small initiatives largely built around ACA trades and quality results that we are teeing off right now.

I don’t have results in, but we would like to have a bigger deal going forward, I think though particularly focusing on those two areas.

Again, I think we are going to have to build our capabilities in care coordination, discharge planning, some of the other areas that taking shifting share in post acute to bring more people sicker in the home, so hospital in the home.

So, we are focusing on all those issues and trying to build out or partner with people as quickly as we can so that we can offer a full package that would create a differentiated offering..

Well, I guess just one quick follow-up. I mean, obviously the question has been asked at the government level, but when you talk to CMS, I mean it seems like this would be – the further rollout would be best case scenario. I mean, it doesn’t cost many incremental dollars and the quality likely goes up pretty dramatically.

So what is the answer that comes back in terms of why further expanding this wouldn’t make sense?.

It’s cricket so far, but I will let Dave, Dave can hit – Dave will give you a more modulated answer..

Yes, Dave Kemmerly, I take you back from, first, I will reiterate what Paul said, we support expansion of VBP at all 50 states. I believe there was and probably still is in industry-wide support for that.

You may recall in late 2017 before CMS chose not to file [indiscernible] around proposal to expand VBP to 50 states and we went to Congress with it, but there wasn’t really a lot of time. Congress wasn’t open to it at that moment. They are waiting to see what came about in the rule.

We haven’t really, I believe, had the opportunity to really sit down with CMS and really vetted and really dive into it. We have been dealing with we can do with HH they’ve been dealing with HACM last year and dealing with PDTM in the interim.

So, I don’t think there is really – I wouldn’t necessarily say CMS has rejected it, but I don’t know we have been able to have a deep and meaningful conversation about is a kind of alternative payment reform or supplement to payment reform.

So, I am still hopeful that we can have that conversation and I am hopeful too that there is consensus in the industry that VBP is a way to get it.

Is that kind of answered your question?.

Yes.

And then guys just one quick follow-up question, if you look at the hospice clinical numbers that you are posting obviously very good on both an absolute and relative basis, can you talk a little bit about what you are trying to do to kind of push quality in Hospice a little bit more to the fore ideally over time start to get portions of reimbursement tied to outcomes and the quality of care?.

Do you want to take it, Chris?.

Sure. Hey, Dave, it’s Chris. Since CMS has recently started to publish publicly Hospice performance ratings, we obviously had some significant focus on where we stand we are pleased with where we stand today.

Now I think the key for us to actually get some sort of benefit from that is for us to work with CMS to demonstrate that actually the better scoring and the better rated hospice agencies out there are actually driving better outcomes and federal levels of care for the patients. So, I think it’s early stages for that.

It took a while for home health to even get to VBP, but that’s ideal for us is to have a system for the best quality providers out there or getting the upside and the worst quality providers out there are getting the downside..

Okay, thanks very much guys..

Thanks Dave..

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

Good morning, guys. Congrats on the good quarter.

I guess just following up on David’s question with Hospice seeing such good growth, I noticed average discharge length of stay increased by about 8 days, I guess what’s driving that and I guess where should we be thinking about where that’s going to shake out?.

Sure. Hey, Kevin. I am going to have Chris answer that one, but I don’t think you will see it go much higher. So, I will let Chris deal with that..

Yes, sure. Hey, it’s Chris. We alluded to this last earnings call. What we started focusing on is, is although the aggregate average length of stay is going up to 97 days where it is today. It was really more of a focus on a subset of care centers that had very low length of stay based on really primarily where their referrals were coming from.

So, we put a concerted effort around kind of diversifying that referral source and that’s what brought up the average length of stay to where it is. As Paul mentioned, we don’t anticipate it going north much further than where it is right now.

This is at a level that we can – we are managing cap appropriately and we are also I think have the right mix with regards to our referral sources..

And I would just add that Q2 2017 was in fact one of lowest points of that, we have kind of been in that low 90ish range, so that from a comparable standpoint, it’s a little different..

That’s helpful. Thanks, Scott.

And actually since I have you, going back to cost per visit, we have seen, you guys have done a great job there in lowering that, but gross margin keeps coming down as well, especially in Home Health, how – did I hear you say that is it stabilizing and I guess how should we think about gross margin in the segments for the rest of this year and even as we head into 2019?.

Yes. So, actually, gross margin just on Home Health, we were up 80 basis points on an adjusted basis and that was in line with probably I think a 30 to 40 basis point impact for reimbursement. So really we are excited about that performance around margin at the Home Health segment.

So they have done well continually as we grow that top line, there are some fixed costs around cost per visit as I have said earlier. So we are just getting expansion off of that. We can pull on the contract utilization. Certainly, we will focus on OPN and RN utilization.

It’s probably something that’s more into ‘19 as we do something structurally to get ready for that, but there is a lot of opportunity there, but from a Home Health perspective, we saw revenue perhaps stood at $45 on a rate cut. So if you think about that where we are, we increased visits by about that 0.3.

So from a margin prep we probably dropped an additional $30, which is – that’s $2 million range of gross margin improvement. So, we are excited about where we are right now.

If you normalize out to the noise around additional holidays raises, we would expect that we are going to be able to maintain kind of where we are as long as that top line number continues to do what we expected to do, but as you put in additional health cost and raises you will see that margin tighten in the back half the year..

Okay, that’s helpful.

And then CapEx it looks like the guidance has been maintained, but abnormally low this quarter and then you got to step up in the back half of the year I guess, anything unusual with this quarter and I guess what’s really driving that big increase in the back half?.

Yes. Some of that, if you look at what we said from a cash flow perspective just timing of payments, but we have just got some bigger projects. We have kind of shifted around as we look at priorities and other things we are trying to accomplish during the year.

We are still guiding to that 7 to 9, probably closer to the lower piece of that right now, if I look forward, but I don’t expect us to get too upside of that..

And then $50 million of operating cash flow and free cash flow, are you willing to give us free cash flow guidance yet?.

I think if you look at what we expect to be in the kind of in that from a if you think about free cash flow from full year, we are looking to be in that 170s range.

I mean right now what’s happening, we are pretty tight now with our new revolver we don’t have any required debt payments, so I am pretty close on free cash flow and cash flow from ops other than CapEx..

It sounds good. Thanks again guys..

Thanks Kevin. I appreciate it..

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

Good morning.

A couple of random questions here, going back to those value based purchasing the demo payments of $250,000 bonus, is there any upside to that, I mean are you is that basically capped out now at that 3% bonus level or is there any upside to that?.

Right now it’s – it goes on an annual basis. We are in the 3% range and then it goes I think 5, 6, 7 and 8 after that is how it’s going up to 2022. So next year it will be 5% and then the year after 6 and then 7 and then 8, so we are excited by that.

Obviously, what we would really like is since we are in 35 states, we would like to be we would love it to be in all 50 states. So because we are clearly we are performing well with 94% of our care centers being four stars and above..

Got it.

But the bonus payment is sort of all or none you get a 3% bonus or you get no bonus and so there is – you can’t do any better?.

No, it’s very graduated and clustered in the middle so that in order to just hit it out of the park, you have to get almost impossible score. So they again – we would love them to spread it out a little so that you can really hit that. We have done a nice job there, but again because we have produced very strong results.

But we would love for them to leave the middle and push it out towards the sides and punish the bad and reward the good..

And when it steps up each year, are the requirements expanding and getting more difficult, I mean I would assume that they are raising the bar if they are giving you a potentially higher bonus, is that fair?.

Well, they are using stars as a result and starts where they often do is shift things in and out and often if they achieve a great star number and everybody has hit it what they will do is they will bring in new measurements to try to up the game. And the bar there is always raised as people improve, because the average keeps moving..

Got it, okay. Shifting gears over you mentioned the possibility of some select de novo development, just curious if you can kind of walk us through how the economics of that works in terms of total capital deployed and time to breakeven and kind of long-term returns.

And then a final one, this is more of a related to M&A, you have referenced it, you have in a little harder to find things not so on the mainstream in the marketplace, but when you talk to the smaller players what is it that’s really driving them actually sell that, they are seeing valuations and your stock go up or is it, is there anything are they worried about this move to the new patient driven group or model or just any color there? Thanks..

Sure. So Frank I’ll do the first question and then Scott can talk about the de novos. But on the M&A front, we decided about six months ago and I think Chris Gerard did a wonderful job here. We decided that we needed that anything involving private equity or that was banked that the multiples we are getting beyond what we could justify.

And we still think we the game has probably changed a little we were looking in the 9 and 10 range for various things. Now probably reality is in the 11 to 13 range. But we have seen a lot of deals particularly in the hospice world go for well north of 15x, so that’s a little crazy.

And so we have decided, we tried it we basically brought some people on some proprietary people who hunt and gather and they went out and brought us some deals and we have got a lot of deals we are looking at. And we like them. We think they are interesting. They are tougher to bring in. But at least we are just talking to these folks so well.

And so we got enough to chew on in this area. And we clearly need to start to deploy our capital. I mean we got to where we are largely organically. And I think it’s been a great run that way, but we now have – we now should start to exercise the inorganic element of our company and really start to buy well. So we are happy with what we have got.

We need to execute on some of these things clearly I think in this year and prove we can do it and prove we can buy and integrate and all that. So we are on it, the pipes are good. They are nice and full and they are quality assets, some large ones mainly medium sized ones that we like.

And again in the hospice world if we don’t – if we for some reason we aren’t successfully here, we are going to build and so we have aggressive plans to build if we can’t bring in some of these deals in the near-term. And so that’s what Scott has the backup plan which is largely the de novo piece. We will still do both, but probably we will do less.

If we bring in a big deal, we will probably do less de novos..

Frank, just on the economics around de novos, it’s going to depend by state-by-state for the most part to get these things up and running, it’s probably going to take about nine months. The costs will accelerate as we staff and take on some patients before we get final approval over price that we will be spending around $40 a month.

If you think about that, we get through revenue positive if I will say around nine month timeframe with breakeven potentially at around 18 months. That’s going to vary depending on how long that startup period will that take, but that’s generally with the economics we would look like.

We have got a couple in progress right now so we will be at an update more statuses as we move forward and look at the model we are building..

Well, I think pure play, what are we thinking about. We are thinking double digits on de novos. If we don’t buy anything, we will be in that. Next year we will be putting a lot of these in place..

So as Paul said we are going to – go market-to-market we are going to go where we want to be and we will certainly get these started, but we will still be active looking for the other tuck-ins, so if I can switch and using our balance sheet to get in some areas we would like to be, we will do that as well, but we have said we will invest and build the de novo machine..

And when you develop those, can you sort of capitalize cost during that ramp up or is just basically all of them are going to flow through the P&L?.

It’s all in our [indiscernible]..

Believe me we have tried on this work. We are not crying. So it’s an OpEx spend, so that’s just we will give up and certainly where we are from a leverage perspective, we would very much prefer to find some nice tuck-ins and geographies that makes sense to us and where we are strong in home health..

Okay, thank you..

I appreciate it. Thanks Brian..

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

Hi Joanna..

Hi, how are you? Thanks so much for taking the question here.

I know we are running out of time, so quickly a couple of follow-ups on the quarter the metrics here, so obviously home health cost same-store organic volumes improvement, can you or did you provide the breakdown in terms of same-store growth Medicare versus non-Medicare in the quarter and also is there any target you had in mind for the Medicare fee for service growth in terms of volumes for the year or maybe the medium-term?.

Chris, do you want to take that?.

Sure. So the breakdown of our growth for Q2 is the Medicare was 2%, 2% of Medicare growth. The episodic which would include also the PPS payers, they pay us on an episodic basis along with the Medicare was 4.5%. And then our total growth was 5.5%. Our non-episodic admits were 8.6%.

And the way we were looking at it we want to obviously grow the Medicare fee for service at a faster pace than the others, that’s where our focus is, that’s where we have our BD team focused on as well.

We have had four consecutive quarters of improvement in that number and we anticipate with this strategy moving forward we would love to get that into the mid-5 to 6 mid single-digit range and be able sustain there. So that’s what our target is..

And Joanna just – this is Scott, just to add a little bit from a total volume perspective, we did about 8% for the quarter, so that’s important, you still have reset rate improve 170 basis points year-over-year.

So as we look at the businesses as we figure what we need from the staffing perspective, we are really focused on this total volume number and that service something that’s been helpful in driving our performance..

Great.

And then on the proposal, the home health proposal the PPGM, the data implies that it is maybe 1.7% cut for Amedisys, but I guess that I assume some of the behavioral adjustment that CMS put in, so how should we think about some of the things you could do to try to offset the headwind from these changes, I know that that number includes some assumptions that CMS which we don’t know exactly what they assume, but nevertheless when you think about when you prepare for 2020 how you plan to go about I mean there are some things around I guess staffing levels, because I guess you are going to maybe fewer therapists more home health aids, but any other things you are trying to consider now given the changes?.

Joanna, thank you. I was just going to start with the numbers piece, you are kind of right, we are around in that 1.6% range from what CMS has put out. So that’s kind of where we are starting from. One thing just I will remind everyone is we do to mandate I will give 1.5% market basket improvement in 2020, so that’s not in that number as well.

Okay, I will let Chris talk about some other items we can work on as we think about ‘20..

Yes. So in the near-term I think one of the first things we do is look at our referral sources and where our referrals are coming from. Obviously, the intent of the proposed rule is to pay a different rate for patients coming out of institutions, so we are evaluating kind of our institutional referral mix versus our community mix.

If there is an opportunity to shift there we can do that in the near-term and that will prepare us going into PDG and then you hit on the other one, it’s going to be really a function of having the capacity and the staff to be able to work in a new environment.

It may be a little different mix of clinicians in PDG and versus what we see today, so that’s kind of led into our focus around our RN retention. We got opportunities around RN and LPN utilization and as you mentioned as well home health aids may play a key component in the future state under PGDM..

Right.

And lastly if I may for that reg I guess you are working still on your comments to CMS, so what you are focusing in terms any changes you will seek from CMS to that proposal in any big I guess surprise or a disappointments with this proposal because in general it looks better obviously I mean we knew that but if neutrality is the key here, but any other commentary you have that you are working on for CMS? Thank you..

No, I am going to have Dave respond to you on that Joanna, but just in general we feel good about it as long as it sticks to budget neutrality and as long as it’s 2020 which it is. So I think with 18 months or 17 months now to prepare for and based on what we have seen we have got plenty of time.

We still have negotiating to do potentially good to get some better definition. And I think once we do that we will – we are talking with obviously CMS and Congress on that..

Yes. Joanna to add some specifics to that, we will be talking – we will be commenting on the behavioral adjustments what you mentioned were a little more detail around methodology and how they arrived at these numbers and how they will track at each year, etcetera. So we will be commenting on that as well I am sure one else in the industry.

We will want some more color around the community and institutional referrals, we think we know most of that, but we are coming on the early and late designation in the 30-day payment periods. We will be looking clinical grouping categories and the impact these will have on chronic patients.

We will be just few more questions around the little bit threshold. So, there is a lot in there to kind of pay drill, payment reform. They get payment reform and movement in by 20 years, so there is a lot to ask about and a lot we want to understand. But again as Paul said, we feel really good about the budget neutrality.

I think about a year ago you had HACM you are looking at 4.3% cut along with behavioral assumptions this year looking at budget neutrality. Again, it was behavioral assumptions, but we and also as Scott mentioned we have got the 1.5% of market basket update is mandated for 2020.

So we are still in analysis modeling, trying to understand, you heard from Chris how – early how we are looking at how we might react to this but there is a lot to learn, so that’s kind of where we will focus our comments..

Alright. Thank you..

Thanks Joanna..

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

Hi, thank you.

Good morning, just I have one question left, I was hopping if you can provide some insight into how you are going to use that 2.1% rate increase for Medicare in 2019 and will the emphasis sort of be on the wage side and hopefully improving nurse turnover even more and increasing the supply to emphasize the growth or does that get reinvested into some of the capabilities Paul mentioned or does that dropdown and benefit margins? Just want to get some insight in terms of how you are thinking about that?.

Thanks, Matt. Just from 2.1 that’s in the proposed rule and that’s industry wide, we would expect us to probably once the rule is final which is based on our case mix and case mix adjustments. We have historically been slightly under that. So we would expect that number to be a little tighter.

Yes, we are looking as we go into the budget season, talking about how to reinvest in the organization preparing from PDGM to putting things for our employees that we would like to do to help them out. So, yes, we are focused on that.

So some of that we will certainly spend some of that money and it’s just not – it’s heading into that year from a net positive reimbursement, we are really excited about that and things we can do and focus on.

So, we will certainly see what the final rule is, we don’t expect much movement, but we will have plans to utilize that to help us reduce turnover as well as prepare for PDGM..

Yes, I think a lot of it will go into the prep on PDGM math and the other one is we are clearly going to do some innovations work. Our hope is we can do that off the balance sheet. We are trying to figure out ways to do that.

So, we are pretty excited we think where there is – when we look at this we think we will be well prepared for it and when there is change, there is always opportunity. So, particularly if we take some of the – what we think we are going to generate next year and really start to prep well and lock things down, we think 2020 will be a good year..

Got it. Thanks very much..

Thanks, Matt..

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments..

Great, thank you very much. Thanks to everyone who joined us on our call today. We appreciate your interest in Amedisys. We would also like to thank again all of the employees to deliver these fantastic results.

We hope everyone has a wonderful day and look forward to updating you on our progress out on the road and our next quarterly earnings call in October. Take care, everyone..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..