Greetings welcome to the Amedisys Fourth Quarter and Year-End 2019 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 fourth quarter and year-end December 31, 2019. 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 on today’s call from Amedisys will be Paul Kusserow, Chief Executive Officer; and Scott Ginn, Chief Financial Officer. Also joining us is Chris Gerard, Chief Operating Officer; and Dave Kemmerly, General Counsel and Senior Vice President of Government Affairs.

Before we get started with our calls, 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 the information available to Amedisys today.

Company assumes no obligation to update information provided on this call to reflect subsequent events, other than is required under applicable securities laws. These forward-looking statements may involve a number of risks uncertainties, which may cause the Company’s results or actual outcomes to differ materially from such statements.

These risks and uncertainties include factors detailed and 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 Form 8-K.

Thank you, and now, I’ll turn the call over to Amedisys’ CEO, Paul Kusserow..

Thanks, Nick, and welcome to the Amedisys 2019 fourth quarter and year-end earnings call. We have three things to talk about today, past, present and future, 2019, 2020 and 2021 and beyond. We generally try to avoid hyperbole on these calls, but it would be inaccurate not to describe our performance in 2019 as tremendous. Some of the highlights were.

We had the great honor of caring for over 50,000 patients each day, making more than 12.3 million visits across our three lines of business. At least 91% of all our Home Health care centers achieved a star score of 4.0 or above. We've lowered total voluntary turnover to 16.9%, our lowest level to-date.

We grew our adjusted EBITDA 25% from $181 million to $225 million while expanding EBITDA margin 70 basis points to 11.5%. We closed on the acquisitions of Compassionate Care Hospice and RoseRock Hospice while closing Asana Hospice on January 1, 2020. I'd like to welcome all Asana associates to the Amedisys' family.

On that note, we are truly excited to have you join the organization. You're unwavering drive to provide the highest-quality hospice care to all your patients fits perfectly with the culture we have created at Amedisys.

Next, we expanded our relationship with Medalogix by increasing our care centers on the Touch and Care products from 10% to nearly 50%, further safeguarding our PDGM transition.

For those of you newer to our story, Touch is a program focused on hospitalization reduction and Care is a program focused on providing individualized care plan to both optimize patient outcomes and utilization.

Next, we executed an innovative nationwide Personal Care partnership with ClearCare, giving us a needed personal care service at scale as we work towards further care coordination. And last, we practiced, practiced and practiced for PDGM and thus far our prep is paying-off.

None of this would be possible without our over 21,000 employees, whose unwavering commitment and focus on providing outstanding care to our patients in their homes, has made this great quarter and year possible. I want to thank every one of you for helping to deliver such great care and strong results.

With that, let's now take a look at the fourth quarter and the full year 2019 results, as it relates to our four strategic pillars, quality, people, operational efficiency, and growth. Always, first is quality.

If you don't hold yourself accountable to deliver the best care and put everything you have into it, what's the point of us getting up in the morning? It's a non-negotiable and in my opinion, it's the reason why we have been so successful to-date.

We achieved a quality of patient care star QPC score of 4.26 and we had 15% of our care centers at five stars, while 91% of our care centers were four stars as of the April 2020 quality of patient care preview.

Our hospice business once again outperformed the national average in all hospice item set measurement categories and is at the top of the national players we benchmarked against.

Secondly, people, if you don't have passionate, productive employees who want to practice their art with you, and to vote to work for you every day, you can't deliver great care, in that we drove total voluntary turnover excluding PRN to 16.9%. These are our best full year results ever.

Third, operational efficiency, great people need great processes and great tools to be able to deliver great care and to maximize their productivity and impact.

Our focus on operational efficiency has once again driven margin expansion in all of our lines of business, and we ended 2019 within adjusted EBITDA margin of 11.5% 70 basis points higher than 2018. And finally, growth, if you have the best people with the best tools, delivering the best care, you should grow disproportionately.

For Home Health, we grew same store total admissions 4% for the quarter and 7% for the year ahead of our guidance range of 5%. In Hospic, we were same store ADC 8% for the quarter and 7% for the year. On the inorganic front, we close the Asana hospice deal on January 1st, adding 450 ADC to our census.

We continue to be very interested in hospice tuck-ins and we'll look to do more this year. In Home Health, we have already seen early signs of the disruption caused by PDGM having already absorbed one asset in Missouri while more and more have been calling.

We will continue to grow share via absorption, but are also interested in strategic inorganic opportunities as they present themselves, particularly in CON space. As you can see, we had another great quarter and an incredible year on all fronts. Our, of the people by the people strategy of quality people, operational excellence and growth is working.

We outperformed our twice increased guidance ranges, and we have set ourselves up for continued growth and success in 2020. Again, thanks to all the Amedisys employees for all you've done to drive the success. You continue to prove that focusing on our people and patients drives increasingly better and better results without an end yet insight.

Before I turn it over to Scott to discuss guidance and the financial results, I want to touch on a few key initiatives that we will be keenly focused on during 2020. All of which will help us deliver the highest quality care to our patients across all lines of business.

Our single biggest initiative in 2020 is PDGM, which we have discussed at great length over the course of the last 20 months, between revenue drivers to offset the behavioral assumption, impact and cost levers such as LPN and PTA utilization, and visits per episode optimization, we stand ready to thrive and grow under the new payment system.

In Q4 '19, we increased our LPN utilization to 42.3%, up from 38.6% in Q4 '18 and we increased our PTA utilization up to 44.4% up from 41.7%.

We also continue to expand Medalogix care within our Care Center portfolio and now have 60 of our Home Health agencies optimizing utilization to get the best quality in the most efficient results for our patients.

Care uses ours and others' data and robust analytics to deliver a patient-specific individualized care plan that help to ensure, we are optimizing visits per episode with the most appropriately-skilled clinicians based on each patient's individual needs.

The results have been promising as this quarter, we've reduced our visits per episode to 17, down from 17.7 in Q4 '18 while the quality ratings are holding strong and in many cases improving. With nearly seven weeks of PDGM under our belts now, I am pleased to report our early experience has been quite positive.

CMS claims processing has gone smoothly thus far and our clinical and back office teams have not experienced much disruption. As expected in the broader industry, we are seeing an uptick in smaller operators reaching out for help. We absorbed one asset late in 2019 and have a growing pipeline of similar opportunities we are evaluating this year.

Our tireless preparation for PDGM is paying early dividends in 2020, and I am confident that, our success will continue throughout the remainder of this year. We'll know much more in March, when we have a cleaner view of PDGM's impact in full, but so far so good.

Our next big 2020 initiative is delivering on the Compassionate Care Hospice EBITDA contribution of $34 million to $36 million. We have developed a fine-tuned integration engine and outperformed our initial expectations in 2019.

This asset is poised to grow and operate more efficiently and we remain confident that we will deliver the EBITDA we promised. Continuing the progress we made in 2019, consistent above market growth in all three lines of business will be a major focus of 2020.

We have become more and more sophisticated with our usage of data related to business development staff activity and referral source patterns and expect 2020 to be a year of out-sized consistent growth across all our lines of businesses, as we build proprietary sales and marketing tools and capitalize on the advantages we've built in quality and people.

Finally, continuing to build the infrastructure necessary to truly operationalize our personal care network will be a focus for our team in 2020.

The innovative arrangement we executed in 2019 with ClearCare was just step one in what will be an iterative process to build the pieces necessary to provide truly coordinated care to our patients and payers. 2020 will be a year we continue to invest in this build-out and to feed the network.

We are most excited though about 2021 and 2022 by then, the early stock of first half 2020 PDGM should we be well behind us.

Our new hospice assets will be fully integrated and operating at our legacy growth rate and margin levels, and we are focusing and betting that integrated Home Health will be a differentiator for MA plans wanting to keep their chronic members at home.

We will update you on these initiatives throughout 2020 and beyond, as we reach the major milestones. And with that, I'll turn it over to Scott Ginn who will take us through a more detailed review of our financial performance for the quarter and year as well as our guidance for 2020.

Scott?.

Thanks, Paul. I'm very pleased to report another excellent quarter and full year financial results. For the fourth quarter of 2019 on a GAAP basis, we delivered net income of $0.83 per diluted share on $501 million in revenue, an increase the $66 million or 15% compared to 2018.

For the year, we delivered net income of $3.84 per diluted share, an increase of $0.29 or $2 billion in revenue, an increase of $293 million or 18% compared to 2018. For the quarter, our results were impacted by income or expense items adjusting our GAAP results that we have characterized as non-core temporary or one-time in nature.

Slide 15 our supplemental slides provides details regarding these items in the income statement line items each item, in each adjustment impacts. For the quarter on an adjusted basis, our results were as follows. Revenue grew 66 million or 15% to $501 million. EBITDA increased over $8 million or 19% of $52 million.

EBITDA as a percentage of revenue increased 30 basis points and EPS increased $0.03 to $0.94 cents per share. For the year on an adjusted basis, our results were as follows. Revenue grew $297 million or 18% to $1.96 billion.

EBITDA increased an impressive $45 million or 25% to $225 million, EBITDA as a percentage of revenue increased 70 basis points, and EPS increased $0.77 or 21% of $4.40 per share. As our results indicate 2019 was a tremendous year for Amedisys.

As we continue to successfully execute on our plan to deliver financial results that match our clinical excellence while executing or inorganic growth strategy for our hospice segment. Before I turn to segment performance, I want to remind you a few items that impact our sequential performance in Q4.

Planned wage increases effective August 1st added approximately $2 million in costs, and seasonality of health insurance claims and workers comp added approximately $5.5 million. I will now turn into our fourth quarter adjusted segment performance. Keep in mind, segment level EBITDA is pre-corporate allocation.

In Home Health, the revenue was $316 million, up 12 million or 4% compared to prior year, driven by a 4% increase in both same-store total volume and admissions. Visiting clinician cost per visit increased $1.55, mostly driven by planned salary increases. Overall cost per visit increased $1.90, a 2% increase over prior year.

Our gross margin improvement of 160 basis points was driven by rate increases across all payers as well as a year-over-year decrease in business prepaid from 17.7 to 17. We have seen sequential improvement in this year-over-year comparison throughout 2019, as we began Q1 of '19, slightly ahead of 2018.

EBITDA was $48.1 million, up $4.7 million with an EBITDA margin of 15.2%, representing a 90 basis point improvement. The segment to EBITDA margin was 16.3% for the full year of 2019, which represents a 120 basis point improvement over prior year and a 310 basis point improvement since 2017.

Other items impacting the fourth quarter results of our Home Health segment include as a percentage of revenue was 24.1% for the quarter, which is up 70 basis points compared to 2018, a shift in our staffing model and raises will be increasing.

Finally, effective November 1, 2019, one of our episodic payers phased out their plan offerings and the members have transferred over to plan the pay per visit. We expect minimal financial impact. Now turning to our hospice segment results. For the fourth quarter, revenue was $165 million, up 56 million over prior year, an increase of 51%.

Same-store average daily census was at 8%, net revenue per day was up 1% $153.42 cents and cost per service per day was up 5% to $83.13 cents. G&A for the segment increase 15 million to 23% of Hospice revenue was inclusive of acquisition activity which added 12 million. EBITDA was 38 million, up 8.5 million over prior year an increase of 29%.

EBITDA our margin was impacted by the inclusion of the CCH and RoseRock acquisitions. Excluding the impact of these acquisitions are Hospice EBITDA margins improved from prior year. For the quarter, the CCH and RoseRock acquisition added $46 million in revenue, and $4 million in for Hospice segment.

For the year CCH and RoseRock and 174 million in revenue and 23 million in Hospice segment pre-corporate EBITDA. Our Personal Care segment generated approximately 20 million of revenue in the fourth quarter and improved EBITDA margin by 110 basis points over prior year. Our difficulty driven by the strong economy continued to limit our growth.

Our results are not comparable to prior years as they're inclusive of acquisitions. Turning to our total general and administrative expenses. On an adjusted basis, total G&A was $154 million or 30.7% of total revenue.

Total G&A increased 25 million over prior year driven by approximately $14 million related to our Hospice acquisitions and 5 million for additional sales employees to support growth. Additionally, we have made purposeful G&A investments of nearly $7 million in 2019 for the following.

PDGM preparation including, pay practice, redesign and staffing model changes, IT security enhancements, innovation pilots and expansions de novos.

Our significant grooming cash flow continues in the fourth quarter, we generated $75.2 million in cash flow from operations and paid down nearly 70 million on revolving credit facilities bring our net leverage ratios approximately 0.7 times. Our DSO decline three 3.8 sequentially to 44.9 day.

As we promised excluding the funding of the Asana acquisition at the end of Q4, we fully paid off all revolver borrowing line of the CCH acquisition. For the year, we've generated $202 million in cash flows from operations and 190 million in free cash flow.

I am very pleased with the progress of our inorganic growth strategy during 2019 we did Hospice acquisition, closing additional acquisition on January 1, 2020 and ended the year with 11 de novos. Finally, as you can see on Page 18 of our supplemental slide deck, we're leasing our guidance for fiscal year 2020.

Our guidance ranges our revenue 2.12 to $2.16 billion, adjusted EBITDA of 250 to 260 million, and adjusted EPS of $4.90 to $5.13. There are several key factors impacting 2020 guidance outlined on Slide 18 to 22 of our supplemental slides.

First, Amedisys' specific PGDM pricing headwind of 2.8%, our Hospice reimbursement is up approximately 50 basis points; however, the majority of the increase will be passed through to general inpatient and restroom facilities translate into a negative 50 basis points margin impact.

For CCH, we're estimating EBITDA and the range of $34 million to $36 million. CCG will be included in our same-store numbers as of February 1, 2020. Planned wage increases of 2% to 3% that will be effective in the second half of the year. Keep in mind, our first half 2020 results will be impacted by raises given in August of 2019.

In total, the impact of 2019 to 2020 raises is approximately $20 million to $23 million of increased spend. Our effective tax rate assumption is approximately 26% with an estimated cash tax rate of approximately 24%.

Continued incremental investments in the business of approximately $12 million, which includes the following; PDGM resource of approximately $5 million, additional de novos spend of approximately $4 million and investments in innovations and projects including future build-out of Personal Care partnership of approximately $3 million.

As Paul mentioned, we are very confident in our preparation efforts around PDGM. As we've discussed throughout 2019, the cost levers dated to offset the impact will be heavier weighted in the back half of 2020. Accordingly, we expect our EBITDA performance in 2020 looks much different than our historical patterns.

There are also some additional miles I'd like to call out that will cause our sequential EBITDA progression from Q4 2019 to Q1 2020 those different than our prior year.

These items include, the impact of $5 million related to rate noted in 2019 was a positive for both Home Health and Hospice, contributions from CCH will now in our year-over-year comp, which accounts for approximately $4 million and the benefit of non-recurring fleet gains realized in 2019 of approximately $1 million.

Finally, this guidance assumes that fully diluted share count of 33.4 million shares. We believe that, our efforts around PDGM that will materialize in the second half of 2020 combined with the continued growth and the contribution from our Hospice acquisitions will translate into a meaningful upside as we move to 2021 and beyond.

This will conclude our prepared remarks. Operator, please open the line for questions..

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

First question for you, Paul. So, as I think about growth, Q4 growth kind of decelerated a little bit from what you did for most of the year.

I know you'd be the guidance for the year on organic growth, but how should we be thinking about the factors that impacted the growth performance for Q4? And I noticed that you're forecasting an acceleration for both the Hospice and Home Health segments for 2020.

So, if you don't mind just bridging us through, how you're thinking about growth, exiting that Q4 run rate or the Q4 performance into 2020?.

Sure. Thanks for the question, Brian. Yes, Q4 was an interesting time for both Home Health and Hospice in the sense that, Home Health, we were heads down on PDGM prep. And in Hospice, we were heads down on CCH integration, finally finishing the Homecare, Homebase integration and then starting to build out to management teams.

So I think what we did is I think the growth in Q4, due to the concentration on these areas wasn't what we desired. And I think we have a lot of confidence. So with the head of steam we're bringing in, in terms of this year. So, we're confident we're going to hit the numbers, particularly in Hospice we know that we're building out.

We have the reps that we need out there. There was a bit of a wall while we were concentrating on all these other issues, in terms of hiring. So we got a little behind, not like we did prior where we were 120 off, we were about, in certain cases, maybe 10, 20 reps off. But we've corrected that and the first.

We know that we have to accelerate on the growth to get through what we need to. So we're feeling quite good about it thus far.

I don't know Chris, any?.

Yes, just a little color on kind of Q3, Q4, there is a little bit of comp noise in those numbers as well. What we did is? We layered our 2017, '18 and '19 out on the chart and the trend lines show consistency across each year with progression. A couple examples is Q4 this year, our Medicare growth was 1% on a crop of 2018 of 3%.

And our Q3 was 5% on a comp of flat, and then our total growth -- our total admission for Q4 was 4% on a comp was 6% and 9% on a comp of 4%. So, we just had a little bit of inner quarter kind of noise in some of the other factors, I feel confident that our trend line is consistent.

Our 2020 trend lines should not deviate much from what we've seen the progression from '17 to '18, '18 to '19. And you should see the same thing is '19 to '20..

Appreciate that. And then, I guess, Scott, in your prepared remarks, you've talked about acceleration 2021 and beyond.

If you don't mind walking us through, how do you guys are thinking about your reimbursement? How you're thinking about, again, growth in volumes as you think about the M&A environment and think about the absorption that you guys mentioned? How do you put all that together past the noise of 2020?.

Yes, I think, I still think all that activity is still if you think about just start with terrible questions around the world, we can absorb it from everything else going on, whether it's some consolidation, you may still feel that in the back half, because that's when most of the payment we felt from the cash flow impact.

So, we still think of the heavy back loaded, if you think as we move forward. I said, our impact was about 2.8% on the revenue piece.

I think we're going to probably be from our modeling and a little bit of adjustment, our comorbidity offset, I think we're going to probably be short on that by about $2 million in Q1 and then we cover that up, so on average we will be fine for a full year. So that gets there.

And then from the visits and the mix, mix piece around the LPN and RN and PT, PTA, we think we're going to get to 50% probably in Q4, and we will average one visit for the year, but you'll see that picked up in the Q4. I just think it looks different well into Q3 and Q4. Typically, Q2 is one of our best quarters and we pull that down in Q3.

I think that's out the window for how we look. I think we still continue to build performance Q2 forward and how we're thinking through all the different movements in the levers..

And then 2021, Scott, just, is that an acceleration year you think?.

I think it's a good tremendous opportunity to be just, in our entire money and look at the multiplier on exit run rate as we hit these levers come through. It's a tremendous upside and we got continued upside around the CCH.

So, yes, I think as our plans way out even if there's some chop in the first quarter, those exit rates in Q4 2020 to 21 pretty exceptionally for us..

Yes, so we're feeling good. We're feeling good about where all this is going on the long view. And we think we're in pretty good shape in terms of how we're heading into the second half of the year where we're going to need to really rely on the cost levers and Home Health and then we'll be fully integrated on Hospice.

So, we should be cooking with gas. So, we feel in generally quite good about this..

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

I wanted to follow-up quickly on Brian's first question around the fourth quarter. Paul, you alluded to, obviously, the heads down on PDGM and I imagine that was not only at a management level, but also kind of an operational level, whether it's talking to referral sources about what new information you need or maybe agencies focused on staffing mix.

Can you just give a sense for the things that affected growth in Q4, do you feel like they're largely in place at this point? Or will some of that linger into Q1 and Q2 as your agencies and your sales folks are continuing to focus on PDGM?.

Yes, I think we're seeing I think we're encouraged about what we've seen so far. I think so we have to put a little note of caution in there will be full out on PDGM in March. So, we'll start to see the full impact of PDGM in March.

I think where there will be some -- we still will experience more or less disruption around us because, as I indicated in my remarks, there's a lot of people picking up the phone and calling us now more than I thought. And so, I think there will be disruption around us. I do think that affects the referrals versus to a certain degree.

And but I don't think we saw a little in the fourth quarter. And then yes, at the care center level, it was heads down, still is that heads down on PDGM execution in Home Health, and then integration on CCH and bringing that asset in line with our legacy operations, but we're, we're still on track on both of them. So, we feel very good about it..

Okay.

And then following up on the care center you absorbed in some of these phone calls you're taking, can you just give us a sense for when you decide to sort of give absorption to greenlight? Just walk us through some of the logistics, the time line, how quickly once the opportunity is right, can you really bring these folks and these patients into the full?.

Yes, I think the key is where we -- there's three buckets, if you will. There's one which is where some of these folks overlap with our licenses, and so that's about 16% of the United States at this point where we have that coverage. So, we believe that we can do some good absorption. And thus far, it's where there has been overlap with our licenses.

That's what that way we can just bring in the business, we can bring in some select employees and we don't have the liability that a provider number would bring with it. The in Home Health, there is a unique thing that's called a look back to six year look back.

And so when we go outside our license area and acquire a provider number, we have to be very careful, because then we're liable for some of the things that occur in that six year look back. The other third bucket is a CON bucket where we're pretty interested in seeing anything in a CON state.

Because these are more difficult markets and obviously people tend to do better in CONs there's a higher value associated with them. So, those are the three buckets we're looking at. The easiest one obviously is where there's overlap within our license area. I don't know, Chris..

Yes, and just to go a little deeper on kind of that process when we get approached or we hear of an agency that struggling financially that has a base of patients and employees.

We have a toolkit deployed all of our care centers out there and we have a dedicated team also running the project management to make sure that we're evaluating our capacity, balancing that against what the agency may have that they're needing to transition, identifying if there's an opportunity to heart clinicians.

We have a kind of a fast track hiring process that, we can deploy at the locations and it's a matter of patient choice, if the patients do choose to move to our agency and physician will sign the orders, and then evaluation, and admission and we absorb them into our business.

I will say that, early experiences is that, this is on a sample of really too is that, about 50% of the actual patients end up qualifying for Home Care, based on our assessment standards. So, it's not a full redistribution of the patients..

And then if I could just sneak one more in and it's on Medalogix, you mentioned you're increasing some of the investments there. I think apart from PDGM prep.

Could you just give a sense for what are the things you're looking for in terms of incremental work with Medalogix? Is that just rolling out the tools to more agencies? Or are there other tools or strategies that you're working on?.

Yes, we're currently focused on two tools Medalogix has run now. It's a care which is really I'd say more of a PDGM kind of episode optimization, kind of model or system. And then, Touch, which is really what we deployed in late 2018, is really more around hospitalizations. We've got through polyphase on both of them in 2019.

We started to expand to other care centers, both products in late 2019. And now, it's really deployment of those two products into all of our care centers. We have a plan to have care deployed throughout the organization by the end of Q2, and then we'll have Touch done by the end of Q3 I believe.

So, it's really more just kind of fees and training and rollout costs associated with those products..

And I think the idea is that, obviously, Care is essential for PDGM. So, that's primary, that's what we want to make sure, pushed out. But the Touch product for us is very important, as we're in our discussions with Managed Care.

Obviously, reducing if we go at risk often and what Managed Care wants to for us to go risk on is hospital re-admissions and helped us very much in our reduction of hospital re-admissions. Where Touch has been in put in place the results have been very strong for us..

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

Paul, can you just spend a quick minute on the ClearCare partnership and what is that done in terms of conversation with the MA plans kind of in the construct of value based care, potential additional services that you guys would be providing? Just anything in terms of how the conversations have changed now that you have that capability in place?.

Yes, the conversations have -- it's been, obviously, I think a real enhancement. The key thing is, there is two parts to it. One is building the network, which is kind of what we've done, and that happened in a big bang approach. So, all of a sudden it was there. And now, we need to feed the network, so Chris is working on that.

We're largely doing -- as we established that we're largely doing that through cross referrals. And we're seeing some, we're seeing some good early results, we still have work to do on that. But since it's emerged, we were encouraged by what we've seen.

The next piece is working with our partners at WellSky and ClearCare to integrate our information that we have from home care, home based and Home Health and Hospice.

And then the information that we're going to be getting through our Personal Care, ClearCare, we have to then integrate that all together so that we can fundamentally optimize which caregivers are best. And then, we have obviously the, what we've been able to build with the care product of Medalogix is fundamentally individualized care planning.

So, we're very excited. The plan seemed to be very excited about the idea that we have access to a variety of different resources to fundamental can deliver really good care for the lowest possible cost. So that's -- but that's, so the talk is really good. I think all the pieces are kind of loosely being assembled. Now, we have to put it all together.

But there seems to be a lot of enthusiasm around it. We have some -- we've been having some good early conversation..

And just a Medalogix, can you talk a little bit about, a little bit of the incremental opportunity around capacity that it likely frees up? And more importantly, does that tool give you the opportunity to potentially accelerate the staffing mix shift? And, I know we've kind of talked about a 50-50 number with the Medalogix tools in place, is there an opportunity to maybe do a little bit better than that?.

Yes, so I'll answer that one, Dave. So, with regards to Medalogix, I think it's going to be really visit optimization making sure we're providing the right number of visits for our patients, if the data plays out and we do achieve like a one visit, reduction per episode. Obviously, that does create capacity at our care center level.

I don't think it really influences our skill mix from a PT to PTA or an RN to an LPN. More importantly, what I think accelerates that we're in, we're already seeing it, coming out of the gate is our pay practice change that we did in Q4 of last year. That was our biggest barrier to getting optimized on that mix.

And we got through the pay practice change 9,000 of our clinicians fundamentally had a change in the way that they were paid. And it really kind of encouraged them working at the top of their license. So, that's what gives us confidence to get to the 50-50. Possibly beyond that, but we're feeling good about it..

Okay. And then just last question, look as the impact of the reimbursement changes and wrap payment and all that stuff kind of kicks in and some of the smaller players struggle.

Do you think the government may revisit the look back here? I mean, in some cases, I would imagine there's not a lot of incentive to take that risk on and you could end up with some bare counties or whatever you want to call it in terms of access to care issues.

Is that an area that you think the government may be willing to take a look at a little bit more closely?.

Yes, I've been trying -- that's a good question, Dave. I've been trying to work with CMS on this. We had some good early discussions with CMS on this, but since they've kind of gone dark on us. I think at some point, there'll be like food deserts.

I think there potentially could be Home Health deserts, particularly in some of the rural areas where you, where, you're losing the rural add on plus, you're getting the rap issues, plus you're getting the cuts. It's going to be I think there will be some places. At that point, we'll see if CMS can come back to the table.

Obviously, I think if the CMS is -- if CMS really wanted to facilitate consolidation in this industry, which it seems like they do with this. I think the first thing they did by eliminating the rep is, is fundamentally tried to push out a lot of fraudulent players and tried to limit people from coming in, particularly smaller players.

But I think the idea is that if they really want to foster consolidation and there were no liabilities that we had to scrub, scrub and scrub, and you can imagine some of the small players we go in that are paper based or that have documentation that's somewhat suspect. It's pretty difficult. So we've been bugging them about this, at least I have.

And my hope is that if they do create these deserts, if it is, if we really have some dips, they're going to have to come back to the table and figure out how to entice people to get back in.

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

I guess might be a Scott question, but you called out, I think somewhere around maybe $10 million of items EBITDA adjustments, that would be affecting the first quarter versus the fourth quarter of '19.

I just wanted to -- is it as simple as just taking that out of that $52 million adjusted EBITDA run rate in the fourth quarter and that's a good place to start for 1Q? I guess that's the first question. And then I think you also commented about how you'd be accelerating with nice growth by the fourth quarter going into next year.

Just any kind of guidance around sort of what would be the implied run rate as you exit 4Q 20?.

Frank. I'll start with that and just kind of reiterate the numbers, but I think the simple answer is yes. I think that's a good way to how you're thinking about to start and a lot of this is just things that came through as Q4 to Q1.

And as it talks about the fact that we as CCH in Q1 of last year was about $4 million, we had rate good guide over about three and then fleet was one good guide.

So, that's about eight there and then the other piece of it was the fact that will be a little slower, probably about 50 bps off from kind of overcoming the 100% of that rate, 2.8% initially, kind of really more January, February that's another two. So that's where that came from.

So, I think that's a good when you're thinking about seasonality, we grew about $11 million last year sequentially, Q4 to Q1. So, I think that's a good way to start thinking about it and then building from there, as the other cost levers in the final days to another 50 bps on rate comes through. I think that's a good way to think about it.

And the other piece was around growth and....

Growth trajectory and acceleration, so that's -- Frank, its Chris. Yes, we expect, as we planned out this year, we think that it will be It'll be a little bit more back half loaded on, on the growth side to total emission side.

What we did not bake into our, into our forecasts or to our guidance is any of the kind of disruption and rescues from other agencies, they go out of business that we absorb. So, any of that that happens in the second half of the year can be tacked on top of kind of, our growth trajectory that we're already expecting.

This year, we're investing a little bit more heavily into our BD staff and as well as adding incremental leadership in both lines of business, which is a senior level position and a significant investment on our part. They'll be kind of on boarded and up and running by the end of Q2.

So, we don't expect to really seem to pull-through from that until later in the year, but all indications are it's going to be a nice exit as we as we go out of 20 into 21..

What would you say that the….

Hopefully, the goalposts will stop moving at this point in the sense that our self-imposed growth in terms of Hospice looks very good. So, we're heading in, we also got some good market baskets, we're heading into.

And then on the Home Health side, we've got some stability there and we'll be, I think cooking with gas on PDGM having worked through the 2.8% and then starting to deliver on the cost side. So, I think we feel very good about it..

Is it fair to say that, the fourth quarter will be the highest quarter of EBITDA contribution for the year?.

The way it built, I think that's a good assumption as really everything will be in place for that. That's correct. So remember just on our normal kind of EBITDA progression that means you're still going to have higher health insurance. So, it just kind of speaks to how good of a quarter that would look, if we get to an exit rate..

I think what we're saying is that, there's a new paradigm in terms of how this is going to look. It's not going to follow the traditional Q2 is the best. And then, I think we're telling people that that's not going to work in that way. It's going to be a hockey stick in the second half of the year..

Yes, the other thing I would add -- as people are thinking, Frank, around on a modeling piece is cost per visit, it certainly, if you think about a differential, we say what's used where somewhere around $90 per visit. We think about 75% of that is really a fixed cost or it is a fixed cost piece of it. So, 25%, I'm sorry, is the inverse there.

So, 25% is fixed. So, as we take out one visit, for example, it could increase -- it will increase our cost per visit, especially ROE and so we get the staff and mates and everything like, just thinking about the math through that. So, Scott, it is important to keep in mind that, what will help us in the back half is as we give raises.

It'll help us overcome some of that year-over-year impact from rates perspective..

Just maybe just one more and I'll hop. Obviously, we've talked a lot about the adjustment laid to PDGM on the traditional part of the business, but what are you seeing out of Managed Care plans? And I think you've made reference to something they converted from a, was that a Managed Care payer that has converted from episodic to per diem.

So, just any color around that whole, on the MA side as it relates to PDGM? Thank you..

Yes. Hey, Frank. It's Chris again. So, on the latter part of the question, yes, we did have a significant volume payer that had an episodic product with us that they did sunset last year, at the end of last year.

Those patients were -- those members were redistributed amongst -- across their other service offerings or plan offerings which we had contracts with. Our Managed Care team did an excellent job in working through that transition with the payer to make it a net neutral for us economically.

But what we'll see as a big shift in our episodic admissions versus our private per visit admissions as we go forward. But, again, it was something that we were able to actually negotiate at nice rate.

And then the bigger picture is, we're having, almost every negotiation that we're having a conversation around these are contracts were or renewing contracts has some component of gain share, that's being contemplated.

So, we're not only inching along in terms of getting our base rates on the per visit side of when we're dealing with a per visit contract, when we're also getting some opportunity, upside opportunity negotiated in with regards to the quality that we produced.

So, we see that trend continuing and it gives us the incentives to make sure that we'd leave with quality and we get paid on quality and but we're dealing with plants at are not quick to open up the first string. So we start the first string. So it's taking us a little while to get there, but we're excited.

We know that Medicare Advantage is not going to slow down in penetration. We have to be able to play in that game very well and be a good partner. And we have a lot of energy around that..

Yes, just following up on Chris's point, Frank, is our at risk pieces on again share last year was 5% of our Medicare Advantage or non-Medicare book. It'll be quadruple this year to 20%. So, we are taking more risk and we are doing more, but it's hardly gain share. So, there's no downside on it.

But we're trying to get involved as many as these as we can, because we believe that's where the future is going..

[Operator Instructions] Our next question comes from the line of A.J. Rice with Credit Suisse..

Just to asking about the cash flow and your expectations for 2020. I have a '19. You did operating cash flow roughly of 202 million and a 194 free cash flow. I know you got obviously the growth of the business, but you're also pointing to higher cash taxes, the impacts of the RAP payments and there was a 3.6 day decline in DSOs at the end of the year.

I don't know where you think that will be this year where that'll sustain or not, but any sort of directional comments on where you think cash flow will come out for 2020?.

Sure. Thanks A.J. We're looking kind of the $160 million, $165 million range for cash flow from us, I think we'll you'll see as a disruption in Q1 that we've been talking about.

I think we're some we believe it's somewhere in the range of $60 million away to the RAP to names and then our number progressed from there and get back to somewhat of a normal. DSO, you'll take a hit then stabilize and you'll see us build cash again. So, we're feeling good about where we're heading into for the rest of the year.

So we'll be in great shape. We drew on the revolver to fund the Asana deal right at year-end. I mean, as we're looking at it now, we think we'll pay that back down probably majority of it in the Q2 have a small portion left in Q3. So we think, cash flow still is absent that Q1 disruption, a nice story for 2020 as well..

Okay, and then a quick follow-up is obviously, you've even done a deal already. I wonder whether in the light of PDGM.

Are you seeing in pricing on deals change in any way yet? And what is the competition? Are you one of the few that are stepping up to be on the buy side? Or are you still seeing the same usual players? And I wondered in the other deals also, does that have any spillover on the hospice side since the tendency to sane buyers of hospice and home health in many cases?.

So, we've seen at least on that front. We've seen that thus far, if you talk something in, it's generally free. So the idea is you have some conditions there that you hire certain people, but generally the patients come. So when it's in our license area, we don't expect to pay anything. Is there competition? Yes.

Is, but I think the key is that we're interested in, I think people, again, our quality wins. I think our ability to absorb employees wins. The fact we have a very good playbook that Chris talked about wins, so we know what to do, how to get licenses up, how to get people working.

The other thing on the hospice side though the prices, as Scott can talk more particularly about this. Unfortunately, the prices haven't followed with hospice. They're still, there's not much left out there. There's some medium sized assets, but they're going to market and everybody's coming to market now because the prices are so high.

So, it's a tough market for hospice, although we're still seeing some pretty decent deals, but….

Yes, that's fair, Paul. I mean I think hospice has been and pretty frothy. Home health, as Paul said earlier on, we think we got absorption opportunity.

I think the more quality assets are some available that, but you'll have some vendors out there for that if you have some larger players that you can move on because they're looking to move out of this PDGM world. We'll see where pricing lands there, but hospice definitely remains expensive..

Thank you. Your next question comes from the line of Justin Bowers with Deutsche Bank. Please proceed with your question..

I'll keep this quick or we're running towards the top of the hour, but I'm just wanted to be, just wanted to clarify the cadence. I'm just trying to parsing some of the some of the statements during the call together and it's sounded like you were saying, 3Q would be higher than 2Q.

And then, if all everything's in place, and you're going to exit 4Q with 4Q being highest. So it just sounds like there's going to be a sequential ramp throughout the year in terms of the EBITDA.

Is that a fair characterization?.

That's fair..

I think because of the way that we're going to that we have to implement our care product, to drive the savings to make a full reduction. And then to get our ratios on 50-50 on LPNs and PTA is we're going to need to, we're going to -- we're going to come to that full fruition in Q4. And so that's where you're going to see the margin expansion..

Yes. So, you have two things that play there. Just to remind everybody. So, we've got the leverage going on with PDGM perspective, as you kind of build most of the revenue leverage and you start off Q1, little bit of miss there, it gets in, you build that in a Q2. The cost levers start ramping up.

And then, if you come back and think about that incremental dollars around CCH, ADC, as we exited Q4 was a lower, we got to build that back up. So, you'll see a benefit of that as we get that full $34 million to $36 million we're talking about. That's going to be through an ADC build for rest of the year.

So, you have both of those, helping prop that number up in the back half..

And then just in terms of quick follow-up on hospice to some healthy double digit growth you're forecasting. There is some moving pieces in there as well.

Is -- should we be thinking about the growth profile of that business kind of similarly as well accelerating throughout the year?.

Yes. And just keep in mind, again, what's showing that if you look at, we're a 14% guide on hospice admit growth. CCH is coming into that number in Q2 -- I mean, I'm sorry, in February. So, that's in my same-store metrics, so they're juicing that growth rate in our guided number..

Thank you. Our next question comes from the line of Matthew Gilmore with Baird. Please proceed with your question..

I wanted to ask about the margin performance which your Medicare Advantage booked in Home Health and the growth rates for the non-Medicare business were again favorable, but you're still able to expand margins even though there's tend to be lower paying another payment rate is coming up.

So sort of what's going on there? Are you just getting more efficient elsewhere? Or are you better able to match sort of resources with what the Medicare Advantage players are expecting?.

I love that question. I think you are getting so, if you step back, we've got increases on the Medicare Advantage. And I'll let Chris, you run that team for us, add a little bit color to that. But so we're getting increases across the board there.

If you look at our overall margin profile, if you look year-over-year from revenue prep on Medicare side, we're up 25, and then we took out 0.7 of the visits. And you're getting more and more efficient there as we move forward. So, that's slowing through from both a cost perspective and a top-line perspective.

So, that's certainly helped to feed our margins there.

Chris, I don't know if you want to add?.

Yes.

I would say it's equal parts to us getting a little bit better rates from the Managed Care organizations, and that's bringing that we're starting to inch up, and we're seeing that sequentially and year-over-year as well as us moving the mix and being able to optimize our Care staff as we're providing these visits is a little bit lower margin than the traditional Medicare we're being more purposeful around kind of how we're deploying our clinicians so that we're kind of optimized in terms of that skill mix..

Okay. I think what we're going to do is push through is, I think we're going to continue to take questions, even though it's it will be over the time. If those for those who want to still hang on, we can still just go through and answer the question.

So if people are have the time to extend beyond 11:00, which I think is almost there now, we'll stay on..

Thank you. Our next question comes from the line of Andrew Cooper with Raymond James. Please proceed with your question..

Thanks. And I'll be kind of quick, but just kind of wanted to take another cut at the admission or admit growth you called out for 2020 versus 4Q. Obviously, 4Q at 4%, I think, overall at 3.9% overall and a little bit better than flat in Medicare and home health versus the 7% guide. Just sort of I know you called out comps.

But other than that, how should we think about that pacing through 2020, if we think about BD reps that you mentioned as well? And just kind of any other kind of way to think about that and make sure we have it sort of framed right as to why 4Q was a little bit lower? And why we're getting back to sort of what you saw in the first three quarters for the year overall?.

So this is a prove-it-to-me questions.

Chris?.

Yes, sure. Well, I mean, I think we've talked about the comp side of it that does distorted a little bit on the 4.4% total admin growth for Q4 and they're 1% or 0.7% on the Medicare side.

The one thing that we did have a lot of kind of internal focus on PDGM and pay practice and things that were affecting impacting our care centers on a pretty much a daily basis.

And the one area that I think that we fail to execute on that had a lingering effect on us through Q4 was when we grew our BD staff, our FTEs, our number of reps out there calling on referral sources. We had subsequent growth in the subsequent quarters in years from that growth of staff.

What we did is we did not grow our BD staff from the end of Q2, all the way through the end of Q4. And it was really kind of more of just we were focused in other areas. We had some leadership changes at the front line manager level that slowed down the hiring process. We've identified it.

I think we've got a good line of sight to get there out of the gate in 2020. We're really close to our budgeted number. We're looking to add about 8% in BD heads in 2020 over 2019, plus the incremental addition of the leadership that I mentioned should give us a lift coming into the second half.

And what we're doing now is we're just getting more purposeful with our data. We have a ton of data. We have claims data that we break it slice in many different ways. But we're finding that we're spending a lot of unnecessary energy on unproductive waters. So what we're doing is getting more purposeful around how we're spending our time.

And through that, we expect to see some incremental opportunity and increased productivity from our reps. So I have a good high confidence level and our ability to hit our 7% admit growth in 2020. Just to kind of just to frame it up one more time. 2018, we had 2% total admit growth; 2019, 5%.

I mean, 2018, 5%; in 2019, 7%; and we added reps in 2018 and we added just reps in the first quarter of 2019. So I still feel like we've got the right strategy we just got to execute on it..

Yes. And I think, Andrew, one other thing is we've dealt with this twice now, so it's not going to be a third time, where we've been caught short on reps, where we it's just not going to happen. So....

Okay. And then just kind of as a quick follow-up.

Of that 7%, how much is sort of just natural absorption that you would call out as PDGM driven as opposed to sort of a long-term sort of volume run rate, if any?.

That has no PDGM assumptions in it..

Yes. We have no….

So any absorption would be above and beyond that, that admin growth?.

Any absorption would be above and beyond. And if there's 12,500 providers out there and we have a 16% roughly 16% overlap, it's rough rough, about 2,000 players, and we'll see what the shakeout levels are, but there's a significant amount of absorption we could do, again, assuming that there's significant shakeout, 20%-ish or something like that.

So there's significant out there. We'd obviously have to fight for it. And it's I think one of the things that Chris pointed out, which is really interesting, is what we've been looking at is, we're taking maybe 50%, 60% of the business of these folks that are out there. The rest isn't is frankly not suitable.

So it's quite interesting from that perspective, how the scrutiny when you pass it through the filter, all the patients got are entirely..

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

All right, so we see wholly in there. A lot of questions have been asked. But two questions on some of these comments you were making in terms of continued investments in 2020. So you're calling out $5 million on PDGM resources. There's also investments in innovations.

So to me, it sounds like despite all the disruption from PDGM and CBC with what hospice ramp up, you're still making some efforts in finding the next, I guess, new thing in terms of investments.

So can you talk about that? And also specifically on PDGM, what exactly is the $5 million, you still expect to spend, as you discontinue to prepare or go through the implementation in 2020?.

It's mainly Medalogix. So we consider that an investment because it's incremental, and it's money well spent. The other is the de novo bucket that we're doing and the other one is the ClearCare bucket, which is the so those are the fundamentally the three buckets where we're spending the growth money. I don't know Scott has all the details..

Yes. I think you've captured I mean, the PDGM resource piece, as Chris alluded to earlier. So you've got care and touch rollout across the organization. There is some management-type pieces we're putting in place in small dollars, not a ton of people, but there is a little bit of incremental there. So that's kind of your $5 million number.

There's de novos as we continue to look at those, we end up we're sitting around 11 that we started since 2018 into 2019. So we feel good about that process. So we've got some more kind of targeting around 10-ish there for next year. So that's something we're looking at.

And then the rest is you build out of that ClearCare partnership, but running some other innovation type people processes. So we're look, we think we'll get through PDGM. We've got our core teams focused on that.

But we see this in a very bullish on 2021 forward, and we're going to continue to build this business and add resources that we think will be important as we look to play more in the Managed Care world..

Thank You. Our next question comes from the line of Matthew Borsch with BMO Capital Markets. Please proceed with your question..

This is Eric Glynn on for Matt.

Just looking at the CCH 2020 EBITDA guide at $34 million to $36 million, would you say this is this increase in EBITDA is driven from margin expansion, with the $10 million in projected 2020 synergies? Or would you attribute it more to top line growth in the CCH business?.

If I had to look at I mean, I think it's a combination, but I would say more on growth. I mean, basically, as you were probably a little different answer if we would have exited a little differently, of course. But we've got opportunity in both.

We'll hit our full run rate on synergies as we get into that, we'll still have in Natural, if you think about from a cost per day in fixed costs through there and how we staff that, you're going to naturally get some margin progression is that that top line grows. So it will be a combination of both. The top line will be very important.

We've got to get that census back up.

When we went forth and talked about this deal, we talked about making investments in BD staff in order to grow and we said, look, we like this company because they have a lot of smaller census care centers, which was like what we looked at looked like by three or four years ago, we did a tremendous job growing that, but we did it by adding sales folks in the right areas.

And we were behind on adding sales folks. We started off well in Q1, but we really kind of missed the mark there. It helped us in savings, but it was probably penny wise and pound foolish. So we'll push forward and get some heads back in and really grow that ADC. That's what we want to do.

If we're going to get to that $50 million opportunity, there'll be plenty of margin opportunities as we get these census numbers to really much higher levels..

Yes, we have to there's a point where you can really start to click in and get a lot of efficiencies and expand your margin on ADC. And one of the reasons why we did this acquisition was because it was suboptimal from an ADC perspective. And so we see the ability to grow this margin, get the ADC up to decent levels.

And then we'll see natural margin expansion as a result of that. That's what we've seen in our core operations..

Thank you. Our final question comes from the line of Whit Mayo with UBS. Please proceed with your question..

I'm just kind of curious, my question is really just around the review choice demo and how you feel about the preparation for that? And how you're balancing the prep with PDGM and kind of how you're contemplating or underwriting, any impact that you may see with your internal plan, if any?.

Yes. So, we have it going on right now in Chicago. And obviously, we're not chose there. We have three locations. We're doing very well. We're having virtually 99 point something percent affirmation rate is running well. We basically use the same process that we did the first time. It was in place before it was put on hold. Next state is slated to be Texas.

We only have one location there. The next state of any size, states of any size that it will roll out into that will impact us will be in North Carolina and Florida. We feel like what we have is a scalable model.

It does require a little bit of an incremental investment in an individual or two depending on the size of the how many locations you have in the state. But from a processing perspective, we've had very good luck with, number one, first round affirmations. Number two, the MACs are better at actually processing this.

So for us, it's just not really kind of any kind of a barrier that we see for now..

Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Kusserow for any closing remarks..

Thanks, Michelle. And I want to thank everyone who joined us on the call today, and I want to, again, thank all our employees, who delivered this great year results, keep doing what you're doing, taking care of the people who need us the most.

We hope that everyone has a really good day and look forward to updating you on our ever-evolving process and purposeful work. On our next quarterly earnings call are out on the road and talk to you soon. Take care, everybody..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..