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Edited Transcript of AMED earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 Amedisys Inc Earnings Call

BATON ROUGE Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Amedisys Inc earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Gerard

Amedisys, Inc. - COO

* Nick Muscato

Amedisys, Inc. - VP of Strategic Finance

* Paul Berthold Kusserow

Amedisys, Inc. - President, CEO & Director

* Scott G. Ginn

Amedisys, Inc. - CFO

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Conference Call Participants

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* Brian Gil Tanquilut

Jefferies LLC, Research Division - Equity Analyst

* Dana Rolfson Hambly

Stephens Inc., Research Division - Research Analyst

* Frank George Morgan

RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Amedisys' Fourth Quarter and Full Year 2018 Earnings Conference Call. (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.

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Nick Muscato, Amedisys, Inc. - VP of Strategic Finance [2]

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Thank you, operator, and welcome to the Amedisys' investor conference call to discuss the results of our fourth quarter and year ended December 31, 2018. A copy of our press release, supplemental slides and related Form 8-K filing with the SEC are available on the Investor Relations page of our website.

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

Before we get started with our call, I would like to remind everyone that statements made on this conference call today may constitute forward-looking statements and are protected under the safe harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today. The company assumes no obligation to update information provided on the call to reflect subsequent events other than as required under applicable securities laws. These forward-looking statements may invoke 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 measure will also be available in Forms 10-K, 10-Q and 8-K.

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

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [3]

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Thanks, Nick, and welcome to the Amedisys' 2018 Fourth Quarter Earnings Call.

We generally try to avoid hyperbole on these calls, but it would be inaccurate not to describe our performance in 2018 as tremendous. Some of the highlights were, we had the great honor of caring for over 376,000 patients, making more than 10 million visits across our 3 lines of business. We've continued to improve our quality scores, growing our quality of patient care star scores from 4.22 to 4.4 stars. We lowered total voluntary turnover from 22% to 19.8%, while growing our home health business development staff by approximately 50 associates to over 800.

We grew our adjusted EBITDA 27% from $142 million to $181 million, while expanding EBITDA margin 140 basis points to 10.8%. We generated over $223 million in cash flow from operations. We closed on the acquisitions of Christian Care at Home, Bring Care Home and East Tennessee Personal Care. We signed and have subsequently closed the Compassionate Care Hospice acquisition, making Amedisys the third largest hospice organization in the nation. And we invested in Medalogix, enhancing our predictive analytics capabilities to help assist with operationalizing PDGM. None of this would be possible without our now over 21,000 employees, whose unwavering commitment to 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 deliver such strong results.

With that, let's take a look at the fourth quarter and full year results. For the fourth quarter, on an adjusted basis, we generated $434 million in adjusted revenue, up 9% year-over-year. We had adjusted EBITDA of $44 million, up 18% year-over-year and adjusted earnings per share of $0.91, up 63% year-over-year. For the year, we generated $1.66 billion of adjusted revenue, up 10%. We had adjusted EBITDA of $181 million, up 27% and earnings per share of $3.63, up 64%. These great results have beat our twice-calibrated and raised adjusted EBITDA and EPS guidance range, which has been raised and beaten several times throughout the year. Our results today also beat consensus and our numbers we are extremely proud of. Scott will elaborate on this in his comments and will detail to you what our 2019 guidance ranges will look like.

Now let's review how we're doing on our 4 strategic areas of focus, starting with clinical excellence and distinction. For the 2019 Quality of Patient Care Star, QPC scores, CMS has introduced a new measure into the calculation and has removed a measure previously used to calculate star scores. The new calculation includes improvement in management of oral meds and no longer includes drug education, a measure in which we performed extremely well. Even with the new inclusion of this measure, our QPC score is still an industry-leading 4.28 stars. We will have 53 care centers rated at 5 stars, with 86% of our overall portfolio rated at 4 stars or better. As we drive more focus on mastering this new measure, we expect to see continued improvement in our QPC score and will continue to lead the industry in all quality measures. I would like to acknowledge and applaud all our clinicians, who are constantly providing outstanding care and always striving to best our already impressive results.

As I've said, great care equals great business. Our focus on clinical quality continues to generate financial returns as our performance in the home health Value-Based Purchasing program, VBP, indicates. For the fourth quarter, we received approximately $250,000 in bonus payments from CMS, bringing our 2018 VBP bonus total to approximately $1 million. We also continue to believe and advocate that this demo should be expanded nationwide and institutionalized as a better way than PDGM for CMS to generate significant taxpayer savings and to drive quality patient outcomes.

For our hospice business, the hospice compare February 2019 preview of quality metrics shows Amedisys outperforming the national average in all 7 measurement categories. We are very pleased with these results and expect our clinical quality to continue to improve in hospice. This is very important as we continue to invest in and grow our hospice footprint.

Taking great care of patients is what keeps us going, and we will never stop trying to best ourselves. This quarter, we are putting our money where our mouth is, and we -- in the form of cash bonuses for our highest quality care centers within both home health and hospice. Clinical quality is what drives this organization and it only makes sense to invest in our best.

Our Q4 2018 results include bonuses to be paid to our 33 home health 5-star care centers, representing 640 clinicians and to our top 10 CAHPS care centers representing 190 clinicians. Thank you to all of our top-performing staff. You are the best of us and this bonus is very well deserved. In the coming years, we aim to grow and expand this practice.

Moving on to Employer of Choice. 2018 was a year in which we continued to execute upon our business development staff ramp to help drive continued growth. Our recruiting efforts resulted in our home health BD FTE count topping 800, up about 50 from the beginning of the year and up about 100 from our low point in 2016. This ramp had a direct correlation with our improving growth metrics. We are very pleased with our BD team and their improving performance, and we will continue to add BD FTEs in select and strategic locations during 2019, where we have clinical capacity and the ability to take on even more business.

Turnover is another key metric, as retention of our associates is extremely important to both the quality of care we provide and our ability to grow. To that point, I am proud to report that we ended the year at 19.8% total voluntary turnover, which is down from 22% for the full year in 2017. We are turning this into a science, and we are out there every day testing and tinkering to bring these numbers down even further. Moving into 2019, we will continue to focus here and are especially focused on reducing turnover in our clinical staff.

Now let's discuss operational efficiency. Our focus on maximizing the efficiency of our operations is particularly reflected in the operating leverage we are achieving throughout our organization. For the quarter, our total adjusted EBITDA margin was 10.1%, up 80 basis points year-over-year from 9.3%. For the year, our total adjusted EBITDA margin was 10.8%, up 140 basis points from 9.4%. This was a great quarter and year of EBITDA performance, and I'm very happy with how all 3 lines of business performed from a margin perspective this year. We are aiming for further margin improvement in 2019.

Finally, driving growth. In our home health division, we had another strong volume quarter, ending the quarter at 6% same-store total volume growth, which is admissions plus recertifications. This is the number we focus on as it reflects all sources of growth. Our total episodic volume growth was 5%, and our total same-store admission growth was 6%. As we have discussed throughout the year, we are -- have focused very hard on growing our fee-for-service business, and I'm happy to report that, this quarter, our fee-for-service admissions growth was 3% compared to a negative 1% for the fourth quarter in 2017.

In hospice, we continue to build ADC at an impressive pace, growing at 9% to 7,809 for the quarter. Admissions were up 12%, both impressive numbers given the strong year-over-year comps our hospice business faces every quarter. As you may have read, we closed the Compassionate Care acquisition on February 1. With the acquisition of Compassionate Care, Amedisys is now the third largest hospice organization in the country, with a combined ADC of approximately 11,233 stays.

Integration is well underway, and we will be working to convert the Compassionate Care centers to HomeCare HomeBase during the first half of 2019. Though the HomeCare HomeBase implementation and other investments in the business are planned, disruption will weigh down Compassionate Care's 2019 EBITDA. We will position the business for similar growth trajectories and similar margin profiles to our current hospice business. We'll get this EBITDA back plus some in 2020 and 2021. Scott will go into more detail about the 2019 Compassionate Care contribution and payback during his remarks.

The next 6 months are planful and purposeful prep work. And after we make the necessary investments in sales and management and recover from any HomeCare HomeBase disruption, we expect a much more significant contribution than if we just left Compassionate Care alone and milked it. Finally, I want to, once again, welcome all the Compassionate Care employees to the Amedisys family, and I can't wait to see what our hospice organization will be able to accomplish in 2019.

In personal care, total hours per quarter grew approximately 14%. We are very pleased with the progress our personal care team has made integrating the 4 assets we have acquired since 2016, and we plan to continue to scale, grow and expand the business both organically and inorganically across our footprint.

On the M&A front, post Compassionate Care, we still have very little leverage and our recently increased credit facility leaves us with plenty of dry powder to spend on M&A. Last Monday, after the market closed, we announced the signing of a definitive agreement to acquire RoseRock Healthcare, a very strong hospice asset in Tulsa, Oklahoma. RoseRock is another privately sourced deal, which, with synergies, will turn out to be a sub-9x multiple. It has great overlap with our home health assets in Oklahoma. We are delighted to welcome all of our new caregivers from Tulsa. Their focus on patient care and quality is something we're very excited about. Capital deployment on hospice acquisitions remains our first priority as we look to replicate our RoseRock process and success with other tuck-ins in our pipeline. We will also continue to focus on tuck-ins and expansion opportunities in personal care and strategic home health assets. For 2019, we are also ramping up our de novo process and have between 7 to 9 de novos planned for the year. We will continue to remain very disciplined on our M&A function, and we will do our best to avoid auction processes or paying nosebleed prices at private equity multiples. This is a strategy we have seen pay off. And though it takes lots of shoe leather, the multiples we pay and the value we return to our shareholders make it the right strategy to pursue. Look for this to continue in 2019 as our proprietary tuck-in pipeline remains full and actionable.

Addressing the always active regulatory front, the Patient-Driven Groupings Model, or PDGM, remains the focus of our conversations with Congress and CMS. As you all know, PDGM, as proposed, is a complete redesign of the home health payment system primarily based on moving to a 30-day unit of payment, payment driven by specific patient diagnoses and characteristics and elimination of therapy thresholds as a basis for reimbursement. While we are steadily preparing for the 2020 implementation, we continue to oppose the use, scope and impact of behavioral assumptions in the transition to the new payment model.

As a result of significant work by our Government Affairs team, the National Association for Home Care & Hospice, NAHC, and others in the industry, I'm pleased to report that on February 11, S. 433, the Home Health Payment Innovation Act of 2019, was introduced in the Senate by a bipartisan group of 7 senators, 4 Republicans and 3 Democrats. The bipartisan group of original cosponsors include members who are in the Senate Finance Committee, Senate Health, Education, Labor and Pensions Committee and the Senate Special Committee on Aging. The bill has been referred to the Senate Finance Committee. This legislation would prohibit CMS from making rate adjustments based on behavioral assumptions and allow only for adjustments based on observed evidence of a change in provider behavior. The bill also requires that any phase-in of necessary rate adjustments will be no greater than 2% per year through 2025 to limit the risk of disruption as we transition into a new payment model. Finally, this legislation also provides some flexibility to the home health eligibility requirements by waiving the homebound requirement for Medicare Advantage enrollees and patients who are participating in ACOs.

In addition to the Senate bill, we expect companion legislation to be introduced in the coming weeks in the House by a group of bipartisan members. Our Government Affairs team and D.C. lobbying firms are working daily with Democratic and Republican members of Congress, their staff and committee staff to urge Congress to adopt the behavioral assumptions prohibition. As evidenced by the introduction of the S. 433 by Republican and Democratic members, we believe that Congress is receptive to industry concerns about the use of behavioral assumptions. We are encouraged by the dialogue and support early in this session of Congress and will continue to work with the bill authors and other members of Congress over the next 10 months to enact this legislation.

Turning to CMS. We are actively continuing our dialogue with them on our concerns regarding PDGM and always to address the challenges in this new payment system, especially the impact on care delivery models. I have been engaging in conversations with CMS leadership as recently as yesterday regarding PDGM and will continue to share our insights until the final rule is issued on PDGM, likely in early November. Despite the transition to an entirely new payment system and its impact on the care delivery model, I will again emphasize my full confidence on our team's ability to operationalize PDGM as currently proposed by CMS.

Finally, I also need to remind everyone that the bipartisan Budget Act of 2018 mandated a plus 1.5% market basket update in 2020, which will result in 2 consecutive years of positive updates for the industry. This 1.5% market basket update in 2020 could also help offset the possible reduction in home health reimbursement associated with behavioral assumptions, if not prohibited by legislation before implementation.

On the hospice front, I want to briefly comment on the recent announcement by CMS' innovation center, CMMI, that, beginning in 2021, Medicare Advantage plans in the Value-Based Insurance Design model, VBID, will be allowed to offer the hospice benefit. While very little information has been shared with the stakeholders at this point, we feel confident that CMS will listen to the serious concerns providers have raised about a carbon of the hospice benefit to Medicare Advantage plans. We are happy to see that CMS is taking what appears to be an incremental approach, but we have concerns about how a managed-care hospice benefit will impact patient care and their access to the benefit.

In closing, on regulatory issues, I want to emphasize, as I have in previous earnings calls, that when confronted with regulatory changes such as PDGM, we will prepare and adapt as we have successfully done in the past. We have 10 months remaining to prepare for implementation of PDGM. We have clinical and operational expertise, plenty of available resources, industry experience, leading-edge technology and seasoned leadership to implement and operationalize PDGM in an effective and efficient manner and, most importantly, to provide the same high-quality care going forward.

As you can see, we had another great quarter and an incredible year, and are forecasting a great 2019, highlighted by strong growth in all 3 lines of our business: improved margins from operational efficiencies; lower turnover as we strive to become the home health hospice and personal care Employer of Choice; and continued industry-leading performance in providing the highest quality care. We are also investing. We're investing in Compassionate Care, in de novos, their growth and acceleration, in innovations and also in our people. Again, thank you to all the Amedisys' employees for all you've done to drive this success. You continue to prove that focusing on our patients drives outstanding results.

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 the year as well as our forecast for 2019. Scott?

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Scott G. Ginn, Amedisys, Inc. - CFO [4]

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Thanks, Paul. I'm very pleased to report another excellent quarter and full year financial results.

For the fourth quarter of 2018 on a GAAP basis, we delivered net income of $0.84 per diluted share, an increase of $0.95 on $434 million in revenue, an increase of $36 million or 9% compared to 2017. For the year, we delivered net income of $3.55 per diluted share, an increase of $2.67 on $1.7 billion in revenue, an increase of $151 million or 10% compared to 2017.

For the quarter, our results were minimally impacted by income or expense items adjusting our GAAP results that we have characterized as noncore, temporary or onetime in nature. Slide 16 of our supplemental slides provides details regarding these amounts and the income statement line items each adjustment impacts.

For the quarter, on an adjusted basis, our results were as follows: revenue grew $36 million or 9% to $434 million, EBITDA increased nearly $7 million or 18% to $44 million, EBITDA as a percentage of revenue increased 80 basis points and EPS increased $0.35 or 63% to $0.91 per share.

For the year, on an adjusted basis, our results were as follows: revenue grew $146 million or 10% to $1.66 billion, EBITDA increased an impressive $38 million or 27% to $181 million, EBITDA as a percentage of revenue increased 140 basis points and EPS increased $1.42 or 64% to $3.63 per share.

As our results indicate, 2018 was a tremendous year for Amedisys, as we continued to successfully execute on our plan to deliver financial results that matches our clinical excellence. The $181 million in EBITDA in 2018 represents a $71 million or 65% increase in EBITDA since 2016 and a 310-basis-point improvement in our EBITDA margin.

Before I turn to the segment performance, I want to remind you of a few items that impacted our performance in Q4. Sequentially, planned wage increases, effective August 1, added approximately $1 million in costs. Seasonality of health claims added an additional $4 million in costs. As Paul mentioned, Q4 includes approximately $750,000 in quality bonuses.

Now turning to our fourth quarter adjusted segment performance. In home health, revenue was $304 million, up $22 million or 8% compared to prior year driven by a 6% increase in same-store total volumes. On a same-store basis, Medicare admissions were up 3%, episodic admissions were up 5% and total admissions were up 6%. Our Medicare recertification rate was 38%, 40 basis points lower than prior year, and our Medicare revenue per episode was up 1.1%. Visiting clinician cost per visit increased only $0.39 compared to prior year in spite of the $1.15 impact of annual raises. Overall cost per visit was flat versus prior year.

Segment EBITDA was $43.4 million, up $6.2 million with an adjusted EBITDA margin of 14%, representing a 110-basis-point improvement. This marks the third straight quarter of significant year-over-year improvement in EBITDA margin. For the full year of 2018, the home health segment expanded margin by 190 basis points. This significant margin expansion is in the face of negative reimbursement and planned wage increases highlighting the realization of our continued focus on growth and operational efficiency.

Other items impacting the fourth quarter results of our home health segment include revenue per episode increased $33 despite a 70-basis-point rate cut. This was driven by the acuity level of our patients, which was offset by 60 basis point increase in visits per episode. G&A was down 140 basis points compared to 2017 and was at 23.4% of home health revenue for the quarter. The continued growth in volume and our reorganization and closures and consolidations we announced in the latter half of 2017 helped to offset the cost of additional BD resources and wage increases. The segment was able to support a $22 million increase in revenue while reducing overall G&A spend. It is a testament to the hard work and dedication of our operational leadership, and I'm very proud of the home health segment's financial performance in 2018.

Now turning to our hospice segment. For the fourth quarter, revenue was $109 million, up $11 million over prior year, an increase of 11%. Same-store average daily census was up 9% and same-store admissions were up 12%. Segment EBITDA was $29 million, up $2 million over prior year, an increase of 9%. Net revenue per day was up 2% to $151.46, and cost of service per day was up 3% to $79.02. The hospice segment benefited from an increase in reimbursement of approximately $2 million. The segment EBITDA margin was down 60 basis points, mainly due to investments in our business development staff and administrative employees to drive and support continued growth and the anticipated closing of Compassionate Care Hospice, resulting in an increase in G&A expenses.

Our personal care segment generated approximately $22 million in revenue in the fourth quarter, representing growth of 20% with over 890,000 billable hours. Our results are not comparable to prior years, they include the results of 2 acquisitions completed since the fourth quarter of 2017. We continue to be pleased with the integration process and margin improvement in our personal care business and expect to see continued expansion in 2019.

Turning to our total general and administrative expenses. On an adjusted basis, total G&A was $129 million or 29.7% of total revenue. The total G&A was down 110 basis points as a percentage of revenue compared to prior year. The sequential increase was driven by planned wage increases and anticipated higher health insurance claims. We remain focused on driving operational efficiency across the entire company. However, based on our strong performance, we did add some additional resources during the quarter to help support current and future growth. Overall, I've been very pleased with our cost control efforts this year.

A significant improvement in cash flow continued into the fourth quarter. We generated $64 million in cash flow from operations for the quarter and paid down $61 million on our revolving credit facility, bringing our net leverage ratio to approximately 0x. For the year, we've generated $224 million in cash flow from operations and $214 million in free cash flow. Our DSO declined approximately 3 days sequentially and 6 days year-over-year to 38 days. As reported earlier this month, simultaneous with the close of CCH, we expand our existing credit facility by $175 million to $725 million, consisting of a $550 million revolving credit facility and a $175 million term loan.

Our pricing represents an interest rate reduction of 25 basis points compared to our current facility pricing. The closing of the CCH acquisition was a perfect opportunity to update our capital structure in order to provide additional liquidity to execute on our inorganic growth opportunities. Subsequent to the CCH closing, we have approximately $360 million of available liquidity. As evidenced by the signing for a definitive agreement to acquire RoseRock Healthcare last week, we have a very active M&A pipeline. Also on Monday, we announced that our Board of Directors have authorized a stock repurchase program, under which, we can repurchase up to $100 million of our outstanding common stock through March 1, 2020. As Paul and I have both mentioned, acquisitions remain our first priority for capital deployment, but we believe it makes sense to add the option of a buyback as a tool in our capital deployment strategy.

Finally, as you can see on Page 18 of our supplemental slide deck, we're releasing our guidance for the fiscal year 2019. Our guidance ranges are revenue of $1.94 billion to $1.98 billion, adjusted EBITDA of $205 million to $210 million and adjusted EPS of $3.98 to $4.09.

There are several key factors impacting 2019 guidance and are outlined on Slides 18 through 23 of our supplemental slides. First, for the first time in nearly a decade, our results will include a positive home health reimbursement. We estimate our rate increase to be 1.2%, which is below the industry impact of 2.2% mainly due to case mix and [rural] add-on. The delta between 2.2% and 1.2% is approximately $8 million. Hospice reimbursement is up 1.6%, which was effective for services provided beginning on October 1, 2018. Planned wage increases of 2% to 3% that will be effective in the second half of the year. Keep in mind, our first half 2019 results are impacted by raises given in August of 2018. In total, this equates to approximately $20 million in increased spend in 2019. 12% increase in our benefits expenses for 2019. This includes 8% in headcount growth and 4% related to plan design and trend.

Our effective tax rate assumption for 2019 is approximately 26% with an estimated cash tax rate of approximately 17%. Additionally, we're using the positive home health reimbursement as an opportunity to invest in our future growth and success. As such, our guidance includes the following: $3 million to enhance IT security and update our staffing model and pay practices, $2.5 million for 7 to 9 de novo locations and $2 million for investments in PDGM preparation and to enhance our innovation plans. For our CCH acquisition, we are estimating EBITDA in the range of $12 million to $14 million.

We're slightly above our ADC target used for our original modeling. However, as we have previously mentioned, we will disrupt the current run rate as follows: We'll make investments in business development staff and regional infrastructure needed to grow low ADC care centers and optimize margin of large care centers; we'll only see partial realization of synergies in 2019 to the -- due to the HomeCare HomeBase rollout. Based on our own HomeCare HomeBase rollout experience, we do anticipate a drop in ADC during the rollout, which is scheduled to be completed in August of this year. This ADC disruption is projected to be approximately 100, which equates to approximately a $6 million impact to EBITDA. Excluded in 2019 EBITDA guidance is onetime deal expenses in nature. We anticipate these costs to range from $16 million to $18 million and includes cost weighed to HomeCare HomeBase implementation resources, updates to technology and a retention program aimed at securing our key Compassionate Care employees. Finally, this guidance assumes a fully diluted share count of approximately 33.1 million shares.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [2]

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So my question is, as I think about the guidance that you gave, Scott, and I know you guys look at where Street expectations are. If you don't mind just bridging us to how you're thinking about the different moving parts between the $8 million that you mentioned and, I think, the investments that you're talking about as well as Compassionate Care. I mean, you're potentially cutting it half the run rate EBITDA expectation there. So just putting all that altogether because I'm trying to get a sense of what the core apples-to-apples EBITDA looks like. And then I guess, any comment you could make on Q1 as we think about modeling for Q1.

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Scott G. Ginn, Amedisys, Inc. - CFO [3]

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Brian, if we still look at -- I mean, I think there's 3 items when we kind of look at what's out there from a Street perspective that kind of have gotten a little bit of a confusion out there, so to speak. So we think about that $210-ish million number, we've got investments of $7 million. We think there's a rate differential out there that we talked about that $8 million plus a disruption in CCH is somewhere around $6 million. So that's somewhere -- it gets you. You add those all items back, we're really in a -- roughly a $230-ish million range of what we're looking at. So there's pieces of that, that are impactful, I think, the most of the noise we've seen somewhat around CCH. I think the factor -- to circle back on that is the issue around disruption, which we're just -- we're mindful of what was impacting us when we got there. So those are the biggest items that we see. If you backed up and think about pure AMED, just what's in our guidance today, that would suggest a $196 million number, you think about adding back $7 million for investments and rate differential there, that's another $15 million, puts pure AMED pre-CCH at a $211-ish million number. So those are some of the moving parts. I think when you back up and look at -- if you want to take an approach where you think about what 2018 exit run rate of $181 million, we've got pricing good guys of roughly $15 million. You put CCH at roughly $14 million, let's use the top end of that line, and then if you think about raises, I've said in my comments, that was around $20 million, investments of $7 million, we're going to put more BD heads of $6 million. That's another $33 million that we're going to add to the cost structure. It puts you at $177 million. I'm going to grow EBITDA $31 million over that. So given an 18% return on kind of that base EBITDA you get there. So a lot of pieces involved in the numbers. We feel good about it, and we think when you step back and look at CCH, and you look at the chart we have on Page 20, we're thinking, from right to left versus left to right, how do we best prepare ourselves to get to that $50 million. We think what we're going to do early in 2018 is going to -- I mean, 2019 is going to be helpful.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [4]

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I think, Brian, just to add to what Scott said, when we did CCH, great asset, delighted to do it, but on a very difficult technology platform that will not be supported a year from now. So we're paying for that to keep going. So we have to get this onto HomeCare HomeBase. We used our experience with disruption that we had when we converted our hospice group over to HomeCare HomeBase. So we believe that that's going to -- we'll see some minor disruption about 3%, which is 100 ADC. And then we really have to invest because, as we indicated, they're about half our margin right now. So we want to get them up to the full margin, and they're about 1/5 of our growth rate. So we believe that this is a wonderful chassis, but we have to do the work necessary in terms of getting them on the right technology platform, hiring the right people in BD, getting the low ADC group up to a more -- a better -- operationally better margin area, which is over 60 ADC. So we're investing very heavily to get that done. And then last part of this year, we'll put some efforts in terms of pulling out the synergies and that will occur until about the first half of next year. So the key is we're investing because we believe that we can get this double, but that we expect to see this double in 2021, and we expect to have a good trajectory in 2020.

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Scott G. Ginn, Amedisys, Inc. - CFO [5]

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Yes, Brian. And thanks, Paul, and then closing on just your comments to Q1. I think, if you look back at our trends that we have back in our deck, I think, the factors impacting it are the same. If you think pure AMED from a modeling perspective, I would look back to ['20] -- what we did from '27 Q4 to -- 2017 Q4 to 2018 Q1, I think you can expect some similar patterns there. We're going to bleed in CCH, which is only going to be 2 months of the quarter. I would look for that to be more of an upward-to-the-right trend with some stronger EBITDA numbers in the back half of '19.

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Operator [6]

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Our next question is from the line of Matt Larew with William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [7]

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Wanted to ask a question on the payer front. You'd mentioned on the third quarter, a number of pilot models that you looked at in terms of taking some risk. I think you mentioned star improvements, ACH and medication adherence. Just wondering where those conversations are at today? And then, in the context of the Medicare Advantage rule change from last April, whether your personal care business has started to get involved in terms of payer discussions as well. So just any update there probably would help.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [8]

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Sure. So we're still in 15 states, 3 different types of pilots, mainly focused, again, on ADC. So focused on readmissions, hospital readmissions, driving that down, focused on keeping the quality scores high, in some cases -- in some of the -- a couple of the cases, we have med adherence. Those are growing well. So we feel good about it. It's still early days. We're still kind of figuring out what we need to be doing to -- what sort of resources we need to bring in and how that's going to net out. But thus far, we feel very good about it. I'd say the interest level has increased considerably from a variety of folks, not just payers but in other types of risk relationships. And so we've seen a lot more of that activity. We're having a lot of bigger discussions with health systems themselves, retailers, specialty folks that are out there, all of them looking to get involved in risk. So we feel good about it. I will say that our work with Medalogix has helped our confidence level on that in terms of our ability to use analytics to drive that and to get better feedback and to project better what risk levels actually are. So we feel very good about it. We'll come out. I think, it's too early for us to really comment on a large scale in terms of how we've done. We're still working through some of the kinks. But we've got a couple other things in the pipeline, knock on wood, we hope that some of these things come through, we'll have some more opportunities, particularly, on a much larger scale. So we're very optimistic at this time.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [9]

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And then, Chris, throughout 2018, a number of times you've provided us updates on progress of underperforming care centers, and that drove some of the improvement on the home health side. Just wondering if -- can you give a sense for what you've focused on in 2019 in terms of improving what has been strong performance on the home health side?

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Christopher T. Gerard, Amedisys, Inc. - COO [10]

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Sure, yes. Thanks, Matt. Yes, 2018 was really nice and a lot of our success in '18 was contributed to by -- from our focus on our underperforming care centers, which is really kind of a core strategy that we continue into 2019. We're always benchmarking our locations against the others and trying to get to a target margin profile, and we've got opportunities we've identified for this year as well. Some of the other things that we think that we still can make some progress on is related to -- on our cost per visit side is you'll see that our actual contract cost per visit is up about $0.45 in Q4. And it was up -- it continued to go up last year. That was really kind of us basically making sure that we had clinical capacity to admit the volume that was coming in the door. If we get better at our staffing and retention and really kind of capacity for our clinical perspective, we think that there's some significant opportunity there. If we were able to shave about $0.50 off of the contract visit rate, that's about $4 million in -- that will fall to the bottom line. We also see some opportunities still around our transportation and kind of our scheduling and making sure that we're more efficient with how we do that. Other than that, we really see the growth is also going to continue to accelerate through 2019. That'll also help us drive our margins.

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Operator [11]

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Our next question is from the line of Frank Morgan with RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [12]

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Hey, I want to stay on that cost per visit thought. You mentioned things that popped up, I guess, agency use. But I'm just curious, what were you able to do to hold it flat? And I think you also made some comments, I didn't quite follow you on what was going on with acuity as it related to cost per visit. So just more color on that. And are you really starting to see a change in maybe your labor mix our visits in preparation for future reimbursement changes?

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Christopher T. Gerard, Amedisys, Inc. - COO [13]

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Yes. So starting with the labor mix, we haven't -- we've seen a slight improvement in our LPN versus RN utilization and have our clinicians working at the top of their license. If I think about '19, we have still some opportunity on there, I think really we will experience the upside in '20 and beyond and that's just really internally related to kind of our pay practices that we mentioned in the deck that we're going to be changing out later this year to where our clinicians are really going to be encouraged to work at the top of their license. So we see that as kind of a 2020 realization, but we still have been improving that a little bit. On the labor side, we still are seeing capacity constraints in some very specific markets, so that's required in the utilization of the contract staff. And then on our ability to keep our actual direct labor costs per visit flat and still give raises is really kind of related to our focus on our productivity of our clinicians. We've been able to -- as we've gotten better with HomeCare HomeBase and use the system more been able to get our clinician productivity up to the standards that we expect, and that's allowed us to offset the raises that we've been giving our clinicians

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [14]

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Got you. Can I sneak one in more, just about, Paul, your concerns around the hospice carve-in for MA.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [15]

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Yes. Early days still on the hospice carve-in. Again, we -- we're all getting together as a group and meeting on this in a couple of weeks in Washington. At this point, it doesn't seem to make sense to -- it seems to make much more sense to leave hospice separately, but what we're talking about is a very much of a kind of a measured step. We saw some folks at CMS, and I think what they're doing is taking a look at what this -- how this would be of interest. Also I think the plans are not particularly jumping all over this yet, bringing in hospice, brings back some of the days of, potentially, where they could be tagged on as -- with death panel type things, and I think that makes them very nervous. So we don't know, frankly, if the plans are going to be jumping all over this. So we don't know if the dog is going to eat the dog food on this one yet, particularly with the plans.

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Operator [16]

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Our next question is from the line of Joanna Gajuk with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [17]

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So just coming back to the discussion around margin and, I guess, the outlook. So clear, the Medicare growth improved very nicely, right, to 3% -- the volume grew -- Medicare fee-for-service growth improved, right. So would you assume growth on that metric to be in 2019 and beyond, because I guess, you just tried to talk about some potential cost savings, but I guess, if the growth accelerates on that front, whether that should help margins even more? So what's your assumption there in your guidance and also on margins for the home health segment?

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Christopher T. Gerard, Amedisys, Inc. - COO [18]

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So on the growth side, what we have baked into 2019, we feel like we'll deliver on is 5% total admission growth. We expect Medicare to be the majority of that growth, and we're looking at our Medicare side to be 3% to 5%. We continue to invest in our sales force and continue to penetrate deeper into markets. So I still -- I anticipate to see an acceleration throughout the year going into 2020 as well as us being able to deliver on our expected numbers in 2019. And then on the margin side, we continue to just try to fine-tune what we're doing in our locations, we still, again, see the levers that we can pull around our paraprofessional mix, which I just mentioned a while ago that we really won't see a tremendous movement there in '19, but we do expect to see it in 2020.

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Scott G. Ginn, Amedisys, Inc. - CFO [19]

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And Joanna, it's Scott, and just cycling a little bit back on this home health segment. So really a great year in margin expansion from an EBITDA perspective. That 15.1% for '18, that's a 190-basis-point improvement. So really strong performance, I think they've outperformed some of our internal thoughts early. So really pleased with that. We do see a little bit more room in 2019 for pure home health to continue on, especially if we hit these growth numbers, especially around Medicare, that we can expand that a few more basis points as we move forward. So we're bullish on what our home health segment has done and what we think they can do.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [20]

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And we're continuing -- we're continuing, Joanna, to focus on our RN/LPN mix so that we can -- we still believe there's quite a bit to be done there. And so -- but that initiative we're going to be starting later in this year. So we will see probably the real impact of that in 2020. So we're excited about that because we believe there's a lot to be done there.

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Scott G. Ginn, Amedisys, Inc. - CFO [21]

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And on that -- I'm glad Paul brought that up because I think that's something we haven't been as clear on and why we think it's so important to do we need to do that this year to get prepped from pay practice changes. I mean as we think about that, we're somewhere around 38% from LPN versus RN utilization on that. So every 1% movement is somewhere around $450,000. So there is a significant opportunity there, some of our competitors in that 55%, 60% range. So you can do the math on that, that's why it's worth us focusing this year on getting prepared for that.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [22]

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That's helpful. So are you saying that even with these investments that you are taking in '19, margins will still be slightly up year-over-year?

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Scott G. Ginn, Amedisys, Inc. - CFO [23]

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Yes, if you back up and looked at kind of what we're seeing, let's put CCH on the side, I still think we have room for some expansion in margin. It'll be moderated by that $7 million of additional investments and then CCH will be a slight drag on that. But yes, there is some room within -- when I'm talking, I'm thinking within our kind of ongoing Amedisys segments we see ability to expand margin.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [24]

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But part of this, remember -- part these that -- what we're investing in, Joanna, it will expand margin. The fact that we have -- that we're putting some investment in terms of what we call pay practice redesign will -- and staff reallocation will fundamentally be very, very advantageous to us from a staffing optimization perspective.

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Scott G. Ginn, Amedisys, Inc. - CFO [25]

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And we see that piece coming in 2020. It will impact...

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [26]

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We're investing it in '19...

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Scott G. Ginn, Amedisys, Inc. - CFO [27]

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It will be in Q4, before we're kind of probably piloting some of the things we have to do to make sure the systems are ready. So our deal for '19, as we said before, is really roll up our sleeves, a lot of work to do, a lot of things we need to do to get ready for 2020. So that's the year we want to get CCH asset ready and really performing well. So this is a lot of hard work for us this year.

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Operator [28]

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Our next question is from the line of Dana Hambly with Stephens.

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Dana Rolfson Hambly, Stephens Inc., Research Division - Research Analyst [29]

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Just following up, Scott, on the last comment on the staffing ratios. You're at 38%, some of the competitors in the mid-50s. I don't want to get out over my skis. How do you expect kind of the pacing of that? Obviously, you're not getting it really starting into 2020. I'm thinking it's more of a multiyear thing not a one year thing where you can get it into the mid-50s. Could you just remind me the -- you gave the [450] number, but just the cost differential per visit between the RN and the LPN?

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Scott G. Ginn, Amedisys, Inc. - CFO [30]

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Yes, I'm going to let Chris give you a little bit of that.

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Christopher T. Gerard, Amedisys, Inc. - COO [31]

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Sure. Yes. So the cost differential, starting there, it's around $20 per visit. So it's significant kind of shift when you can go to an LPN versus an RN. We have, over '17 and '18, made small incremental improvements in the mix. The pay practice that we mentioned a couple of times today is going to be really the key lever that's going to open up and make it simpler for us to move this mix, but we're also doing some other things early this year. One is kind of our staffing model redesign, which is really getting the right kind of spending control at the care center level. That'll be done early in Q2 that we feel like will also facilitate a little bit of a movement. So our goal is to get kind of where some of our competitors are in that mid-50s percent range and making sure that our RNs are doing RN work. And it won't happen, as you said, overnight in January 2020, but I expect us to move up from our 38% today into the low 40s during the course of 2019 and then, by the time we exit 2020, we should be kind of in line with everybody else.

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Scott G. Ginn, Amedisys, Inc. - CFO [32]

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Dana, and we'll be focused on doing that. We're certainly always focused on the turnover. So we certainly want to get better at that, but as we'd be looking to -- as things -- as positions turn, replacing those with the right discipline. So we're not going to make a wholesale change in our staffing mix and turn away some folks that are doing a great job for us today. So we want to be smart about that as well.

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Operator [33]

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The next question is from the line of Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [34]

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I jumped on a little late, so if I ask something that's been discussed already, you can point me to the transcript. But M&A, clearly, your balance sheet still remains in really good shape. You've got CCH integration this year, but how does the pipeline look? We saw the small hospice deal you guys announced earlier this week, but just wondering where the pipeline sits and how valuations look.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [35]

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Yes. Let me just -- I'm going to turn it over to Scott, but in general, as an ex-M&A guy, it's very, very good. We've developed a whole new methodology, largely this has been Scott and his team and Chris. So I think we feel very, very good about it. It's quite full, it's -- there's a lot to say grace over. And we're, again -- we're really staying outside the process because we're seeing -- the prices we're seeing are crazy from an EBITDA multiple perspective, so we're seeing 15 and above in some of those things, it's just crazy. So I think we feel really good about it, and we've got some things in the pipe, we're -- knock on wood. We're hoping that we'll be announcing some of these in the next 6 months or so that are going to be substantial. And then we've got the de novos, which that process is working exceedingly well. So we're actually starting to get good at building things. Scott?

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Scott G. Ginn, Amedisys, Inc. - CFO [36]

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And I think you covered most of it. I think, if we step back and think about M&A early, I think, in January this year -- or of last year, we were out at a conference and we talked a lot about our strategy around a large hospice, tuck-in hospice and de novo, so we're doing all those. We've got a great pipeline, but we're going to be smart about how we're -- what we're spending as well as what we're buying. So it's a really very thorough diligence process, which sometimes makes it a little slower. Certainly, externally some folks got frustrated, and we were certainly internally frustrated with the timing it took, but we're going to continue on that path, but the pipeline looks great. As we look at these tuck-in deals, we're looking more of those about buying ADC, which -- so you're going to see some of us will talk more around per ADC pricing because some of these smaller ones aren't going to have really material EBITDA, but if it's a place we want to be and we can get there faster, we'll certainly do some more tuck-ins. So we're excited about the opportunities that are ahead of us.

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Operator [37]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. So I'd like to pass the floor back over to management for any additional concluding comments.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [38]

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Great. Thank you very much, operator, and thanks to everyone who joined us on our call today. We hope it was enlightening, clarifying and inspires confidence in Amedisys. We appreciate your interest in Amedisys. We would also like, again, to thank our employees, who delivered these phenomenal results. Keep doing what you're doing, taking care of people who need us the most. We hope everyone has a great day, and we look forward to updating you on our ever-evolving process and purposeful work on our next quarterly earnings call in May. Have a great day.

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Operator [39]

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Ladies and gentlemen, this does conclude today's conference. Again, we thank you for your participation, and you may disconnect your lines at this time.