Chemed Corp (CHE) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Roto-Rooter Incorporated's conference call for the first quarter of 2004 ended March 31, 2004. My name is Marvin and I will be your conference call facilitator today. Please note that today's call today is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer. (Operator Instructions).

Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform act of 1995 apply to this conference call. During the course of this call, the Company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the Company's news release of May 4th, its 10-Q dated May 10th and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the Company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization, or EBITDA, and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the Company's press release dated May 4th, which is available on the Company's Web site.

With that, I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Roto-Rooter, Dave Williams, Vice President and Chief Financial Officer of Roto-Rooter, and Tim O'Toole, President and Chief Executive Officer of the Company's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Mr. McNamara.

Thank you, Marvin. Good morning, everyone. Welcome to Roto-Rooter's first-quarter 2004 conference call. I will begin with an overview of the quarter. Dave will provide financial and operating metrics color and Tim O'Toole will discuss our hospice growth strategy relative to organic growth, start-ups and acquisitions. Afterwards, I will follow up with our go-forward strategy on our operating segments before we open it up for questions.

This has been an incredibly dynamic quarter. We have successfully raised over $400 million in capital, completed the VITAS merger and are now managing the nation's largest provider of hospice service and the country's largest plumbing and drain cleaning business. I will defer talking about our consolidated operating results. Although relevant from a GAAP perspective, the unique accounting and merger issues certainly rendered the consolidated financial statements difficult to understand. I refer you to our press release for a detailed analysis of the merger and consolidation issues that are incorporated into our consolidated financial results. Instead, I will comment on the Pro Forma operating results, which assumes ownership of VITAS as of January 31, 2004, and 2003 for comparative purposes.

The Q1 2004 Roto-Rooter plumbing segment sales of $69 million were an increase of 7 percent over the prior year quarter. More importantly, this growth was across all revenues segments in both commercial and residential markets. This is a continuation of a positive sales trend that began in the second quarter of 2003. We were able to translate this 7 percent revenue increase in Q1 2004 into a 35 percent increase in net income through a variety of cost containment programs that have been rolled out over the past two years.

We're now in position to begin realizing the benefits from the scalable centralization strategy. Our three centralized call and dispatch centers are completely up and running. These centers have replaced the local call centers in our fifty Company owned and operated locations. On a go-forward basis, this structure allows for more clarity and local operational challenges in all of our markets in regards to day-to-day staffing, productivity and customer satisfaction.

On the VITAS side of the business, our operational performance surpassed even our expectations. Despite this reasonable disruption from the merger operations and activities, field operations remain focused on providing the highest level of hospice care to our communities. As all of you are aware, there has been significant tumult experienced by a number of hospice providers recently. Dave and Tim will spend some time detailing the VITAS business model and how our approach to the market is unique in providing for a very stable and sustainable growth.

In addition, we have accelerated our Greenfield start-up programs. This acceleration of new starts does create short-term pressure on our profit growth. However, it is very controlled and once the pipeline is filled, we will begin to realize increased acceleration in our revenue and net income. Tim O'Toole will be providing specifics on these programs later in the teleconference.

One of the core competencies of VITAS has been in the creation of a proprietary infrastructure that allows for a scalable deployment of hospice services across all levels of hospice care. Through our centralized computer and management support systems in Miami, we seek to provide routine homecare, inpatient care and continuous care in all of our markets. This complete line of hospice service allows VITAS to penetrate markets deeply and capture significant market share. That is why, in our 22 established programs, we have an average daily census in excess of 350 and we can efficiently execute patients' individual plans of care in markets with average daily census well in excess of 1000 patience.

We believe the VITAS business model of providing all levels of hospice and care, combined with a scalable management and information systems infrastructure, will result in a more stable platform, which we will use to build out our geographic coverage through a balance of start-ups and acquisitions.

Now, I would like to turn this teleconference over to Dave Williams, our Chief Financial Officer.

Thanks, Kevin. Before getting into the details of the quarter, I want to remind everyone to carefully review both our press release, which was issued last week, as well as our 10(Q) that we released yesterday. The financial and accounting complexity related to the merger needs to be carefully understood when analyzing our operating results.

First, let's talk about the Roto-Rooter Plumbing segment. The first quarter of 2004 was the fourth consecutive quarter which showed decreased revenue over the equivalent prior-year quarter. The second quarter of 2003 revenue increased 2.4 percent over the prior year, a 5.2 percent increase in Q3 of 2003, a 4.6 percent increase in the fourth quarter of 2004 and a 7 percent growth in the first quarter of 2004.

Gross profit margin in the first quarter of 2004, excluding depreciation, was 44.6 percent. This compared to 43.7 in the prior year's quarter. This improvement in gross profit margin is a combination of a 1.1 increase in job count, approximately a 5 percent price increase, as well as a shift in mix to more plumbing.

Adjusted EBITDA for the Plumbing and Drain Cleaning segment totaled 8.7 million for the quarter, which was an increase of 35 percent over the prior-year quarter.

Now, let's take a look at the hospice segment of our business. VITAS is unique in its approach to the hospice market. Our business model is based upon the premise of providing a high level of hospice care to any individual diagnosed with a terminal illness, regardless of the level of care. Our individual patient plans of care are carefully prepared, documented and monitored through our internal systems. These systems allow for a detailed documentation, review and adjustment throughout the patient's stay, monitoring all critical patient metrics. VITAS is a very stable and sustainable business model with a reputation for excellence. This model results in the high ADC growth that is generated from significant market penetration.

Further, our average length of stay and (inaudible) length of stay are derived from the total community hospice needs. This effectively minimizes any impact from the Medicare caps.

In the first quarter of 2004, VITAS generated revenue of about 124 million, which is an increase of 24 percent over the prior year. Adjusted EBITDA in Q1 was 11.4 million, an increase of 18 percent from the first quarter of 2003. The Q1 2004 adjusted EBITDA margin was 9.2 percent. This compares to an adjusted EBITDA margin of 7.7 percent in the Q1 2003 quarter and 11.5 percent in the fourth quarter of 2003.

The first quarter of 2004 had a sequential decline in our adjusted EBITDA margin of 230 basis points from the fourth quarter of 2003. This is the result of several factors. The first is a seasonal issue involving higher gross quarter payroll taxes primarily state and federal unemployment, which impacted margins by 90 basis points. It was also a shift in hospice service mix that reduced margins by 50 basis points, a decline in routine Homecare margins that impacted VITAS by 50 basis points, and our acceleration of start-up programs in the first quarter of 2004 contributed incremental losses that resulted in a 50 basis point decline. The shifts in mix I had mentioned earlier that caused the 50 basis points decline are a normal fluctuation between routine homecare, continuous care and inpatient care demand.

Homecare margins were impacted by the normal census drop-off after the year end. Typical of the seasonality, census improved from the January drop-off, resulting in margins strengthening as the first quarter of 2004 progressed.

In the past five quarters, routine homecare as a percentage of total revenue has ranged from 67.1 percent to 69 percent. These normal shows between care segments create fluctuation in operating and EBITDA margin, given the large disparity of margins between segments.

VITAS' cost of services provided include basically all costs incurred directly by our program. These (indiscernible) can be further subdivided into direct patient costs and indirect patient costs. The direct patient costs include all labor and provide hospice service directly to the patient, related payroll (indiscernible), drug supplies, home medical equipment and similar expenses. Indirect patient costs would include all other expenses incurred at the program level such as a branch manager, admin support, office facilities, admission personnel, marketing, etc.

The routine homecare direct patient margins were 48.8 percent for the first quarter of 2004. This compares to a 27.1 percent margin for inpatient and 19.2 percent for continuous care also in the first quarter of '04. Inpatient directory (ph) margins have a range between 22.4 percent and 27.1 percent. Continuous care margins have ranged between 19.2 and 23.5 percent over the past five quarters.

VITAS' central support costs are reported to our selling, general and administrative expense line item for a statement of operations. As a percentage of revenue, these costs were 10.9 percent in Q1 of 2004, down favorably from the 11.6 percent in the fourth quarter of 2003. We continue to get operating profit leverage from our central support costs and we anticipate this favorable leverage to be a continuing trend on a go-forward basis.

Start-up losses in the first quarter of 2004 were 1.1 million. This compares to 559,000 of losses in the fourth quarter and 207,000 of losses in the first quarter of 2003. Our press release, as well as the 10(q) we filed yesterday, provides a significant number of operating metrics over the past five quarters. Our goal in providing these metrics is to allow shareholders to obtain clarity on our hospice operations and business model and recognize the unique aspects of VITAS.

Our Day Sales Outstanding, or DSOs, at the end of March of '04 were 36.4 days. Over the past twelve months our DSOs have ranged from 34.2 days to 40.2 days. You should also note that our DSOs include nursing home reimbursement.

Our average length of stay for the quarter was 55.7 days. This compares to the first quarter of 2003 of 54.1 days and to the fourth quarter of 2003 of 59 days. These fluctuations are related to normal shifts between routine Homecare, continuous care and inpatient care. Our routine Homecare length of stay in the first quarter of 2004 was about 85 days. Intuitive (ph) care was 19.2 days and inpatient care had an average length of stay of 17.6 days. Our overall median length of stay was 11 days. Inpatient (indiscernible) admissions impact our average length of stay since these patients' notices are generally in an advanced date. The shorter length of stay does result in minimizing VITAS' exposure to the Medicare caps.

Admissions in the first quarter of 2004 were 12,236 patients. This compares to 10,979 in the fourth quarter of 2003 and 10,925 in the first quarter of 2003.

Our consolidated balance sheet looks pretty good. As of March 31, 2004, cash and cash equivalents were 43 million. We have an available an additional 44 million through unused lines of credit. In addition, we have another 4 million on deposit as other current assets. They will be (indiscernible) and tied to cash once we finalize our Workers' Comp Letter of Credit. We also anticipate receiving 19 million in tax refunds and benefits from the deductibility of stock option buy-out at the VITAS level.

Further, total Cap Expenditures for the quarter were 1.8 million and compares to depreciation for the period of 4.3 million.

Our focus since this merger closed in late February has been on merger integration as well as developing an accelerated hospice expansion program strategy. We anticipate the strategy to be completed by the end of the second quarter. At that point, we will be in a position to provide forward-looking guidance for 2004 and 2005.

With that, I'd like to turn this call over to Tim O'Toole, our Chief Executive Officer at VITAS.

Thank you, David. As most of you are aware, as a privately held company, VITAS historically has been operating under tight capital constraints. Geographic expansion was accomplished but on a relatively conservative basis. However, VITAS was aggressive in the development and build-out of a proprietary management and information systems infrastructure that provides extensive monitoring of all crucial metrics within all of our programs. As Kevin mentioned earlier, this has resulted in VITAS possessing a very robust, scalable infrastructure that is capable of managing multiple programs and results in an ADC patient base that is significantly larger than other hospice providers.

Our future growth will come from three areas, organic, de novo and acquisitions. The organic growth is the easiest to see in that VITAS has been generating significant ADC growth in established programs over the past year. We currently have 26 licensed programs. As of March 31, 2004, we had five programs in excess of 450 ADC. These are considered our large programs and as a group, they generated revenue growth of 20 percent in the first quarter of 2004 when compared to the prior-year quarter. We had 12 medium programs with ADC up 200 to 449 that generated revenue growth of 19 percent. We have four small programs that are licensed and have less than 200 ADCs that generated revenue growth of 148 percent over the prior year.

In addition, we have eight start-ups, three of which are licensed and five of which are in the process of obtaining licensure. Three of these was started in the first quarter of 2004. As a group, they generated losses of $1.1 million in the first quarter of 2004. This compares to losses of 600,000 in Q4 of 2003 and 200,000 in Q1 of 2003.

The acceleration in our start-up plan is delivery. We are very comfortable with the current de novo investment level and have recently moved two consistently profitable start-ups into our base business. There are currently eight new sites. By that we mean with less than one year of producing revenues at various stages of development in northern California and the Northeast. In the quarter, these sites produced revenue of 1.4 million, nearly 6 million annualized, with census of 111 patients.

Our business model anticipates all of our programs will capture significant market share by offering referral sources a hospice program that is capable of providing the appropriate to plan of care to any hospice eligible patient regardless of the diagnosis or difficulty of care. This results in VITAS possessing a major competitive advantage in all of our markets.

Further, our VITAS marketing representatives are receiving enhanced training, education and resources to accelerate admissions growth. New programs that allow our marketing representatives to specialize in specific areas, such as skilled nursing facilities and assisted living, are helping to expand our presence in these settings of care. This competitive advantage should also come into play as we enter communities and establish relationships with smaller for-profit and non-for-profit hospices.

VITAS' reputation for quality of care and the ability to meet a community's complete hospice needs is an important consideration, as smaller hospice providers consider exiting the market.

We're also prepared to acquire large census hospice operations to the extent the culture of the employees is a proper fit to VITAS and, on a Pro Forma basis, the return is accretive to our earnings. Strategic acquisitions, acquisitions with a relatively small census that would accelerate our entering the market will also be utilized in our expansion model. Since the completion of the merger, our focus has been in the development and execution of an expanded and suitable growth strategy. Expansion geographically will always place the needs of patients first in terms of appropriate care. It is our reputation as the clear leader in quality hospice service that will allow us to enter and eventually become the leader in the communities in which we serve. We believe the reputation of VITAS has created a brand equity that is highly valued by our patients, families and referral sources.

With that, I will turn the call back over to Kevin McNamara.

Thanks, Tim. One issue that is on many of your minds is synergies, or lack of synergy between our business segments. From an operational basis, these are minimal. Certainly, on a high-level, there are overall corporate benefits in regard to tax, financial, treasury, Sarbanes-Oxley and related public reporting requirements. However, the greatest benefit to these segments is the strength generated from the combined cash flows of the businesses. Long-term, we recognize they will need to be separated. You certainly get maximum value from a pure play.

However, the plumbing segment is just beginning to emerge from the recession. Their adjusted EBITDA is well below its historical highs. In addition, the current run rate of adjusted EBITDA from the Plumbing and Drain Cleaning segment is more than adequate to meet the current debt support plus provide remaining free cash flow to fund the hospice expansion strategy.

At this point in time, from a cash flow perspective, these business models are complementary. Long-term, separation is inevitable.

In summary, we are well positioned in both our core businesses -- in both of our core businesses and we should generate very positive growth and shareholder value.

Thank you for your attention. We will now open it up for questions.

(Operator Instructions). Jim Barrett with C.L. King and Associates.

The first question I believe is for you, David. In reading the Q, I noticed that the covenants restricted the amount you could spend on acquisitions without gaining approval from the banks. Would you comment? Would you tell us out that jives with your acquisition strategy of VITAS?

Yes, that is actually a standard term.

So I take it there are no material -- can you tell me what the constraints are in terms of the amount you can invest?

It is a pretty low threshold; it is a standard term the bank puts in as just their general covenants. At this point, we consider it largely perfunctory to build it out; we just lay out the program to receive approval. We do not anticipate an issue at this time. We are actually very blessed with cash and the bank is extremely cooperative.

Tim, can you tell us how much additional private company costs are left to be eliminated at VITAS as of the end of the quarter?

Absolutely, Jim (sic). You know, we basically got in there for the full month of March and we were giving guide that we felt that we could take about $5 million pretax out of private company expenses. We accomplished most of that in the month of March and I think when we get into the quarter of June, you will see the full benefit of that.

Finally, Dave, could you talk about the -- the plumbing margins were 7.6 percent, excluding the long-term incentive cost in Q1. Is there any reason sequentially that the margins should not be at that range or above, given the fact it appears your Yellow Pages advertising may be significantly lower, or at least the growth in Yellow Pages advertising may be lower in the remainder of the year?

There is going to be a fluctuation. Yellow page cost is largely a crapshoot. As you see, on an adjusted EBITDA basis, we deliberately smooth that because of what we will call kind of the bizarre GAAP reporting.

With that said, though, on a full-year basis, we anticipate the margins being at or above that level. At this point in time, we are actually extremely pleased with the continuing strength we've seen on the plumbing side, certainly the strength on the topline revenue, so we would expect margins to maintain at this level.

Thank you.

Eric Gommel with Legg Mason.

Yes, thanks. A couple of housekeeping questions -- what were the total patient days for the quarter for you guys?

Just a second, we will get it for you.

Then also, if you have like an average weighted daily rate for the quarter as well?

Yes, I can give you the average for the quarter. The average for homecare was $127; inpatient was 551 for the quarter; continuous care was 544. These numbers tend to fluctuate just a hair because they are regional reimbursement rates -- (Multiple Speakers) -- significantly.

Then you just weight that for the different days in each quarter, okay. Then you will find me the total patient days?

Yes, you could actually do the calculation with the average -- (Multiple Speakers) -- and the days.

Right, okay. What kind of assumption should we be making about income taxes and sort of the tax rate, going forward? Is there an assumption we can make at this point, or is it too early to talk about that?

Well, for VITAS, about 40 percent for their segment. Overall, the blended rate will be a hair lower.

Then just a little bit about -- I mean, you talked about the synergies between the -- or lack thereof between the plumbing and the hospice business and sort of the plan longer-term. Can you put any kind of timing on a plan for a spin-off or a sale of the plumbing business? Do you have any idea what kind of timing we could be looking at here?

Looking at what is going on in the businesses, in the markets, I would say, not this year but it's certainly -- we're going to be looking at all options, you know, we're looking at the options now.

Would I -- really to answer your question, would I anticipate a culminating development? We are talking about next year at the earliest.

Fair enough. I guess really my last question is more on the hospice side. You guys have talked about taking out the $5 million in cost from the hospice. I guess the question is, is this more -- can you squeeze out more costs on the hospice business or is this really platform that is more leveragable? I guess is growth versus cost savings? I mean, where do you guys really expect to -- you know, sort of the growth strategy, where does it come from? (indiscernible) growth less cost savings? If you can just kind of expand and what your thoughts on that are?

Tim, why don't you respond to that?

Very good. Just a housekeeping matter before we get into that, you asked a question about days of care -- 737,000 days of care in the March quarter this year; that compares to 619,000 in the prior-year quarter, about a 19 percent increase.

So, also just as an item, our average revenue per day of care -- $168 approximately this year compared to 162 in the prior-year quarter, so we're making good progress on those fronts.

As far as the $5 million of cost savings, yes, that was really just identifying the private company compensation structure, whereas we would explain -- you know, (indiscernible) had a large compensation compared to the situation today, so that was taken out immediately. The Company had contributions that were in the nature of, in many cases, political contributions that we have stopped providing. The Company still continues charitable support for our patients and we're providing about 1 percent of our revenues are in charity days of care, and that is a very healthy program that is in line with the history of the Company and meets our needs in the community and our Company's needs very well.

As far as the growth strategy, we taking more cost out. As we have explained historically here, we're looking at a company that it is about a 500 million run rate in revenues. The revenues are growing. Our targets are between 15 and 20 percent growth rate. We're obviously exceeding that right now and I thing, for the near-term, we should continue to exceed that. The good news is that as we control the costs in the field and bring that growth level down to the field level profit base, we have further leverage by controlling our corporate level expense. The corporate local expense area is fully historically built up to our needs, so the increasing needs of that area will probably increase at a 7 to 8 percent rate into the future, so that actually produces further leveraged on the margins.

As we had talked to people about, we saw a company that, on a Pro Forma basis, was looking at a 9 to 10 percent EBITDA margin, and we expect it to expand that number and we're very comfortable we can do that; we're already seeing very favorable EBITDA trends in the March and April quarters in April month as we move into this quarter. So we can have additional average but it will not be by changing any of the practices or models; it will be by leveraging our cost structure. We're very comfortable we can produce very good growth with that model.

Thanks.

(technical difficulty) -- with S.G. -- (technical difficulty).

Thanks. Could you discuss labor trends in VITAS both in terms of wage rates but then also labor turnover?

Tim, why don't you respond to this?

Absolutely. We are actually seeing very good results in our labor area. We certainly see, with our companies being geographically across the country, we see areas where there is higher demands (sic) on the wage pressures than we're able to meet those with high growth in those communities as well within those programs. Basically, we have looked at this and our overall salary and wage rates increased at a 4.2 percent rate in the 2004 March quarter, compared to the prior year, so we feel like we're in pretty good shape there. Our average nurse, as an example, earns $46,000 a year when we looked at those figures for this quarter. That represented a little over a 3 percent increase over the prior year, so we feel that is in good shape and we're not seeing any immediate pressures in those areas.

Probably over time, we will see wages increasing more than those levels than historically we have for some of the professional positions. When you look at the growth that we're seeing across the field level results and some of the fixed costs help us to absorb some of those rates that are a little higher than these rates I quoted in total. So, we're able to absorb particular needs in various geographic areas but our overall experience is very good and we do not expect any problems in the wage areas increasing compared to our expectations.

As far as turnover, we have seen normal patterns of turnover with respect to our -- generally speaking, our professional caregivers, the nurses and home health aides were in the range of something in the 25 percent range. That has been consistent with what we have seen in the last several years so if anything, it is actually improving a little bit. We think we have very strong programs to retain our professionals, both in the area of appropriate compensation (indiscernible) healthy benefits and we believe we are the employee of choice in the hospice arena and we believe that VITAS is offering the right home for them, the patients and our families, so we attract, we think, the highest quality professionals and we're able to retain them better than most of our competitors in the industry.

Also, we are looking at areas across the board where we can further enhance potentially benefits. Part of bringing VITAS into a bigger company will allow us to do that. So, we're seeing very good results there. We're not seeing pressures in the wage area. Our margins are improving.

Great. Just to switch gears a little bit, are you still pursuing -- I think it is Good Shepherd of Winter Haven or it's a nonprofit program in Winter Haven that reportedly has received an offer from you?

Tim, why don't you respond?

Very good. There has been some things (sic) in the newspapers about that particular company. We will not respond to whether or not we're in discussions with any particular company in any particular time until we would make an announcement upon some of the benefit would require that. So I cannot comment on the particular company that you have referenced. I will tell you that we have numerous discussions going on with some very attractive acquisition candidates in all regions of the United States, both some very nice regional plays as well as some smaller, potential companies that will help us enter the new markets that we are targeting. So all I will say is, to reiterate, that the acquisition opportunity is a great opportunity for us. It, again, will allow us to leverage our fixed costs in the corporate area, leverage our systems and provide the high level of hospice quality care in those regions that we think we can enhance what we do if we get a hold of a company, if it is the right kind of business, if it has good, strong historical results, if it has been strong quality assurance programs and the employees are the kind that are forward-thinking about joining the VITAS model, we would certainly do acquisitions and I think we will as we move forward this year.

Thank you.

Mark Kaufman (ph) with Lazard.

Good morning, gentlemen. Nice quarter. I just had a -- I guess maybe you could comment on this -- one of your competitors recently announced their results and they used the same letters as you do in there name but that's besides the point. Basically, I have a what, 47 locations and their business is about two-thirds your size. You are running only 25 locations and clearly, it's a higher revenue base -- (technical difficulty) -- certainly have higher expenses per unit. I'm just wondering how that affects your business vis-a-vis someone else, well, one of your -- I guess not direct competitors but someone else in the business. What advantages do you have by running a larger census -- (technical difficulty) -- running larger organizations rather than being out in the (indiscernible) so to speak?

Well, I think it is certainly our strategy when we go into a new area to develop a large hospice program that will have high market share. It, first of all, is the natural result of us having the model where we provide all levels of care, including inpatient care when we can, continuous care and home care, but it is also our goal to go into the markets and develop them early by educating the community about VITAS coming there, what we're all about, having a fully staffed operation with a healthy marketing effort, but all of the quality services from the patient care site already in place. So, when we go to the market, first of all, we think it is a better opportunity when you have high market share. Our goal would be to have locations that clearly exceed, over time, 100 census. Our experience would be that every market is different but we can achieve that within, say, a year and a half of entering a new market and then we can grow from there. So, it is just a different strategy than some other hospice companies have where they want to go in and develop a smaller census opportunity. It takes a little less investment; it takes a little bit less expertise maybe but over time, we believe that having the large market penetration, the large census, the large support system allows us to have a stronger office, it allows us to leverage the growth into specialty programs for different settings, and allows us to take on all disease states and again, allows us to have a broader, stronger program that we can have more caregivers, so if you have disruption vis-a-vis scheduling, you can have better coverage there. We can have, again, just a stronger presence in our market.

So again, our strategy is different. We have very large programs in certain areas of the country. We have, as we've broken up, certain size programs in other parts of the country. Our goal is to have large market share. So probably when we go into a market, we easily think we could garner 25, 30 percent market share, which would take two to three years to develop, but that is our goal. So, our goal is to have very strong programs, so our goal would not be to necessarily target a number of new starts but the new starts that we develop would be strong programs penetrating the markets deeply and therefore very profitable as we move down a two to three year time frame from opening them.

The ability I'd like to add to that is that, long-term, when the competition is mature in this field and everyone -- because the large companies are everywhere -- the referral sources they are only going to refer to as they have the option to well-run full-service hospice programs. Again, the size comes from full-service and then with full-service, again, it begets better referrals. When the referrals source has a choice, why wouldn't the referral choice, assuming excellent service in both, go with a full-service hospice program. That is where we already are, so what you're describing is more a result of our strategy and that is to be the best option for outsource.

As the follow-on, how long does it typically take for -- (technical difficulty)?

I am sorry, I did not hear the question. How long it takes to do what?

For licensing when you move into a new area?

Every state is different. We have seen very different situations in very -- you know, in each state we operate in. We have seen situations where the licensure basically can occur within maybe a three to six month time frame and we have also seen situations where we had hoped that will be the case but it drags on for another three to six months because, in certain states, especially we're having some issues like everybody in California because the State is burdened because of their budget crisis for meeting the need to get out into the field for licensure surveys. We have made very good progress in California with several of offices and we have several pending but those are part of the considerations as to where we will target our development operations. We're not seeing the licensure process, whether it be from a federal Medicare level or a state licensure perspective, difficult; it just is different in each state. So as we learn about them, we just basically make decisions about the pacing of our start-up programs in various locations.

So, I think we're doing a very good job of having local market knowledge and we in are really no problem with getting our licensures. They are taking longer in certain cases but in many cases, we have received licensure exactly on our planning schedule. So, we look at the licensure situation as we determine our new start targets; we also look at the need in the marketplace and the opportunity, both with the underserved need for hospice as well as the competitive environment. We also focus on markets that, in many cases, are close to where we have established programs, so we have a very good feel for the regulatory environment and we also have a lot of bench strength in the local programs that are nearby that we can call on to help us implement our starter programs.

So, across the board, VITAS has a lot of support. We have a specific development team that has individuals that not only can open the new offices but provide transition to the base business from those offices and then move on to start new ones. So, we have a dedicated team and they are gaining experience and with every one we do, I think we do it better. So, we're very encouraged by the opportunity and when I go out to see our businesses in the field, I've been very encouraged by the opportunities we see in the markets, even where we're at today to penetrate the markets further by opening branch offices, which necessarily do not need new licensure, and as well to open up new offices in nearby territories. There is a big opportunity out there for VITAS to open new offices.

I would like to say, what we've seen as far as licensure, it is really based on ensuring the quality is there rather than somehow restricting the entrance or the entrance of a new competitor. Again, we are -- just given our size and our experience, that is right up our alley. Quality is what they're looking for in (indiscernible) and that is what we're delivering.

Thank you very much.

Your next question comes from -- (technical difficulty).

Hi, I have a quick question. How do you view sort of what has happened or has what has happened in the context of Odyssey and VistaCare, which I know Mark was alluding to earlier, changed the way that you look at your -- does it present a sort of better opportunity for you? Does it hurt you to the extent that either of those two competitors will be sort of looking to a customer base that has been more of the type of a customer base that you have gone after and thereby sort of hurt your business or do you view it as an opportunity to build because they will be less aggressive in their practices?

I just do not think it has much effect on the operations of our company. I would say, in a very small way, to the extent that one of these significantly-sized competitors (indiscernible) you know, pull back a bit, given the fact that with regard to acquisitions and what not, I still think we will see them because they will disappear, so I don't see it having a significant effect. I mean, I think that some of the issues they are dealing with, they will probably try and emulate more of our marketing programs and our model, that is less of niche players and more of full-service firms. They will go through some growing pains perhaps in the (indiscernible) but it really just -- you know, the issues that they're having that seem to have such a big effect on their stock price and then by, you know, by inference on us as well, again, they are issues that just don't really apply to us and I think they will, in short order, be very natural for them to evolve to an area where they did slate themselves from these same factors as we already have.

Thanks.

Because it's going to be hard for them to do. It's going to be hard for them to do. We're talking about a situation where some of the growing pains that they are experiencing going out, you know, expanding out of their midst we went through ten years ago. The systems that we have already developed, you know, are the ones that -- again, they're proprietary and they're the results a of trial and error and a lot of investment over a long period of time with some fits and starts, I may add. When they have those, they will probably be able to move as quickly as we are now but they're not quite but they're in a nice niche. I'm not in any way trashing them. I mean, they do well in their niche business -- niches that they've carved out for themselves.

Do you think it will help you from an acquisition perspective, going forward?

A little bit but we don't even -- I mean, they're still going to be there. It may up a little bit but I do not see that as a real significant issue.

Okay, thank you.

Darren Lehrich with Piper Jaffray.

Thanks. Good morning, everyone. Thanks for all of the disclosures here in the 10(Q). I am just wondering if, Tim, you could maybe comment a little bit more just to give us a better sense for the seasonal aspects to your census by product line? I understand you get that first-quarter fall-off in the home business but maybe just speak just a little bit to the inpatient and continuous care side of things and help us out, just think seasonally about your mix? Thanks.

Very good. Well, the seasonal aspect is really something that is hard to describe in total because you do not see it all the time; it is a little bit more of art than science, but you know, we clearly see a phenomenon that, as we move to the holiday season at the second half of December, that individuals that may be hospice appropriate just defer the decision to admit themselves during that period because they want stay at -- you know, not have to face up to it; they want to have fun at the Christmas and holiday time with the family and then when that period ends, as we move into January and February, our admissions begin to increase. The same phenomena happens at certain other periods of holiday seasons but it is most pronounced in that December period. So, we mainly see the drop-off in the home care, the routine home care side the business, not necessarily the continuous care or the inpatient, so that is what we see.

This year, we saw that happen in January; we saw the census drop by about 200 compared to where it was in December, but we recovered that by the end of February and were higher by the end of March and again higher as we move into April. So, it was a seasonal factor and since we know that happened and since we knew that our census was going to grow rapidly in the February and March period, we needed to keep the staff, the caregivers, around obviously. As the census dropped, you have some excess capacity on your hospice teams, so that is why the margins go down in the January/February timeframe, but then we have already achieved recovering that margin drop. So, it is part and parcel to the business. As I say, it is a psychological issue that takes a lot of study but we clearly see it, other companies see it, the industry sees it, and so it is basically the concept of the admissions flow changes around the holiday period.

Thanks. Just maybe a couple of other things here -- as I think about the start-ups, you have got a handful that are not licensed yet and I guess a few that you are still ramping nicely on. Can you just give us a sense as to the dollars for this? Will we see those dollars also accelerate as we get through the course of this year, or is that roughly $1 million per quarter range a good number to think about?

Yes. I think right now we're getting our feel for that. The first thing that we have done in the March timeframe is set the groundwork for the acceleration of the start-up programs. The other thing that I would comment on is, you know, in the period, we also graduated two programs that were in the start-ups phase to our base business. Those programs, which had been in the start-up base for about 15 months, when we transferred them to our base business, were contributing about $14 million on an annual basis with operating margins exceeding 12 or 13 percent. We've had great success with the start-ups that were developed in the last year, year and a half and the ones that are in development we feel very comfortable with. The expense at the rate of about 1.1 million in the quarter is about the rate of investment we're comfortable with at the current time. We do not see that accelerating. We're optimistic that it should come down a little bit because we had a big investment in some new starts here in the last three or four months. So to the extent that that would be, again, at an annual rate of about over $4 million, we think that is a reasonable contribution out of our EBITDA results for the strategic development plan, so we do not see that number getting larger; we see it being at that level or lower, but we will give better guidance on that once we get through the June quarter.

Okay. Then I guess, just relative to the sales and marketing efforts that you have within the Company, maybe could you just comment broadly about the number of sales people you have within the Company? I'm not sure that you will be disclosing that or not -- and just kind of the comp structure that you have in place, just given all of the talk that we have heard in the competitive environment on this point?

Very good. First of all, we're very pleased with the current situation of our marketing representatives in the field. We seem to be improving in our success, so we're very happy with that. I'm not sure if these figures will disclose exactly detailed numbers but we have over 130 marketing representatives right now in the field and that is up from the prior year at a reasonable level. I expect that number to grow into the future. I think more marketing efforts will enhance our growth rates of admissions and we have very good programs right now in place to support our marketing representatives. I think what we do is we bring individuals in and we orient them very well to our company so they know the VITAS model systems and how we do business. I think we basically continue to educate them about the hospice benefits so they know the benefit very well when they're in the field talking to the referral sources. The other thing that we have done is we have provided, with our size in certain markets, we've been able to specialize our marketing effort to individuals that just target the nursing facilities or individuals that just target the assisted living facilities. We're having very good success in the assisted living area because they see us as real partners to help manage that plan of care for that patient so they don't have to be transferred out of the assisted living facility to a hospital environment during their last days and weeks of life, so that has been very well-received.

We have a very robust system in our company our -- what we call VITAS Exchange -- as we have talked a lot about. Again, one of the advantages here is for our marketing representatives to have access to information. We have recently added some tools to it that allow them to manage their relationships in the field with referral sources and schedule their days and work more efficiently. We think this is going to be very helpful.

One of the other unique aspects about what we do with our systems is when we have discussions with our marketing representatives and referral sources, they are actually able to go back and share with them specific patient data about patients that they have referred and show the quality and the level and the number of visits and the care that we have provided. The other thing they're able to show is, on a specific patient basis, they're able to show how we have managed the pain effectively very quickly once they have been admitted.

So, one of the goals, obviously, of this type of education to the referral source is to let that referral source know that this patient was probably hospice appropriate earlier than they referred them to us and we do wonderful work to help them, so we're seeing very, very good success there.

As far as our compensation program, we have a compensation program that both consists of a base pay as well as incentive compensation. Incentive compensation is based on hitting goals that are set by the Company that are managed by our marketing people in the corporate area and also developed at the field level for targets. These targets would incorporate issues such as the number of issues, the length of stay of the patients that are brought in to the extent that that is an issue and also just overall quality of what they do. Are they helpful in the community with setting up educational meetings? Are they helpful to the other members of the team in that branch? So both subjective and objective goals for their compensation structure but certainly a reasonable portion of it, probably at least half of their total compensation, would be based on targets that are admission oriented.

Thanks very much.

Tom O'Shea (ph) with Golden Tree (ph).

I know you said you're not going to give guidance until 2Q but given the seasonality of 1Q, is there anything you're seeing right now that makes you think the next few quarters won't be at least flat with what you just put up?

At least flat. I mean, the answer to question is things are -- as Tim mentioned, and we mentioned with regard to (inaudible) business. You know, things are going very well. We are exceeding our expectations. There is nothing if -- if the one thing I know we're under a lot of legal requirements and a lot of prohibitions but if I was a shareholder, an analyst of this field and I was listening in on a conference call, I would say, God, is there any bad news around the corner?

All I can say is the results are counter-directional to what is going on and where everyone is a bouillon (ph) with what is going on with our actual operations. The real question is, well, just (indiscernible) we are that will all -- we are really working hard on giving projectable results that mean something and we will push and do that again this quarter but yes, things are going well.

Okay, thanks.

That's it. Thank you for joining us today and thanks -- (technical difficulty) -- we certainly look forward to speaking with you at the end of the second quarter.