Chemed Corp (CHE) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Chemed Corporation conference call for the second quarter of 2004 ended June 30, 2004. My name is Lynn 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 period. If you would like to ask a question during this time simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press "*" then the number "2" on your telephone keypad.

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 the forward-looking statements as a result of a variety of factors, including those identified in the company's news release of August 3rd, 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 of EBITDA, and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dating August 3rd, which is available on the company's website.

With that, I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation, Dave Williams, Vice President and Chief Financial Officer of Chemed, and Tim O'Toole, President and Chief Executive Officer of Chemed VITAS Healthcare Corporation subsidiary. I will now turn the call over to Mr. McNamara.

Thank you, good morning everyone. Welcome to Chemed Corporation's second quarter 2004 conference call. We’ll begin with an overview of the quarter and strategic developments. David Williams will provide financial detail as well as guidance for the second half of the year. Tim O'Toole will discuss specifics on our hospice operations. I will then open this teleconference up for questions.

We are very pleased with our second quarter 2004 results. On a consolidated basis, our revenues increased 170% to $209 million, our adjusted EBITDA was $24.5 million and our pro forma diluted earnings per share were 60 cents, significantly exceeding analysts expectations.

For Q2 2004 Roto-Rooter segment sales of $68.9 million were an increase of 7% over the prior year quarter. This growth continues to be generated across all revenue segments in both commercial and residential markets. This is a continuation of a positive sales trend that began in the second quarter of 2003.

Consistent with the first quarter of 2004, we were able to translate this revenue increase into a 33% increase of net income through benefits derived from our reorganization and centralization strategy discussed in last quarter's conference call.

VITAS produced solid results for the quarter. ADC or are Average Daily Census increased 19% to 8,581. Revenue for the quarter totaled $130.2 million and our adjusted EBITDA was $16.3 million.

We have eight startups in progress as of June 30th 2004. These new programs generated operating loses of $1 million in the quarter. We view these losses as cost effective investments that will play a crucial role in generating long term sustainable growth for VITAS.

We continually review our internal [costs] for opportunities that will allow us to become more efficient. Our strategy and all our hospice care delivery programs is to ensure that we have in place efficient scalable systems that will easily expand with our organic and geographic growth and meet the immediate needs of our patients.

Our investments in systems and infrastructure will allow for continued refinements in the VITAS business modal. The benefit of this structure will become more evident as we build out our geographic coverage to a balance of startups and proactive acquisitions.

Now I'd liked turn this teleconference over to David Williams our Chief Financial Officer.

Thanks Kevin. First let's talk about the Roto-Rooter plumbing segment. The second quarter of 2004 was our fifth consecutive quarter which showed increased revenue over the equivalent prior year quarter. Gross profit margin in the second quarter of 2004 excluding depreciation was 44.4% this compares to 44% in the prior year quarter. This improvement in gross profit margin is a combination of our 1.65 increase in job count, approximately 5% price increase, as well as, a favorable shift in job mix as a higher margin plumbing jobs.

Adjusted EBITA for the plumbing and drain cleaning segment totaled 10.4 million for the quarter which was an increase of 33% over the prior quarter.

Now, let's go to the hospice segment of our business. In the second quarter of 2004 VITAS generated revenue of 130.2 million which is an increase of 23% over the prior year, adjusted EBITA on Q2 was 16.3 million, an increase of 65% from the second quarter of 2003.

The Q2 2004 adjusted EBITDA margin was 12.5% this compares to an adjusted EBITDA margin of 9.3% in the second quarter of 2003 and 9.1% in the first quarter of 2004. The second quarter of 2004 had a sequential increase in our adjusted EBITDA margin of 333 -- 330 basis points from the first quarter of 2004. This is a result of several factors. Gross margins in the quarter were 21.8% this compares to margins of 22.2% in the prior year, however, as Kevin mentioned earlier included in the second quarter of 2004 was a $1 million in operating losses from our startups as compared to 300,000 losses in the prior year. Our investment in new starts negatively impacted our margins by 50 basis points.

We also enjoyed a significant decline in our central support expenses. These costs, which were included as selling, general, and administrative expenses in our statement of operation declined 8.1% over the prior year and declined 6.1% sequentially. This favorable decline is the result of eliminating certain private company expenses discussed in our prior conference call, as well as, carefully managing expenses into a realized appropriate ADC growth that justify additions to our infrastructure.

Our average length of stay for the quarter was 59.9 days this compares to second quarter 2003 of 55.4 days and to the first quarter of 2004 of 55.7 days. Our medium length of stay was 12 days in the current and prior year quarter.

Our nursing home-based routine homecare length of stay in the quarter was 97.4 days other routine homecare had a length of stay of 80.8 days. Our continuous inpatient levels of care materially impact our overall average length of stay. However, a significant portion of days of care for inpatient and continuous care are from patients transferred out of routine homecare. Our experience is that a typical level of care episode for continuous care and inpatient care would average approximately 5 days.

Our day outstanding or DSOs at the end of June 2004 were favorable 35.1 days. Over the past 12 months our DSOs have ranged from 34.2 days to 37.4 days.

Our consolidated balance sheet was pretty solid. As of June 30th 2004, cash and cash equivalents were about $52 million. We have an available and additional $69 million to our unused lines of credit. We also anticipate receiving in the fourth quarter 2004 $15 million in tax refunds from the deductibility of stock option buyouts at the VITAS level.

Looking ahead into the second half of 2004, we anticipate sequential revenue in the third quarter to be modestly above the second quarter due to seasonality factors within Roto-Rooter. Roto-Rooter is estimated to generate a 3-4% sequential decline in revenue in the third quarter and 67% sequentially growth in the fourth quarter, which is very consistent with historical seasonality patterns.

VITAS has generated exceptional organic growth in the first half of 2004. As a result, we anticipate a short come flattening of census growth in the following one to two quarters. We are very optimistic as to the long term sustainable growth in ADC, revenue, EBITDA margins and earnings per share, however, we need to keep in perspective reasonable fluctuations in growth patterns that will occur quarter-to-quarter.

We'll continue to adjust staffing within our programs to ensure our ability to provide care for all hospice-appropriate patients within a community. Capacity growth will be based upon our trailing ADC trends. This results in margin fluctuations quarter-to-quarter as capacity and central support resources are grown at a much more methodical rate than our ADC.

Accordingly, we conservatively estimate our third quarter sequential ADC growth to be in the range of 2.5%-3%. And our fourth quarter ADC growth to be between 2 and 2.5%. This conservative growth estimate should result in an ADC of 9,100 in the fourth quarter of 2004. We also anticipate receiving an average Medicare reimbursement rate increase of 3% effective October 1, 2004. Based upon these factors and a diluted share count of 12.7 million shares, our expectation is that earnings per diluted share to the third quarter will be between 56 cents to 60 cents per share, and the fourth quarter will be in the range of 68 cents to 72 cents per share.

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

Thanks David. As Kevin mentioned earlier, VITAS had an excellent quarter. Driving these results was our ADC growth in the second quarter that was 19% above the prior year. Even more importantly, our smaller programs are contributing a greater percentage of this organic census growth. We currently have five large programs in excess of 450 patients. The growth in these programs was 16% in this last quarter. Our 12 small programs with ADC less than 200 and our medium programs with ADC between 200 and 450 census had a combined census growth of 22%. What this means is that our small-to-medium programs are going at a faster rate than these large programs, which we believe indicates an excellent prognosis for long-term sustainable growth. Continuation of our start up programs is critical to insure a steady development of new markets and organic growth. We currently have 8 start ups, five of which have licensure and four are Medicare certified through a combined ADC of 133. This compares to an ADC of 29 in the prior year quarter.

We also continue to probe for acquisitions that will augment our internally developed growth. We anticipate these acquisitions will consist of large step-out programs that will establish a platform for VITAS to build up erg in terms of organic growth and contiguous start-ups. We continue to evaluate strategic acquisitions of small programs. These type of acquisitions would allow VITAS to penetrate a market at an accelerated rate beyond pace of a typical start-up. Our business model anticipates all of our programs will capture significant market share by demonstrating to a communities referral sources that VITAS has a comprehensive hospice program with the capability of providing superior end-of-life care to any hospice eligible patient. This results in VITAS possessing a major competitive advantage in all of our markets. This advantage consists of providing superior end-of-life care and having the systems and infrastructure capable of managing, monitoring, documenting and controlling high census programs. To accomplish this we need a highly dedicated group of employees that are focused on providing our patients excellent care on a cost effective basis.

As of June 30, 2004 VITAS employed 6,554 employees, this compares to 6,268 employees in the first quarter of '04 and 5,483 employees in the prior year quarter. The hiring, training and retaining quality employees is a critical success factor within VITAS. This ability has resulted in VITAS establishing a very stable employment base. This is demonstrated in our turnover rate. That was 23% in the second quarter and compares favorably to 24.7% of the turnover rate in the calendar year 2003. Included in our second quarter '04 headcount are 4,915 direct caregivers, which include nurses, home health aides, physicians, social workers, chaplains. Over 78% of our employees provide care to patients. Of those caregivers, 2,622 or 53% are nurses. We currently have a 135 dedicated homecare teams with an average patient load of 62.6 patients. Our staffing ratios for nurses is generally in a range of 1 nurse to every 10 patients depending upon acuity levels and setting. Our home health aides have a similar ratio. We currently average over 5 visits per week per patient.

Critical to sustain growth is our admissions programs. We currently admit 70% of our patients in 48 hours or less. To ensure an accelerated admissions process, VITAS employed 93 admissions personnel, a 195 admissions nurses, and a 142 sales representatives as of June 30, 2004. These representatives maintain relationships with over 1,900 institutional referral sources and approximately 6,600 physician referral sources. We monitor these referral sources carefully and continue to expand our network.

With that, I would like to turn this teleconference back over to Kevin.

Thanks Tim. I will now turn this conference over for questions.

At this time, I would like to remind everyone if you would like to ask a question, please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Jim Barrett with C.L. King and Associates

Hi, Good morning every one.

Good morning

Tim, could you talk about the VITAS, EBITDA margins, we obviously have seen what they have been able to do in Q2, what kind of expectation would you see intermediate term if you look in to '05 and beyond?

Well, thank you Jim. The margins that we just produced in Q2 did show improvement as you know from the first quarter, and the improvement was on several fronts. The growth of our business allowed us to get leverage obviously on all front, so we made success in getting the corporate area to the level that we expected fully in that quarter. The labor cost are in line within the ranges of what we expect, so really in the third quarter we would expect the margins to be very similar to what we saw in the quarter, but certainly with very good growth on the top line year-over-year, expanding EBITDA from a pure numbers basis, but the margin should be similar of that range. And obviously we are optimistic as we move into the fourth quarter with receiving the price increase, October 1, that we can show some expansion there possibly.

Jim, this is Kevin McNamara. I can't make it one comment, I know you're aware because your father coming very close to bed. It’s a little bit unusual business where our dominant -- we get a price increase on one day -- from probably our dominant customer, so it always creates a little -- if we get one-time boost, once a year boost in the price we can charge and it has little effect on a quarter-to-quarter basis, but as Tim says nothing, but what we are seeing is what we expected to see with regard to taking for the private company expenses out and things are going smoothly in that regard.

Jim, David Williams.

Hi, David.

We only get after that as our EBITDA expansion clearly came from the leveraging of our central support costs. And our field based margins stayed about the same and we would expect margins to remain relatively flat and the field level as our mix stays about the same. Our leverage is going to come from central support cost, which will expect to grow at a rate significantly lower than our top line, but we are not going to give any guidance into EBITDA margins on a go forward basis, only that for the analysts in their model, but any increase in EBITDA margins will come from leverage of central support costs.

Dave, can you talk about the corporate expenses, you did 2.3 million in the quarter, what is a good annualized run rate for that as we look to '05?

In terms of the Chemed or VITAS?

I am sorry, I was talking about Chemed overall corporate margins that you are breaking out now for the first time?

We haven't given guidance to that, what I will say is for the full year 2004. We anticipate there is going to be about $1.1 million of after-tax expense just related to Sarbanes-Oxley, a large portion of that will go away, a portion will be recurring as we have to maintain the documentation process of all four certification and so still are developing what those numbers will be, but there is a large amount of one-time expense that's going to be included in our full year Chemed overhead results.

And then finally Kevin, plumbing seems to be improving more rapidly than you may have thought, but what is your current expectation of possibly separating that business as you have mentioned in the past, have you moved up the time table along?

No, I would say that we've always been on at intermediate time table with that at present in short run. I mean it continues to provide excellent cash flow to service the debt we took on to buy VITAS. Its still a business that we believe is -- we are reaping the benefits of some very significant investments we made with regard to the Roto-Rooter business. I mean it would be a little premature to focus on liquidating that investment out of the work. But again just given the debt level -- it would almost take at this point a transaction that resulted in an immediate infusion of cash but -- it really to say -- in order to make sense but really to say that to the extent that we continue to run the two businesses with both have excellent cash flow, to the extent that we accumulate cash, that we have cash available to pay down debt it will increase our options dramatically with regards to the separation of the two business.

Yeah. Thank you very much.

Your next question comes from Mathew Ripperger with Smith Barney.

Hi, thanks very much. Just a couple of questions here, first of all related to your average daily census growth for VITAS, can you just remind us on a pro forma basis what that was for fiscal year 2003 versus fiscal year 2002, the year-over-year growth in that metric?

I'll ask Tim to respond to this question.

From '03, the fiscal year of September of '03 compared to the fiscal year of September of '02 the revenues grew at about 17% to 18% range.

So, average daily census is probably in the 14 --

There would have been a little lower than that because of the price increase of about 3%.

Okay. When you look at the average daily census growth year-over-year just in recent quarter, it's picked up from that 14% range to about 17.7% in the first quarter and now 19.2% in the second quarter and can you give us some color there as to what really is driving that sort of pickup and then sort of what the outlook is on a year-over-year basis going forward?

Yeah very well. I mean that's exactly right. We definitely have seen an acceleration in the first six months of the year of even what were very good trends of the admissions and the length of stay figures, and just the overall growth of all our programs throughout the company. So you know we really have done well in all settings. We have 30 locations offices now and we have had good growth in all over them instead of having good growth you know in 80% of the offices and a couple holding it back. So that’s been helpful. We have been opening you know basically the opportunities to talk to new referral sources and take patients on in new settings, so we have expanded our sales effort with our marketing reps. We have enhanced you know -- their tools to go talk to the referrals sources to show you know why VITAS is doing good work you know for the people that they have already refereed as well as how we can do good work for various kinds of patients that in certain cases other hospice company's can't take on. We admit people fairly quickly and you know all of our programs -- we do admissions 7 days a week, 24 hours a day which is very unique. We take on as you know all types of patients regardless of [categories] in the home or the setting that they need. So I think it's just a matter of capturing what we know is growth similar to this in the need out there. So we are keeping pace with the need because we are offering care and all settings when I say that I am suggesting, you know home care, nursing homeless, assisted living, inpatient settings. We are currently having very good progress in developing new inpatient relationship. So we have seen that business you know not grow as high in the first six months as we have the routine home care but now we are focusing on some new relationships inpatient settings, which we can think will only enhance our growth rate of not only that category but the related home care business there.

So, I think again it’s the model that we talked about is allowing this growth. Our overall focus we really want to stick to. We think that it’s very reasonable to have revenue growth from our base business of 15% to 20% as a long-term target and that does include approximately a 3% you know price increase annually and currently we are in the middle to high-end of that range and we see no reason why won’t be able to continue that as we look out so.

Okay, great. And then the second question I had is related to your inpatient admissions, I just wanted to clarify if you could provide, you know what the inpatient revenues were for VITAS this quarter and then if you could clarify what percentage of your inpatient revenues are received from your routine care as supposed to being received directly from an inpatient facility?

I have that [inaudible] In terms of our in patient revenue for the second quarter of 2004, it averaged 14.3% of total revenue and this is a rough number, we don’t track this and publish it quarterly, but approximately only 10% of our census that ends up in inpatient is direct admission. So 90% of days of care is actually for patients who are transferred in from our routine home care center.

Okay. And do you see much seasonality in terms of the 10% volume that’s directed net?

No.

Okay.

I think that good news as Dave mentioned is that the inpatient mix is historic to where we had it. And we think this mix of business with you know 15% or so coming from inpatient, 15% to 17% coming from continuous care and something a little under 17% coming from the routine home care and keep in mind the home care consists of both you know residential work where person lives in a individual residence as well as nursing home and assisted living. So, you know we are basically having what I consider to be very good success on all fronts. So that’s our strategy is to grow all of these areas and again to provide a reasonable amount of continues care which is a bridge for individuals who need more care at home, they can provided there on a per visit model to as much as 24 hour care at home and continues care provides a good supplement to your inpatient care and so we think that model is correct and we all know that a patient would like to be at home as compared to inpatient setting. So we’re very aggressive in trying to provide the continuous care to difficult product because it's very labor intensive and it's hard to find the nurses and the home health aides and schedule them officially but we are making great progress there. So this is one of the reasons again where we are little unique, our model we provide levels of care and quality, quantity of care that other company's can’t. So the need issue, so we are capturing more of the need out there which is allowing to grow our top line at a very nice rate so.

And probably because of that, I just wanted to clarify you don’t have any Medicare cap exposure in any of our programs?

No we do not have any cap issues in any of our programs and we monitor them obviously very frequently.

Okay. And then just lastly you know there have been a couple of efforts to try to penetrate the Florida [CON] barrier, I just wanted to see if you can give us an update in terms of where that stands and has anyone to date made any progress and been able to penetrate that?

Well let me -- this Kevin McNamara just respond generally and say that it's been significant. But I would say that -- you have remembered that VITAS is excluded from many fantastic areas in Florida from -- by the same system. I mean we have various great rights in Florida which are nice at least compared to couple of the other public hospice company's but I really believe that to extent that Florida was opened up we would be the major beneficiary of that change. Who would be better to take advantage of those elements of those areas of Florida that we are right now excluded from? The VITAS. I mean it would -- we have a pretty good situation we are not croaking about but to the extent that it would change I can’t imagine the scenario why wouldn’t be the major short and mid-term beneficiary of such a change.

Okay.

Okay, let me just may be reinforce there is some activity in the state under the certificate of need process and as Kevin mentioned those particular laws require that any one that who wants a new license you can't just go, apply get the license without first of all the state indicating there is need in that region and there are numerous region that they you have no administrative bodies that look at whether a need is there. In the last year there have been several regions where they have identified that a need exists and so there been process occurring where numerous companies have been filing applications to be selected you know as the company that gets the new license. VITAS is actually applying in both of the regions you know where that process is occurring. We don't know how that will come out exactly. There have been some preliminary decisions made that have offered, you know, the license to some third party company's we don't exactly who they are. The process to sometimes very unique, you can have various subsidiaries of a public company. Our understanding is that -- and I don't know I apologize. ODSY or Vistacare or both or some other players are moving on the strategy they try to form some non-profit subsidiaries. They apply for these licenses in the state and you know that's unfolding right now, it's a little unclear in our view whether or not that's going to be ultimately deemed to be qualifying under the roles today, which really provides a ban on for profit hospices, other than the historical grandfathering that VITAS, as Kevin was mentioning.

Just to cut through, you know, some of the complexities. Under the current program VITAS has some advantages implying for these expanded [inaudible] situations. These [state] that the whole system is opened up and changed so that it becomes, you know, much more traditional statutory pattern. Then I think we would have some fantastic opportunities, to be honest with you.

Great. Thanks very much.

Your next question comes from Eric Gommel with Legg Mason.

Yeah. Thanks. A couple of housekeeping questions. What was your revenue per patient day like average revenue for patient day for the quarter?

Eric this is Dave Williams, the average was a $166.78.

And how about total patient days for the quarter.

Yeah, the patient days were 781,000 in the quarter, which is up, you know, around 20% from the prior year.

Right.

These numbers [can all] be derived Eric, [inaudible] volumes, by just taking the number of days on a quarter and multiplying by our ADC by the various levels of care.

Right. The -- I guess the only other -- the other question I have is, understanding the startup losses in the quarter, if I want to look at that on a trend line basis going forward you're obviously developing new program, does that increase -- do we look at incremental decreases over the next few quarters I mean how does that payout or is that more of a constant you know $1 million a quarter number?

We are working, this is Kevin McNamara, we are working to make that number little bit higher -- but the manageable number -- but it's a great opportunity for us. And to be honest with you, we are becoming much more -- the loses occur because we started new program. We have to develop patients and we can't go for them. And you have loses. We're obviously getting much more efficient in opening up new programs, so we are getting licenses sooner and the growing to a profitable level faster. So I guess what I am saying is, we expect that those trends continue. A bigger lot number means we are making a lot more progress faster but if we have to -- we expect those numbers to go up relatively modestly, but from our perspective unless those trends I mentioned previously, unless those reverse, this is a good time.

Right. And you had eight programs currently under development; do you have like a target for each year that you want to do, like how many you want to do a year?

We are still in the process of developing you know precise targets in that regard but this eight up from last year, two year ago we had zero, right Tim.

We have a couple that we two years ago that we have graduated and keep in mind what we are talking about with the [fineness] operations that are been in existence for a less than a year. So these eight, you know, were started less than a year. And that means from when we started billing revenue. That's how we have defined that. So these eight and, you know, we [might] just mentioned is that -- again we mentioned five of those licensed, and we also -- for state licensure and we also have four of those licensed for the Medicare billing and we are feeling very good as Kevin said about the process that we are going through. You know its meeting our targets as far as licensure. You might have one or two outliers from time to time but we think we are getting -- we are going to get better overtime, and refine the programs. We gave guidance last quarter that we thought the losses in any given quarter will be ranging about a 1 million or 1.1 million. So we are feeling good that we came in under it. So if you see it at a 1 million or 1.1 million next quarter it won't be a negative situation only because we are probably opening some new ones. And we don’t know is that a couple of these could turn profitable soon which is what we hope. And then whether we will be able to open several new ones and [build] the losses back up might be our problems.

I will give you one reason why this is such a -- it's a vibrant dynamic element of our strategy. The cost [losses] developing a census of 1 person through one of these programs is about one-tenth to one-twelfth of the current cost of buying one through an acquisition. So, it’s you know there is lot -- its great opportunity -- we can demonstrate overtime the ability to grow census in this organic method. There's fantastic advantages compared to the acquisition note which -- we are pursuing both. I am just saying I think the best way -- the way we go -- are going to go from 8 states to 40 states is going to be a combination of the two processes.

And actually that leads me to sort of my last question. It's really -- I guess you probably answered that. How do you see the acquisition environment right now? You talked about making a larger acquisition. And then I guess the second part of that is you have kind of answered that but how important is the acquisition story to the overall growth story, it seems like organic growth is really what you are concentrating on but if you could just give me some additional color on that'd great. Thanks.

I will turn it over to Tim O'Toole; just to amplify what I really said was that is that the ability -- the opportunities for organic growth are there. We demonstrated that, you know, we can get to the profitable levels in a shorter and shorter time period. So the trends are good but we have a staff that currently working on acquisitions and I will turn it over to -- you know we don’t obviously like most companies comment on potential acquisitions, but I think I will turn over Tim to talk about his outlook towards them which I can tell you that the advance is positive and it’s a part of our strategy. But --

Yeah, I think just to reinforce, what we said in our prepared comments. First of all we feel very positive about doing some acquisitions. We think though they will occur, keep in mind that we really ramped up our activity beginning in the spring here. As you know, we closed the merger in February and we’ve been very busy in the spring, reinforcing historical contacts we've had, deciding you know which areas we want to focus on more so than others. And I will only say I am very encouraged. I think our discussions are moving ahead at a good pace. We will have -- as we noted we'll have smaller opportunities, which kind of help augment our startup program and you know those are decisions that we look at a given market, look at numerous concepts, [whether we startup buy], what the opportunity is for multiple expansion, look at the need in the market that’s not being served. Where we see that there is an opportunity for existing hospices aren't serving the need which we can identify through statistics. It impacts our decisions of how we might go. But clearly there is also a big regional opportunities, we are in discussions for some of those and you know we will be more cautious with a larger deal and certainly nothing is eminent. But you know we think all those things were happen in due time. So, yes, we are focusing on a very good opportunity in our core business, good growth, the startups and another leg to third legged stool our growth plan is clearly acquisitions and we will accomplish them.

Thanks.

Your next question comes from Bilal Basrai with Stifel Nicolaus.

Hi. I think you mentioned that you had a 142 sales and marketing personnel at the end of the quarter, and I think this compared to about 135 at the end of the first quarter. Was this number within expectations? And can you maybe tell us how many of these personnel you'd like to have at year end and if you have any difficulty in any of your markets either recruiting or retaining any of your personnel?

Tim why don't you respond generally.

Very good. You have a good memory; I think we did focus on a number of 135 or 134 in the last conference call, so that’s correct. Most of the growth coming from these figures from 134, 135 to 142 is from some of our activity in our new locations. So, obviously, when we have more new starts, in the new starts you have marketing people. So, probably half of that is in the new starts and half of that is in our base business. So, we definitely would expect to grow the figure, there is no target because it's a qualitative type of analysis at each branch, each level. We have good opportunity to expand our marketing efforts to specialized representatives now were we can have them they are just specialized for example on assisted living market. We know there’s big opportunities there and we know that discussion is little bit different than it is with a physician referral. So we are trying to train our people for specialty settings and that will offer them a better opportunity, it will get the VITAS name more in the marketplace. We are also doing new strategies in the marketing network which we are going to call team selling. And so for example we are getting more of the branch management involved to go make business to our referral sources, for example, when we are talking about an assisted living facility or a nursing facility, you know we are basically having in our management come from time to time and reinforce that we are here to meet your needs and problems solved and talk to them for many reasons, so it’s -- the sales effort is working, the marketing effort is working. We've talked in the past about some of the new tools that we are able to offer our marketing people to go in and share data with the referral sources about how we have been able to handle problem issues with the referrals and in most cases that's pain management, so we can go in and there and show them how after we admitted the patients, we were able to bring the pain under control quickly with our new data support that we have. We have also installing and we are rolling out throughout the whole company some customer relationship management software, which is proprietary to our company. It's actually based off of the application from salesforce.com, but we've had modified and that’s been very well received, allowing us to schedule and effectively work on marketing people better for us to know and put up there better support there for the referral contract, so feeling very good about that. We do have turn over that’s probably still little higher than we would like in that area.

Our turnover is down a little bit, but it runs between -- runs around 30%. And you're going to have some turnover in a job like that because it's a tough job and people aren’t meeting the opportunities that we see out, there are not going to be over the long period of time finding there a good job for them in the company, so we have to have some turnover there, but we also would like to think that we could lower that and over time we could have a longer tenured sales force than we have today. So anyway that the issues that you have talked about, we are growing, there is no targets, you will see an additional sales force effort as far as numbers by yearend, but it would probably grow in step with the growth of our volume.

Okay. Great. And also if we were to look, I think we all appreciate the second half 2004 guidance. Now further to look into our 2005 and beyond, would it be a fair assumption to say that kind of a ballpark, you would expect about 15-20% top-line growth and perhaps about 15% bottom-line growth going forward over the near-term?

Well, certainly if we look out to 2005, we would go back to what our standard view is of the growth rates of the opportunity here. And I go back to suggest that our 15-20% top-line growth is again what we were looking for. We are now doing near the high-end of that. We certainly expect to deliver very high growth in the future and there is no reason to think that that's not on track, keep in mind we get there by increasing length of stay and that expands our revenue as well and the price increase which we're expecting to be 3%, who knows what it will be, and that’s the top line and the growth looks good. As far as predicting the net income growth end of '05 we will leave that to the forecast that we've shared with you already.

Okay. And then lastly, can you just tell us what the bad debt and percentage revenue was in the quarter and what sort of trend are you kind of seeing going forward?

Bad debt is about 1.2% of our revenue and the trend actually was down for the quarter. We are seeing improving results there and keep in mind that our bad debt in that area is made up of several factors, one would be the ultimate denial of reviewed claims and that is still very, very small, it's about 0.2%. The balance -- the 1% of our bad debt is generally in the Medicaid area. We have very little bad debt in the Medicare area and so that’s an improving trend and we think we are doing very well there and expect that to continue.

This is Dave William. We actually -- Tim is right we have been historically at 1.2%. We actually pull the quarter, firmly pull that down to 1.1% for the quarter.

Great. Thank you.

Your next question comes from Michael Maggot (phonetic) with Basewood Partners (phonetic).

Good morning. It's the question on the start up program. I wanted to know typically what the average time to I guess to get the EBITDA margins up to that quarter plus 12% level?

Tim, you want to respond.

Well, we basically have about a 12 to 15 start up examples that we have done in the last three years. We have some of those examples that you know, I don’t -- I have to focus on your question because you talked about EBIT level of teens, but we at this point are focusing on, you know, when they breakeven, when they start making profit. And you know, we have seen 9 months to 15 months would be kind of the range. And keep in mind that in certain cases we control that. So if we are running the company at a reasonable close to breakeven rates add 12 months into it, and we decide to hire another marketing representative or community lays on our community access program support and we understand that’s going to delay the profitability for three months but we think a year from now that's going to make it a much higher census program and higher market share and getting the results so what we would do that. So no right answer, no real model because every market is different, but there is no reason to think that we can get them breakeven by 9 months to 15 months based on the situations. I will tell you that we graduated in the first quarter. We graduated two programs that were moving out the starts up to the base and they're in the Florida market, the West Palm and the Melbourne market. And those programs are definitely over double-digit EBITDA margins now. And producing well over, my last view was a annualized rate of 15 million of revenue from those two programs that are graduated early in the first quarter to the base business, so we have very good opportunity with the start ups.

And as I said the trends generally in this area are good. We are doing a better job, we are trying by the relatively small sample. But we are generally seeing better results and better trends with regards to start ups.

Okay, and then just one another follow-up question. The 15%-20% long-term growth target, how much of that assumes that VITAS takes market share from existing players versus increased utilization of the hospice service?

That’s anyway we can get it. Anyway we can get it, and we are not assuming we are taking necessarily market share. What we can tell you is that we have of our 30 locations, there is at least half of them that we have less than 20% market share and we know we can get 30% market share in all those markets. So whether we are taking market share from any particular customer or just in the market that that opportunity is high growth and we are growing the company and others don’t. A lot of times we see that. We see a lot of the smaller competitors that get to a census of 60-70 and they are happy to stay there. That’s their goal, that’s their orientation. We get to a census of 150, and we are heading to 250. So you know that's the way we grow. But we may take market share but really that is just a market growth. So we do not have to take market share to grow at that level from anybody.

This is Dave Williams. Feeling as Tim said, our raw organic growth well as start ups, it just does not include acquisitions, but as Tim said any other place we can get a relatively expending high or penetration.

Okay, that helps. Thanks.

Again, at this time, I would like to remind everyone if you would like to ask a question, please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your next question comes from Mark Kaufman (phonetic) with Lazard (phonetic).

Good morning gentlemen. I'd like to say congratulations on a terrific quarter and a very smooth and what appears to be a smooth transition at the senior levels and at VITAS. I just had a question as pertain to that, in [inaudible] perception. Do you see any other opportunities at VITAS as far as cost go and also we really haven’t discussed Roto-Rooter margin, are there any opportunities to bold any additional franchisees? And if you could comment on the consolidation exchanges that you've made there on the first part of the year?

Well, I will start by turn it over to Tim -- VITAS, but I think he is going to say that we’ve been pretty happy with the completing kind of the changes you would like to make. It’s going from the private company to public company sector. But there are many other comments you want to in that regard.

No, absolutely, I mean I just reinforce that whenever you get into a company and certainly we were in involved with VITAS for a long time as an investor. I certainly participated at the Board level, but when you get into a company and see the day-to-day operators, see the management team how it works, you know, you don’t know exactly how that’s going to be. And I can assure you me personally and I know all of the executive team at Chemed is incredibly impressed with the group at VITAS, not only at the corporate level, but also at the field level. It’s a company we knew, was very deep in its talent across all areas that it would take to grow a business, so whether that's to support the field or to support new technology and systems, to support our quality in our assurance efforts. You know VITAS is a very strong company. It's been -- you know the relationship with Chemed/Roto-Rooter has been warmly received and you know it's been a very good transition. So no surprises other than as a results show, a very high growth oriented team that wants to perform and wants to continue its leadership in the hospice world and as seen that under Chemed ownership that’s going to prosper. So very good news to report regarding what we found out and the transitions is moving very well.

Let me just talk about the [revenue], this is Kevin McNamara, and the answer is [in a short] to your question, yeah, we’re always looking for pulling in sought of franchise in major metropolitan areas that we don’t currently have. I would -- say generally that universe of franchises, right now might have sales about a $130 million. There are several -- just to give you we are always in a discussion phase with a number of our franchises. At the time of the VITAS opportunities was available to us we were actually in some form of discussion with our two largest multi-location franchises. At the time we -- because we thought the opportunity was so dynamic, we backed away from those opportunities and since then we basically told those franchises that were focusing on the VITAS opportunity presently. We would certainly entertain discussions with regarding to purchase of regular franchises but they be at much lower levels. Our appetite for those franchises has been [sedated] a bit and I have given the fact that we are basically the only logical purchase for some of these family owned franchises makes it -- so yes, we periodically get calls but I think it will take some time for an acceptance of a lower purchase price for these franchises -- the acceptance by the franchise of that fact. And Would I anticipate in the mid-term over the next 12 to 15 months that we might pick up a franchise or two at a very good price? The answer is yes. But we are not actively pursuing any of those. At this point we will just focus our attention on the VITAS growth opportunities. Dave you got anything you want to add on that?

No. The smaller one will happen with less than a 2 million acquisition price showed a great return on investment but the larger one as Kevin said we don't anticipate anything in the Q until they give realistic.

In defense of their financial thing here is that we changed and it will take some time for them just to realize that we changed, there is a good reason for it and that’s just the way we like it.

Hey Dave while I got you on the phone, can you tell me what the tax [benefits] were in second quarter, to try to get an idea there for the rest of the year?

I didn't understand the question.

I know its taxes but I wondered if that were the actual tax [benefits]?

I don't have a ---

Because in your press release I didn't

Almost zero because we utilized some of the benefits related to the merger. That’s actually why our -- remember we talked last conference call about a 19 million benefit and we received 4 million of that through reducing our tax payments currently and we will get a 15 million refund.

I see so it looks that it offset [tax benefits] for the rest of the year the other the other 15.

Yes

Thank you. Again terrific quarter guys and keep up the good work

Thanks Mark.

Your next question comes from Jim Barrett with C.L. King and Associates.

Several of my questions were answered but Kevin your operating margins in plumbing given where you are now trending, considering the productivity improvements you have made in that business can you give us some sense as to weather you are at your maximum level now for lack of a better word or do you see further improvement on that front?

Well I think were -- I think there will be you know we are close to what we think is good run rate, I think that -- we see improvement by kind of dealing with the statistical outliers or the exceptions. I mean when -- I would say that one of ways you look at this Roto-Rooter businesses which are really -- it is a very similar competitive problems in the field with a very few exception. Houston has a major top competitor, but generally speaking we see a lot of similarity between our branch and to extent that in normal times we have -- what we do is we focus a lot on our bottom 10 branches. When things were a little bit tougher, when the economy wasn't ticking along as quite the rate it was now, we saw that there were 20-25 branches that were having struggling but facing you know pretty similar struggles, it was hard to focus on a group that large. Right now its back to what we expect it, you know, the 10-12 branches what we say that -- there outline the -- what we expect to see in the group and there is almost always a reason for that, a manger is having some difficulty or what not. I believe as we continue to improve those statistical outliners we might see some improvement in the margin, but generally speaking its you know we are happy with what we accomplished and we are looking to you know, grow -- you know, grow in the commercial business certainly and to the extent that we do that we would be happy growing that at the current margin, that is in trying to get higher margins for my current commercial base.

And how about pricing power in that business, with gasoline up, with other cost factors up?

I mean one comment on that I think historically, we had pricing power. We have you know, we put a price increase through and it stuck and it hasn’t affected you know -- it hasn't affected our what we call our close rate, that is we generally that we don’t quote a price over the phone. We have someone go to our location commercial or residential, they make an estimate and we either do the work or don't do the work. During periods of you know, I would say just couple of months ago -- few months ago we did have a price increase that was generally put through at Roto-Rooter and are close rate was just statistically coolly unaffected. So its kind of thing we watch overtime but I would say based on that in the Roto-Rooter's business we are viewed as the price leader and make I think it all trends into pricing power.

Okay. Thank you.

[inaudible] I have been harping on for two years; there is no question in that field. I mean we are in an industry of putting a guy in van who is going to go to your small business or house to fix something, so I am going beyond just the you know, [inaudible]. In the industry that’s more broadly defined as putting the guy in the van the cost of doing business have been going up and I think we made some attempts to increase productivity by making some changes internally and by effecting an price increase but we responded to those pressures. And let me tell one of the most significant positive developments I mentioned was in general liability insurance, car accidents, generally car accidents but the number of workers comp and all that. It’s a kind of thing that -- it takes you a while to get you in hole as those expenses go up, it takes a while to get out of that hole but our experience and again through a hard work by people in the field we have had you know excellent progress in reducing those type of clients and its going to help us a lot over the next 6-18 months as we have seen those trends.

Thanks again.

Your final question comes from Harden Bete (phonetic) with Deprints Race Zolo (phonetic).

Hi guys. I got three small questions. One is can we get your tax rate, I mean there was a discussion of what cash taxes or for this year what I am looking at trying to get a sense of where your tax rate goes on a GAAP reported basis. How can you help me there?

Dave

About 43-44% will be the range.

Okay. And can you tell me what capital expenditures were in the quarter and if you have an idea what they will be for the year?

Yeah. Both, for the CapEx for the quarter was about 5.9 million, year-to-date 7.6 million. It will probably be in the neighborhood of about 17 to 18 million for the full calendar year.

Okay. And then the last question I have is about your dividend and dividend policy. How do you view it and is there an expectation of growing the dividends as your cash flow and earnings grow?

This is Kevin McNamara. There is a bit of a conundrum; historically Chemed Corporation has been a company with a [fully] relative to our earnings, a relatively high dividend paying company at least on a percentage basis. We had a period for about 20 years, where we increased our dividend every year. Given the opportunities that exist in healthcare field in the VITAS business, we get a lot of pressure from shareholders or at least groups of shareholder, that we kind of have opportunities, we would rather use them in the business rather than pay the dividend. So it's tough. Our general cost [orientation] is to pay a dividend and we say a lot of shareholders like to see that you know increasing overtime but I would say that it’s because of the opportunities within the VITAS business; it’s hard to give a definitive answer on that. I can just tell you if you look at our past record, we got dividend payments but you know, its -- there is great opportunities out there. Our current 1% yield is in line with you know comparable companies but we are torn, it’s a question we are torn. Whenever we are in front of individual shareholders, I ask the question, maybe one of my questions and this is a last question. I say what’s your view towards our dividend policy? And I get feedback and I would say it’s a partly a function of -- I am more likely to be talking to big institutional investors generally speaking they are saying if you got the opportunities I would rather see you use it in the business rather than paying the dividend out.

Okay. With that said -- [clutter] of acquisitions going forward I mean is there an expectation that you would -- I mean how do you look at funding those I guess the --

Cash flow from operations.

Okay.

Right now we have over cash available and our credit facility really over $120 million available to be redeployed.

Great. Thanks.

Thank you.

At this time there are no further questions, are there any closing remarks.

No closing remarks other then -- I seemingly wanted to congratulate the operating executives at both VITAS and Roto-Rooter for a lot of work and again I think that even people at the headquarters have done some -- some programs that have specially with regard to investment in the Roto-Rooter business over the last of couple of years and completing VITAS acquisition has made for a very quarter. My closing remark is that it's a bad time for pessimists right now around here because there is not much more to say but I just want to thank everyone for listening and the interest you have in the company and we’ll go on from here.

This concludes today’s Chemed Corporation second quarter 2004 conference call. You may now disconnect. Thank you.