Chemed Corp (CHE) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to Chemed Corporation’s First Quarter 2006 Conference Call. My name is Lakesha and I’ll be your conference call facilitator today. Please note that today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question answer period. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Miss Sherry Warner with Chemed Investor Relations. Please proceed ma’am.

Good morning. Our conference this morning will review the financial results for the first quarter of 2006 ended March 31, 2006. 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 April 25th 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 April 25th, which is available on the Company’s web site at www.chemed.com.

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

Thank you. Good morning everyone. Welcome to Chemed Corporation’s first quarter 2006 Conference Call. I will begin with an overview of the quarter. David Williams will provide detailed financial metrics. And Tim O’Toole will follow with specifics on our hospice operations. I will then open this conference up for questions.

VITAS generated record admissions in the first quarter of 2006, increasing 7.3% over the prior-year quarter and 11.3% sequentially, significantly exceeding our first quarter 2006 internal business plan. This strong admissions growth resulted in average daily census increasing 10% over the prior year. However, on a sequential basis, ADC increased less than 1%.

The first quarter of the year is the least predictable in terms of ADC and revenue. This is due to fluctuations in revenue mix, the timing of admissions and the typical first quarter spikes in discharges. For example, January 2006 experienced record admissions of 4,593 patients, our single highest admissions month ever recorded. This exceeded the fourth quarter 2005 average monthly admissions, as well as January 2005 admissions, by 10% and 7%, respectively. However, the timing of these admissions, coupled with an unusually strong seasonal spike in the discharge rate resulted in a modest decline in our January 2006 ADC when compared to December 2005. In prior years, the February and March results overcame this seasonal spike in discharges. However, the timing of our 2006 admissions combined with an unusually long tail on our seasonal discharge rate resulted in flat ADC until the latter part of March 2006. The census on March 31, 2006 was 10,821 and continues to climb in April.

I was pleased with the margins in continuous care and in-patient care. Continuous care is operationally complex, and even when managed perfectly, provides a relatively low direct care margin. However, we consider continuous care a key combination to our high acuity patients that have a strong desire to receive hospice care in their homes as opposed to being transferred to an in-patient unit. Nurses and health aides must be scheduled on short notice. And even then, meeting the standards necessary to qualify to bill for continuous care is challenging.

Our benchmark to be successfully is to bill for continuous care 80% of the time. In other words, for every five days of providing continuous care, only four will ultimately be billed to Medicare.

In the first quarter of 2006, we were successful 81% of the time. This resulted in margins of 18.3%, an 80 basis point improvement over the first quarter of 2005 and in line with our historical margins.

In-patient care is all about occupancy. Anything at or above 80% will provide reasonable bed utilization and allow us to spread the fixed cost of these units over enough billable days to provide reasonable margins. Our occupancy levels were 84.1% in the quarter, resulting in direct in-patient margins of 23.1%, a 20 basis point improvement over the first quarter of 2005, and the second highest margin level in the past five quarters.

I was, however, disappointed in our routine home care margins. In our 2005 year-end earnings teleconference, we noted our staffing levels relative to ADC were out of balance pulling down our operating margins. This excess patient care capacity was carried over into the first quarter of 2006 and was anticipated to be fully utilized, given the strength of our admissions and anticipated growth in ADC. Unfortunately, the timing of admissions, coupled with the volatility in our discharge rates, resulted in elevated staffing ratios existing for the majority of the first quarter. The higher labor costs associated with these staffing ratios negatively impacted the first quarter of 2006, generating routine home care direct margins of 47.5%, as compared to 49.9% in the prior year quarter. This negatively impacted our gross profit by approximately $3 million. Although I’m disappointed with the impact this excess capacity had on our operating result, I believe we made the appropriate decision to maintain staffing levels and allow the ADC to catch up to our current manpower. The difficulty in costs related to hiring and maintaining quality caregivers is a constant challenge in our industry. Short term volatility in either admissions or discharges is an inherent attribute of our business model. And short term fluctuations in these metrics can never be perfectly matched with staffing levels.

We analyzed and forecast our hiring and retention goals to ensure a stable workforce and provide a reasonable level of available staff to be able to take on any patient at any time. This ensures our patients receive quality care and provide VITAS with a competitive advantage in the local markets to be able to provide immediate care to the terminally ill.

Certainly a long term change in admissions and discharge patterns would change our hiring and retention patterns, but VITAS is not in that situation. Discharges have normalized and admissions continue to be very robust. Based upon current trends, we anticipate our daily census to exceed 11,000 patients in April or May.

Roto-Rooter continues to generate strong operating results. For the first quarter of 2006, Roto-Rooter had revenue of $78 million, an increase of 7%. Adjusted EBITDA was $12.7 million, an increase of 8%, and represents an adjusted EBITDA margin of 16.3%.

Both of our operating segments fundamentally are in great shape. The overall metrics driving the growth in VITAS and Roto-Rooter are intact. And I’m extremely confident in our ability to provide high level of care in VITAS, excellent service to our Roto-Rooter customers and return to our shareholders, to see an increasing earnings and cash flows.

With that, I would like to turn this conference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. VITAS generated revenue growth of 15.3% over the prior year period, and declined 0.4% sequentially. This is typical of the Q4 and Q1 seasonality trends. For comparison, the first quarter of 2005, excluding the impact of our Phoenix and Pittsburgh acquisitions, had sequential growth of just 0.8%. It should also be noted that the first quarter of 2006 had two less billing days, when compared to the fourth quarter of 2005.

Gross margins were 19.5% in the first quarter of 2006 for VITAS, a decrease of 153 basis points, when compared to the prior year quarter. This decline in margin, as Kevin mentioned, is the result of increased staffing levels in routine home care. Direct home care margins were 47.5% in the first quarter of 2006, and compared to 49.9% in the prior year quarter.

The January 2006 routine home care margins was unfavorable to the prior year by 330 basis points. In March 2006, this gap had been reduced to 190 basis points. The first quarter 2006 gross margin includes $1.6 million in start-up losses, which is $400,000 higher than the losses from programs classified as new starts in the prior year period.

Central support costs for VITAS, which are classified as selling, general and administrative expenses in our Consolidated Statement of Income, totaled $13.2 million, including $132,000 in OIG legal expenses. Excluding the OIG expense, central support costs increased less than 1% when compared to the prior year quarter and declined 5.4% sequentially. Adjusted EBITDA for VITAS was $19.8 million in the quarter, an increase of 11.6% over the prior year. The adjusted EBITDA margin in the first quarter of 2006 was 11.7%, which declined 39 basis points when compared to the first quarter of 2005.

VITAS’ average length of stay for patients discharged in the quarter was 72.4 days. This compares to 70.0 days in the fourth quarter of 2005 and 66.0 days in the first quarter of 2005. Our medium length of stay in the quarter was 12 days.

Total discharges in the period were 13,408, when compared to admissions of 13,896. Of these discharges, 343, or less than 3%, of the Q1 2006 discharges were for extended prognosis, which is consistent with our historical averages.

Our mix of revenue at VITAS shifted slightly to the higher per diem levels of care during the quarter. Our in-patient revenue aggregated increased at 13.7% and continuous care was 17.7% of total revenue in the first quarter of 2006.

Routine home care represented 68.6% revenue, a 50 basis point decline over the prior year quarter and a 70 basis point decline sequentially.

All of our base and new start programs, including Phoenix, are estimated to have Medicare cap cushion in excess of 10% for the 2006 measurement period that ends on October 31, 2006. This is based upon an estimated 3% increase in the 2006 cap level, although preliminary data indicates the cap will actually increase slightly above 4%. We have not accrued for any Medicare billing limitations in any of our programs for the 2006 cap period.

VITAS’ day sales outstanding or DSOs in the first quarter were 39.4 days in comparison to 39.5 days in the prior year period. If you eliminate the impact of new starts and acquisitions, which have an accumulation of receivables until billing and payments are allowed by CMS, the Q1 2006 DSO is reduced to 37.6 days. That expense continues to be calculated at 90 basis points of revenue.

On the Roto-Rooter side, Roto-Rooter’s plumbing and drain cleaning business generated sales of $78 million for the first quarter of 2006, 7.2% higher than the $73 million reported in the comparable prior year quarter. Net income for the quarter was $7.2 million and compares to net income of $7.3 million in the prior year. However, we noted in our prior year’s earning release, that the first quarter of 2005 net income included $1 million of favorable after tax adjustments for casualty insurance accruals. Excluding this favorable item in the first quarter of 2005, net income in the first quarter of 2006 increased 14% over the prior year period. Adjusted EBITDA in the first quarter of 2006 totaled $12.7 million, an increase of 7.7% over the first quarter of 2005 and equated to an adjusted EBITDA margin of 16.3%, which slightly exceeded the prior year period.

Job count in the first quarter of 2006 increased 2.0% over the prior year period. Commercial plumbing jobs increased 5.7% and commercial drain cleaning increased 4.7% over the prior year period.

Residential plumbing jobs did decrease 0.7%. However, residential drain cleaning jobs expanded 1.5% compared to the first quarter of 2005. Overall, commercial jobs increased 4.4%, residential jobs increased 0.9%. This is a favorable shift in job mix since a commercial job will typically average 30% more revenue than a residential job, which significantly more repeat business within a one-year timeframe. Accordingly, this multi-year trend line of expanding our commercial focus has a positive impact on aggregate revenue.

We are reiterating the guidance provided you in the previous quarter earnings release. We continue to estimate VITAS will generated a revenue increase of 15 to 18%, increase admissions of 7 to 9% and continued expansion of EBITDA margins through the leveraging of central support costs. This should result in VITAS increasing its adjusted EBITDA margins approximately 60 to 80 basis points.

Roto-Rooter is estimated to generate a 5 to 6% increase in revenue in 2006 with adjusted EBITDA margins averaging between 16 and 17%.

Based upon these factors, an effective tax rate of 39% and an average diluted share count of 27.0 million, our expectation is that a full year 2006 earnings per diluted share from continuing operations, excluding any charges or credits not indicative of ongoing operations as well as excluding any expense for stock options required under SFAS 123R, will be in the range of $2.20 to $2.35 a share.

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

Tim O’Toole: Thank you David. In the first quarter of 2006, VITAS revenue increased 15.3% to $168 million, and average daily census expanded by 10% to 10,480. In our fourth quarter of 2005 teleconference, I discussed our staffing levels. At that time, I was also looking at record admissions in January of 2006 and strong month to date admissions in February. We anticipated utilizing our capacity developed in the fourth quarter, as well as increasing our efforts in hiring field based personnel. In fact, total nurses increased from 3,267 in the fourth quarter to 3,354 at March 31, 2006, an increase of 87 nurses. We added three additional hospice teams in the quarter and now total 182 hospice teams.

The first quarter of 2006 had 943,226 days of care. This compares to 957,897 days of care in the fourth quarter of 2005. This is a decline of 1.5%. As David mentioned earlier, this decline was solely related to having two less billing days in the first quarter of 2006, when compared to the fourth quarter of 2005, which equates to a 2.2% decline in billing days.

We constantly analyze our staffing ratios on a program by program basis. This involves balancing daily, monthly and quarterly admissions, discharges and the ability to have the capacity to take any patient with short term and long term staffing needs. In most cases, this is somewhat predictable since many of our programs are working with large numbers in terms of employees, admissions and average daily census. However, the first quarter of the year is not nearly as predictable as the remaining quarters. As Kevin noted earlier, our decision to retain staffing and ride out any short term volatility in admissions and discharges is necessary in our business model. It is also the right thing to do for our employees, patients and our referral sources.

On a positive note, we were able to provide our patients an average of 5.6 visits per week, which is significantly above the industry average of 4.3 visits per week. I am also extremely pleased with the progress we have made in expanding our cap cushion. As David mentioned, we have estimated cap cushion in excess of 10% in every one of our markets. This is indicative of VITAS’ ability to serve a full spectrum of patients and to expand continuous care and inpatient capacity as we successfully expand penetration in the higher equity portion of our markets.

At the end of the first quarter of 2006, VITAS employed 199 sales representatives. This is an increase of 17 or 9% from the 182 sales reps we had as of the prior year quarter. Just as important, we continue to expand our admissions personnel. We now have 347 admissions nurses and coordinators dedicated to patient intake, an increase of 13% of the prior year. This investment in personnel is paying off in terms of record admissions and has allowed us to expand our referral sources. Admissions by major diagnosis continues to be relatively stable with 33.6% of our first quarter admissions being cancer-related, 20.5% neurological, 13.8% cardio, 7.9% respiratory and 24% in the other category.

We currently have 10 programs classified as start-ups, 9 of which are Medicare certified. These start-up programs had an average daily census of 188 patients with revenues of $2.7 million and pretax operating losses of $1.6 million. In the prior year quarter, these same programs had an average daily census of 31, with revenues of $302,000, and operating losses of $1.3 million.

In summary, VITAS had excellent admissions in the quarter. Our patient census materially expanded late in the quarter and at this point appears to be adequate to fully utilize our staffing levels as we go into the second quarter of 2006.

With that, I’d like to turn the call back over to Kevin McNamara.

And at this time, we are in a position to entertain questions.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Matthew Ripperger with CitiGroup. Please proceed sir.

Hi. Thanks very much. Just a couple questions if I could. Tim, I just wanted to see if you could help maybe explain just the seasonality discharges. And maybe just give us a little more color as to why there exists seasonalities, especially in the January period. And I understand admissions going into the holiday season. But I just wanted to get a little more clarity in discharges.

Tim O’Toole: Absolutely. It’s a phenomena that’s been consistent over the year with both VITAS and the whole hospice industry that generally there’s a lack of discharges during the holiday period. That would be the Thanksgiving, the Christmas. And there’s less activity around the hospitals for some admissions. But on the discharge side, it seems to be people are holding off through the Christmas season. They visit their family. They see family members. And it just seems to be that the months of January come along, maybe it’s the fact they don’t have that to look forward to, seems to accelerate the death rate compared to the norm that we see every other month of the year by category of patients. So, we see that. And we see it historically every year as the other companies in our industry do. So that’s generally the issue.

And you generally have fewer admissions around the holiday season as well. Is that correct?

Tim O’Toole: Yes, that’s true. And that’s because there’s less activity around the hospitals. So for example, as there’s less people checking in that have situations, they again deferred it. There’s less physicians that are actually working. They’re taking vacation. There’s just less opportunity to serve what we know are probably the people that need hospice during that time. But some of them don’t get admitted maybe for several weeks as this lack of activity around the physician situation occurs during that period.

Okay. Great. The second question I had is related to staffing and how you looked at it in terms of staffing to ADC or any type of ratio there that you alluded to. Can you please give a sense of sort of how you look at adequate staffing levels and where you stand right now? And how much incremental ADC volume can you add without material change in your underlying staffing levels?

Tim O’Toole: Yeah. Well, we have normal ratios of nurses and to patients and home health aides to patients. And as far as our team sizes, as far as patients per team sizes. So let me just say those have been worked on over the years based on best practices and what we feel is appropriate. But certainly, when you look at any one team, you can have a high level number of higher acuity patients that have higher needs and that can change from time to time. So, again, we have a standard. We haven’t changed that. We think those are appropriate. We did see, as we kind of mentioned, during the early part of the year, we saw basically the staffing capacity expand compared to our patients. And the number of patients per team go down which indicates you have excess staffing. And as we exit the quarter, we’re beginning to utilize that excess capacity and they’re coming back into more norm. But we feel very good about where we’re at. Admissions are strong. And we have the staff to take them on. One of the other things we’ve been doing is adding a lot of full-time employees to our continuous care staff as opposed to using outside agency costs. We ramped that up in the last several months. And that costs you a little money early on because you’ve got some training costs for the new people and dual costs as they’re in orientation. But we’re now, again, in the last several weeks and months, we begin to see those figures come back in balance. So, using less agency, which is less costly. And by having your full-time people do what we hope to be providing as high quality service as we can. So those are some of the issues.

And Matt, this is Kevin McNamara. I just -- Another way to look at it is this. As far as -- You got to remember the services provided on a team basis. A team generally speaking -- these are general comments -- can serve 50 to 75 patients, if you look at how we work at any one time. If you have too many teams at the lower end of that, on average your payroll expense is up. It’s difficult. We saw this in December. We saw that we had excess capacity. Then the question is what do you do? You don’t -- It was -- In no program did we not think that we were going to by the mid point of 2006 be in need of that capacity. So we didn’t -- We weren’t really in the -- Nobody in their right mind would have eliminated a whole team just to see if we couldn’t get every team up to a 70 patient level. It’s just that when you’re dealing with a rising tide of ADC, you have to build the sort of capacity even though we knew we were looking at a period that is January, February, the traditional flattish ADC, given the fact that we were already a little behind the eight ball in December. We’re hoping for the best. Admissions were very strong. Discharges, which is a little out of our control, were high. But it really comes down to the fact is that just too many of our teams were just at the lower end, closer to 50 than they were to 75.

Okay.

Matt, mathematically, if it worked out, it would be like a 3 to 400 ADC pop, would have absorbed 100% of that capacity.

Okay. And then the way that -- Kevin, you mentioned that you expected at least 11,000 ADC in April or May, which is about 5% greater --

In the census. Census.

For ADC.

Well, the average -- The ADC travels actual -- I mean, it’s -- It’s a census. And the ADC catches up to that. There’s a little bit of a trailing factor.

Tim O’Toole: Let’s say we hit 11,000 in the first part of May, it would have been up from 10,700 during the beginning part of April. So the average would be ten eight. But we would have hit 11 is the point. So the 11 is the daily number, not the average for the month.

Okay. Let’s just assume for this time being, that it’s 11,000 average for the quarter, which is up 5% from your average in the first quarter. And that’s about incremental revenue of about sort of 8 plus million, versus the first quarter. Given that you have staffing that’s already staffed up for that incremental volume, what would the incremental margin be on that 8 million of revenue?

Well, we’re just really dealing with a variable cost structure. We would anticipate if we could utilize all the excess capacity based on historical trends, Matt, the direct margin for routine home care, would be 49 point something. We don’t -- It was 47.

Tim O’Toole: We would -- The best way to answer your question is, we expect it to go from 47 to 49.

And typically it goes like 49 point something to low 50 point something, as kind of the historical variable margin. And we’d expect that trend to continue.

Okay. All right. Thanks very much.

Your next question comes from the line of Eric Percher with TWP. Please proceed.

Thank you. First I have a question. I think I understand the losses in the quarter. But I wonder about the admits and how that tracks through each of the months and where the variability in admits month to month comes.

For that -- We’re pretty much not releasing it on a monthly basis, Eric. But, actually March was another all time record that beat January. It was strong for every single month of the quarter.

Okay. And what adds to the variability of that that’s more broadly throughout the quarter? It’s a usual January per Q1 trend, correct?

Tim O’Toole: That’s correct. As we mentioned earlier, the activity is slower in the winter months. Part of it is just with the winter and people not getting out. The spring hits. A lot of people -- a lot of activity in the month of March and late in February. And again, part of it is the -- less activity and the physician and the hospital markets in the January period. And the trends we've seen this year in March have tracked historical trends. March was a very strong admissions month. And we did see an abatement of the discharge rate, as Kevin mentioned in his comments.

Okay. Excellent. And then one other -- patient days in Q2, do we gain one day or two days by your calculation?

Over the prior year, it’s going to be flat because there was no leap year in either year.

Right. Okay. Thank you.

Your next question comes from the line of Jim Barrett with CL King and Associates. Please proceed.

Good morning everyone. Tim, could you give us an update on the status of the acquisitions, opportunities within the hospice business and how you currently are viewing this?

Tim O’Toole: Absolutely. I mean, it’s pretty much as we reported in the last several quarters. A lot of activity. We’re involved in many, many discussions. And we have not hit across a deal yet that meets our criteria for basically financial value and the nature of the program as it would benefit us. So we think again, there’s no immediate rush to the alter from any companies at this point. We think at some point in the consolidation phase there will be. We don’t know exactly what will force that. But we’re very prepared and we’re building an infrastructure with systems and people that can take on more acquisitions. It would be nice to fill in certain regions or certain places we’re at. So, again, we’re -- it’s a big part of our three part program. And we have a lot of activity in the acquisition area. And we expect those to occur in the future.

All right.

This is Kevin. Actually, the one thing I’d say, I characterize it, on the acquisition front, as a quiet quarter. We see some building forces that might suggest some things down the road. What we’re really working at internally is our approach to the large not-for-profits that at some point down the road because of financial or regulatory reasons determine that to outsource their hospice function to us basically. And we’re just in the process of building that approach. But relatively speaking, I just wanted to -- I think it’s fair to say to get right to the base of your question, not a lot of change this quarter in those dynamics.

Well, sequentially, quarter over quarter, it appears that you reduced your debt by $40 million. Kevin, can you give us some sense as to if you did go out and take a larger acquisition, what level of leverage you’d be comfortable with on a year term basis without having to raise equity?

Well, we have a lot of capacity in that regard. Dave, you can give the specifics. But I mean, we -- It would have to be a total change in the market dynamics to get us thinking about raising equity.

Right. We could -- The current revolver will let us go up -- Well, let’s back out the letters of credit for workers comp. $200 million plus our $40 plus million cash on demand. It’d be $.75 billion dollars that we could absorb between utilizing our cash and taking on debt. The banks actually have signaled they’d be more than willing to expand that capacity. But remember, that’s with the revolver. We would backfill with long-term money. Definitely probably a long term debt before we start considering anything on the equity side.

Right. So it looks like on balance, you have the ability to go out and do a deal in the $200 million range?

We could spend $.75 billion --

Right.

-- before we run out of cash in current capacity for debt.

Right. Okay. Well, thank you very much.

Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Thanks. Hello everyone. Just a couple things here. I guess back to the -- this staffing question, was there some kind of operational change or management strategy that drove a higher staffing push in the latter part of last year? Was there anything that you’re doing differently to recruit? Can you just comment on retention? Was that higher than you would have expected? And is that part of what you anticipated in the first quarter?

Tim O’Toole: Well, no I wouldn’t say there’s any dramatic change in our recruiting. We recruited very well. We have -- We’re getting the people we need. Our retention is pretty good. We need to work on our retention. Our turnover rates have been fairly consistent. They probably moved up just a tad. I think it’s, again, we did see the census flatten a bit in the December, January period compared to our expectations. And we commented on that. So, that’s where the excess staffing came in. It wasn’t hiring a bunch of people that we didn’t expect to hire. So, and again, the idea of hiring more full-time nurses and staffing for our continuous care program was a goal of ours as it moved into this year. And we implemented that. And so that is now working well for us as we move into the second quarter. And we’re pleased we’ve done it. So, no change in dynamics. It’s a very competitive market for certain categories of caregivers, i.e., especially nurses. For us especially, admissions people. Admission nurses as well. But that’s a constant dynamic. So we’re in pretty good shape. We don’t have many open positions. And where we do, we think we have good support to do the job until we fill them. So no big changes there. And it was mainly a function of the flattening census compared to our models. But as we’ve mentioned to you, with the strong admissions we’ve seen in the first quarter accelerating towards the end, we feel very comfortable.

And Darren -- this is Dave Williams. Typically, again, we see it because our census grows sequentially year over year. Typically, admissions exceed discharges by several hundred patients a quarter. In the fourth quarter, we were somewhat surprised that, although it was a good admissions quarter in the fourth quarter of 2005, discharges exceeded admissions by 2 to 300. We thought that was -- And that usually indicates your discharges will be slightly below normal in the following quarter. And obviously that didn’t happen. Like capacity, was based upon admissions in the fourth quarter higher rate, and then discharges popped ahead of where we traditionally see. And obviously that continued on to the first part of 2006.

Again -- This is Kevin. I just want to add again, we saw these things and when you -- You have to remember that as we talked about hiring, we’re really talking about formation of teams that are a little unwieldy in dealing with relatively small numbers. I mean there -- We’re dealing in increments per program of 50 to 70 patients. And we have to -- So it leads you to make some decisions that in the short run have tough financial results. But we certainly were -- We just weren’t in the position to back down, let’s say with a team in any one of our programs. We weren’t going backwards in that regard in any program. So, it’s just yields these results when you combine it with, again, a declining census and that’ll be over some periods of the quarter.

Sure. Now, just with regard to your guidance, obviously, that’s unchanged. And I guess, my observation would be that perhaps what you did in the first quarter was really not too far out of Dan with what you thought and the industry numbers were a little bit above internal targets. I just want to confirm that that’s a fair statement. And any comments on just kind of whether ’06 will be more back-end loaded in terms of how the earnings per share falls out.

I would say that -- this is Kevin McNamara -- that the first quarter, we were a little surprised. It was a little below our internal numbers. And by that I mean, in the range of $0.02 to $0.03. But, again, relatively speaking, given some of the trends we see, we don’t think we’ll have any problem making that up and it’s certainly within our range. But, again, the -- to the extent that when we take a look at the external analysis of our business, we’ve all along thought that they were too high in the -- early in the year. And a little too low later in the year. So, again, we -- It wasn’t anything too surprising to us.

Okay. Just two other quick things then I’ll hop off here. Tim, are you seeing any difference in terms of the uptake or ramp up of your start up projects and whether you know any competition in the market places impacting those lines? And then with regard to Phoenix, I guess you got the inpatient piece working there. Is that really the reason why we’re not talking about cap anymore and Phoenix? Just a little more comments there. Thanks.

Tim O’Toole: Great. As far as the start-up situations, we feel very good about it. We made good progress. As we mentioned, I think the programs we’re looking at now grew from a 30 census a year ago to 130 or 40 now. So they’re making good progress. We’re very excited. We’ve recently been -- received licensure in the Washington D.C. market, which we think is a very good market. We’ve been in the Northern Virginia market. So, that’s going to be a real good one for us. We want to make sure that we’re getting big programs in the markets that we’re at. So we’re probably doing a little more early study before we go in, figuring out how we can have relationships with inpatient, relationships with some of our partners in long term care and assisted living. And we’re building a business that has a little longer break even point, a little higher number of census to break even. But we’re seeing that the market opportunities are very big in some of the markets. So, that’s great. In addition, we’re supplementing kind of the new start program with expanding new branches in our existing programs. So big markets where we see geography that we’re not really covering, some of the big markets in California. For example, we’re going to be opening branches that are very close to our offices, but might be 40 or 50 miles away. And we think that is a strong point. A lot of times you get referrals. And people in those areas want to see that you have a more local presence. Just to have an office down the street is a good thing. So we see that as kind of a new leg to our new start expansion program. So we feel very good about where we’re at on that and where we’re headed.

Regarding the Phoenix situation, yes, the inpatient facility is helping. And we definitely think we’re making progress there. We’ve managed to -- the company to have a lower census than it was. And we think it’s a more stable situation. And with the lower revenue and the current pattern of admissions we think we’ll be within the cap situation for our current year analysis. And we certainly expect going forward as we not only expand the current inpatient unit we have, but we’re also working on others in that market. So we’ll be in a much better situation as we move into the future years. So, start-ups look good. And the Phoenix situation is coming into form.

Great. Thanks a lot.

Your next question comes from the line of Kevin Fischbeck with Lehman Brothers. Please proceed.

Okay. Thanks. Good morning. Just wanted to follow up on that last question. Is it indicative at all of your sights on the cap cushion. I assume it’s that this is actually a positive benefit, from the unusually high discharges that you saw in the quarter. And if that is the case, is there any way to separate that impact from the improvements that you may have made, additional growth for a lack for a stay anyway. I mean, i.e., how many sites would be near the cap [inaudible] unusually high discharge?

Tim O’Toole: No. It’s really not the discharge. It’s just the great work we’ve done on the admissions side. As you know, the cap is calculated on a fixed amount per beneficiary, so to speak, times your admits. So your discharge is really only effect the revenue you built. So if your discharges go up, your census comes down a little bit. So you’re billing less revenue. But the cap calculation is solely based on your admits times a fixed number. And that must exceed the revenue you bill. So the discharges cause the revenue to go down modestly, which does improve your cap cushion. But the critical component is your admissions. And our targeted efforts in the programs where we’ve had cap exposure is working. And that’s the good news. We can make impact by taking on higher acuity patients who are in stay patients. And still serving the county broadly and all the focus groups such as dementia and ALF and long-term care. So it’s a function of our admissions and targeting the good work at the programs that had cap exposure.

So, you view the admissions side as a much bigger portion of the --

Tim O’Toole: If you don’t hit the admissions number, it makes no difference what your ADC is. You’ll have a cap problem.

Okay. And then going back on Phoenix, since you have been able to show the improvement there, has this experience given you any more confidence in acquiring how much is cap problems or is that what’s your view on that? Can you give us an update there?

I just answered this question. Yeah. It has. Now we’re still in position -- we’re still looking for the right sized program that is facing those issues. But to the extent that are we very prepared to go forward with that type of opportunity and the answer is yes. I mean, I caution to say that there is not any one or two that are in the -- on the front burner in that regard. But to answer your question, there’s no question about it. It demonstrates that VITAS is in the position with their business model to take a hospice program like Phoenix that has almost exclusively its patients coming from the assisted living care and long term care market. We are able to develop a broader mix of patients. So, the answer to your question is yes. But, I don’t see the fruits of that that are just right around the corner yet.

Okay. And then could you just talk about the cash flow which was particularly strong. It looks like the cash collections actually was really strong. Anything unusual going on there?

No. A couple things. Some of the catch-up on the fourth quarter, where we got the final money from the Phoenix acquisition, there was a couple million dollars still hanging on the balance sheets at the end of 2005, as well as we got the extra payment from CMF in the first quarter of 2006. That’s kind of a trust to our -- the dip payment, the prospective pay estimated payment. So between those two we pulled receivables down nicely. Even without those, regardless, it’s a strong cash flow. So receivables were pulled down, as well as we got the tax benefit related to the stock option exercising. That impacted things. But what it’s really reflective of our EPS is going to basically work out to be our cash flow and vice versa. And as you can see CapEx was still in line with depreciation and everything else. So, a little bit of catch up on the fourth quarter. But very strong cash flow period.

I’m sorry. You said cash flow -- was that free cash flow was the difference on the cap?

Pardon me?

Did you say cash flow or free cash flow was the amount of the income?

I said actually after -- ignoring the financing restructuring, basically call it cash flow from operations, less CapEx. That number will equal our earnings.

Okay. All right. Great. Thanks.

Your next question comes from the line of Kemp Dolliver with Cowen and Company. Please proceed.

I think I really have two questions here. First, how did Florida perform in the quarter? We’ve had some comments from the hospital companies about weakness there, et cetera.

Tim O’Toole: Florida performed in line with -- I mean, again, we’ve mentioned that we were short of our internal goals. And that did not all come from Florida. It came from numerous locations. Florida did well in the quarter.

Okay. One of your peers also released their results this morning. And they had very solid census growth. We don’t have a lot of detail from them. But, do you have any -- I guess, my question is what kind of checks did you do with the analysis and with a feel to confirm that --

Tim O’Toole: Who was it that released earnings?

It would have been Heartland.

Tim O’Toole: Oh. Heartland.

And the question is, as you’ve analyzed the data and the trends and the discharges and admissions, what have you looked at to confirm to yourselves that you aren’t seeing some competitive issues of like in some of your markets?

Tim O’Toole: Well, we focus on every market. We focus on the local competition in every market. And every market has some ups and downs in any given month or quarter. We’re -- I mean that’s -- Manor Care, Heartland, we’re not seeing any incredible focus from them in any market. So, they’ve been a player. They’re a very healthy player. A big player. And they’ve been that way a long time. So there’s no surprise that they’re doing well. The industry is doing well, as we are.

That’s great.

The only thing I would add is when you start looking too broadly at this, I mean, again, we -- The January, February timeframe is always the toughest one for us as far as predictability. It’s the time when we have to make our -- give our year-long guidance. It’s a tough period for any hospice program for some of the reasons we’ve mentioned. But overall, when we talk about looking forward, we see very healthy things going on in the business right now. I mean, it’s kind of the improvements that we would expect. We’re seeing the increase and continued strong admissions. We’re seeing the results and high increase in census because -- discharges are coming back into line. We’re seeing all that. We’re not seeing any change in the dynamics of either the market overall or our competitive division.

That’s great. Thank you.

Your next question comes from the line of Eric Gommel with Stifel Nicolaus. Please proceed.

Hi. Good morning. Can you talk a little bit about labor costs in general? I mean, you’re competing for a specialized trained nurse and hospice and it’s fairly competitive. I mean, are you seeing wage rates flowing out of what you would expect or out of the ordinary? And are there any geographic regions in particular that you’re concerned about for wage rates?

Let me just start by saying and somebody can give specifics, but I’ll tell you that’s a question we talk about all the time, obviously for a labor intensive company. The answer to your question is no. We’re seeing no change. It’s tough. I always -- Whenever I say that -- mention wage rates for nurses and staffing and retention, I always say we seem to be -- we continue to seem to be doing pretty well. But I always feel remiss in that it’s not without a lot of hard work and the daily battle in the field. It’s not easy. I’ll let -- I’ll turn it over to David for some specifics. But we’re not seeing any change in that. As I say, when we talk about the labor margins, in other words, the margins in these -- in our field operations fall because of labor, it’s tied more to the number of -- the patient ratios than it is increase in costs for the individual people. It’s controlled by that ratio number rather than increase in wages per employee. But Dave, anything to add to that? Specifics that you can point out?

Just in general, we pay a lot of attention to how we motivate, reward and coach people. And we think our programs are well focused and balanced. Our salary increases have been pretty modest, in the range of 3.6%, even for nurses. And we do have markets that are more difficult than others. But we generally work through those challenges. And I think we’ve been pretty successful in attracting and really retaining people.

Great. My -- really my last question. Is there anything we should be thinking about on the reimbursement of regulatory front out there? Is that still fairly stable at this point?

Tim O’Toole: I think very stable.

If you say the last Med Pac transcript, I think the report was very pleased with the approach of hospice. I think their conclusion although was probably poor grammar. It’s if it ain’t broke, don’t fix it, seemed to be the conclusion after about 15 pages of the transcript. So I consider the political front and the attitude of CMS and Med Pac, all Congress seems to be very pleased with the approach of hospice.

Thanks.

Okay. Well, I guess that’s the last of our questions. And I thank you for everyone’s kind attention. And we look forward to another discussion very much like this three months from now. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.