Chemed Corp (CHE) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Chemed Corporation's third quarter 2006 conference call. Please note today's call is being recorded. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Sherri Warner with Chemed Investor Relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2006 ended September 30, 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 October 26, 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 October 26, which is available on the Company's website at www.chemed.com. 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, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone. Welcome to Chemed Corporation's third quarter 2006 conference call. I will begin with an overview of the quarter. I will then turn over the call to Dave Williams, Chemed's Chief Financial Officer for a detailed financial analysis as well as components behind our updated guidance. This will be followed by Tim O'Toole, Chief Executive of our VITAS subsidiary for a discussion of our hospice operations. I will then open up the conference call for questions.

The past year certainly has been challenging for our hospice business. The Medicare Cap, although impacting very few of our programs is an issue that is inherent to the industry and is a permanent risk factor for VITAS as we continue to expand our hospice business. I'm also very encouraged in terms of our refinement of our process to manage Medicare cap over the long term. However in the short term cap will remain a volatile component of our overall cost structure. 2006 has also been challenging in terms of forecasting admissions, discharges, and ADC. The slow down in our admissions and ADC growth over the past two quarters has impacted our historical trends. Predictive trends are a critical component in developing hospice capacity. This, of course, impacts our labor margins in the short term.

It is management's responsibility, my responsibility, to successfully navigate through these types of issues and deliver long-term profitability growth to our shareholders. I am confident we will be successful in managing all these issues. I am disappointed that VITAS will generate minimal earnings growth in 2006. I certainly believe we could have executed better to have minimized a portion of the impact of the Medicare caps. However, I would be remiss if I did not put into perspective our performance since we acquired VITAS in February 2004.

From a business model perspective, VITAS has performed exceptionally well. When we acquired VITAS in early 2004, the trailing adjusted EBITDA of this business was $42.3 million. Our 2006 estimated adjusted EBITDA for VITAS is approximately $87 million. An increase of more than 100%, or an annualized growth rate of 27%. In fact, we had projected VITAS to earn $87 million of adjusted EBITDA in 2008. We are more than two years ahead of our investment thesis in terms of earnings and cash flow. Without a doubt we have significant future challenges and opportunities within our hospice segment. I also recognize that to a degree past success breeds increased expectations of future growth. I am committed to meeting and exceeding these expectations in all of our business segments.

Now let's go to some specifics for the quarter. On a GAAP reported basis, Chemed generated net income from continuing operations of $10.2 million. If you adjust for certain items not indicative of ongoing operations, such as favorable tax adjustments, exiting the Phoenix market, and other items detailed in yesterday's press release net income would adjust to $12.8 million which equates to diluted earnings per share from continuing operations of $0.48. In the third quarter of 2006, our VITAS subsidiary recorded revenue of $175 million and net income of $7.8 million. Revenue was negatively impacted by a $5.5 million Medicare contractual billing limitation accrual, otherwise known as Medicare Cap. This reduced net income approximately $3.5 million. The Phoenix program recorded a Medicare Cap billing limitation of $2.9 million. And two other hospice programs recorded $1.6 million of Medicare billing restrictions.

The third quarter 2006 Medicare Cap accrual includes an additional $1 million for estimated prior year billing limitations. These retroactive billing restrictions result from the fiscal intermediary reallocating admissions for decreased Medicare patients -- for deceased Medicare patients who receive hospice care from multiple providers. By definition this is done in hindsight and is extremely difficult to predicts. Of this prior year billing $500,000 is for one of the programs noted above, and the remaining $500,000 is an estimate for a program that is not anticipated to have a billing restriction in calendar year 2006. Historically, VITAS's operating model has been able to successfully navigate around Medicare billing limitations. This has been achieved by admitting a significant number of high acuity patients, those patients in the late stages of their terminal illness.

High acuity, or short-stay patients, can be directly measured in a program with a median length of stay calculation. For VITAS, median length of stay is typically 14 days or less. In other words, half of all patients admitted to VITAS are discharged in 14 days or less after entering hospice. This is materially lower than the national hospice and palative care organization industry median length of stay which they calculate at 22 days. VITAS overall has a median length of stay which is 40% favorable to the industry average. Typically VITAS hospice programs with the lowest median length of stay also have the greatest Cap cushion. VITAS defines Cap cushion as the difference between the maximum Medicare billing potential based upon total admissions and the actual hospice billings in a program.

The industry trend has been towards individual patients entering hospice earlier and earlier into their terminal illness diagnosis. This is resulting in longer length of stay, resulting in expanded Medicare billings on a per patient basis. This trend does reduce overall Cap cushion, resulting in hospice programs with increased potential of being in a Medicare Cap situation. However, VITAS's relatively low median length of stay on a program by program basis provides a competitive advantage in terms of the ability to rebalance patient mix and minimize the financial impact of Medicare Cap as well as limit the duration of a time a program remains in a Medicare Cap situation. It is our goal to demonstrate that we have the ability to rebalance programs out of the Cap situation. That is not to say Medicare Cap accruals will be eliminated. These types of accruals from time to time are inherent in the current Medicare hospice reimbursement program. Rather, we need to desensitize shareholders to the words Medicare Cap and demonstrate that Medicare billing can be managed without detrimentally damaging the VITAS business model and long-term profitability. This will allow VITAS to continue to provide excellent care to our hospice patients and their families and deliver to our shareholders sustainable revenue and profitability growth. With that I would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. VITAS generated revenue growth of 9% over the prior year period. This growth rate was negatively impacted by 305 basis points due to the $5.5 million Medicare cap accrual Kevin mentioned earlier. Admissions for the quarter increased 3.1% and average length of stay expanded 4.5 days to 71.0 days.

On a year-to-date basis VITAS's revenue increased 12% to $515 million, admissions have increased 4.6% and length of stay has expanded 3.7 days to 70.5 days, an increase of 5.5%. Excluding Medicare Cap and Phoenix, September year to date revenue increased 14.2% and year to date admissions increased 4.9%. Gross margins before the impact of Medicare Cap were 19.9% in the quarter and compares to 21.7% in the prior year. This equates to 180 basis point decline in gross margin and is driven primarily by increased labor costs relative to our average daily census. Higher labor costs impacted all levels of care during the quarter.

During the third quarter, VITAS continued to expand manpower and specific hospice programs. This conscious capacity expansion took into consideration the inherent difficulty of hiring and retaining qualified healthcare professionals, particularly in the fourth quarter of a year. Typically, when admissions and census run at abnormally low levels, he potential for material increase in admissions -- the potential is for a material increase in admissions and census. If the fourth quarter admissions remain at the current rate staffing ratios will be appropriately adjusted on a go forward basis. Central support costs for VITAS, which are classified as selling, general, and administrative expenses in the consolidated statement of operations totaled $13.6 million including $344,000 in OIG legal expenses. Excluding the OIG expense from all periods, central to support costs decreased 172 basis points when compared to the prior year quarter and decreased 66 basis points sequentially. In essence, we are very well managing our overall central support costs within the VITAS business model.

Now let's turn to the Roto-Rooter business segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $78 million for the third quarter of 2006, 7.5% higher than the $73 million reported in the comparable prior year quarter. Net income for the quarter was $8.5 million and compares to net income of $7.1 million in the prior year. Adjusted EBITDA in the third quarter of 2006 totaled $12.9 million, an increase of 11.4% over third quarter 2005, and equated to an adjusted EBITDA margin of 16.5% which is an increase of 57 basis points when compared to the prior year period. Job count in the third quarter of 2006 decreased 0.4% over the prior year period. Commercial plumbing jobs count decreased 2.7% and commercial drain cleaning decreased 2.6% over the prior year period. Residential plumbing and drain cleaning jobs both increased 0.7% when compared to third quarter of 2005. Overall, commercial jobs decreased 2.6% and residential jobs increased 0.7%.

The swing we're seeing relative to job counts within Roto-Rooter are kind of normal volatility and fluctuations so the fact that revenue expanded and job count declined is a reflection of job mix within those categories. Chemed's cash flows from continuing operations continued at a healthy rate generating $40.7 million through September 2006. Medicare did implement in late September a claim payment delay as mandated by the Deficit Reduction Act of 2005. As a result, the periodic interim payment, or PIP payment of 23.9 million that normally would have been received on September 29, and included in our quarterly results was actually received on October 3, so this payment will be included in our fourth quarter 2006 cash flows from operations. We are reiterating the guidance provided in September of 2006. VITAS is estimated to generate full-year revenue growth from continuing operations, assuming Phoenix is discontinued by the end of the year, prior to Medicare cap, of 14 to 14.5%. Increased admissions of 5.0% to 5.5%, increased ADC of 10% to 11%, adjusted EBITDA margins prior to Medicare cap of 12.9% to 13.2%. Again, this guidance assumes a Medicare price increase that will average 3.8% in the fourth quarter of 2006 and assumes Phoenix is classified as a discontinued operation in the fourth quarter. Full-year Medicare cap -- Medicare contractual billing limitations excluding Phoenix is estimated to range from $5.7 million to $8.6 million which equates to revenue reduction of 80 to 120 basis points.

Roto-Rooter is estimated to generate a 6% to 7% increase in revenue in 2006, job count growth of between 0.5% and 1%, and adjusted EBITDA margins averaging between 16.5% and 17%. Based upon these factors, an effective tax rate of 39%, and average diluted share count of 26.7 million in the second half of 2006, our expectation is that full year 2006 earnings per diluted share from continuing operations excluding any charges or credits not indicative of ongoing operations and excluding expenses for stock options will be in the range of $2.00 to $2.10. This earnings per share guidance includes $0.13 to $0.20 for the after tax impact of Medicare cap related to continuing operations. With that I'd like to turn this call over to Tim O'Toole, our Chief Executive Officer of our VITAS subsidiary.

Thank you, David. In our first quarter 2006 earnings call, we discussed our staffing levels available capacity, and the impact this excess capacity had on our margins. It was our expectation that normal patient census growth would utilize this excess capacity and margins would normalize. That is precisely what happened. During the second quarter 2006 census did expand and our margins normalized to more historical levels. We faced a similar situation as the census and admissions flattened during the third quarter 2006. We continually strike a balance between methodically hiring field personnel adequate to offset our estimated turnover as well as meet the capacity necessary to care for our forecasted average daily census. This is particularly challenging when our admissions, ADC, and turnover rates deviate from historical patterns. The trade-off is lower gross margins in the short term to ensure appropriate capacity as we see an increase in our ADC.

Unfortunately we did not achieve our admissions growth target during the third quarter. We have chosen to carry this care giver capacity into the fourth quarter. We continually monitor our ADC and staffing ratios on a program by program basis. I consider the fourth quarter critical in determining our go-forward run rate in terms of admissions, discharges, and related overall census, and if necessary any excess caregiver capacity will be adjusted. Our nursing staff increased by 3.7% sequentially in the quarter to 3,566, and is 12.9% above the prior year quarter. This compares to our increase in average daily census of 9.3%. We currently have 187 hospice teams, which compares to 171 teams in the prior year quarter and 181 teams sequentially.

Our average visits per patient per week have increased to 5.8 and compares to 5.4 visits per week in the prior year quarter. Our overall turnover rate remains fairly constant at 26.7% on a trailing 12-month basis. Salary increases remained in line with the industry and averaged 3.7% as compared to 3.4% in the prior year. In the third quarter of 2006, we recorded 1,031,635 days of care this compares to 943,848 days of care in the third quarter of 2005, an increase of 9.3%.

At the end of the third quarter of 2006, VITAS employed 225 sales representatives, this is an increase of 20 sales personnel sequentially from the 205 sales reps we had as of the beginning of the quarter. Just as important, we continue to expand our admissions personnel. We now have 368 admissions nurses and coordinators dedicated to patient intake which is an increase of 23.1% when compared to the prior year quarter and 5.4% sequentially. Admissions by major diagnosis continues to be relatively stable with 37% of our third quarter admissions being cancer related, 19.3% neurological, 12.4% cardio, 6.7% respiratory, and 24.6% in the all other category. We currently have nine programs classified as start-ups. Seven of which are Medicare certified. These start-up programs had an ADC of 205 patients with revenues of $3 million and pretax operating losses of $982,000. In the prior year quarter these same programs had an ADC of 30 with revenues of $143,000 and operating losses of $1.6 million. With that I'd like to turn the call back over to Kevin.

At this point it would be appropriate to entertain questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Eric Gommel with Stifel Nicolaus.

Could you just -- you talked about census flattening in 3Q '06. Can you just review some of the issues that caused that?

What we talked about was the census flattening from some of our historical trends. The census grew in the quarter. The admissions rate as we mentioned was about 3%, and that's below our targeted rates of 5 to 6%, so what we're suggesting is the admissions were below our targets which caused the census not to be as high as we expected, so that's where the flattening comes from. We addressed these issues somewhat in some of our earlier discussions with you. We did see a slow summer in some of our large markets in some of the hospital census numbers, and generally that causes the hospitals not to discharge as much to the hospice arena. We are beginning to see the hospitals fill back up, especially in South Florida as we speak now in October and so forth. So basically we missed our admissions target which caused the ADC to be not as high a growth as we expected, and that put pressure on the margins as we mentioned.

Eric, our discharges were up 5.5% for the quarter over the prior year, so typically we see a larger gap between our discharges and admissions in a quarter, and basically those were darn near equal, only about 100 and some odd differential.

Was this similar to the issues I think late last year that you had with the discharge got out of whack with the admissions basically?

Yes, although at different times. Last year was more due to seasonality volatility, in this case normally we expect more stability in the third quarter.

Great. Then just one other additional question. On the share buybacks, could you just review over the last two quarters, how much in share buybacks you have made and kind of outline what your plans are going forward, and also just the actual absolute ending share count at this point?

Yes. Through the end of this -- actually, through today, we have just a little under 200,000 shares, about 198,000 has been purchased. In calculating what the exact share count is, but our buyback program on a go-forward basis, again, as we stated before, the buyback isn't intended to prop up the share price. It's just what I'd call a methodical buying back of our shares. We'll be opportunistic to a certain degree if we see what we consider an abnormal dip, but we're going to be slowly buying our shares back on a very steady basis. And our share count at the end of the quarter actually was 26,270,441. 26,270,441.

Thank you.

Your next question comes from the line of Kevin Fischbeck, Lehman Brothers.

Can you talk a little bit more about the Cap, the Cap accrual at the core sites was 1.6 million in the quarter. That was below the 2 to 3 million range that you provided, but you didn't change your annual guidance for Cap. Do you expect Cap to get worse in Q4, or are you just being conservative? Can you talk about what went on there?

Let me just make one comment, then Dave can go through the specifics. But generally speaking, Dave's very nervous at the volatile area, but if you look at all indications from the programs we have mentioned, we're working hard, Tim and his people are working very hard, and they're seeing real results. There's no question about it.. So overall let me start by saying that I would be remiss if I didn't pass along the indication that, no, we expect things to get better in the fourth quarter with regard to those cap programs. But now having said that Dave can talk about how that translates to the numbers.

You're absolutely right, Kevin. The original forecast was 2 to 3 million for the quarter. It came in 400,000 below the low end at 1.6 million. We didn't change our overall guidance for the continuing operation programs in Cap. But basically we're very happy with the results of the third quarter. It went the way we had hoped it would have, but because it's so volatile, and to be honest we were caught off-guard in how weak July-August was in the quarter, we kept the overall guidance the same. We're very, very, very encouraged, and particularly with October looks very good, but one month doesn't a Cap quarter make, so we kept guidance the same but we are very happy with the direction things are going.

I guess you guys now have said a couple times that you have -- you believe you have some ability to manage admissions in the Cap. Do you know exactly what it is that you've been doing that led to a better sense of the trends at least during this quarter?

Absolutely. I think the way to focus on is it to just understand that, obviously on the Cap issue, we need to accelerate the admission growth in these programs and in the kind of admissions that do not increase your length of stay by doing that. That takes some time to achieve. We mentioned in these two locations that we've had this issue that we believed that we would show progress as we just continued to allocate more resources to those areas, and that's what we have done. We have increased the selling effort both in the number of individuals selling, the type of selling, and I think that's just taken some time. So we're beginning to see the admissions improve in those areas. We're beginning to see the right kinds of admissions coming in without a excessive increase of length of stay or ADC build. All I can say is we had a lot efforts of and we're beginning to see those pay off, it takes time but when you get it in place the future looks pretty good. So our selling effort along with just understanding the better analysis of a local marketing plan, and where your selling effort should be focused and where maybe it shouldn't be focused. But the programs we're talking about are very stable and moving ahead and look to be in pretty good shape.

Let me also add that with regard to those two programs that we're focusing on here, they were both good programs. They were both profitable. They were both programs going through what I would consider -- they were fast growing programs, programs that I would call going through growing pains. They were not broken programs by any stretch of the imagination or description, and again, they have gone through that -- they've made some good steps in going through that growing pain section, and again, it's nothing that we've done magically or dramatically different than those two programs, just seeing some of the fruits of the labor.

Okay. So is it appropriate to say that -- a disproportionate amount of that increase of 20 sales people sequentially was targeted towards the sites with cap issues?

It's proportionally, I mean, we definitely increased the staffing but not disproportionately. We had increase across a lot of programs. In terms of the increase from Q2 to Q3.

The labor going up.

The feet on the street.

These programs would be programs that have, today in both of them maybe 15 or 16 sales representatives as opposed to 10 or 12 a year earlier. So that's some of the increase. But the big increase is just throughout the Company. Obviously we had a 12% growth in ADC. And we also had some new starts out there, that we have new sales people in this year that we didn't even have a year ago. But that's not really where the big increase is. It's across the board. We have got better people in those sales positions now and more of them. But overall the numbers at the whole company are moving ahead as well.

Okay. Last quarter you guys provided some data about groups and facilities and length of stay within each group. Do you have any similar type of breakout for us this quarter?

No, that was we got assurances of the overall metrics, and I think we said that last quarter. We don't plan on releasing that every quarter. But we don't see any change relative to the data provided previous quarter as well.

Okay. And I guess at least in the past you said there were like another three sites that had less than 10% Cap cushion? Is that still right? Or has that changed at all?

It's good, actually it's gone down to two.

Okay.

Beyond the podiums of course, we have talked about that earning Cap.

Okay. I guess the last question, going back to the guidance, trying to back into what it implies for Q4 growth at both VITAS and Roto-Rooter, it looks to me like it's, I don't know, maybe a little bit aggressive on VITAS, a little bit conservative on Roto-Rooter. It seems like your guidance would imply that VITAS can grow 14 to 15.5% in Q4 compared to the 14.2%, I think you said year to date they did excluding Phoenix and the Cap. Meanwhile Roto-Rooter only would have to grow 2.7 or 6.5% to hit your numbers compared to 7.2% year to date. Can you explain both of those trends and how the numbers shook out?

Yes, let's take Roto-Rooter first because that's the fastest. Without a doubt I'd guide toward the higher end in terms of the sales were actually slightly above that except the fourth quarter of last year was an incredibly strong pop in the fourth quarter of 2005, so we -- I wouldn't anticipate that same percentage growth to continue. I'd expect our overall growth rate to moderate a little bit on the Roto-Rooter but I'd still guide to the high end of our sales and I'd keep the overall EBITDA margin about where we have it. On VITAS it's kind of a combination of things relative to you can look at admissions, look at revenue, length of stay that goes down to average daily census. I'd probably guide to the lower end of the ranges, for VITAS, but there's kind of a ying and a yang relative to admissions, ADC, length of stay, but I'm still very comfortable with the overall EPS. But without a doubt we're at the lower end for admissions and revenue.

Great. Thanks.

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

Good morning, everyone. Kevin, I think this is, or, rather, Tim I think this may be a question for you. Considering the -- the fixing process with your -- with the Medicare Cap programs, are you still actively looking at acquisitions, and if you are, have the -- are the acquisition multiples in the industry starting to come down at all?

Well, let me just say, Jim, the answer to your question is yes, we have an acquisitions department that we're always looking at them, and I think that, from -- certainly from their peaks, prices are down. I would say that the biggest effect is that when you look at the admissions growth countrywide, it's a little bit tougher, and because Medicare Cap is done on a program by program basis, every acquisition we look at, every program at that, you know, acquisition candidate, there's a trend analysis that you undertake, and if admissions generally are tough, that makes those trend analyses pretty difficult, and that's -- we're not going to buy any problems. Let's put that it way. We have a high -- we're very concerned about anything like that, and we're very knowledgeable, having lived through it, of what those problems are and how difficult they are to deal with, but I mean, I just wanted to give you some flavor on it before Tim goes into some relative specifics. But that's where we are.

Just to reinforce what Kevin said there are acquisitions available. I think the pricing probably certainly has come down in the last year so that's probably an attractive thing for us. Keep in mind, we're in most major markets now and there's probably only another eight or ten major markets that we'll be heading into with our new start program that we're not today. When we look at acquisitions, it's also helpful if it puts us into a market we're not strong in today, and that would be an opportunity that would be better than one where we have overlap. We'll look at targeted acquisitions. they're available. We'd like to do them. As Kevin mentioned, we want to clearly make sure we're not buying into a Medicare Cap problem that we can't understand and manage without heroic efforts. So they're available, we're focused on them. We'd like to think we could bring some to the table at the appropriate time.

To sum it up, Tim, when I look out three to five years, will acquisitions be a fairly important part of your growth when we look back?

Well, we've said before we expect at some point for there to be a better consolidation opportunity than today because of pressures that will come to bear on certain players in the industry, whether they be a small local player or whether certain companies have a Cap issue and can't manage it where we have shown the expertise too. I think if you look out longer term, we would like to think there will be a moment in time where the consolidation opportunity is better today. Whether that's two years, three, or five we don't know but we'll be ready when it's there.

Kevin, just a question on Roto-Rooter. Your commercial job count appears to be down and wanted to find out what your thoughts were on that in terms of future trends, and secondly can you discuss the current pricing flexibility on the plumbing side?

Well, I'll make some general comments. First of all we're very happy with our commercial side of our business. There's some mix change, some -- some change in just the size of job on the commercial side, and that comes from some of our emphasis. A lot of that intentional. We're very encouraged on the commercial side of both drain and plumbing at Roto-Rooter. With regard to pricing, we've seen some pretty good flexibility in that regard. One characterization I'd say that we're holding back the field just from taking a longer view. Some of their -- the first information we get with regard to our pricing strategy comes from field with regard to what they think the market will bear, and we think, if anything, we're just saying that we think they're more optimistic than we are, but again, we're taking the longer term view. we don't want to -- for a short term benefit don't want to have some pricing that hurts our strategy. But, no, the -- what we see in the field looks good with regard to pricing of Roto-Rooter.

Jim, this is Dave Williams, the price increase that we put through, basically our pricing went through December of 2005. We anticipate a price increase in December 2006, so there's nothing that's happened within the quarter in terms of pricing. No changes.

Dave, can you tell me approximately what that price increase is likely to be? Have you announced it already?

We have not. We are still developing it.

Well, thank you both.

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

Thanks. First question is, I didn't catch the billing day number completely. Would you repeat that?

Yes. 1,031,635.

Great, thank you. With regard to VITAS, is it fair to interpret your comments of saying that the census -- disappointing census growth has mainly been in Florida, or is it in a broader range of markets?

It's in a broader range of markets. It's certain specific markets within Florida, certain specific markets outside of Florida. And keep in mind, as we've told you, we need to be very thoughtful about the type of growth we select. We need to always be looking out three, six, nine months, vis-a-vis what we need to do to manage the Medicare Cap on long-term basis. So sometimes when you see a little lower growth rate in admissions it's simply because you're making the transition with the type of admission that will be better long term for the Company. We think some of that was going on but that trend needs to continue over the next several months to understand it more fully. So it was not in any one specific market. It was markets throughout the country. Some good, some bad, but overall those were the numbers.

Let me make one comment with regard to something I referred to several times over the last several calls. Growing pains. When you have a program that's going this -- this is amplifying Tim's point, but when you're going with a relatively new program, and you're still getting in that critical mass stage, the path of least resistance is to take patients from where there's maybe on the fringes, the longer length of stay patients, and it's just very important to get in there and at the earliest possible stage get the strongest relationship with the sources that are going to refer you to the shorter stage patients. You can't leave that for the latter stages of development of a program. And, you know, of course, we're doing that, human nature being what it is, it doesn't always happen. The path of least resistance still rears its ugly head from time to time, but that's one thing that we have seen, and we're pushing for in all these middle-size programs. That gives some -- maybe some specifics. That is a growing pain that these programs go through.

All right. Just last question, on this -- how would you characterize say the significance of the couple -- the phenomena you just cited? Is it fair to say that the hospital census in Florida is maybe half, and the other items are half, or?

30%.

35% of it might be the issue.

Okay. Thank you.

Your next question comes from the line of Matthew Ripperger with Citigroup.

Thank you. This is Jie Bao filling in for Matt Ripperger. Just a couple of questions here. The admissions improvement in the month of October, can you just comment if you are seeing admissions improvement in the two Cap programs specifically?

Let me just say, the answer is, yes and yes. Those particular programs, we're encouraged by. It's -- it would be very bad if we didn't, but very encouraging news in the one month, and as Dave said, admissions generally, for the month of October, are exceeding our expectations, but one month does not a quarter make.

It's in the right direction but don't run too far with it. These things tend to turn both positive and negative. As we point out, it's volatile but we're very encouraged.

Okay. My second question is, looking at the mix of your admissions, it looks like cancer admissions were up just 1% for the nine months of this year versus last year, and your cancer admissions growth were almost 8% in 2005. Maybe can you give some comment in terms of why your cancer admissions growth is slowing and what your outlook for next year?

Well, I don't know that there's any significant change in that regard, but let me suggest as you look in the future that is one area we hope to see increasing. We are doing a lot of work right now with getting back to some of the historical work of the Company to focus more on physician referrals in the oncology area, working with hospitals, for the type of patients that will give us the balanced program we're looking for, and so we think this is the right time to do that. We have been accelerating those efforts in the last six months, and that's very important. So we don't see a big see change there, but I expect in the future you will see that remain healthy and hopefully increasing as we improve our relationships on the selling side with physicians. We're upgrading the sales force activities, we're hiring, we hope, individuals that have the ability to bring those relationships to the Company, and I think that will be very important as we move forward, because as we all know, we need balanced programs, and we need physician relationships, we need a strong oncology product, and VITAS has the best knowledge of anybody to bring those patients on and give them great care, and that's what we'll do.

Now, Jie, you also have to probably keep in perspective, that because the noncancers are growing at such a faster rate, industry-wide than the cancers, that actually the fact that the numbers are still in my mind relatively comparable actually speaks well. The fact is you should see cancer as a lower percentage of overall admissions nationwide, probably over the next several years. That's why the -- two years ago cancers outweighed noncancers in terms of admissions for NHPPO. Today I think that cancers are only about what, 43, 44% of total admission. So the fact that we kept the overall ratio to where it is is pretty positive.

Okay. Maybe lastly, if you can just give an update on the Florida market, I think there's a couple of changes going on in the licensing regulations what are you seeing in terms of perhaps some consolidation in the market and also the CON law?

We mentioned this last time. There's no change recently. The law changed nearly six or eight months ago on the for-profit status but the certificate of need laws are still in place, so there's no dramatic changes in the Florida market which is to our advantage.

Thanks very much.

Thanks, Jie.

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

I want to just ask a couple questions here, first in relation to the inpatient strategy of the Company, it would seem that that's an important part of helping manage cap as you're saying in some of these mid-size programs. I guess the question is really strategically what are the big challenges in setting up inpatient programs, and if you could just help us understand how permanent or transient maybe some of the inpatient relationships you have and some of these newer markets might be. That's the first question.

Let me just say that we're, in our new markets, since you specifically asked what we're trying to do there is accelerate our thinking about how soon we would want an inpatient relationship. Historically we've deferred those inpatient decisions for maybe six, nine, or 12 months from when we start, just thinking that we won't have the number of admissions to fill them, but now we see that as such a critical component of the long-term need that we're trying to do them sooner. Keep in mind you do not have to open up a full inpatient unit with 10 or 12 beds in it to have an inpatient opportunity. The first thing we do is find a hospital or a facility that will allow us to do what's called contract beds. So you can have two or four contract beds within the hospital. They're just not separated out in a hospice wing, so to speak. So we're doing a lot of that.

Keep in mind that the inpatient strategy is first off the strategy of the settings of care that are very healthy and necessary for our patients to have the appropriate hospice care. So that's the first approach we look at when we look at inpatient facilities. It is obviously also very important to have those if you're going to work with physicians more aggressively to get the cancer patient because those referrals come mainly out of hospitals and the transfer to an inpatient facility in that hospital is best for the patient, and it's easier to have the physician working with you on that basis. So these are market by market strategies.

Sometimes where they're difficult is because every hospital in a given location already has - an internal hospice or is affiliated with someone else with a longstanding relationship. Those are situations where we just have to work, work, work to show we can do better, or we put an inpatient facility in a skilled nursing facility, or we can build our own freestanding. So there's many many opportunities. We need the inpatient facilities for the care we give to take care of the patients appropriately. We also need them to have a good mix of our programs, so we just have to be very smart about where we put them, whether we want contract beds or a large facility, because if you have 12 or 14 beds you certainly need to have good occupancy, or it's a very bad financial model. So overall we feel like we're about where we need to be. We'll be opening more in the future. In any given market where we're having a hard time affiliating with a hospital we're very able to build our own freestanding one, and I think we'll be doing more of that in the future.

That's great. The other part of the question here would just be in evaluating new markets is the hospital relationship, the inpatient relationship, now becoming more of gating factor in going into markets? Because you describe in some situations where the hospital relationships are locked up, and I'm just wondering if strategically this is changing your view about coming into markets that might be more saturated on the inpatient side.

I'll say it's a factor. When you say gating, it's something that is right -- it has moved right to the top of the list that we consider. At this point still when we're prioritizing, as far as when we still have a list of areas we want to go into, it certainly helps going through this transitional phase. I don't think that there's a market we're talking about that we don't think we can eventually overcome the issue. As Tim said, by building your own facility ultimately when you get to a certain size. But you very adroitly picked up a point that it's having an effect on our selection process. Tim, anything else?

Well, I don't mind saying the good news is we're in most major markets already and in most of those we have great relationships with our own inpatient facilities. In the eight or ten large markets we're not there today, that will be an issue. It may be a reason why you look for an acquisition in that market that already has that relationship. So they are very important and we'd be reluctant to go into a new market if we didn't think we could either get one soon or very near term because it's important long-term for the balance of your program.

Okay. Then second question here, then I'll jump off, just relates to, I guess this year we've seen a little bit more overstaffing, if you will, with regard to building up capacity and admissions not coming in. That's clearly had some negative impact on margins. I guess the question is, are you thinking differently about how you build capacity, and is there any way to adjust in a little bit more of a real time basis to this volatility that you're seeing? Just thinking in terms of how next year might play out if admission trends remain a little bit more volatile?

This is Tim. I would just say, yes, we can do a better job, and it's really just a matter of executing on a real-time basis things that historically maybe we've taken two or three months -- two or three weeks, excuse me, to see and act on. So what we're doing is implementing internal management processes where we're looking at issues weekly instead of every two weeks, and we'll have just immediate action where we can take action quicker. By doing that I think we'll do a better job of matching our staffing to the existing trends of our ADC.

And let me say that, this is Kevin McNamara, that we acknowledge that this issue, if we want a higher multiple applied to our stock price we need to be reliable with regard to coming in with the earnings that we guide to, and the labor component on the VITAS business is the 2,000 pound gorilla, or whatever. It's one that a lot of effort is being made to get on top of that, as you say, on a real-time base, and to the extent that we don't, it's a real failure.

Let me just add we mentioned a couple times that the October admissions are going quite well. If we did not have the capacity available the admissions would not have been able to have been broadened.

This is Dave Williams to. Reiterate that is, the census can move a heck of a lot faster on the upside than we can hire qualified people and get them ingrained into the VITAS culture. So this issue is always going to be there. Or you could be a little tighter and react faster but the fact of the matter is it's always a challenge to guess on your retention and hire people and hire the right people. That will have to be done methodically, and census fluctuates significantly day to day. So it's kind of inherent, and it comes with the more stable our trend lines are, the more tightly we can control margins.

We're much more focused on implementing strategies that will accelerate our revenue growth rate than having strategies to minimize our capacity.

Okay. Thanks a lot. Appreciate it.

Your next question comes from the line of [Larry Foulkes] with Robert Baird.

Thank you. Good morning, everybody. Could you bring us up to date, please, on current management's thought about the eventual potential for splitting the companies up, the two operating entities?

No significant change there. We believe that both -- rather unusual combination of a plumbing company with a hospice company is something that the market has generally accepted with regard to its valuation, that the characteristics of Roto-Rooter, that is being a very stable business with very strong cash flow characteristics is something that fit's well with a business that is largely dependent on government reimbursement, so the marriage of those two companies has gone relatively smoothly. They have not changed the tax laws with regard to the substantial tax bite that would occur if Roto-Rooter was sold. So -- maybe that's a short way of saying we haven't seen any change in that regard.

Yes, the only player who would really be pushing for that would be the IRS for a value creation. Everyone else takes a haircut.

Thank you.

Well, that shows we're at the end of the questions, and I'd like to thank everybody for listening and we'll reconvene shortly after the end of the fourth quarter. Thank you.

Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.