Chemed Corp (CHE) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Chemed Corporation's first quarter 2007 conference call. My name is Gina and I will be your conference coordinator today. Please note that today's call is being recorded. [OPERATOR INSTRUCTIONS] Now, I would like to turn the call over to Sherri Warner with Chemed Investor Relations. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2007 ended March 31, 2007. 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 30, 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 30, 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 this call over to Kevin McNamara.

Thank you, Sherri. Good morning everyone. Welcome to Chemed Corporations' first quarter 2007 conference call. I will begin with an overview of the quarter. I will then turn the call over to David Williams, Chemed's Chief Financial Officer, for a more detailed financial analysis as well as our updated guidance. This will be followed by Tim O'Toole, Chief Executive of our VITAS subsidiary for a discussion on some of our hospice metrics. I will then open this call up for questions.

Chemed had a solid start for the year. Revenue in the first quarter of 2007 totaled $270,000 million and net income from continuing operations was $16.2 million. This equated to diluted earnings per share from continuing operations of $0.62. If you adjust for certain items that may not be indicative of ongoing operations, earnest per diluted share was $0.73 in the quarter.

In the first quarter of 2007, our VITAS subsidiary recorded revenue of slightly over $184 million and generated net income of $15 million. Revenue was favorably impacted by reversing $472,000 for Medicare contractual billing limitations recorded in the fourth quarter of 2006. I remain very cognizant of our need to continually demonstrate that Medicare billing limitations can be managed. With that said, I am encouraged by our success in this regard over the past two quarters. However, as long as the current Medicare hospice reimbursement structure remains in place, VITAS will always be at risk of not being reimbursed for the care we provide to all of our Medicare patients. Medicare Cap remains a component of our overall cost structure that will be difficult to predict.

Roto-Rooter had an excellent first quarter, generating slightly over $86 million in revenue, earnings of $9.5 million and adjusted EBITDA of over $16 million. This equated to an adjusted EBITDA margin of 18.9%. Both VITAS and Roto-Rooter are operating fundamentally sound business models. Although there are risk factors impacting both segments, we believe these factors are manageable and Chemed is well positioned to continue to generate strong revenue, earnings, and cash flow growth in the coming year.

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

Thanks, Kevin. As Kevin mentioned, VITAS had revenue of $184 million in the first quarter of 2007, which is an increase of 10.8% over the prior year period. VITAS did not record any billing restrictions related to Medicare Cap in the first quarter of 2007. In addition, approximately $472,000 of Medicare Cap related to the fourth quarter of 2006 was reversed into revenue during the first quarter of 2007. As of March 31, 2007, VITAS has not accrued any Medicare billing restrictions for the 2007 cap year. Our success in billing Medicare for 100% of the hospice care provided to our patients is the result of improved admissions, improved median length-of-stay, and the continued combination of certain hospice programs that qualified to bill Medicare under a single provider number.

Over the past decade, VITAS has made substantial investments in centralized support infrastructure to provide the ability to efficiently monitor key patient and operating metrics in all its hospice programs regardless of the program's census or geographic location. The annual cost of the centralized infrastructure totaled over $56 million in 2006 alone and included such functions as computer operations, electronic monitoring of vital patient statistics, pharmacy, medical equipment, billings, payables, labor management and contract administration. The development of the centralized infrastructure provides VITAS the opportunity to better serve the communities in which it operates by combining certain hospice programs under a state license with a single overlying Medicare provider number. This allows VITAS to provide increased monitoring, benchmarking, efficiency and overall efficacy of patient care. In addition, this approach provides state and federal regulatory agencies the increased ability to effectively and efficiently monitor patient care and review the documentation related to this care.

Starting in 2006, VITAS has merged several hospice programs resulting in reducing the number of Medicare provider numbers in three states. VITAS is in the process of eliminating one additional Medicare provider number that is not currently in a cap situation. Once completed, this will result in all of VITAS' hospice programs having a cap cushion greater than 10% on a trailing 12-month basis with the exception of two programs. These two programs have a cap cushion between 5% and 10%.

The same analysis through the first five months of the 2007 cap year results in all of VITAS' Medicare provider numbers having a cap cushion greater than 10% with the exception of one program. This program has a cap cushion between 5% and 10%

Gross margin for VITAS in the quarter, excluding the reversal of $472,000 of Medicare Cap, was 22.6%. This compares to 19.5% in the prior year quarter, which equates to a 310 basis point increase in gross profit. The majority of this increase in margin is the result of VITAS eliminating the excess staffing that we discussed in our previous conference call. This has resulted in labor cost tracking to more historical levels without negatively impacting our average visits per patient per week.

In addition, 80 basis points of this improvement is the result of certain expenses which have historically been charged to cost of services, now being expensed into central support.

Effective October 1, 2006, management realigned certain processes related to hospice program support such as recruiting and information technology. These processes and related expenses were centralized effective at the beginning of the fourth quarter of 2006 and are now incurred and controlled at VITAS Corporate and classified as selling, general and administrative expenses.

In the first quarter of 2006, approximately $1.3 million of these expenses were classified as cost of services. Central support costs for VITAS totaled $15.9 million which is an increase of 20.3% over the prior year quarter, and a decline of 3.2% sequentially. Adjusting for the reclassification of expenses I just noted, first quarter of 2007 central support costs increased 9.4% over the prior-year period.

Now, let's turn to the Rot-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $86 million for the first quarter of 2007, 11% higher than the $78 million reported in the comparable prior-year quarter. Net income for the quarter was $9.5 million, an increase of 32% over the prior year. Adjusted EBITDA in the first quarter of 2007 totaled $16.3 million, an increase of 28% over the first quarter of 2006 and equated to an adjusted EBITDA margin of 18.9%. This is an increase of 251 basis points when compared to the prior-year period.

Job count in the first quarter of 2007 increased 1.9% over the prior-year period. Commercial jobs decreased 3.6%. Residential jobs increased 4.5%.

Commercial plumbing job count increased two tenths of one percent and commercial drain cleaning decreased 4.3% over the prior-year quarter.

Residential plumbing jobs increased 14.6% and residential drain-cleaning jobs expanded seven tenths of one percent when compared to the first quarter of 2006.

Roto-Rooter company-owned and operated territories are divided into four regions. During 2006, all four regions were challenged in various areas of the Commercial segment. As of the first quarter of 2007, only one region is struggling commercially. This region accounts for over 100% of the commercial job count decline and is the only region to post a decline in residential job count during the quarter. Management is focused on correcting the issues impacting this region and improving both commercial and residential job count growth.

Our updated 2007 guidance is as follows:

VITAS is estimated to generate full-year revenue growth from continuing operations, prior to Medicare Cap, of 10% to 12%, increased admissions of 4% to 6%, increased Average Daily Census (ADC) of 8% to 10% and adjusted EBITDA margins, prior to Medicare Cap, of 13% to 14.5%. This guidance assumes the hospice industry receives its full Medicare basket price increase of 3.6% in the fourth quarter of 2007. Full-year Medicare contractual billing limitations are estimated at $3.8 million.

Roto-Rooter is estimated to generate an 8.5% to 9.5% increase in revenue, job count growth between 0.5% and 1.5% and adjusted EBITDA margins in the range of 18.5% to 19.5%.

In the Company's press release dated April 4, 2007, Chemed announced the conditional redemption of its $150 million 8-3/4% senior notes which are due in February 2011. This redemption is conditioned upon the completion of one or more financing transactions to be completed by the Company prior to May 4, 2007. We anticipate closing on a new Bank Credit Facility that we'll use to fund this redemption on or before May 3, 2007. Based upon preliminary terms of this Bank Credit Facility, and assuming the redemption noted previously as completed, this refinancing is anticipated to be accretive to 2007 earnings by $0.08 per diluted share, or on an annualized basis, $0.12 per diluted share. This excludes any related charge associated with the early extinguishment of debt.

The Company has purchased approximately $54 million dollars of Chemed stock since the announcement of its intent to repurchase shares in 2006. At March 31, 2007, the remaining share repurchase authorization totaled $13.6 million. Chemed's board of directors has increased this stock repurchase authorization an additional $150 million, resulting in $163.6 million authorized for future Chemed stock repurchases.

Based upon these factors, an effective tax rate of 38.5%, with an average diluted share count of 25.9 million shares, our estimate is that full-year 2007 earnings per diluted share from continuing operations, excluding expense for stock options and other long-term incentive compensation, gain on sale of building, early extinguishment of debt or any other charges or credits not indicative of ongoing operations, will be in the range of $2.85 to $3.05.

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

Thank you, David.

VITAS generated a record 14,110 admissions in the first quarter of 2007. This was a 6.2% increase over the fourth quarter of 2006 admissions and a 2.4% increase when compared to the prior-year quarter. These comparisons are on a continuing operations' basis. However, the prior-year quarter was exceptionally strong. If we can maintain our historical quarterly admissions pattern, admissions growth should average between 4% and 6% in 2007. April admissions, although still preliminary, should be up about 6%.

Average daily census in the quarter increased 9.9% to 11,309. VITAS' average length-of-stay was 76.9 days and the median length-of-stay was 13 days.

VITAS, first and foremost, is focused on providing quality patient care. Every operational decision we make always takes into consideration the impact these decisions will have on the care we provide to our patients and their family members.

However, there are always opportunities to improve patient care and at the same time allow VITAS to become more efficient. The three key areas VITAS is concentrating on in this regard are admissions, staffing ratios and managing within Medicare billing limitations.

We continue to focus on educating referral sources and the community to the benefits of hospice. VITAS tailors its approach to these communities based upon whatever unique issues may be impacting individual markets. At the end of the first quarter of 2007, VITAS employed 216 sales representatives, 103 admission coordinators and 261 admission nurses.

Admissions by a major diagnosis continues to be relatively stable with 33.6% of our first quarter admissions being cancer related, 18.9% neurological, 13.3% cardio, 7.8% respiratory and 26.5% being in the "all other" category.

As David noted earlier, we made solid progress in reducing the impact of Medicare Cap in the first quarter. Through a combination of increased admissions, low median length-of-stay in certain programs and merging hospice programs when opportunities allow, all of our programs have a cap cushion greater than 10% through the first five months of the 2007 cap year except one. This program has a cap cushion between 5% and 10%.

We have also reviewed the impact of CMS's decision to recalculate the 2003 and 2004 cap years to correct for an administrative error in their calculation of the per patient cap benefit. Based upon our analysis, we do not expect any liability related to this issue.

Our staffing ratios have been brought back into line with our historical levels. In addition, we continue to average more than 5.5 visits per patient per week, well above the industry norm.

Our nursing staff decreased 3.9% sequentially to 3,337. We currently have 190 hospice teams which compares to 182 teams in the prior year quarter and 186 teams in the December 2006 quarter. Our employee turnover remains fairly constant at 25% to 26% on a trailing 12-month basis. Salary increases remain in line with our expectations and are averaging around 3.6% on an annual basis.

The first quarter of 2007 had 1,017,774 days-of-care. This compares to 926,125 days-of-care in the first quarter of 2006, an increase of 9.9%.

We currently have six programs classified as start-ups; five are licensed, four of which are Medicare certified. These start-up programs had an ADC of 110 patients with revenues of $1.6 million and pre-tax operating losses of $818,000. In the prior-year quarter, these same programs had an ADC of 24 with revenues of $287,000 and operating losses of $514,000.

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

Thanks Tim and David. It's now appropriate for the group to respond to questions that the callers may have.

[OPERATOR INSTRUCTIONS] Your first question is from the line Kevin Fischbeck with Lehman Brothers. You may proceed.

Hi, good morning. It's actually Brendan Strong calling in on Kevin's behalf. There's maybe a few questions on guidance. The first one just related to ADC. You brought down your estimates regarding your guidance regarding ADC a bit, but you kept the admissions the same. So, you're implying longer lengths of stay. So just curious your thoughts on that and why you're still comfortable, or why you actually brought down the Medicare Cap assumption if length-of-stay is going to be higher.

A couple on this. One I'd just say, of course one quarter in we can nudge the numbers a bit and that's exactly what we did relative to the first quarter, as well as the anticipated trend line. So, literally just adjusting for three months out of twelve having actual results, as well as having a bit of a glimpse on April. Although, until we actually close out the month, the final mechanics of the operating performance of April is difficult to predict.

Relative to length-of-stay and Medicare Cap, keep in mind since Medicare billing limitations are on a program-by-program basis, you can't make any assumption on that regarding VITAS' overall length-of-stay. We actually had a very moderate increase of length-of-stay. Sequentially, a reasonable increase over the prior-year quarter, but really unrelated in terms of what we have to accrue for Medicare billing limitations; or in the case not accruing.

We did lower our estimate for full-year Medicare billing limitations from $10 million to $3.8 million. That's based on, as Tim described, a variety of factors, primarily the increase in admissions. It increased the higher acuity which ticked down our median length-of-stay. But more importantly, the fact that we now have zero Medicare Cap accrual five months into government's cap year; as well as we look forward in terms of the various current trend lines of programs, we don't see for the full year 2007, based on current trend lines, a Medicare Cap billing limitation. However, we have 41 programs, and of those 41 is it possible someone could have a severe break in trend line? That's always a possibility, and to remain conservative, we left $3.8 million of cap billing restrictions in our guidance. Ideally, we'd be able to pull that number down as we go into the next quarter, but right now we thought it was prudent to anticipate at least one program breaking trend line. Although at this point, we don't know if that will happen and we can't predict. We don't see any programs doing that. We'll keep that, though, in our guidance.

Okay, and then, maybe just a little bit more on some of the consolidations that you've done. If you could remind us if things were driven by cap issues and maybe how much of the estimated cap reduction or the reduction in cap --.

It's not -- it wasn't driven by a cap issue. In this case, it's just really literally coming down to administrative efficiency and benchmarking. We have very robust systems. So, where it makes sense to do, where it improves the state's ability to manage the regulatory review of our programs, we've done it. We've done it in three states. I'd be very surprised if a year from now we haven't done it in 13 states.

Could you just remind me how many programs that actually covered?

We're going to say, or actually I'd say we're talking about five markets.

So in five markets you went down to one provider number?

No, not necessarily down to one provider number. We've consolidated.

You've consolidated five markets. Okay, thanks a lot.

You're welcome.

Your next question is from the line of Jim Barrett of CL King & Associates. Please proceed.

Good morning everyone. Kevin, could I ask you how active the Company currently is on the acquisition front in both hospice and plumbing? Specifically in hospice, to what degree has the, you know certainly the difficulties that we're seeing with your publicly-traded competitors, has that reduced the multiples being paid for the sort of businesses you're looking at?

Let me respond to the first part of your question, that is how active are we. I'll talk about hospice first; not very active. To the extent that there are opportunities available for purchase, there continue to be. But again, we have a high hurdle and we see too many multi-site opportunities that basically have some good with the bad. At this point, we just don't see any reason to take on some of those problem units.

I mean we had a problem taking on a problem -- we had a problem taking on kind of a listing program in Phoenix and we're not looking to recreate that; once burned, twice shy. But to the extent that if we saw the right opportunity, that is a program that fit our general profile, or a series of programs that fit our general profile, we'd move fairly aggressively. As I've said, and I don't want to sound like a broken record, if it was a large program we'd be interested in it; a large urban program. That is, a large not for profit under the right circumstance. We'd move very aggressively. We don't see that type of opportunity staring us in the face.

And having said that, when you talk about what's the valuation per census or what have you, there are not enough transactions to really measure that. For the right program, I think the valuations would be very high. It's supply and demand. You have few bordering on no financial players out there bidding unrealistic numbers for troubled programs; so to the extent that the demand has slackened the valuation for those programs. So we've seen some purchases over the years that we didn't quite understand why people would pay that amount, for the rumored amount for the programs for some of the transactions that did occur. And that type of purchaser, I think, is disappearing. So, hard to say on valuation. But it's just given the fact that you haven't seen too many transactions lately that would be indicative of a change in valuation, I don't want to comment too much, any further on that other than to say that no, between now and the end of the year I don't anticipate any blockbuster acquisitions on the hospice side.

With regard to Roto-Rooter, a similar story. We continue active on the smaller level acquisition, as it's rare that we are not reviewing a potential acquisition that involves a purchase of a franchise of a smaller size that's appropriate for our contractor operations. Generally, I mean and that is a group that we've been very pleased with the results on.

But no action on the large, multi-site franchisees at this point. So, again, unless there'd be something, a big change, I wouldn't anticipate anything breaking this year in that regard either.

Okay, thank you. Dave, you mentioned program consolidation going from three states to 13 states possibly in a year's time. Should that change our assumptions about SG&A within VITAS? Are there significant savings to be had there?

There's efficiency in terms of management and monitoring, but not in a dollar and cents statement from that same point. But, I think the important thing is to recognize that each state has its own regulatory environment and infrastructure. As we have conversations with states, the goal is to make sure as we talk to the individual states, they want to make sure there's good hospice access, quality hospice for all of the population of their state. And they certainly are recognizing now that rural markets have less access to hospice than urban markets. And so the states where their regulations allow, or they can evolve the regulation, if they can open up their world programs such that hospice access can be provided under a state license that covers an urban market, the state wins and the population wins by having available hospice to those markets and then the provider can get paid for it. So the states are very, very conscious of the unintended consequences of the cap results in certain markets, not having fair access to hospice care, and that's really where the evolution of this is coming from. But, it's a slow process and it's a process we work with in the infrastructure. And where it makes sense for the patient, for the regulatory bodies and for us, we intend to do it. Now, I say we'll have discussions with a lot of different states. The end result of those discussions will be decided on a community-by-community basis.

Okay. Thank you very much.

Your next question is from the line of Kemp Dolliver with Cowen & Company. You may proceed.

Hi, thanks. A couple of questions. Number one, with the start-ups I want to get some color on anything with regard to that's influencing the amount of impact they have. It looks like the incremental benefit from the start-ups is about 1%. I think historically you all have been hoping to see about 2%. Is there anything that just is subtle with regard to say the timing of these openings or anything of that nature that would make this more of blip, versus something that's a longer term trend?

Well, this is Tim. I would say that whether it's the 1% or 2% you're correct. We'd like to have a meaningful program. We have probably slowed it down just a tad in the last couple of quarters. As we mentioned in our last call, we are actually accelerating some start-ups in a group of satellite openings in the Company that we'll be able to talk more about as the summer unfolds. As our base of revenue and ADC gets higher, we'll probably get less growth than more out of that. So, maybe where we're getting 2% now we're getting 1% we're just a bigger company and haven't accelerated the effort. But we have a strong start-up program. We're focusing on large cities, large opportunities; and to leverage off our infrastructure in large locations where we can go out 50 or 100 miles, again with appropriate licensing and whatnot, and accelerate from our infrastructure at a lower cost. But really over several years you continue to build census and penetrate those markets. So, not a big change, but yes, we're probably going to see a little smaller impact to the total company from that as we move forward.

Okay, that's helpful. The other question relates to the two programs that are in continuing operations that were the source of your cap problems last year. My recollection is there were some oddities with regard to some of the operating situations in at least one, if not both of those cases. Is there anything that you all have done in the past 12 months to essentially prevent, put in some protection that would prevent a recurrence of those types events; say if a salesperson, key salesperson leaves the program, etc.

That was one of the issues on one of the programs, but I think that's an anomaly. But basically, we've increased the admission focus. We've gone harder after shorter-stay patients. Both of the metrics remove fundamentally on their own within the individual community. One of them actually, as well as completely got out of cap on its own fundamentals, is basically going to be merged into a single provider number. So, it's a combination of just increased individual metrics. Certainly, the opportunity under a single state license to consolidate helped one of the programs in the first quarter. But basically, it's a lot of blocking and tackling at the community level in terms of our focus on our referral sources, focused on our admissions' personnel, and the reputation within the community, so.

Let me answer, respond to one thing and say that to your question could a similar happen again with a similar type program. The answer is yes, because the issue if a program is growing but still small to middle size, it's still vulnerable to relatively -- the cap as to relatively small deviations in admissions' trend to having a big impact on cap. Again, if you're in one of these vulnerable stages to one of these fast-growth programs, it could happen. It's beyond anything we can do other than we watch it very carefully. To the extent that we're, and states are allowing us to move a little more aggressively in merging programs, there are fewer vulnerable-sized programs I guess is really what it comes down to. But to answer your question, we haven't done anything that could say let's make sure we don't lose a key employee. We never want to lose a key employee like that, but there's no magic to it. I mean that's one of the risks. Could that pop up and is that's why we still have a cap accrual in our guidance? That's one of the reasons.

But I'd say that a key point, too, is our definition of a cap cushion has gotten very conservative since last year and it's just based on first-time Medicare admits going against 100% of the Medicare revenue, and it's ignoring any transferred-in patients that we might take. So from that standpoint, we're very comfortable with the direction things are going. It's not without risks, but we think we've minimized that risk.

Just briefly, how are you booking the cap credit or accrual with the transfer patients. You mentioned, I guess, patients coming in, but if a live discharge goes out, how are you handling those?

We also ignore that. The vast majority of the live discharges actually either re-enter our program or don't enter another program. So, in the vast majority of cases, except for a very, very, very unusual market, the not taking credit for any transfers in will be much greater than the live discharges out. So we think that's why it's conservative. The assumption is the transfers in will have more of a benefit than the live discharges out.

That's very helpful. Thanks.

Let me add one thing, and I don't just like to mention Phoenix, but when base is the unusual market, it's hard for us to predict this type of effect on our business with regard to Phoenix, because as I say, it was a reverse. In that market, a large majority of our discharges, or our live discharges went to other programs eventually. It was exactly flat, and to the extent that was one part of the experience and it was just hard to deal with. But again, so we're aware that that type of market can exist, but we don't see it generally in the areas we now are operating.

Your next question is from the line of Kurt Streckvis [sp] with Stifel Nicolaus. You may proceed

Good morning. This is Kirk Streckvis on Eric Gommel's behalf. You guys have seen some solid margin improvement in the Roto-Rooter business and I just wanted to know how sustainable you think those margins are going to be going forward.

We feel the margins are sustainable, but the growth we absolutely anticipate slowing down in the margin expansion. Kevin and I like to say this is as good as it gets in terms of a technician workforce that's commission based. The gear is we're getting some leverage on our fixed or semi-variable costs, insurance, healthcare, the call centers; but we fully anticipate the margin growth to substantially slow down. But in terms of the margins we're currently achieving, we consider it very sustainable.

Okay. Just wondering if you could give a little color on what you're doing to get your labor costs down?

Relative to VITAS?

Yes.

Well, the labor costs coming down, as we mentioned to you in the last call, we had our labor too high in the fourth quarter of last year. So basically, as we moved into the January/February timeframe, we're down about 200 caregivers from our peak and that's the right number. So, we feel like we're in the right position today as we move forward through the summer, and the spring and summer here where we get nice growth, we'll be hiring up to that. But basically, we just managed it to the correct level from where it had gotten out of balance in the fourth quarter.

Okay, thank you.

Your next question is from the line of Matthew Ripperger with Citigroup. You may proceed.

Hi, thanks very much. This is Jean Faust [sp] on Mat Ripperger's team. A couple of questions here. Just looking at your admissions' growth for April being 6% and very strong in terms of the comparison a year ago, can you maybe talk about what is the admissions' growth for Florida programs and non-Florida programs?

Jean, we don't release the information on a state-by-state basis. But I will say in general, our larger program will grow at a lower rate than our smaller programs.

Okay. Next question, related to the programs that you are merging, or potentially merge in the future, do you -- are they in CON states? When you do that, the only difference is billing, or do you need to give up your license?

Well one, a CON states have a process where you can combine programs where it makes sense, and there are multiple states with CONs; some of them more restrictive than others. But basically, you would give up a state license and you would give up the related Medicare provider number when you through this merging process.

I think as Dave said as well, every state's different and every situation's unique to our market opportunity. In several situations we've merged and in some cases you do give up a license for that territory, but then the other license allows you to operate in that territory. In one case what we've done, is given up a merged license, but then we move the address of that license to a new territory which was allowed under that particular state law. So each state is different. We're focused very much on the rules in each state and then what we can do that's in our interest, and as we've highlighted, constantly in the interest of the regulators to provide benefits to them as well, and the patient care does not change at all.

Okay. Last question on the G&A front for the VITAS business at $56 million plan rate. I think that's what you said?

: That was the 2006 investment.

Okay. What is the outlook for 2007, trying to just see how much of a leverage you can get from that G&A cost?

We think some of the leverage is going to dissipate that we've enjoyed the last couple of years. Part of it is kind of a re-engineering internally that's largely transparent to the street. But we anticipate being up probably, once we pro forma out the cost of the services and SG&A issue, 8% roughly for a full year.

Okay, thank you.

We'll continue to get some leverage, but not nearly to the great extent we did in earlier years. To a certain degree it's the law of larger numbers are kicking in.

Thanks very much.

Okay. I believe that's our last question. I thank everyone for their attention and I guess I said the same thing last time. We're off to the start of another quarter and we anticipate continued strong results. I thank you for your attention.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.