Chemed Corp (CHE) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Chemed Corporation's second quarter 2007 conference call. My name is Michaela and I will 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 speakers' remarks there will be a question and answer period. I would now like to turn the call over to Sherri Warner, with Chemed Investor Relations. Please proceed, ma'am.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2007 ended June 30, 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 August 1, 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 August 1, 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, 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 second quarter 2007 conference call. I will begin with an overview of the quarter. I will then turn over the call to David Williams, Chemed's Chief Financial Officer, for 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 discussion on some of our hospice metrics. I will then open up this call for questions.

Chemed had an excellent second quarter in terms of revenue and earnings. Revenue in the second quarter of 2007 totaled $271 million, and net income from continuing operations was $9.4 million. This equated to diluted earnings per share from continuing operations of $0.38. If you adjust for costs associated with our refinancing and certain items that are not indicative of ongoing operations, earnings per diluted share were $0.79 in the quarter, an increase of 55% over the prior year.

In the second quarter of 2007, our VITAS subsidiary recorded revenue of $186 million, and generated net income of $14.2 million. Adjusted EBITDA for VITAS totaled almost $25 million in the quarter, equating to a 13.4% margin. We did not have any billing limitations or Medicare Cap in the quarter.

I remain very cognizant of our need to continually demonstrate that Medicare billing limitations can be managed. With that said, I'm encouraged by our success in this regard over the past three quarters. However, as long as the current Medicare hospice reimbursement structure remains in place, VITAS will always be at risk of not being paid 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.

We have good developments in regard to the qui tam, or whistleblower, action filed against us shortly after we completed the acquisition of VITAS in 2004. As most of you know, this action was brought against us by a former employee, who alleged that VITAS inappropriately billed Medicare and Medicaid. The focus here was implicitly on length of stay. Per the National Hospice and Palliative Care Organization, 50% of all patients are discharged or die within 23 days after admission, and 90% are discharged in 180 days or less. This also means that one out of every ten patients admitted to hospice will live beyond six months. We refer to these patients as statistical outliers. VITAS' length-of-stay statistics, which include over 50,000 admissions per year, are well within these industry norms. In the opinion dismissing the complaint with prejudice, the Court noted that the plaintiff's allegation hinged on the misconception that evidence of lengthy patient participation in hospice was sufficient to raise the inference of fraud. The Court also noted that the plaintiff did not allege a single fact that would support their alleged knowledge of fraudulent behavior so, overall, a good development.

Now let's turn to Roto-Rooter, which had an excellent second quarter, generating $86 million in revenue, earnings of $10.7 million, and an adjusted EBITDA of over $18 million. This equated to an adjusted EBITDA margin of 21.1%.

Both VITAS and Roto-Rooter are operating fundamentally sound business models. Although there are risk factors impacting both segments, we believe these risks are manageable and Chemed is well positioned to continue to generate strong revenue, earnings and cash flow growth in 2007 and 2008. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. VITAS had net revenues of $186 million dollars in the second quarter of 2007, which is an increase of 8.3% over the prior-year period. VITAS is generating significant growth in its routine home care segment, with days of care increasing 7.4% and revenue increasing 11.6% over the prior-year quarter in this revenue segment.

However, this increase was partially diluted by relatively flat revenue growth in our higher acuity levels of care. Continuous care and inpatient days of care declined 2.5%, and the related revenue from this care declined 0.8% in the quarter. The impact of this mix shift is magnified, since routine home care has an average reimbursement of $141 per day, as compared to our reimbursement of approximately $610 per day in our higher acuity settings.

These higher acuity settings of care are not growing at the same rate as routine home care. The higher acuity settings usually involve care that is episodic in nature. What this means is that the majority of the days of care in higher acuity settings involve patients in routine home care that have an issue that require continuous or inpatient care for typically three to seven days. Once the medical issue is resolved, the patient would then be transferred back into routine home care. As patients elect to enter hospice earlier and earlier into their terminal illness diagnosis, it does not necessarily result in an equivalent expansion of these episodic events. Accordingly, we anticipate routine home care to continue to grow at a somewhat faster rate than the high acuity settings.

As of June 30, 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 qualify to bill Medicare under a single provider number. All of VITAS' hospice programs have 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 of 5% and 8%, respectively. The same analysis through the first eight months of the 2007 government cap year results in all of VITAS' Medicare provider numbers having a cap cushion greater than 10%, with the exception of two programs. These programs have a cap cushion of 7% and 8%, respectively.

Gross margin in the quarter was 22.1%, which is a 180 basis point improvement over the prior year quarter. Approximately 90 basis points of this improvement is a result of VITAS managing labor costs to more historical levels. Our management of labor has improved significantly over the past year. However, as a result of unpredictability in terms of census by program, by level of care, we anticipate a small amount of variability in margins quarter over quarter.

During the second quarter of 2007, VITAS' direct care margins for routine home care was 51.1%. This compares to 49.5% in the prior year quarter and 50.8% sequentially. Direct in-care margins in the quarter-- direct inpatient margins in the quarter were 18.9%. This compares to 20.9% in the prior year and 20.1% sequentially. Continuous care, the least predictable of all levels of care, had a gross margin of 17.7% in the quarter, which compares to 20.3% in the prior year and 20% in the first quarter of 2007.

The remaining gross margin improvement during the quarter is the result of $1.6 million of expenses that had historically been charged to cost of services and are now expensed into central support. Effective October 1, 2006, management realigned certain processes and expenses related to hospice program support. These processes and related expenses were centralized effective the beginning of the fourth quarter of 2006, and now are incurred and controlled at VITAS corporate, and classified as selling, general and administrative expense. In the second quarter of 2006 approximately $1.6 million from these expenses were classified as cost of services. These expenses were charged to central support in the second quarter of 2007. Central support costs for VITAS which are classified as selling, general and administrative expense in the consolidating statement of income totaled $16.3 million, which is an increase of 18.7% over the prior year. Adjusting for the reclassification of the expenses noted above, second quarter 2007 central support costs increased 6.3% over the prior year.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $86 million for the second quarter of 2007, 11% higher than the $78 million reported in the comparable prior-year quarter. Net income for the quarter was $10.7 million, an increase of 53% over the prior year. Adjusted EBITDA on the second quarter of 2007 for Roto-Rooter totaled $18.1 million, an increase of 42% over the second quarter of 2006, and equated to an adjusted EBITDA margin of 21.1%, which is an increase of 469 basis points when compared to the prior-year period.

Job count in the second quarter of 2007 increased 1.6% over the prior-year period. Residential jobs increased 6% and commercial jobs declined 7.4%. Residential plumbing jobs increased 14.7% and residential drain cleaning jobs expanded 2.2% when compared to the second quarter of 2006. Residential jobs still dominate Roto-Rooter's demand and represent approximately 70% of total job count. Commercial jobs decreased 3.8%-- commercial plumbing jobs decreased 3.8%, and commercial drain cleaning declined 8.7% over the prior-year period. Management is focused on correcting the issues impacting the commercial sector and improving commercial 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 9% to 11%. This range is one percentage point lower than our previous guidance, to reflect the revenue mix shift of routine home care noted earlier. Admissions are estimated to increase 4% to 6%, average daily census to increase 8% to 10%, and adjusted EBITIDA margins, prior to the Medicare Cap, of 13.5% to 14.5%. This guidance assumes the hospice industry receives its full Medicare basket price increase of 3.3% in the fourth quarter of 2007. Full-year 2007 Medicare contractual billing limitations are estimated at $2.5 million pretax.

Roto-Rooter is estimated to generate an 8.5% to 9.5% increase in revenue in 2007, job count growth between 0.5% and 1.5%, and adjusted EBITDA margins in the range of 19% to 20%. Based upon these factors, an effective tax rate of 38.5% and an average diluted share count for the second half of 2007 of 24.5 million shares, our estimate is that full-year 2007 earnings per diluted share from continuing operations, which excludes early extinguishment of debt, expense for stock options, and other long-term incentive compensation, gain on sale of building, or any other charges or credits not indicative of ongoing operations, will be in the range of $3.10 to $3.20 per share.

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

Thank you, David. VITAS generated 13,658 admissions in the second quarter of 2007. This was a 5.2% increase over the second quarter of 2006. On a year-to-date basis, admissions have increased 3.8%. If we can maintain our historical quarterly admissions pattern, admissions growth should average between 4% and 6% in 2007. July admissions, although still preliminary, should be up approximately 4% to 5%. Average daily census in the quarter increased 6.6% to 11,406. VITAS' average length of stay was 76.6 days, and the median length of stay was 13 days. Our days of care totaled 1,037,968 in the quarter. Our routine home care days increased 7.4%. Inpatient days of care increased 2.1%, and continuous care days declined 6%.

VITAS first and foremost is focused on providing quality patient care. Our operational decisions always take into consideration the impact on the patient and their family. 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.

At the end of the second quarter of 2007 VITAS employed 230 sales representatives, 110 admission coordinators and 274 admission nurses, and we continue to focus on sales recruiting, training and ongoing support to the sales representatives. Admissions by major diagnosis continues to be relatively stable, with 36% of our second quarter admissions being cancer-related, 18% neurological, 13% cardio, 8% respiratory, and 25% in the all-other category.

As Kevin and Dave noted earlier, we continue to effectively manage within the Medicare Cap. Through a combination of increased admissions, lowering our 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 eight months of the 2007 cap year, except for two programs. These two programs have cap cushion of 7% to 8%.

Our staffing ratios continue to stay in 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 staffing-- our nursing staff remained relatively flat sequentially, totaling 3,340 at the end of the second quarter. We currently have 193 hospice teams, which compares to 181 teams in the prior-year quarter and 190 teams sequentially. Our overall turnover remains fairly constant at 25% to 26% on a trailing 12-month basis. Salary increases remain in line, and are averaging around 3.5%.

We currently have six programs classified as start-ups. Five are licensed, three of which are Medicare-certified. These start-up programs had an ADC of 93 patients, with revenues of $1.1 million, and pre-tax operating losses of $1.2 million. These same programs had an ADC of 26, with revenues of $328,000 and operating losses of $450,000 in the prior-year quarter. The prior- year quarter had operating losses of $902,000 for programs classified as start-ups at that time.

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

Thank you, Tim. I would now open this teleconference to questions.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Kevin Fischbeck. Please proceed.

Good morning. Thank you. I wanted to ask you a couple questions on the cap. You mentioned that you received some benefit from consolidating sites. How many sites did you consolidate, and is there any way for you to quantify what your cap might have been if-- or what your cushion might have been if you had not consolidated those sites?

And this is Dave Williams, Kevin. Last quarter actually, zero wouldn't have made a difference. We haven't even looked at it this quarter. I don't know, I mean the actual-- all the numbers-- all the metrics we're looking pretty good. To a certain extent it's kind of moot. We don't go back and then subdivide, whether it's Jersey, Florida, Illinois. It's certainly helping even out cushion, but we don't even look at it that way. But the last quarter zero, this quarter we didn't even look at it.

Okay. And so how many sites have you consolidated, and is there more room for site consolidation from here? Or is that pretty much done at this point?

Probably over the last year roughly eight provider numbers, seven provider numbers, might have disappeared, roughly. And it's going to be an ongoing process. For example, if we open up a De Novo site, and if we're-- we won't even get a new provider number. We'll just cover it under that current state license, if we're allowed. So it's going to be a continuing-- it's a process.

Okay. Is there an opportunity at any of the sites below 10% cap cushion to consolidate, or is-- are those not--

Could you say that again, please?

For those two sites that are below 10% cap cushion, is there opportunity to consolidate with them or something? Or are those freestanding?

Actually, there could be opportunity on those as well.

Okay. And then the last question I had before I jump off is your guidance assumes 8% to 10% ADC growth. You only did about 6.5% this quarter on a same-store basis, 8% in the first half. And I know Tim mentioned that seasonal patterns might imply that admissions pick up in the second half, but I guess-- what are you seeing there? What gives you confidence that you're going to be seeing that ADC and that admission growth to get you into your guidance in the second half of the year?

Actually, pretty reasonable. Right now, on a year-to-date basis, our admissions are up, say 3.8%, and we're saying 4% to 6%, although we think we have some easier numbers to [lap] in Q3 and Q4. As well as-- we've actually-- although our admissions are up 3.8%, our discharges are actually a bit abnormally high. I think they're running year-to-date up about 6%- 6.5% or so. So we really expect that to stabilize, which will translate, hopefully, in slightly faster expansion of ADC than we saw in the early part of this year, the first half of 2007. So I think it's actually very realistic.

Okay. Thanks.

Our next question comes from the line of Kemp Dolliver with Cowen. Please proceed.

Hi. Thanks, and good morning. The discussion regarding the mix change I guess strikes me as pretty straight-forward, given that the high acuity patients are shorter length of stay, and you've probably penetrated those markets. Yet the margins in continuous and inpatient were down, and some of the slowdown, I think, particularly in the continuous care, was a bit pronounced this quarter, versus recent quarters. Is there any other color you can add to your comments regarding the mix shift?

This is Dave Williams. Not really. Actually, if you look at the margin for both inpatient and continuous care over the last six quarters, both of these aren't the low point. It's actually within the corridor of the normal fluctuation, at the low end of where we'd like to see it, but it's actually not abnormal. And because we're still dealing with a relatively small patient census within these categories, just the volatility, say in inpatient relative to the occupancy, we're trying to schedule the labor and you could have [stranded] labor costs or contract labor on continuous care. We're going to see this type of fluctuation on a regular basis, but it wasn't outside the norm, the low end of where we'd like to see it, but not outside the norm, on both of those high acuity categories.

And then just any color on the, particularly the continuous care census?

Well one thing that's probably important is we did open a couple of new inpatient units in the quarter, and had some modest cost to do that, probably less than $100,000. The continuous care and the inpatient kind of work in tandem, so sometimes when you open up new inpatient units your census in continuous care in that market goes down just a bit, where you didn't have that available before.

It also has to do with the number of days that they're on continuous care. As Dave explained, normally between three and seven days, so that's just based on the needs of the patient, what the plan of care requires for them, and it's hard to predict. But the ranges that we're talking about aren't really substantial. We're doing very well in all of these niches. The inpatient units, we have 27 or 28 now, and looking to add more over time. And we're meeting the needs of the markets we serve and, again, to reinforce, many of our continuous care programs are in some of our new small markets and, as those markets mature, we'd expect the margins in the markets there to go up a little bit and our overall margin to improve in continuous care.

Okay. That's great. And you operated how many locations at the end of the second quarter?

We have 44 locations right now.

Great. Thank you.

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

Good morning. This is Kirk Streckfus on behalf of Eric Gommel. Just a couple questions for you. First, what are your plans to drive top-line growth in the future? And do you see any potential for acquisitions?

Well let's first answer with regard to VITAS. Tim?

Great. I mean as far as top-line growth, we've mentioned in a couple of quarters that we have really tried to enhance our selling effort by being more aggressive in the number of sales people we hire, the quality of the sales people we hire-- tried to improve our training programs for them, our ongoing sales administrative support for them. We're in tandem with that. We're enhancing our marketing efforts, going into the communities with some commercials and higher advertising. We have community liaisons that are out in the system educating people about hospice. So, again, our view is to continue to accelerate the sales effort that obviously needs to be backed up with very high level of patient care and service levels. We think we're doing better than ever before at the quality of the service and the service we provide. So we intend to take market share in the future by enhancing the selling and the marketing effort in providing great quality care.

As far as acquisitions, we see no big change there. We're always looking for niche regional acquisitions, and we're still in the discussions from time to time with people. But we don't see any big move there necessarily. It's pretty much what you've seen in the past, and our answers are the same.

In other words, we have the wherewithal available to buy them. It's just the type of programs that we'd be interested-- we're just not seeing on the market at this point. We're not being outbid for them. We're just not-- they're just not currently on the market. So I wouldn't see that in the next couple quarters as having a big impact on our revenue-- rate of revenue increase.

And with regard to Roto-Rooter, again we're talking about a fairly basic business with, all things being equal, single-digit sales increase expectations. We're constantly in negotiations to buy franchises from here and there, but not in active negotiations with any of our large multi-site franchise holders.

Okay. What do you have left on your repurchase authorization, and are you planning on to continue buying back shares?

There's roughly $50 million left, maybe a hair more, on the repurchase authorization.

Okay.

We'll be opportunistic at that level, as well as relative to we would like to pay down debt as early as possible in regards to the bank term note. So we'll balance that out.

Okay. That's it. Thank you.

Our next question comes from the line of Matt Ripperger with Citigroup. Please proceed.

Hi. Thanks. This is Jie Bao from Matt Ripperger's team. Just a couple of questions here. Going back to the margin decline in the inpatient and continuous care segments-- realizing there are strategic value to those services in terms of managing the patient mix and marketing to physicians. But just on the margin side, are you doing anything operationally to hopefully improve the margins in the second half of the year?

Well, I mean we mentioned in our presentation there's always room for efficiencies. So we always study the most efficient way to run these programs and a lot of it has to do with your ability to use your full-time staff versus outside part-time staff and agency use, which is very minor as a percent, but it impacts the margin. The biggest issue really is where we select, as I mentioned, to have a continuous care program in a small operation, maybe a location that has under a hundred census, that maybe only has three or four patients on continuous care. We have numerous of those because of the start-ups that we have put together in the last several years. As the patients under the continuous care program grows to six, and eight, and ten, as the census of that location goes from 100 to 150 to 200, the margins improve. So as that occurs the margins will improve.

On the inpatient level, as you mentioned, there is a lot of strategies necessary and, behind all this, first and foremost, we provide inpatient units to give these patients and their families the appropriate service that they deserve, to have them near to where they reside, to have numerous ones in the city, and so forth. So that's the first decision. As far as the margin, as I mentioned, we had two new locations in the quarter that had losses in the quarter, that as they mature they will help us and the margin will improve. Now, on the other hand, we may be developing new ones in the future, and the margins will be impacted by that. We all know that the Medicare Cap is important, as we mentioned in our strategy. And inpatient units provide high level of admissions, of high acuity patients, and that's very, very important-- for us to manage the Medicare Cap as well. So all said, I expect the margins to improve in both those categories, but there's no problem out there that can be fixed quickly just to turn them around, as far as the margin.

And Jie, let me add just one point-- this is Kevin McNamara. I would say in many respects we take these margins as we find them. I mean the strategic implications regarding these two lines of service so overwhelm the financial aspects. To give you an example, in almost every market, if we wanted to improve both, what we would do is we would have all the continuous care people go inpatient. That would be more convenient for us. Our occupancy would go up. Our margin in the inpatient would improve dramatically, and the logistical nightmare of providing continuous care out in the field would largely disappear. We don't do that because of, again, the importance on giving convenient care to what the patients-- the patients' families prefer. That overwhelms the financial side of it and it has bound-- as Dave said, it gives us a corridor in which we operate for these margins, which are lower than our base business. But they're both profitable and it's something that, as long as we're within that corridor, we say, well, we can live with that. But as I say-- so in other words, we just don't focus on the financial aspects. We'd like them to improve, but the strategic limitations that we operate under just overwhelm all other considerations.

And Jie, to demon-- this is Dave Williams. To demonstrate the norm, for example, on inpatient over the last six quarters, inpatient direct care margins have been as high as 23.1% and as low as 16.5%. This last quarter inpatient margins were at 18.9%. So again, a hair lower than we prefer, but well within the norm over the last six quarters. Continuous care is actually at 17.7%, and that's been as high as 20.3% and as low as 17% over the last six quarters, and again, at 17.7%, in the norm. So, as Tim said, to a certain extent I guess we exacerbate a little bit of this problem as we expand inpatient capacity, and it'll come out in occupancy and inpatient or we'll lose some of the days of care in continuous care as they're more appropriate on inpatient. But again, it's very manageable. The rate of growth and our capacity is nice, and the margins still are very acceptable.

Mm hmm. Okay. And on the Roto-Rooter segment, I think you gave the job count contribution from residential services of 70%. Do you have the revenue contribution?

I don't have that handy but, because commercial accounts typically have more revenue, it's going to be more diluted. So it will be under-- it will be more than 30% in terms of revenue. But it's probably worthwhile to point out at this point too, a lot of the what I'll call leakage on the commercial jobs have been our very low price jobs, in some cases only about $100, on some camera work that we're no longer doing in several markets. So in a lot of cases the commercial leakage has been in low-revenue, low-margin jobs. Now we'd just as soon have those jobs, but it doesn't concern us if-- and I'd say about 30 to-- about 30% of the leakage in terms of the job count decline was due to that-- these low priced jobs.

And let me add one thing also with regard to that. Yes, we have a lot of focus on the commercial side of the Roto-Rooter business, and we mother-hen that very significantly. However, when we see the demand-- the increase in demand on residential plumbing, like we have, it creates a problem for a company with a relatively fixed labor force. We'd like more plumbers, but we have as many as we can hire. And to the extent that virtually every residential plumbing job is an emergency or near-emergency situation, when you have a fixed labor force what suffers is the kind of scheduled commercial work that can be put off. And that is something that's skewing the numbers and, when you combine it with what David's saying, an awful lot of leakage on the commercial side is isolated in one or two markets because of some unusual, or distinctive I should say, economic factor. It's not something that overly concerns us.

Okay. And just last question-- in terms of your De Novo programs, you mentioned that you have roughly 93 patient census currently. Where do you see that going next year, for the next year in terms of growth from these programs?

I would say this-- Tim, I'll let you jump in here but, generally speaking, we see the rate of increase for census dramatically higher than our Company average, just by definition. But we don't-- when you're talking about projecting on relatively small numbers like that, it's tough. But I would say this, that every one of those programs we believe have good potential ultimately to-- when you say over the next several years, every single one of those has the potential to go to census of 300, 350 within the foreseeable future.

Mm hmm. Right. And I guess there are a couple of companies out there, including pure-play, or a subsidiary of a healthcare services company-- they're looking for a strategic alternative. I guess if you're looking at your expansion plan and your corporate infrastructure, support infrastructure, is that something that you would consider in terms of your growth strategy?

Would consider as an acquisition?

Right. In terms of acquisition of a bigger platform. Some of the companies that are in the market now trying to evaluate their own alternative strategies in terms of selling, or (inaudible) the hospice.

We would look for any good location regardless of who owned it. So if someone has something available we would be interested in it if it meets our needs, whether it's a player that you're thinking of or anybody else. So-- but to answer your question about the growth expectations, keep in mind we report our De Novo's for one year as De Novo and then they merge into the base business. So a year from now we won't disclose the numbers on some of the new starts that have been in this pipeline for more than six months.

But to give you an idea, if you look out over a one-year period, first of all, as you know, it takes us a start-up period of time with investments in time before we can even take patients on. We have to be licensed under a survey. Then we take some patients on and the Medicare license occurs. Reviewing the files and the work around those patients takes sometimes anywhere from a month to a couple of months to happen. And then we're building the patient base by increasing the sales effort and having a large staff of people available to care for them. You could easily see a process where the census builds from 10 to 20 to 25 to 30 in the first three to four months, and then hopefully it would double from there by month nine, and hopefully within a year we're looking at 75 or 100 patients. So that's our thinking and that's what we've seen in numerous cases. Every market's different. But that's sort of the way it happens. So the percentage growth depends on the point in time you predict-- you pick to start the base from, so hope that helps.

And Jie, typically on acquisitions, the larger-- we'll look at everything and anything. But the larger a potential acquisition is, the more sites they have and the more states they are in, we have less of an appetite for that type of an acquisition because typically there's a number of programs we would prefer not to acquire. We'll always look at these larger ones, but it's very difficult to have it make sense.

Mm hmm. Okay. Thank you.

Our next question comes from the line of Josh Fenton with GAMCO Investors. Please proceed.

Good morning. Can you hear me?

Yes, Josh.

Yes, Josh.

Good. Great. Sorry. Just-- you might have been asked this already. I'm sorry if I missed it. On the share buyback, how much more of that is in your guidance?

Zero.

Zero. Okay. So anything you do this year will be incremental?

In the third quarter, that would be correct.

Okay. And just to-- you said your CapEx is running a little bit above last year on a six-month basis. Is that going to lessen in the second half or continue at a higher level?

We did have a large acquisition of durable medical equipment for utilization on the West Coast that shouldn't repeat itself in the second half of the year, so it should normalize.

Okay. Thank you very much.

Well with that, gentlemen, that's the extent of our questions. Thank you for your attention, and I'm gratified for the hard work for our operating executives this quarter, and thank you for your attention.

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