Chemed Corp (CHE) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Chemed Corporation's fourth-quarter 2007 conference call. My name is Stacey and I will be your conference facilitator for 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.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2007 ended December 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 February 21 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 February 21, 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, Executive 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 fourth-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. 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 consolidated revenue in the quarter totaled $286 million and net income from continuing operations was $20.2 million. This equated to diluted earnings per share from continuing operations of $0.83. If you adjust for non-cash items or items that are not indicative of ongoing operations, earnings per diluted share were $0.92 in the quarter, an increase of 26% over the prior year.

In the fourth quarter of 2007, our VITAS subsidiary had revenue of $197 million and generated income from continuing operations of $17 million. Adjusted EBITDA for VITAS totaled over $28 million in the quarter, equating to a 14.4% margin.

Throughout 2007, we have seen excellent growth in routine homecare hospice revenue. This level of care, which is provided in the patient's home, has expanded 11.2% in 2007. Partially offsetting this strong growth has been relatively flat year-to-date revenue growth in our high acuity levels of care, inpatient and continuous care.

The higher acuity settings typically involve hospice care that is episodic in nature. What this means is that the majority of the days of care in the high acuity setting involve patients in routine homecare that have medical issues that require continuous or inpatient care for roughly three to seven days. Once the medical issues are resolved, the patient would then be transferred back into routine homecare.

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 homecare to continue to grow at somewhat a faster rate than the higher acuity settings.

VITAS did not have any billing restrictions related to Medicare Cap for its fourth-quarter 2007 operating activity. As of December 31, 2007, we have not accrued any Medicare billing restrictions for the 2008 or 2007 cap years. VITAS measures its Medicare Cap cushion or Medicare Cap liability on a program-by-program basis. VITAS' 37 unique Medicare provider numbers. 29 provider numbers, or 78%, have a cap cushion greater than 20% on a trailing 12-month basis. Four provider numbers are between 15% and 20% and one is between 10% and 15%. Three provider numbers have cap cushion ranging between 4% and 9%. We have aggregate cap cushion in excess of $219 million on a trailing 12-month basis.

Roto-Rooter had a good fourth quarter, generating $89 million in revenue, earnings of $9.7 million and adjusted EBITDA of over $19 million. Adjusted EBITDA increased 10.5% and equated to an adjusted EBITDA margin of 21.5%. David will go into more detail on the operating metrics, but suffice it to say, Roto-Rooter's 2007 performance has been outstanding in terms of revenue, margins, profit and cash flow.

Both VITAS and Roto-Rooter are operating fundamentally sound business models that we believe are recession-resistant. Although there are risk factors impacting both business segments, we believe these risks are manageable and Chemed is well-positioned to continue to generate strong revenue, earnings, and cash flow growth in 2008 and 2009. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $197 million in the fourth quarter of 2007, which is an increase of 5.9% over the prior year period. This revenue growth was a result of increased ADC of 4.3%, a Medicare price increase of approximately 3%, partially offset by the continued shift in revenue mix from high acuity care to routine homecare.

In the fourth quarter of 2006, high acuity days of care was 8.68% of total days of care. High acuity days of care averaged 8.39% in the first quarter of 2007, 8.04% in the second quarter, 8.01% in the third quarter and 7.97% in the fourth quarter of 2007. As you can see, over the last three quarters, this has stabilized significantly.

This mix shift from high acuity care to routine homecare negatively impacted our revenue growth by $3.8 million in the quarter or took away approximately two percentage points of sales growth. Routine home care reimbursement averaged $144.97 and high acuity care averaged $632.49 per patient per day in the fourth quarter of 2007. Given this significant disparity in reimbursement per diems, any shift in days of care mix will have a noticeable impact on overall revenue. However, given the relatively low profitability margin on high acuity care, this mix shift had minimal impact on gross profit and net income.

Gross margin in the fourth quarter of 2007 for VITAS was 23.2%. This is a 70 basis point improvement over the prior year quarter. Selling, general and administrative expense was $17.3 million in the fourth quarter of 2007, which is an increase of 5.2% over the prior year. Adjusted EBITDA totaled $28.4 million, an increase of 11% over the prior year and equates to an adjusted EBITDA margin of 14.4%, an increase of 63 basis points in the fourth quarter of 2006.

During the fourth quarter of 2007, VITAS' direct patient care margin for routine home care was 51.6%. This compares to 49.7% in the prior year quarter. Direct inpatient margins in the quarter were 18.8%, which compares to 19.4% in the prior year. Occupancy of our inpatient units averaged 76.6% in the quarter and compares to 79.7% occupancy in the fourth quarter of 2006. Continuous care, the least predictable of all levels of care, had a direct gross margin of 17.6% in the quarter, which compares to 17.0% in the prior year.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $89 million for the fourth quarter of 2007, 3.3% higher than the $86 million reported in the comparable prior year quarter. The prior year quarter was exceptionally strong in terms of revenue and job count. Given the way the holidays fell in the fourth quarter of 2007, we are very pleased with the overall revenue growth in the fourth quarter.

Net income for the quarter was $9.7 million. This net income includes $1.2 million of an after-tax charge for a tentative settlement of a class-action lawsuit that alleged wage and hour violations in California. This suit claimed Roto-Rooter failed to provide meal and break times, as well as credit for work beginning from the first call to dispatch rather than from arrival at the first day's assignment. Excluding this tentative settlement, net income in the fourth quarter of 2007 increased 12%.

Adjusted EBITDA in the fourth quarter of 2007 totaled $19 million, an increase of 10.5% over the fourth quarter of 2006 and equated to an adjusted EBITDA margin of 21.5%, an increase of 140 basis points over the prior year period.

Job count in the fourth quarter of 2007 did decline 2.8% when compared to the prior year period. However, as I noted earlier, the fourth quarter of 2006 was exceptionally strong. Roto-Rooter did experience its typical seasonality for the fourth quarter of 2007, which is demonstrated by job count increasing 3.3% sequentially from Q3 to Q4.

Total residential jobs declined 0.8% and consisted of plumbing jobs increasing 4.5% and drain cleaning jobs declining 3.1% when compared to the fourth quarter of 2006. Residential jobs continue to represent approximately 70% of total job count. Total commercial jobs declined 7.3% with plumbing jobs declining 1.6% and drain cleaning decreasing 10% over the prior year quarter. A significant portion of the commercial job count decline is attributed to the elimination of low revenue, low margin commercial business. This mix shift had a very positive impact on the average revenue per commercial job, which increased 8% in the fourth quarter of 2007 and has increased 10.6% on a year-to-date basis.

Consolidated cash flows remain strong with Chemed generating $100 million of net cash provided by operating activities for full year 2007. Capital expenditures aggregated $26.6 million in 2007 and roughly equivalent to our full-year depreciation and amortization of $25.4 million.

Our 2008 earnings guidance is as follows. VITAS is estimated to generate full-year revenue growth from continuing operations, prior to any Medicare Cap, of 7% to 8%. Admissions are estimated to increase 4% to 5% and VITAS' adjusted to EBITDA margins, prior to Medicare Cap, is estimated to range from 14.2% to 15.0%. This guidance assumes the hospice industry receives a full Medicare basket price increase of 3% in the fourth quarter of 2008. For calendar year 2008, Medicare contractual billing limitations are estimated at $5 million, which equates to $0.13 per share of expense.

Roto-Rooter is estimated to generate a 6% to 8% increase in revenue in 2008, job count growth from flat to 1% and adjusted EBITDA margins in the range of 19.5% to 20.5%. Based upon these factors, an effective tax rate of 38.5% and an average diluted share count for 2008 of 24.55 million shares, our estimate is that full-year 2008 earnings per diluted share from continuing operations, excluding non-cash expense for stock options and charges or credits not indicative of ongoing operations, will be in the range of $3.60 to $3.70. With that, I wood like to turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS.

Thank you, David. VITAS generated 13,594 admissions in the fourth quarter of 2007. This was a 2.3% increase over the fourth quarter of 2006. On a year-to-date basis, admissions totaled 54,798, an increase of 3.9%. Based on our historical quarterly admissions pattern, admissions growth should average between 4% and 5% in 2008.

January 2008 generated an all-time high, monthly high in terms of admissions, increasing 8.6% over January of 2007. Average daily census in the quarter increased 4.3% to 11,660 compared to the prior year quarter. Our discharge rate has been unusually high throughout 2007; however, over the past quarter, we have seen this rate begin to return to more normalized levels.

VITAS' average length of stay in the quarter was 75.7 days, equal to the prior year quarter. Our median length of stay remained at 14 days. Our days of care totaled 1,072,749 in the quarter. Routine home care days increased 7.3%, inpatient days of care increased 1.6% and continuous care days declined 8.4%. We continue to focus on increasing admissions, managing staffing ratios, and operating within Medicare billing limitations. Increased admissions are being generated from educating referral sources in the community and to the benefits of hospice.

VITAS tailors its approach to these communities based on the unique issues that maybe impacting these individual markets. At the end of the fourth quarter of 2007, VITAS employed 250 sales representative, 116 admission coordinators, and 290 admission nurses. Our staffing in the admissions area has increased 11% over the prior year period.

Admissions by major diagnosis continue to be relatively stable with 37% of our fourth-quarter admissions being cancer-related, 19% neurological, 12% cardio, 7% respiratory and 25% in the all other category. Our staffing ratios continue to stay in line with our historical levels. In addition, we continue to average more than 5.4 visits per patient per week, well above the industry norm.

Our nursing staff remained relatively flat sequentially, totaling 3522 at the end of the fourth quarter. We currently have 195 hospice teams, which compares to 186 teams in the prior year quarter and 194 teams sequentially. Our turnover rate has declined slightly on a trailing 12-month basis, averaging 24.5% compared to 25.9% in 2006.

Salary increases remain in line with the industry and are averaging around 3.5% per year.

We currently have four programs classified as start-ups. Three are licensed, two of which are Medicare-certified. These start-up programs have an ADC of 51 patients with revenues of $552,000 and pretax operating losses of $630,000. These same programs had an ADC of five and revenue of $70,000 and operating losses of $387,000 in the prior year quarter. With that, I wood like to turn this call back over to Kevin McNamara.

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

(OPERATOR INSTRUCTIONS). Darren Lehrich, Deutsche Bank.

I just have a question with regard to your admissions guidance and obviously you started out the year pretty strong. I am just wondering if you can give us a sense for how that builds up at the program level. You still have some pretty fast-growing markets that are ramping up. I think you have commented previously that some of your larger programs would be driving more ADC growth from length of stay than admissions, and I'm just wondering if you can give us color around that point and where you are seeing the admissions growth coming from.

This is Tim. The admissions growth, as you say, we are pretty optimistic based on how we started the year off and we're seeing similar trends that we've seen in the prior years that we've talked about. That would be a higher growth rate in the small units compared to the large units. I think the good news is we're still seeing pretty healthy growth in many of our large units, and that's very helpful obviously. We have a lot of large units. So the trends are that this time of year is quite healthy because there's a build of the opportunity in the South Florida markets as people come down for the winter and the hospital census builds, and that has been our historical trends and we've seen it again this year. So we are optimistic about that and that usually is a very strong trend until the summer and then the business slows down a little bit in the summer as there's less activity in the hospitals and people take vacations and then seems to build back in the fall and stay pretty strong until the very end of the year when there's a slowdown around the holidays, Christmas, Thanksgiving, and the first.

So we are still seeing the same trends, but the good news is our small units are growing nicely and we define that as size of under a couple hundred and we are getting 15%, 20% growth there in some of them. They are small numbers and the opportunity is to be able to grow them rapidly. That's where a lot of our focus is, as you know, is to turn units that we've developed in our new start program over the last several years from a 50 or 70 census program and double that to 150 or 200, and we are very optimistic those plans are on track. So we have seen historical trends and we are pretty optimistic as a result of how the year is starting.

Darren, this is Dave Williams. Actually the quarter was pretty well for admissions. December was a little light, but that actually accounts for why we're running 8.6% in January in terms of admission growth. So overall though, I think we are pleased with the January affect on admissions, as well as the overall quarter.

Okay, just also a question about provider numbers. I think you have 37 now with some consolidation of provider numbers. Can you just remind us how many provider numbers you consolidated throughout '07 and whether there is more of that going forward and how many provider numbers do you expect to add through de novo in '08?

We're trying to remember exactly, but I think we did about four in 2007, a couple the year before, and we would probably expect to do at least two or three in the current year. We are studying that and working on it. As we all know, you want to make sure, if the separate licenses are working fine for you, you don't want to do it. So what we do is monitor it looking forward. We have plans in place were we see any Medicare Cap issues potentially looming to do some consolidations where we can. We can't in all cases, but we're feeling pretty good about where we are at and again, obviously a strong start with the admissions number, which is what drives the cap, as well as keeping control of your length of stay. We are feeling pretty good about where we are at right now, so it is encouraging.

Somewhat related to that, Darren, as our guidance has $5 million of cap liability for 2008 or $1.250 million a quarter, that is consistent with what we've been guiding since Q2 of 2007. However, currently, we don't have any programs that are projected to be in cap in 2008. We are keeping that $5 million in our guidance as a reminder, a placeholder for the fact that Medicare risk does exist. But at this point, we don't have anyone projected to be in cap.

Sure, then last question and I'll come back in the queue. Dave, can you update us on [ADR] situation? I believe it was with Palmetto and what your expectation is to clear some of that backlog. Obviously [AR] built a little bit more here.

I will defer that one to Tim.

I think -- we've reported this over the last three or four quarters as it is a trend that has hit the industry that they're looking at some of the patient and we being the largest player, they're looking at a lot of ours. I think the good news is we've seen it peak we believe and we are beginning to see some of the programs that were on the review come off. As you know, that allows you to begin to bill. It takes a period of time because you have to bill sequentially, but then you begin to bill for the open receivables, which we're doing. So I actually expect that we are peaking now and over the neck several quarters, we will see that issue return to a more normal rate.

The other thing I would say, which isn't directly to your question, I have been very happy with the rate of success for -- our success rate in ultimately collecting amounts we've billed once they go through this extensive review process. That is still near 100%.

This did impact our days sales outstanding a little bit. It went from 38.7 days to 43.4, but didn't bother us overall and our cash flow remains strong and we eventually collect all of those receivables.

In your -- just the dollar amount of receivables that are tied up, just round number, and would you expect your reserving policy to see bad debt come up a little bit in the next quarter or two?

Not at this point. We expect the reserve to remain at about 90 basis points of revenue. Overall receivables --.

The number is running at about $15 million or a little higher of the receivables in the backlog. Keep in mind that our bad debt expense is about 1% of our revenue and probably half of that comes from Medicaid and commercial and the other half comes from Medicare, and a great amount of that comes from basically these [FMR] reviews. That is very consistent with what we've seen historically. It could possibly creep up very modestly as a result of this issue and we are keeping an eye on it, but we are encouraged by the progress we're making and we have a very good handle on it, we believe.

Thanks a lot.

Jim Barrett, C.L. King & Associates.

Kevin, I had a question for you on plumbing. When we look back to the last recession, is Roto-Rooter better positioned to weather a consumer slowdown, especially on the top line, than possibly historically?

Well, I don't know that it is to say we are better-positioned. I think we are well-positioned. We are -- if you remember and you've been a follower of the Company for a long time, through a couple cycles, what we see is a little difficult on the commercial side. We see -- to the extent that -- one of the reasons we see more difficulty in the commercial side is as new construction, plumbing plummets, the plumbers look to be employed and they can't really do much on the residential market. In other words, they don't have a big yellow page ad. There's not much they can do to get back into it. But they can start -- having feet on the street and bidding for commercial work. We don't, but to the extent -- our competition might. I think in a recession, we would see more of that.

To the extent, on the residential side, one thing that we noticed last time -- last time, there was a significant downturn in the economy, something we described at the time is the Home Depot effect and that is where homeowners, for residential -- for relatively small residential jobs, they would run a drain cleaner or get some plumbing help from a Home Depot person who is just working there in the aisle and they made a big push at that time to do what we considered assisted repairs. We saw more of that and I think that some of those jobs didn't come back, but that was not bad for us because we [weren't] very efficient in doing that service work.

In other words, we have to -- the bill would be pretty high because we had to charge for putting a guy in a truck and driving him across town and getting him there and the value that he really brought once he got on-site wasn't necessarily commensurate with the invoice total.

So with regard to plumbing, we think that, on the Roto-Rooter side, very clear to say recession-resistant to the extent that we have -- we have been doing a much better job hiring and retaining plumbers. That probably put us in a little better position. But that's almost ancillary to your question.

Again, if there is a severe recession, it hurts on the fringes of Roto-Rooter. Let me amplify a little bit a point that Dave made with regard to commercial jobs. One of the things we're very careful to say, for instance, is we do no new construction plumbing. But one of the things we've seen in the last year and we expect this to continue this year, we saw a little niche develop mostly in the southern units with regard to new construction, builders who are kind of mass building. When they finished a job, they would pay us to camera the lines just to make sure there wasn't an excess of construction debris blocking the lines. Again, it was low margin for us, but it was scheduleable. A lot of the sticker, a lot of the equipment was something that we were happy to do.

That business has disappeared in those units. Effected the job numbers, but not, as Dave said, not the profit numbers and we don't like that. We don't like to amplify that point if only because it is, in a sense, very indirectly ties us to the new construction home industry, but that is one affect of the recession that we've seen already, the decline in those commercial jobs, but I don't want to be long-winded here. We have always said that Roto-Rooter -- we have a fully commissioned salesforce, which is a boon on the downside. Everyone shares the pain. It takes a little bit of our upside away when times are good, but it positions us well and we are comfortable with that system.

Speaking of new home buildings, a couple of your largest franchises are in states with very bad housing markets. Is your outlook, when we look out over the next couple of years for making acquisitions, first in Roto-Rooter, but also -- first in Roto-Rooter, is that improving at all?

Here is what I would say about that. As you said, our two largest multi-location franchisees in Roto-Rooter have substantial California operations. Our reports from them are that they are struggling mightily on the commercial side more than the residential side, so that cheered us. One of the things we've noted before is an awful lot of our efforts in Roto-Rooter are coming at the commercial -- on the commercial side of the business. We really think it is an example of all those efforts aren't necessarily driving the top line, but they are softening the effects of what has been a difficult market on the commercial side.

But the bigger issue really goes to the operating environment in California. As I said, as we've indicated, we had a wage hour -- two wage hour matters with VITAS in California, and these are matters in which there's largely no defense and our research has indicated that no one has litigated this on the company side and won one of these cases. The deck is stacked against you. As I say, we only have one significant operation at Roto-Rooter California. We settled that case, got it behind us on what we think are very advantageous terms. We would be reluctant to make major acquisitions in California until that situation was addressed by the California legislature or the court system. It's just -- it is a trap for the unwary and it's a tough situation. So I think that would have a bigger effect on us than the actual -- than say the housing market in California or other aspects of the operating environment.

Jim, I would say -- this is Dave Williams -- we have seen an increase in inquiries from some of our franchisees about whether we would be interested in acquiring them, but nothing I would say is heating up. I think typically a recession, though, brings reality to some people in terms of an exit strategy on their ownership. So we're anticipating a pickup, but we haven't seen it yet.

Thank you both.

Eric Gommel, Stifel Nicolaus.

My first question relates to Florida. I saw a recent headline discussing the Governor's potential intent to eliminate the CON rule for hospitals or discussing that. I was curious if you could shed some light as to whether or not he is considering that for hospice as well.

I will turn it over to Tim and Dave Wester are here, but let me start by saying that we've analyzed this situation and we think that, again, maybe whistling past the graveyard, but we think -- we would be in favor of it. It would hurt us a little bit in the short run. That is in areas where we have a very dominant share, there might be some more competition, but we're very well-situated in those areas, but it would open up several markets in Florida that we would jump in.

So let me start by saying long term, we are in it for the long term. We would be in favor of that, at least I would. Now I'll turn it over to the Florida residents to say if they know anymore about it as far as the likelihood of it and its applicability to hospice.

We have heard what you have heard. So yes, we are aware that the CON for hospitals is on the table. Whether or not that has any likelihood, we don't know. There is nothing on the table that we are aware of for repealing the CON for hospice, but it probably will come up. It comes up every year. Someone is going to suggest that.

It will be fought by the not-for-profit hospice.

Yes, and keep in mind that hospice is very mature in Florida. It was one of the first states with hospice licensure and there are many, many, many, many, many not-for-profits. They would all be not happy with that happening and they have strong connections and lobbies, and so we're not taking a strong position, as Kevin says. We are pretty neutral on it. There are some pros and cons either way. We are positioned to deal with whatever happens, so nothing is on the table now. As you know, the session is in March in Florida. It's a short session, a lot of activity, but who knows if it would even come up. I would be very surprised if it happened this year.

It would be very disruptive to the Florida healthcare system for the elimination of CONs. I think that always gives them cause for pause.

They have a process in Florida where when they do open up a new license in one of the regions because need is shown, if you look at the history of the last couple years, actually those studies indicate that there really is not much need shown, that the existing hospices are providing the appropriate care needed. One or two licenses come up every year. The statistics are there to show that there is not a need for a bunch of new hospices, so with that behind it, I would be pretty surprised if it ever carried the day.

Great. Then actually some of the comments you made answering my first question lead into my second question. How should I look at I guess mature growth in a program, a program that is mature, that's large? What is a consistent growth rate that we could use to model such a program?

Every place is different, but we always still have, as you know, demographics working for us. So the population is growing older in all markets in this country and we also believe that the acceptance rate of hospice, people that are becoming aware of hospice, want it. Many, many people are familiar with it now just by word of mouth and there's a lot of information being put out there. Hospice is being taken on by all the managed care providers to understand that the public demand hospice wants it and it's an appropriate service. So we still believe that there is good opportunity for growth and it is our job in the markets where we have large presences to always find new opportunities with new customers, have incredible presence of inpatient units, which we are expanding and continue to market in a strong way.

Again, like in many cases, many of our competitors are not looking necessarily to grow and penetrate the market beyond where they are at and we always are. So we are optimistic in the transfer utilization of hospice, demographics, and we believe we're continuing to raise the bar on the product and quality we put in the marketplace. So all those things being pretty well for our opportunity in the future and we have done better than we have expected in the last couple of years in these large programs and I expect that to continue.

To give you a number, I would say -- Dave, jump in here -- but those would grow in admissions and revenue. I would say the two or three largest at half the rate that we would look at overall.

I would say it would certainly anticipate our price increase, so that would give you three points of growth. We would expect roughly half -- relatively flat on admissions, but population growth, as well as just even a slight increase by one or two days on length of stay would put you in the mid single digits top line.

Great. Thank you.

Kevin Fischbeck, Lehman Brothers.

I had a question about your guidance. You didn't provide ADC guidance. Is it safe to assume that given that you are looking for 3% pricing and 7% to 8% revenue growth, that you're looking for ADC growth of 4% to 5% from (inaudible)?

That would be correct and there's one that's percepted as one underlying characteristic. We are anticipating in that guidance no change in our length of stay. Historically, we have always had somewhat of an increase, so that would be kind of what I would call [cushion] on our guidance. You are correct on the ADC assumption and if we see an expansion of length of stay, that would expand on the average daily census and revenue as well.

I guess given Kevin's comments earlier about routine care growing faster, that would imply length of stay would increase, (inaudible) kind of conservatism in your guidance then?

That is exactly right.

I appreciate the increased disclosure about the cap cushion at your sites, breaking out the number of sites into 10% to 15% and 15% to 20%. Do you have those numbers over the last couple of quarters?

It is roughly the same. On the top end where we have significant cushion, they all stay up there. What we do is we typically see one or two programs cycle in and out of the below 10%/above 10%, so you certainly can't assume if we had two or three two quarters ago it's the same two or three today. So I'd just leave it at that.

We have given that information, generally speaking in the past.

Yes, below 10% you guys have been giving pretty consistently. The 15 to 20 --.

After that, it is all about the same. And the only reason we went to a little more detailed this time is the 2008 cap year really only has two months into it. They're looking at admissions for our November and December. So a trailing 12 months and kind of do a recap for the past year, we think is useful. I would not actually anticipate going into this kind of detail every quarter, but we will certainly continue to talk about the above 10%, below 10% cap cushion programs.

Let me just add one thing. It's something we look at. We're not laughing it off. I mean, Medicare Cap is a serious issue for the industry. We think we are -- I would say overall $219 million of cap cushion just indicates that our general operating conditions suggest that we should be able to develop programs that are within the guidelines. But it is one that -- it's something we pay a lot of attention to. We think it is going to create opportunities for us to the extent that as more and more programs go into a cap problem, it is going to create opportunities for us.

And we think we can -- we have historically and we think we can continue to run ahead of the pack a little bit. Again, one of the reasons we have cap cushion in our guidance is it is a real issue and it's one that is going to be facing the industry, and I anticipate over the next couple of years it will be addressed in some way.

All right. Switching gears a little bit, going to Roto-Rooter, can you talk a little bit more about what happened in the quarter? Because it sounds like you're highlighting the same trends that you've seen really throughout 2007, getting out of the low-margin commercial business. But this quarter the pricing benefit really wasn't able to offset the volume loss that you saw. So you were showing 7%, 10% growth for the first half of the year. It was 3% this quarter. Can you go over what changed this quarter and what makes you think that you'll get back to 6% to 8% in 2008?

I would really -- I hate doing this, but the facts are the facts are the facts. Last year's fourth quarter was just so incredibly strong, it was difficult to compare to. On a net basis we're actually very, very pleased with the quarter. And that is why I took the time to point out we typically see seasonality going from the third quarter to the fourth quarter, and our seasonality remained exactly where we expected, growing 3.3% from the third quarter of 2007 to the fourth quarter. So last year's fourth quarter was very unusual in terms of strength and depth across both commercial and residential.

Although the fourth quarter of 2007 was strong with regard to things like turnover, accident rate and whatnot, it just -- even though they were all good, the fourth quarter of 2006 was just almost unheard of good by comparison. So all of those things added up for some negative comparisons, but generally speaking given a little bit of the difficulty at the top line, we were very happy with the Roto-Rooter results for the quarter and the year. We don't really see much of a deterioration in the base business at this point.

So the 10% type growth that you were showing in the first half of '07, that you don't believe gave you the same type of typical comp for the first half of '08?

No, and that is why we kind of pulled down the top line a little bit in that regard for our forecasts, although we continue to see strength in our margins and our cost-containment. But no, we think we have actually the last couple of years have been exceptionally strong in Roto-Rooter. And you continue to hear us say this. I don't expect it to continue and our guidance is assuming the growth rate declines a little bit, but continues obviously in the mid to upper single digits.

What is the long-term growth rate for that business?

I would probably put it at about 5% to 8%.

Okay, and then last question for me. Any comments about the commentary of CMS, if they were looking to make some wage index adjustments to hospice administratively that would kind of cut reimbursement in that kind of 3% to 3.5% range this year?

Yes, this is Dave Williams. What Kevin is referring to, as some of you are aware, the President's 2009 budget basically proposed a five-year phaseout of something called the budget neutrality factor. When the President puts out a budget, although obviously there's going to be a change in the White House, the deputy administrator of CMS, Herb Kuhn, said in an interview that most of you picked up on that the agency is going to consider administratively adjusting payment formulas in kind of their annual proposal for several reimbursement systems, including hospice later this year. Basically proposing eliminating the budget neutrality factor over a five-year period, which would have the net effect of reducing hospice reimbursement below inflation rates since 1998 because this budget neutrality factor grows every year.

For a little historical background, Congress through the Social Security Act has specifically mandated or required by law that hospice receive an annual increase in our hospice per diem to offset inflation. They mandate we get an inflation adjustment, and now it is up to CMS to come up with a formula to calculate that. And the calculation has gone through a number of iterations over the past 25 years. It has utilized indices from the Bureau of Labor & Statistics, hospital survey data, as well as adjustments for differences in metropolitan statistical areas or the MSAs. Basically inflation throughout different parts of the country.

But now over the past 10 years, HCFA and then CMS has calculated inflation for hospice using a combination of the hospital wage data and then they further refined that inflation with this budget neutrality factor. Again, the purpose of the neutrality factor is to determine the aggregate dollar amount of inflation from one year to the next and then they weigh or redistribute those inflation dollars among the various MSAs to reflect their varying inflation rates.

What this really means is a portion of inflation is calculated with this neutrality factor. Now CMS has the ability and the responsibility to revise the inflation calculation methodology if they say there's a more appropriate way to measure inflation. However, given the fact that the hospice -- Social Security mandates reimbursement to be adjusted for inflation, any changes that CMS proposes in the methodology can't be arbitrary. It has to be based upon a reasonable set of facts and data in terms of measuring true inflation. So they are largely constrained. They can measure inflation, but they can't arbitrarily take away a piece of that inflation into our reimbursement.

Let me just add one thing. Again, because it is just proposed, I can't say that our level of analysis has -- is something that I can fully rely on, but I'll just say this. With regard to the effects of the budget neutrality act, it has helped us in some years and hurt us in some years. So it is (technical difficulty). I was just saying with regard to proposed changes, any time -- I'll just say that to the extent that -- if you are in the healthcare business, there's a good chance that the government is your most significant customer. There are issues dealing with the government. We don't, we can't see into the future other than to say, last year for instance, they were talking about reducing the increase by 40 basis points. It didn't happen. It could've happened if Congress had acted.

We don't know other than -- I would say this. Regardless what the government does with regard to reimbursement, we believe we're nimble enough and have the systems in place that we will be able to respond to whatever is required. I mean we are not a niche player. We're right in the center of hospice providers in this country with regard to length of stay, type of patient we are serving. Again, come what may, you never -- the only thing we are sure of is, over the next coming years, there will be changes and we just have a high level of confidence will be able to adjust to them.

CMS, again, we debate what they can and can't do on a relative basis, but they weren't even [proposed] to wiping out the budget neutrality in a single year. There are talking about a multi-year phaseout. I know someone had a report out that said if it all came in one fell swoop, they would have a huge impact on our '09 earnings, but the fact is even CMS is not proposing that, so basically this has a long way to run. It has come up multiple times before and at this point, unless Congress intervenes, we anticipate getting an adjustment for our full-year inflation in 2009.

Okay, great. Thanks.

With no more further questions in the queue, I would like to turn the call back over to Mr. McNamara for closing remarks.

Thank you. I have no closing remarks of substance other than to say, well, we have given guidance for the year. We are at a high level of confidence we will be able to deliver on those and we believe we had an excellent fourth quarter and thanks for your kind attention. Thank you.

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