Chemed Corp (CHE) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to Chemed Corporation's fourth-quarter 2008 conference call. My name is Fab and I'll be your conference call facilitator today. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the 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 2008 ended December 31, 2008. 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 16th, 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 16th, 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 Corp. subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone; welcome to Chemed Corporation's fourth-quarter 2008 conference call. I will begin with an overview of the quarter; I will then turn over the call to Dave Williams, Chemed's Chief Financial Officer. 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 the call up for questions.

Chemed consolidated revenue in the quarter totaled $292 million and net income from continuing operations was $20.1 million. This equated to diluted earnings per share of $0.89. If you adjust for non-Cash items, or items that are not indicative of ongoing operations, earnings per share were $0.99 in the quarter.

As most of you are aware, last week Congress approved the American Recovery and Reinvestment Act of 2009. The President has stated he intends to sign this stimulus package into law sometime today. This act provides for an increase in the Medicare hospice wage index for the period October 1, 2008 through September 30, 2009.

Given the timing of the passage of this act VITAS has not included any adjustment to the fourth-quarter 2008 operating results for this change to our Medicare hospice reimbursement rates. David Williams will provide you the impact this will have on our hospice operations in 2009 later in this teleconference.

In the fourth quarter of 2008 our VITAS business segment had revenue of $206 million, an increase of 4.4%, and generated EBITDA of $34.3 million, an increase in our adjusted EBITDA of 21%. This equated to an adjusted EBITDA margin of 16.7%.

I'm very pleased with the progress we've made over the last year in managing our excess labor capacity as well as our general and administrative expenses. This progress is clearly reflected in our improved EBITDA margin.

Our improvement in margins is primarily the result of refinements in our approach to matching our labor needs to daily patient census. We accomplished this through reinforcement of existing labor management tools. This would include daily scheduling meetings, rebalancing the mix of nurses and home healthcare aides in our hospice teams, and through more cost effective utilization of agency staff.

I continue to be very disappointed with our admissions growth. In the fourth quarter of 2008 our admissions totaled 13,314, a decline of 2.1% over the prior year quarter. For the full year 2008 we admitted a total of 55,799 patients which is an increase of 1.8% over our 2007 admissions.

Over the past three quarters we have noticed increasing disruption in our typical admissions patterns in certain geographic markets as well as from specific referral sources. I believe a significant portion of this disruption is a result of economic dislocation, making access to hospice appropriate patients more difficult in some markets.

We continue to adjust our local marketing efforts to respond to these changing referral patterns. Tim O'Toole will provide additional color on how we are shifting our resources in these markets to better access referral sources and their patients.

VITAS did not record any Medicare Cap liability for the 2008 measurement period ended September 28, 2008. VITAS has recorded $235,000 of Medicare Cap liability related to our fourth quarter which is the first three months of the 2009 Medicare Cap measurement period. This Medicare Cap liability relates to one provider number that has a gross margin in excess of 20%. Admissions of this provider number have declined in the first three months of the 2009 Medicare Cap year. This program generated a 15% cap cushion over the prior 12-month period. January 2009 admissions did show a strong upward trend in this provider number and I believe it is likely we will eliminate this Cap liability through increased admissions during the course of the 2009 year.

Of VITAS' 34 unique Medicare provider numbers, 29 numbers, or 85%, have a Medicare Cap cushion greater than 20% for the most recent 12-month period. Four provider numbers have 15% to 20% cushion and one provider number has a cap cushion of less than 10%. VITAS generated an aggregate Cap cushion of $220 million during the calendar year 2008.

Our Roto-Rooter business segment continues to be marginally impacted by the slowdown in the economy. This is evidenced by a 20.1% decline in fourth-quarter inbound call volume into Roto-Rooter's centralized call centers when compared to the prior year quarter. We have been able to substantially offset the revenue impact of this decline in call volume through a combination of selective price increases, favorable job mix shift to higher revenue per job, increased excavation work and increased conversion rates of calls to paid jobs.

We are in preliminary discussions or performing due diligence with several Roto-Rooter franchise territories. This activity is attributed to the current state of the capital markets, the long-term potential for increased tax rates and the recessionary difficulties our franchisees are experiencing. The timing or actual completion of these acquisitions cannot be predicted. However, we intend to be highly disciplined in terms of valuation and risk assessment to ensure these acquisitions will be immediately accretive to our earnings.

I believe that Roto-Rooter's business model continues to be recession resistant; this is a result of Roto-Rooter's focus on emergency plumbing and drain cleaning jobs that customers find difficult to defer. In addition, our variable cost structure minimizes the negative financial impact when demand is soft. This is primarily achieved through the utilization of a commission pay structure for our plumbing and drain cleaning technicians.

Both of Chemed's business segments are well-positioned to weather the current challenges in our economy. Given our strong balance sheet and capital structure a difficult economy may provide us with future opportunities relative to our competition.

Before I turn this call over to David, as you know, we received a letter from a shareholder late last week requesting that we separate the VITAS and Roto-Rooter business segments. Chemed will carefully evaluate this shareholder's recommendation and respond appropriately. Today we will not be taking questions on the shareholder letter. With that I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $206 million in the fourth quarter of 2008 which is an increase of 4.4% over our prior-year period. This revenue growth was a result of increased ADC of 1.4% and the Medicare price increase of approximately 2.6%. The remaining difference is attributed to shifts in our level of care as well as geographic differences in where our patients are receiving care.

Average revenue per patient day in the quarter was $189.37 which is 3.0% above the prior-year period. Our routine home care reimbursement and high acuity care averaged $149.26 and $665.38 respectively per patient per day in the fourth quarter of 2008. During the quarter high acuity days of care were 7.8% of total days of care. Quarterly high acuity days of care have averaged between 8% and 8.4% in 2007.

VITAS' gross margin in the fourth quarter of 2008 was 25.1%; this is 192 basis points above the gross margin in the prior year quarter and a 150 basis point increase sequentially from the third quarter of 2008. Our home care direct gross margin was 53.3% in the quarter, this compares to 51.6% in the fourth quarter of 2007, an increase of 170 basis points, and increased 90 basis points when compared to the third quarter of 2008.

Our direct inpatient margins in the quarter were 14.9% which compares to 18.8% in the prior year. Occupancy of our inpatient units averaged 75.8% in the quarter and compares to 76.6% occupancy in the fourth quarter of 2007. Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.1% in the quarter which compares favorably to 17.6% in the prior year quarter. VITAS' selling, general and administrative expense was $17.2 million in the fourth quarter of 2008, which is a decline of 0.3% when compared to the prior year.

Now let's turn to our Roto-Rooter segment. In the fourth quarter of 2008 recessionary pressure continued to impact demand for certain discretionary plumbing and drain cleaning services. This is evidenced by a 20.1% decline in call volume in Roto-Rooter's centralized call centers. This decline has been substantially offset by increased pricing, favorable job mix shift to excavation work, and increased conversion rate from calls to paid jobs.

Roto-Rooter's plumbing and drain cleaning business generated sales of $86 million for the fourth quarter of 2008, 2.5% lower than the $89 million reported in the comparable prior year quarter. Job count in the fourth quarter of 2008 declined 12.5% when compared to the prior-year period.

Our total residential jobs declined 12.2% percent and consisted of residential plumbing jobs decreasing 11% and residential drain cleaning jobs declining 12.8%, when compared to the fourth quarter of 2007. Residential jobs continue to represent approximately 70% of Roto-Rooter's total job count. Total commercial jobs declined 13.3% with commercial plumbing job count declining 13.2% and commercial drain cleaning decreasing 13.7% when compared to the prior year quarter.

There continues to be substantial disparity in demand for Roto-Rooter services within the United States. The South region has experienced a 17.3% year-to-date decline in commercial jobs while our Northeast region had a modest 2.7% decline in commercial volume. Residential demand is not as disparate; with the South region residential job count declining 13.5% while the remaining regions for Roto-Rooter have experienced a job count decline ranging from 6% to 11%.

It's important to remember that Roto-Rooter provides its customers a necessary service that in some cases is deferrable but eventually unavoidable. We view Roto-Rooter's consumers as making a grudge purchase decision -- basically they're buying a raw necessity. What is impacting Roto-Rooter is that it's become more difficult to upsell additional services to our customers.

Upselling would include such non-critical services as faucet repairs, or the drain cleaning of partially blocked or secondary lines, or selling drain care products. However, Roto-Rooter's core business of emergency plumbing and drain cleaning services remains strong.

Now let's take a quick review of our consolidated balance sheet. Chemed's debt aggregated $210 million at December 31, 2008, $187 million of which carries a fixed interest rate of 1.875% and is due in May 2014. Our remaining debt consists of a $14.5 million bank term loan and $8.2 million of debt drawn against Chemed's $175 million revolving credit facility. The current interest rate on this debt is approximately 1.4%.

Chemed's $175 million revolving credit facility expires in May 2012. At December 31, 2008 this credit facility had approximately $140 million of undrawn borrowing capacity after deducting for the $8.2 million of borrowing and $27 million of letters of credit issued under this facility to secure the Company's worker's compensation insurance. Chemed's total debt divided by the trailing fourth quarters of adjusted EBITDA reflects a debt leverage ratio of 1.3 times.

Effective January 1, 2009, Chemed will be required to retrospectively adopt a provision of FASB staff position for accounting for convertible debt instruments that may be settled in cash upon conversion. This somewhat esoteric ruling -- or requirement has the Company -- requires the Company to separately account for the debt and equity portions of its 1.875% senior convertible notes.

This accounting creates a discount on the notes that will be recorded in equity at the inception of the debt. The notes, net of this discount, will be accretive to their face value over the life of the note using the effective interest method. The impact of this accounting change for the year ended December 31, 2009 is projected to be a non-cash increase in our pretax interest expense of approximately $6 million and $3.8 million after tax.

Our year to date net cash provided from operations aggregated $112 million. Our capital expenditures for 2008 aggregated $26 million and compares favorably to our total 2007 capital expenditures of $27 million. Chemed's full-year 2008 depreciation and amortization aggregated $28 million.

Now let's turn to our 2009 full-year guidance. As Kevin mentioned earlier, Congress has recently approved the American Recovery and Reinvestment Act of 2009. This act provides for an increase in the Medicare hospice wage index for the period October 1, 2008, through September 30, 2009. Our 2009 guidance includes approximately $8 million in additional revenue related to this adjustment in the Medicare hospice reimbursement rate.

VITAS is estimated to generate full-year 2009 revenue growth, prior to Medicare Cap, of between 6.0% and 7.5%. Our admissions are estimated to increase 2% to 4% and our full-year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 15.3% to 16.3%. This guidance assumes VITAS will receive a Medicare basket price increase of 1.5% effective October 1, 2009.

Full-year calendar 2009 Medicare contractual billing limitations are estimated at $5 million. Roto-Rooter is estimated to generate full-year 2008 revenue growth of between 4.0% and 5.0%. This revenue growth is a result of increased pricing of 4.0% to 5.0% and a favorable mix shift to higher revenue jobs partially offset by a job count decline estimated at 7% to 9%. Adjusted EBITDA margin for 2009 is estimated in the range of 17.0% to 18.0%. This guidance does not include any Roto-Rooter franchise acquisitions that may be completed in 2009.

Chemed's consolidated effective tax rate has been impacted by the severe volatility in the stock market as it relates to certain deferred compensation investments and required GAAP tax accounting. This stock market volatility does not have any material impact on Chemed's reported pretax earnings. Excluding the impact of taxes associated with this deferred compensation issue; Chemed's effective tax rate for full-year 2009 is estimated at 39.0%.

Based upon these factors and a full-year average diluted share count of 22.8 million shares, Chemed management estimates 2009 earnings per diluted share from continuing operations, excluding non-cash expenses for stock options, the non-cash increase in interest expense related to the accounting change for convertible debt and the tax rate impact from deferred compensation investments will be in the range of $3.70 to $3.95 per share. I'll now turn this call over to Tim O'Toole, our Chief Executive Officer of our VITAS subsidiary.

Thank you, David. In the fourth quarter of 2008 we continued to refine our efforts on the daily scheduling of field labor with the goal of ensuring appropriate levels of staffing notwithstanding length of stay and census fluctuations. This involved not only the efficient utilization of existing field-based labor management tools but the implementation of several new tools. We continue to refine our approach to staffing levels and eliminate inefficiencies while still responding to patient care needs and achieving quality outcomes.

Over the long term VITAS continues to focus on its investment in labor management and scheduling tools with the goal of advancing patient care and using its resources in a more leveraged way. While this will not eliminate the inherent volatility of our labor cost as a function of admission trends and patient care acuity, we should have more consistency in scheduling direct labor with the daily flexibility needed to meet patient care needs.

Admissions continued to be difficult during the quarter declining 2.1%. We believe this reflects one of the many aspects of a disruptive economy. Offsetting the admissions rate was a favorable discharge trend which declined slightly in the quarter. Admissions from hospital referrals declined 2.1% in the fourth quarter of 2008 and admissions from nursing homes declined 11.8%. On the positive side, admissions in assisted living facilities increased 6.9% and our home-based admissions increased 3.1%.

Certain geographic markets are experiencing more disruption than other markets. Florida, our most dominant market which represents 38% of our census, continues to show steady expansion in terms of admissions, Average Daily Census and revenue. Our Illinois and Texas markets are particularly difficult and have experienced a decline in admission, census and revenue in the last quarter.

I attribute this decline to a combination of economic disruption in terms of traditional referral patterns and missteps on our part to adjust our local marketing and education approach in these markets. We are pursuing new approaches to sales and marketing strategies that address these issues.

I am very focused on returning these programs to our historical admissions levels. This involves refining our local marketing approach and realigning resources in each market to effectively manage these changes and create better patient access. VITAS' average length of stay in the quarter was 83.1 days which compares to 75.7 days in the prior year quarter and 74.1 in the third quarter of 2008. Our median length of stay was 14 days.

Our days of care totaled over 1.1 million days in the quarter; routine home care days increased 1.7%; continuous care days increased 4.1%; and inpatient days of care declined 7.4%. At December 31, 2008 we had three programs classified as start ups all of which are licensed and Medicare certified. These start-up programs had an ADC of 42 patients with revenues of $554,000 and pretax operating losses of $362,000. These same programs had an ADC of 8, zero revenue and operating losses totaling $302,000 in the prior year quarter. With that I would like to turn the call back to Kevin.

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

(Operator Instructions). [Brian Sequino], Barclays Capital.

Good morning. Just wanted to follow up with you regarding some of the cost controls that you had. I know in the past you -- I think last quarter you said you thought that you would try to keep cost increases below the 2.5%, which was in line at the time with the Medicare increase. Is that still the goal for 2009?

I'll tell you what our goal has consistently been and we, in almost all periods, have been able to achieve it. We try and keep our costs -- our central support costs growing at half the rate of our sales increase in our VITAS subsidiary. And we've been able to achieve that generally, but you may be referring to cost of sales. But what we generally talk about as far as cost saving goals is really our central support costs at VITAS growing to that 50% figure. Tim, do you want to --?

Your comment I think is probably leveraging off of the last couple of quarters where we talked about our year-over-year increases in our payroll for field staff was beginning to increase at a little higher rate and we have been able to bring that down in line with something in the 2.5% range. So we're accomplishing that now and I feel very comfortable we'll be able to maintain that in the future, we have very good controls over it.

And again, it's not only the issue of the pay increases for people that are with you with annual reviews, but also the pay that you bring new employees in that you hire compared to the ones that left the Company. Our turnover has gone down in all of the critical areas so that helps a little bit. But to answer your question specifically, we're comfortable with that range of 2.5%.

Okay, got you. Thank you. And then just moving on to Roto-Rooter. I know your margins came down a bit in the back half of 2008. And your guidance is for margins to be 17% to 18%; I think they were closer to 16% in Q3 and Q4. Is there anything that is changing with regards to the business going forward that you'll be able to boost the margin there?

I'll tell you -- give one factor, then I'll turn it over to Dave. But one factor in 2008, which we don't expect to recur, is something we've mentioned that our share of the cost with regard to employee healthcare, large employee health care claims before the stop loss was up over $1 million in 2008 compared to 2007.

To put this in perspective, the bottom 98% of claims, which are pretty predictive, were very much right in line with our expectation. It was just that the number and severity of our large claims was beyond our expectation and we fully expect that to retreat to the mean in 2009. That's one factor which helps more than one media dollars. David, anything else you want to add to that?

No. If you just put it in perspective, we averaged with that higher increase in large claims for healthcare for Roto-Rooter. Our EBITDA margin was 17.6% and with Kevin talking about the final number, it will probably turn out to be about a 40 basis point hit. So absence -- in 2008 n unusual amount of large claims we would have been right at 18%; we're forecasting our guidance 17% to 18%.

We certainly see stress definitely in the first half of the year as we're lapping the prior year in terms of job count. However, we did pass through price increases, it varied throughout the United States but it averaged about 5%. We are seeing stress in our job count but we're also beginning to see more stability. For example, we had a 2.2% increase sequentially from Q3 to Q4 for Roto-Rooter, we view that as very positive.

So all of that, we put it together, we see stress on the Roto-Rooter business model but more stability, we don't expect the negative trend lines we saw in call volume and job count to continue, we see stability in our cost structure, primarily in healthcare, and we do see a little bit of uplift from the small amount of acquisitions we completed late in 2008. So all of that says we have a fair degree of confidence that we think Roto-Rooter is going to end up slightly above or slightly below in terms of EBITDA where we were in 2008.

Great, thanks. Thanks for taking the call.

Frank Morgan, RBC Capital Markets.

Good morning. First is just a housekeeping question. With regard to the catch-up from the fourth quarter from the retroactive full market basket increase. Will you record the full catch-up of the first quarter -- I'm sorry, the fourth calendar quarter -- will that all occur in this first quarter of 2009?

That's correct; we'll basically pick up roughly $4 million.

Okay, so $4 million of catch-up or incremental on top of what you would get in the quarter itself?

Well, no, we will get $2 million from the -- if this was in place and happening as of October 1st, our revenue would have been $2 million higher in the fourth-quarter 2008. So we'll pick that up in the first quarter of 2009. In addition, we'll be having a higher reimbursement rate for the first quarter of 2009. So, basically we're picking up an extra $2 million. So a total of $4 million will be the benefit from this stimulus package.

Both revenue and pretax profit.

That's exactly right, revenue and EBITDA.

Okay, guys, thanks. And then secondly, I was hoping you could elaborate a little bit more on the notion of the economic disruption. I think you specifically mentioned places like Illinois and Texas and how that's translating into a weaker volume trends there.

I'm going to turn this over to Tim. But let me tell you something that I've seen and some of it is borne out on a preliminary basis some of the numbers we've been seeing, but also some anecdotal information. And it's really tied to this -- that there are a variety of traditional sources of referrals that VITAS has done a very good job of capturing. And if you look at our very low median length of stay you'd say we do a great job capturing referrals from hospitals, discharge planners, from oncologists, from those types of sources along with the traditional sources like nursing homes, assisted living care.

These are referral sources that do a very good job educating the hospice eligible patients of the nature and benefits of the hospice service. And generally this is in the face of some pretty strong misconceptions with regard to what hospice is. Most of the surveys we take of the uninitiated, they think that hospice is someplace that you go and, of course, most of the callers on this call know it's -- 95% of our patient days are in patients' homes or residences or nursing homes or assisted living care facilities.

To the extent that fewer people, to the extent that the occupancy or the people exposed to those strong referral sources are having trouble or having low occupancy, that translates into problems for us, which we are -- we're in a period of transition. We recognize that and we're spending more money on salespeople and local marketing efforts. But it hasn't borne the fruit yet that we're looking for. But no question about it, no gilding of the lily, it's something we have to address and I have confidence that Tim and his people will. But Tim, anything to add?

I think that's exactly right. And as Kevin mentioned, a lot of our historical referrals come from relationships we have at hospitals and nursing facilities and assisted living facilities. And statistics are indicating that hospital census is down and exactly why that is. Everybody has various opinions; it has something to do with people's ability to pay their co-pays, deductibles, their insurance and the economy is just tough out there.

Nursing facilities -- we've seen situations where individuals have been removed and gone back to home because they no longer can pay the bill because the family needs the money for other things, the Social Security check or something like that. Assisted living facility providers -- basically if you think about it most individuals, when they decide to go into an assisted living facility, they're selling their personal home, their residence. And because of the housing crisis and the pricing for the homes many people have decided to defer that decision so the census is down in assisted living facilities.

So these are things that we've been saying over the last six months. I think when you first begin to hear some of this you're a little skeptical. But it has been clearly documented to us and we've seen it now in third-party reference material. I think that will abate. I think these things come and they find their bottom and they'll recover. So we don't want to not continue to service all of those historical relationships; in fact, we're going to work even harder to be the hospice of choice for these categories, and we will.

But what we need to do also is go directly to the public with consumer advertising. We need to visit places like clinics with our liaisons and representatives that people are going to instead of the hospitals. And we need to do things like, for example, make sure people in the emergency rooms of hospitals understand that when someone comes in that is deferred to their chronic and they have chronic situations and finally gotten so bad they go to the emergency room, that we're there to help them with those cases as well, so with a big push on all alternative sources.

So I'm very confident that it's a local issue. So we're looking for our local management at each location to come up with the ideas that will work, we'll try them. And then when we find one that works we'll spread it throughout the Company as a best practice. So we're looking for new ways to reach the patients that need our service and I think we'll be successful at it as the year progresses. So I think we see the situation, we're going to change some of our sales tactics and I'm optimistic those will improve our results.

Okay, let me ask one more and then I'll hop in the queue. You mentioned that the admission trends at the one facility that had Cap exposure had improved nicely in the month of January. Can you give us any kind of color commentary about other programs like how admin trends are going so far in the first quarter? And then I'll hop off, thanks.

I'll turn that over to Dave. But again, we don't like to speak about -- too much about individual programs except to the extent they have a Cap issue we do. Let me start by saying, yes, but trends in that program -- it's a good program, it's not a situation where we've blown through Cap, it's a very profitable -- you'd expect if you're close to the Cap it was going to be very profitable. It's one where we had what we think was a short term deviation in referral trend, as we say, at a nice cap cushion for the 2008 cap year, a bad quarter that we're one-month in the new quarter with a good trend.

I will say with admissions generally speaking we haven't -- we haven't solved the problem. It's one that it's going to be, given the nature of some of the problems that I just mentioned earlier that Tim just spent the time talking about, it involves some midcourse correction. As indicated overall we have a Cap cushion of $220 million. But admissions are the lifeblood of any hospice program. And we want to get them growing at a better rate.

So I think the best way I can characterize an answer to your question without giving too much of a look forward -- things public companies try and avoid doing here is that it's a situation that still needs improvement. But the good news is that where you have a program that really needs a lot of attention we're still able to move the needle on that in that regard, at least have been able to do that a couple of times in the last couple of years when we've been forced to. Anything else, Tim, on that.

The only thing I'd add on relative to this one program is the fact of the matter is we can't carry forward any Cap cushion to the next year. Each Cap year sits in its own bottom and when you're dealing with a very short period of time -- in this case just really 90 days of activity -- any blip could result in what I'd call a temporary Cap liability.

We think it's actually a very reasonable or probable chance we'll end this 2009 Cap year with no liability. But without a doubt with softened admissions growing between 2% and 4% in '09 we're concerned, we'll keep an eye on it. But also I'll point out that the second half of the year admissions will be much easier to lap. Certainly the first quarter of 2008 was our best admissions year.

So the first quarter is going to be difficult on a comparative basis, but the fact is we know where the problems are, it's not in all locations, it's in certain locations, it's a combination of economic disruption. The nursing home is not getting the patients, the discharge planner from hospitals aren't having the same activity, so we need to ferret out where those patients are and make sure they have access to hospice. But relative to Cap we think we're in a very good position.

Jim Barrett, C.L. King & Associates.

Good morning, everyone. Dave, I think this is a question for you. Could you talk about your allocation of capital in terms of how you would prioritize it between buying back the convertible debt, making acquisitions, buying back stock, reinvesting in the core business?

A good question because clearly our cash flow is strong, basically our earnings-per-share works out to be our cash flow. In the past we've been opportunistic in buying back our shares, our stock. We're not as inclined to do that, even though there's a significant amount of remaining authorization from the Board for continued share repurchase we're not inclined.

We did take advantage of purchasing our debt last year before our window closed in terms of we had clarity on what the quarter is. We purchased roughly $13 million to $14 million of stock -- or worth of debt, that effectively had a yield to maturity of almost 11%. So opportunistic in that regard.

We'll continue to take a look at our debt and if it's favorable repurchase it. But in this market with this bizarre capital situation we're actually inclined to build cash in our balance sheet and use it for opportunistic investments on the Roto-Rooter side and the hospice side. So not as concerned on share repurchasing as we are of maximizing our debt structure and taking advantage of good valuation on acquisitions.

Although we have -- over the last 12 months have repurchased a lot of stock under a slightly different situation.

I understand that, yes. And then secondly, Kevin, can you talk about Roto-Rooter for a moment? You're seeing -- you have guidance that the business will grow 4% to 5%. Is there revenue growth year to date that would support that guidance or is it more expectation that things will improve later on?

This is Dave, Jim. What I would say on that is clearly if we pass through a price increase and we have about -- on revenue side we're going to have roughly $7.5 million -- well actually we're lapping it -- so call it $6 million of increased revenue just from the acquisitions we completed last year on an incremental basis in 2009.

So a combination of our price increase -- those small acquisitions we did last year offset by a negative job count decline but probably not as severe as we saw in 2008 leads us to our modest revenue growth. So the fact is absent of a price increase in the acquisition we would be slightly down in revenue. But we've managed our way to a slight positive on our forecast.

Of course the bottom line is do we think that the Roto-Rooter guidance is particularly aggressive, no. We think it's in the middle of the range in that regard.

But to keep Roto-Rooter in perspective, in 2007 we had a record year of $69 million of EBITDA for Roto-Rooter and we had about $7 million or $8 million of CapEx. Let's just stay on the EBITDA. Our second best year ever in EBITDA by a pretty wide margin was 2008 just right at just barely under $60 million with the same amount of CapEx spending. I think the debate in 2009 is will it be our second best year ever for Roto-Rooter or our third best year ever for Roto-Rooter?

Again, it's slightly up or slightly down.

All right. And then Kevin, can you give us the view on your level of confidence that the hospice industry will be able to permanently clawback the CMS pricing action beyond October 1 of 2009? And what sort of timeline should investors be focused on in terms of the industry and VITAS' ability or progress in making that happen?

I'll say the first thing is the more you know the more you know you don't know. We are very active in our lobbying efforts along with the industry Association. It did not surprise us that we were included in the stimulus bill if only because of the precarious nature of so many of our competitors.

Last year before there was the reduction in the increase because of the budget neutrality factor, the government was reporting that hospital-based hospices were already at a minus 3 percentage points EBITDA margin for their hospices. The industry as a whole was under 5%. I mean there was a lot of consternation and pressure on representatives on both sides of the aisle to protect the hospice industry. Again, not protect high levels of margins to protect the viability of it, especially in rural areas.

So I guess the answer to your question is, we saw it as a two-step process as far as abrogation of the budget -- taking out the budget neutrality factor and we're through step one. I mean the issue if you ask us -- our personal view is that these struggling hospice programs are now in the process of redoubling their efforts to prevent the second clawback from occurring. So we'll see how it goes.

I will say this -- that one of the biggest supporters of the hospice industry is Arlen Specter, who has seen to be pretty important to the Democrats in achieving their filibuster proof margins on what they want to get enacted. With that -- Dave (multiple speakers)?

The only side thing, Jim, because it's a pretty good question is -- if you remember the House was looking to support getting rid of this budget neutrality factor for a year; the Senate didn't have anything in their initial bill and then they came together in conference. And as part of the bill there are notes on the conference.

And what they said is of course they receded to the House provision, but as part of this conference they don't anticipate extending this delay in the budget neutrality factor. They don't expect to extend the provision but what they did specifically state is they expect the hospice community to seek a permanent fix in the annual rule-making cycle. So what they really said is they expect us to work with CMS to keep this problem from happening again.

As part of this bill being passed in the Congressional record on February 12th, Arlen Specter, including 25 other senators, both Republicans and Democrats, basically strongly encouraged the President through Health and Human Services to stop any phase-out of the budget neutrality factor, and leave it to MedPAC's study to really examine the costs and the way hospice is taken care of, and then address this at the conclusion of the study.

So bottom line is they expect us to work with CMS to try to delay this budget neutrality factor until MedPAC has completed its study.

Okay. Well, thank you both very much.

Darren Lehrich, Deutsche Bank.

Good morning, guys, it's actually Pito Chickering in for Darren. A couple sort of quick questions here on the tail-end of this. Looking at the VITAS admissions growth, guidance for '09 of 2% to 4% I guess versus what happened in '08 and the tough comps in the first half of '09. Can you give us a little more detail as to exactly what -- how that is going to reaccelerate?

You talked a little bit about looking at some key markets and focusing on direct-to-consumer, but have you seen any sort of success of those so far, or just more detail on that?

This is Tim. No, I don't think we can provide a lot more detail. In many cases, it comes down to each location having a good strong management group there, a good strong selling effort with a good local plan. We have corporate individuals that oversight that, spur them along, monitor it and make sure it is happening. So as far as successes, we have had successes. We've had successes with hiring different types of sales representatives, as I mentioned before, that go into clinics as opposed to historical places we go.

We have had successes with local advertising programs, both in the radios as well as the newspapers. Television advertising doesn't seem to pay off for what you have to spend, and it really would just create a brand, we think. But we are also targeting the specific segments of the communities we serve. The Hispanic market is big in South Florida, and we have recently put forward an aggressive campaign for advertising to make sure that that segment of the community accesses or is aware of hospice. Historically, it has been underserved.

So a lot of these things are new, but they're also just programs we've worked on before, we know they'll work; it's just a matter of where you want to have your spending. If you'll recall, we accelerated our spending on sales efforts quite a bit early in '08. Those expenses now are not accelerating any further, so it's a good portion of our expense structure and it's just a matter of utilizing that correctly both on the direction of it and the individuals involved.

In many cases in various local programs it does come down to individuals who are not performing as well as they need to and we'll recruit new individuals to get us where we need to be in those cases. So we're being aggressive, we're changing things, but our historical approach is basically we'll get the job done for us with some modest changes. We're very, very comfortable with that.

So then I guess in looking at hospice industry in general, historically whenever you -- VITAS so far has done a very good job with Cap because of your focus on high acute patients. As you guys focus more to -- I guess the radio, newspapers and clinics versus hospitals, is there any concern that all of a sudden you could get some of the longer length of stay patients and face Caps with a new patient base you guys are admitting (multiple speakers)?

We're a long way away from that. Let me just say that.

I would say when our average length of stay gets to about 100 days and a good number of units then you'd have that type of issue would rear its ugly head.

And I'm not concerned about that. We're also being very aggressive in inpatient facilities. We have several new ones coming on board in the next couple of quarters that will help. And a lot of these places that we do get the referrals that we haven't historically, that does not mean they're long length of stay patients, they may clearly only be with us for several weeks. So if that trend were to begin to rear itself it would be a long time before that would provide a Cap problem. And we do have balanced admissions from these (multiple speakers).

One thing you can follow on that is our median length of stay is still almost 10 days shorter than the national average. Until you saw some substantial change in that number, that's another thing to look at. But (technical difficulty) we're a long way from that.

Okay. And then I guess a last question here is, going to the Roto-Rooter side, if you look at '08 year you had a pretty favorable mix shift with your excavations throughout the year. Looking into '09 as those become anniversaried, do you see that component of the business beginning to slow down year over year or is it still going to provide a pretty good tailwind for mix shift?

I'll turn it over to Dave, but just to say like a lot of things like that you can imagine we had more success in certain geographic areas, that's now a best practice. We're trying to hit those same levels at the other three-quarters of the country. In other words, there's plenty of geography left to do that same blocking and tackling and it's a reasonable expectation that we'll have plenty of time and effort and geography to see continued benefit from that mix shift. But Dave, anything other to add to that element of it?

Just -- there's been a number of call it beta sites in various Roto-Rooter locations in terms of what can we do to increase sales activity. And we've rolled out capital equipment in a variety of forms to these markets and we found out what worked and what didn't. In 2009 we plan to roll out a lot more, say for example, fiber-optic camera equipment through two different waves with key technicians or all technicians to camera every line to identify opportunities for excavation.

So the fact is we're only going from a small portion of our branches to nationwide in all of our company owned territories so we expect the excavation, for example, to continue, as Kevin mentioned. We're also looking at a number of other things. We're in a position we can afford $300 million -- or $300,000 for a Vactor, think of it as a giant vacuum cleaner for sludge and debris. We can afford that capital equipment where some municipalities can't so we can pick up larger jobs in that regard.

So we're utilizing our strong balance sheet, our ability to be able to buy expensive equipment to try to increase our jobs to offset some of the leakage in the other areas. So we're optimistic we could actually hold our own in this market as we see some of our competitors actually downsizing and closing up shop. So with those reasons we feel pretty good about our positioning for Roto-Rooter.

So a quick follow-up on that one and then I'll jump off. I guess looking out on the average site in '08 that had the fiber-optic cameras, what percent of your sites had that in '08? And where do you think that is -- what percentage of sites is that an appropriate level of service for in '09 and 2010?

I can't give you an easy answer because I don't have it. For example, areas with -- our markets that have a lot of old trees and high growth are much more productive for utilizing camera for collapsed lines, not as exciting say into Florida where most of the lines are only sitting under a couple feet of sand and you don't have significant old growth trees that are entering the lines. So each market is different, but we think there's actually more opportunity in 2009 than 2008 relative to excavation.

Great, thanks a lot.

Mario Gabelli, Gabelli & Company.

Just a quick question. If you were paying X to roll up a franchise two or three years ago and you were expecting a return of Y, I assume the returns, even though cyclical dynamics are obvious, what are you paying relative to that X today? Are you paying 30% less, 40% less --?

Well, let's put it this way. For the last three years we have not been very active in (multiple speakers).

Yes, I know, I know, so just a hypothetical question.

Here it is. I will put it this way. We are paying the last couple -- we've been very disciplined in our pricing and we've been buying them between four and five times EBITDA on an adjusted basis, making adjustments that are realized within six months or so. So very good pricing. Now the question is, that sounds like great pricing, why don't you buy 10 more in the first quarter?

The issue is that most of these franchisees have been in the family for two generations and the considerations that the sellers often make are non-economic in nature. When they're ready to sell they're ready to sell and we're the only potential buyer. Before that time, before they're ready to sell they say things like well if you pay me three times what it's worth I'll sell it to you.

Listen, I've been in the stock for two generations hearing the same arguments. Any event -- you're not going to comment on this question that someone is proposing, but so that I can get up to speed on this -- is the question to split the companies an actual proposal in front of the shareholders?

No.

Or will it be?

No. Not this proxy season, no. It's just a letter we've received.

I got you, Okay. So basically -- but it's not something that the shareholders are going to vote on?

That's correct.

So they'll just ask for that for next proxy season?

Perhaps. Maybe their issues will be resolved by then.

Good, I'm glad to hear that. Thank you very much.

Okay. Well, I guess if there are no further questions that will conclude our conference call for the fourth quarter and look forward to talking to you all in about three months.

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