Chemed Corp (CHE) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Chemed Corporation first quarter 2009 conference call. I will be your conference facilitator for today. (Operator Instructions). I would like to turn the call over to Sherri Warner with Chemed Corporation investor relations.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2009 ended March 31, 2009. Before we begin, let me remind you that the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call the Company will make various remarks concerning Management's expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors including those identified in the Company's news release of April 22 and in various other filings with the SEC. You are caution 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 the non-GAAP results is provided in the Company's press release dated April 22nd which is available on the Company's website at www.chemed.com. I will 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 turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone. Welcome to Chemed Corporation's first quarter 2009 conference call. I will begin with an overview of the quarter. I will then turn the call over to David Williams, Chemed's Chief Financial Officer. 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 this call up for questions. As this is our earnings call, we are focused today on our first quarter performance, not on our upcoming annual meeting and we'll ask that you limit your questions to matters related to our earnings announcement.

Chemed consolidated revenue in the quarter totaled $294.9 million and net income was $19.3 million. This equated to diluted earnings per share of $0.85 which is an increase of 30.8% over the comparable prior year period. If you adjust for non-cash items or items that are not indicative of ongoing operations, adjusted earnings per diluted share were $0.94 in the quarter, an increase of 28.8% when compared with adjusted earnings per diluted share in the first quarter of 2008. In late February, 2009, Congress approved the American Recovery and Reinvestment Act. This act provided 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, we did not include any adjustment to our fourth quarter 2008 revenue for this increase in Medicare Hospice reimbursement. Accordingly the revenue recorded in the first quarter of 2009 includes approximately $2 million of additional revenue that relates to the fourth quarter of 2008.

In the first quarter of 2009, our hospice business segment generated revenue of $208.4 million. An increase of 5% over the comparable prior year period, an adjusted EBITDA of $31.2 million, an increase in our adjusted EBITDA of 32.2%. This equated to an adjusted EBITDA margin of 15%. I continue to be pleased with the progress we've made over the past four quarters in managing our excess labor capacity as well as our general and administrative expenses. This progress is reflected in our improved EBITDA margin. The improvement in margin is a result of refinement in our approach in matching our labor needs to daily patient census. We accomplished this through a daily scheduling process, rebalancing the mix of nurses and home health care aides in our hospice teams and through more cost effective utilization of agency staff. One negative in the first quarter was the continuation of disappointing patient admissions.

In the first quarter of 2009 our admissions totaled 14,168, a decline of 6.9% over the prior year quarter. However, these admissions did reflect a 6.4% of sequential growth over the fourth quarter of last year and the first quarter of 2009 was the second highest admissions quarter in VITAS' history. We are re-evaluating every market in which VITAS operates and anticipate adjusting local marketing efforts to respond to shifts in admissions and referral patterns. Tim O'Toole will provide additional color on how we were shifting our resources in these markets to better access referrals sources and patient admissions. VITAS recorded $270,000 of Medicare cap liability in the first quarter of 2009. This Medicare cap liability relates to one provider number that had a gross margin in excess of 20% including this cap liability. Admissions in this provider number increased 10% when compared to admissions in the fourth quarter of 2008. Of VITAS' 34 unique Medicare provider numbers, 32 provider numbers or 94% have a Medicare cap cushion greater than 15% for the current Medicare cap year. One provider number has a 5 to 10% cushion and only one provider number has a projected cap liability. VITAS generated an aggregate cap cushion of $220 million during the calendar year 2008.

Now let's turn to our Roto-Rooter business segment. Given the severity of this economic recession, I'm very satisfied with the results of our Roto-Rooter operations. Our call volume declined 11.8% when compared to the first quarter of 2008. However, our job count only declined 6.9% and, more importantly, our aggregate revenue was essentially flat with the first quarter of 2008. We continue 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 priced jobs, increased excavation work and increased conversion rates of calls to paid jobs. Acquisition opportunities continue to be one of the few positive aspects of this recession.

The Dayton and Colorado Springs acquisitions completed in the fourth quarter of last year have provided Roto-Rooter with approximately $3.8 million of revenue and roughly $650,000 in EBITDA contribution. In addition, we completed the acquisition of our Detroit franchise on March 31, 2009. These acquisitions were relatively small and individually provided us with modest contribution to overall profitability. However, in aggregate, acquisitions could provide us with us meaningful growth over the next several years. Since Chemed acquired Roto-Rooter in the 1980s, we have acquired roughly half of the United States population in Company owned territories. The remaining 50% of the U.S. population resides in approximately 500 Roto-Rooter franchise territories that have an estimated $350 million in street sales. Our acquisition strategy is focused on acquiring the more densely populated franchise territories that have roughly $175 million to $200 million in street sales.

Over the past ten years we have made a significant investment in a centralized infrastructure. This centralization allows for integration of these acquired territories into our operations so they are immediately accretive to earnings and have minimal disruption to existing operations. Both of Chemed's operating segments are leaders in their markets and are well positioned to challenge-- to meet the challenges of a severe recession. A difficult economy may provide Chemed with opportunities relative to our competition given our strong balance sheet, capital structure, and approach to risk and return. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $208.4 million in the first quarter of 2009 an increase of 5% over the prior year period. Excluding the $1.95 million of fourth quarter pricing adjustment recorded in the first quarter of 2009, revenue increased 4.0%. This fourth quarter pricing benefit was taken into consideration when we issued our full year 2009 guidance. This revenue growth was a result of increased average daily census of 0.3% and a Medicare price increase of approximately 3.5%. The remaining difference is attributed to revenue and patient geographic mix. Average revenue per patient per day in the quarter was $195.87 which is 4.9% above the prior year period.

Routine home care reimbursement and high acuity care averaged $152.16 and $671.03 respectively per patient per day in the first quarter of 2009. During the quarter, high acuity days of care were 8.4% of total days of care. The first quarter of 2009 gross margin excluding the impact of cap and the retroactive pricing adjustment that related to the fourth quarter of 2008 was 22.8%. This is 276 basis points above the prior year quarter and represents our fourth consecutive quarter of margin increase. We believe this is a direct result of refinements to scheduled field labor. Our home care direct margin was 51.5% in the quarter. This compares to 49.5% in the first quarter of 2008, an increase of 200 basis points. Direct in-patient margins in the quarter were 17.4% which compares to 19.3% in the prior year. Occupancy of our in-patient margins-- or in-patient units averaged 79.5% in the quarter and compares to 80.7% occupancy in the first quarter of 2008. Continuous care, the least predictable of all levels of care, had a direct gross margin of 19.1% in the quarter which compares to 16.5% in the prior year period. Selling, general and administrative expense was $17.5 million in the first quarter of 2009, which is an increase of 8.7% when compared to the prior year. VITAS adjusted EBITDA totaled $31.2 million. Excluding Medicare cap and the impact of the fourth quarter 2008 pricing adjustment, adjusted EBITDA increased 25.1% over the prior year and adjusted EBITDA margin increased 239 basis points to 14.3%.

Now let's turn to Roto-Rooter. In the first quarter of 2009 recessionary pressure continued to impact demand for certain discretionary plumbing and drain cleaning services. As noted earlier, this is evidenced by the 11.8% decline in call volume in Roto-Rooter centralized call centers. The revenue impact of this decline has been substantially offset by selective price increases, favorable job mix shift to higher priced jobs and increased conversion rate of calls to paid jobs. Roto-Rooter's plumbing and drain cleaning business generated sales of $87 million for the first quarter of 2009 essentially flat to the comparable prior year period. Job count in the first quarter of 2009 declined 6.9% when compared to the prior year period. Total residential jobs declined 5.2% as residential plumbing jobs decreased 4.4% and residential drain cleaning jobs declined 5.6% when compared to the first quarter of 2008. Residential jobs represented approximately 70% of our total job count.

Total commercial jobs declined 10.8% with commercial plumbing job count declining 12.7% and commercial drain cleaning decreasing 11.3% when compared to the prior year quarter. These declines were partially offset by an 18.8% increase in jobs in our other category. This job count decline was significantly mitigated relative to total revenue through a combination of our increased pricing and favorable job mix shift. On a geographic basis there continues to be substantial disparity and demand for Roto-Rooter services within the United States. Although this disparity has lessen somewhat over the past several quarters. The south region has experienced a 19.4% year-to-date decline in commercial jobs while commercial volume declined 1.2% in the northeast region. Residential demand is not as disparate with the south region residential job count declining 11.5%, while the remaining regions have experienced a job count decline ranging from 4.5% to 9.6%.

Now let's take a quick look at our consolidated balance sheet. Effective January 1, 2009, the Company retrospectively adopted the provisions of FASB Staff Position Number APB14-1. "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." This new rule required Chemed to separately account for the debt and equity portions of its 1.875% convertible notes. This accounting assumed the Company could have borrowed under a conventional seven year fixed rate interest only note at 6.875%. The difference between the 1.875% coupon rate of the notes and its estimated borrowing rate created a discount on the notes that is recorded in equity retrospectively to the inception of the debt. The notes, net of this discount , will be accreted to their face value over the life of notes 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 pre-tax interest expense of approximately $6.3 million or $4.0 million on an after tax basis.

Chemed's total debt was $159 million at March 31, 2009. This debt is net of the discount taken as a result of the FASB staff position I just mentioned. Excluding this discount at aggregate debt is $199 million, of which $187 million carries the fixed interest rate of 1.875% and is due in May 2014. The remaining debt consists of a $12.0 million bank term loan with a current interest rate of approximately 1.4%. Chemed's total GAAP debt is less than one times trailing four quarters of adjusted EBITDA. Chemed's $175 million revolving credit facility expires in May 2012. At March 31, 2009, this credit facility had approximately $149 million of undrawn borrowing capacity after deducting $26 million of letters of credit issued under this facility to secure the Company's workers compensation insurance. Net cash provided from operations in the first three months of 2009 aggregated $25.1 million. Capital expenditures for this period aggregated $3.4 million and compares favorably to first quarter 2009 depreciation and amortization of $6.9 million.

Our 2009 full year guidance is as follows: VITAS expects to achieve full year, 2009, revenue growth prior to Medicare cap of 5.5% to 7.0%. Admissions are estimated to increase 1.5% to 3.5% and full year adjusted EBITDA margin prior to Medicare cap is estimated to be 15.5% to 16.5%. This guidance assumes VITAS will receive a Medicare basket price increase net of the BNAF phaseout of 1.5% effective October 1, 2009. In full year calendar year 2009 Medicare contractual billing limitations are estimated at $4.0 million.

Last night the Centers for Medicare and Medicaid services issued the proposed rule for the hospice wage index and phaseout of the budget neutrality adjustment factor for fiscal year 2010. This proposed rule was not a surprise and has been anticipated since February 2009. This proposed rule basically corrects the inconsistency that is currently in the federal register regarding this phaseout. The inconsistency was created when Congress, as part of the American Recovery and Reinvestment Act, suspended the budget neutrality adjustment factor reduction originally set for fiscal year 2009 but did not affect fiscal years 2010 or fiscal years 2011. CMS is proposing hospice reimbursement effective October 1, 2009, is at market basket plus a 75% phaseout of the budget neutrality adjustment factor. CMS has the 2010 market basket adjustment at 2.1%, less 3.3% for the phaseout or a proposed cut in reimbursement from current range of 1.2%, again effective October 1, 2009. This proposed reimbursement change is anticipated to go into the federal register on April 24th, this Friday, and is subject to a 60 day comment period. We anticipate providing comments to CMS on this proposal as well as work with the administration and Congress to ensure continued hospice access for all Medicare and Medicaid beneficiaries. We will adjust our guidance regarding 2009 hospice reimbursement once the 60-day comment period lapses and CMS issues the final rule regarding the budget neutrality adjustment factor.

Now on the Roto-Rooter guidance, Roto-Rooter anticipates to achieve full year 2009 revenue growth of 3.0% to 4.0%. The revenue growth is a result of increased pricing of 5.0%, a favorable mix shift to higher revenue jobs partially offset by a job count decline estimated at 7.0 to 9.0%. Adjusted EBITDA margin for 2009 is estimated in the range of 17.5% to 18.5%. This guidance does not include any Roto-Rooter franchise acquisitions that may be completed after the first quarter of 2009. Chemed's 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.

The stock market volatility does not have any material impact on Chemed's reporting pre-tax earnings. Excluding the impact of taxes associated with this deferred compensation issue, Chemed's effective tax rate for the full year 2009 is estimated at 39.0%. Based upon these factors and a full year average diluted share count of 22.6 million shares, Management estimates 2009 earnings per diluted share from continuing operations excluding non-cash expense for stock options, the non-cash increase in interest expense related to the accounting change for convertible debt interest expense and the tax rate impact from deferred compensation investments will be in the range of $3.70 to $3.95. I will now turn this call over to Tim O'Toole, Chief Executive Officer of

Thank you, David. Over the past year we re-enforced the importance and the necessity of efficiently managing our labor. We've refined our approach to the daily scheduling of field labor with the goal of ensuring appropriate levels of staffing notwithstanding length of stay and census fluctuations. All of this was accomplished as we continued to provide quality patient care averaging over 5.5 visits per patient per week, which is well above the industry average. We anticipate continued investment in labor management and scheduling tools with the goal of advancing patient care and using our resources in a more efficient way. While this will not eliminate the inherent volatility in our labor costs a as 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 on a comparative basis continue to be difficult as our admits declined 6.9% in the quarter. Keep in mind, however, that the first quarter of 2008 had a record level of admissions for VITAS. The first quarter of 2009 was in fact the second best quarter of admissions in VITAS' history and represented a 6.4% increase in admissions as compared to the fourth quarter of 2008. However, we are not remotely satisfied with our admission rates. Admissions are critical to our long-term growth and we anticipate addressing this problem with the same focus and energy we've applied to the management of our labor cost. We're analyzing each market in detail in terms of segmentation and focus, referral source trends and our marketing and intake processes.

Certain geographic markets are experiencing more disruption than other markets. Florida, the market where we have the largest presence and which represents 38% of our census continues to remain steady in terms of admissions, average daily census and revenue. Our Illinois and Texas markets are particularly difficult and have experienced declines in admissions, census and revenues in the last several quarters. We attribute this decline to the combination of the economic disruption to traditional referral patterns and the need to adjust our local marketing and education approach in these locations. VITAS' average length of stay in the quarter was 76.6 days which compares to 71.5 days in the prior year quarter and 83.1 in the fourth quarter of 2008. Our median length of stay was 13 days. Our days of care totaled over 1.1 million days in the quarter, a decline of 0.8% over the comparable prior year period. The comparison of the first quarter of 2009 to the prior year quarter was modestly impacted by the first quarter of 2008 containing an additional day since it was a leap year which negatively impacted the comparisons by 1.1 percentage points.

Routine home care days declined 0.7%, continuous care days increased 4.6% and in-patient days of care declined 8.1% when compared to the first quarter of 2008. At March 31, 2009, we have three programs classified as start ups, all of which are licensed and Medicare certified. These start up programs had an average daily census of 63 patients with revenues of $854,000, and pre-tax operating losses of $280,000. These same programs had an average daily census of 12, no revenue and operating losses totaling $309,000 in the prior year quarter. With that I would like to turn the call back to Kevin McNamara.

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

(Operator Instructions). Your first question comes from the line of Darren Lehrich of Deutsche Banc. Please proceed.

Thanks. Good morning, everyone. How you doing? Couple things here. I guess the first I just wanted to start off with your assumptions for the 2010 update. I heard your comments and obviously saw the proposal last night. Is there something imbedded in your assumption with regard to fourth quarter that implies where you think your advocacy efforts may come out? I'm just trying to square the 1.5% number which I think was net with what came out last night.

(inaudible) Actually, what we anticipated, but this hasn't changed since we issued guidance at the end of--- when we reported the fourth quarter. We were originally anticipating actually higher inflation and a 220 basis point cut after the budget neutrality factor.

I see.

So, obviously now inflation that's coming out is lower and the budget neutrality cut is higher. Although we consider actually what is going out in this proposed in the federal register on Friday is pretty draconian. If you think about it based upon MedPAC's estimate, there's only a 4% margin in the entire industry, and effectively that gets eroded with inflation and now CMS is proposing a cut in reimbursement effectively 1.2 points, lower reimbursement on October 1.

We don't think the industry could weather that. We can. We have obviously more scale and we have the ability to offset a portion of this. But a lot of hospices are hand to mouth and some of them currently operate at a loss with charitable contributions. So this will be a very interesting 60 day comment period. And we think there will be a lot of talk both in Congress and the administration on what they want to do with hospice.

The other element in the proposal was some changes to physician certification. I'm just wondering if you could give us your remarks or comments about how you see that impacting your process, if at all.

One, we're very positive. We've been working very closely with MedPAC and we're actually in complete agreement on the recertification process of the narrative from our medical director and we currently do that now. We are a little concerned on the proposal regarding the initial certification primarily because that typically involves two doctors - the patient's doctor as well as our VITAS doctor. And the patient's doctor may not be completely familiar with end of life, and the process, so we're concerned with a lot of education on that side. It could result in a negative impact on admissions or there will be a delay in patient's entering hospice. What we are currently planning on working through the comment period to point these issues out. But, on the recertification process, we think it's on the money and we are in favor of the narrative.

Okay. That's helpful. And then I guess just, Tim, you did discuss some of the issues you're having in a few states and we clearly saw the admission number here. I guess I wanted to drill down a little bit more in terms of the expectation for the balance of the year which would imply some pretty steep recovery in admissions. First question is, is there anything competitively maybe with regard to [SNF]- based hospice programs. I think your SNF census may have been down a bit here. What else do you think will drive the admissions back into the level that you are guiding to?

Very good. I think that is certainly one of the issues we were seeing softness in the nursing home area, the SNF area. That's an ongoing trend for some time. A lot of difficult issues there. Some of it is related to the reimbursement they are receiving from the Medicaid programs and the individuals that are not coming into the SNFs any longer. So that's caused our admissions to come down from there. Some of the SNFs have their own internal hospice programs that has been a challenge. That's been happening over the last several years. It's not a sea change to any degree.

I think the balance of the year we are continuing to work on, again, local efforts both at the management level of the local programs and the analysis of the opportunity seeking new sources of opportunities. We are also continuing to focus now on just sort of new direction to -- I mean, the patients are -- that need hospice are out there. They are not basically cited any longer in some of the historical places where they have been, for example, nursing home or assisted living. So, we're becoming very aggressive and I think making the right moves to talk with different referral sources, home health companies that now have a lot of patients that are appropriate, personal care companies, community organizations, retirement communities. We are doing branding at the local level through print and radio. We are working more aggressively on the internet where people are seeking their own information before they select a hospice company. So again, it's a process.

And as we mentioned the first quarter admissions in 2008 were extremely high for us. So as we move through the balance of this year the comparisons get easier for us on a year to year over comparison and I think we were seeing some progress. We saw little bit of progress as the quarter moved to its end in March better than the early part of the quarter and we were optimistic that we are making the right moves to increase our admission rate. When we have an opportunity, we need to have the appropriate discussion very quickly and we need to have the service levels very high. And be able to bring them in and admit them quickly which we do. Better than most. And all of these other activities that I mentioned are kind of shift in direction. We think we will begin to pay off. We think we were seeing that. We have to prove it still. The year will be challenging but I think it will improve as we go forward.

That's helpful. Thanks. My last question is over on the Roto-Rooter side of things. Maybe if you can remind us-- this other category which is growing and has been growing nicely. What is the percent of your revenue. I recall it's less than 10%. Can you talk about the maybe percent of jobs and number of jobs and revenue and I think what's implicit in your guidance for math is right. Pretty good continuation of the growth in this other category. Maybe a little more discussion there, please.

I mention only because if you do the math the overall change in job count decline and give the weight of the pieces it looked a little funny. But basically other for example for the first quarter other contained a total of 2800 jobs this year versus 2600 the prior year. So, it's not significant. In this case we just had unusual as a percentage it was larger so it skewed the numbers a little bit and that's why we mentioned it. We are only talking in total other $3.2 million is the typical revenue in it and it was. So, it was just an unusual fluctuation of job count, but it's very, very immaterial.

Okay. Then where is the growth in plumbing really coming from. I guess looking at the guidance. I think you did lower the range a little bit. Can you just give us a sense for where you think that visibility is into that number or that range?

We are finding decline in job count and flat revenue and really keep in mind we did have the acquisitions that it's not overly material, it's $3.8 million in revenue, but certainly helps on the margin. For example, job count declines 6.9%, but if you -- it gets a little difficult because one of the acquisitions, Colorado Springs, just blended into an existing branch, but job count would have declined 10.1% without those acquisitions. We also converted a Las Vegas to a contractor so that also fuzzes a little bit where it's excluded to the job count. But certainly these numbers-- we were dealing with small changes and these numbers are impacted by the acquisitions.

And then the Detroit is in the $3.8 million revenue number or is that --

No. Detroit closed on March 31. So it's not in there.

Okay. So the incremental annual revenue, can you give us a sense for what you acquired thus far this year?

We did $3.8 million for the quarter and you can pretty much annualize that so say a $15.5 between $15 and $15.5 million annually from Colorado Springs and Dayton combined.

Okay. Very good. Thank you.

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

Good morning. Just going back to Darren's question on the reimbursement in the rule last night. If we simply take your guidance in the 1.5% increase you have and then plug in sort of a 2.1% decrease, that's sort of the delta where numbers could go theoretically if the final rule is adopted? Is there maybe some color you can add there?

I would say from a raw math standpoint we would basically we are talking about would have to lower -- would lose 2.7% of about $208 million. The fourth quarter revenue we'll get from Medicaid and Medicare. That could be as theoretically if you don't do anything to offset that, $0.13 to $0.15. However, we clearly are going to start doing things today to try to mitigate some of this as well as the fact that we don't think it will happen to this extent. But we think -- if -- let's say it's frozen in time it's going to happen. It's guaranteed. We could offset-- it's difficult to say, but maybe half of that.

Great. And then I guess given the economic issues out there and when you are not for profit competitors and now I guess adding to this negative headlines that are likely come from this, can you talk a little bit about the acquisition environment for hospice? Have you seen any changes over the last few months? Do you start looking more aggressively? I'm assuming you already are looking aggressively at acquisitions but how does that change your thoughts relative to that strategy and have you seen impact in valuations or anything on that side?

Let me just respond by saying it hasn't changed much. It hasn't changed our outlook. We were aggressively looking at hospice programs 'cause they kind of fit our profile. Those tend to be larger hospice programs in major metropolitan areas with a good blend of patient mix. And there hasn't been a change. Those are not for sale at the present time. Virtually every other hospice program that doesn't fit that description is for sale.

It's a real question is what you describe the headlines, whether that presents a tipping point so that there would be a change. As far as our perspective, we were aggressive, we remain aggressive as far as pursuing every possibility for a program that would fit our profile. But again, it's been less than 12 hours since this came out, whether the effect of this change is going to be a tipping point, it's a little early to tell. As we described it previously, the pot of gold at the end of the rainbow from an acquisition standpoint when you combine what's going on with a not for profit, that is change in reimbursement, increase in paper work requirements, decline in charitable contributions and decline in contributions from endowment of the overall health care system. All of those factors would suggest the acquisition environment could possibly improve. We are standing at the ready.

Great. Thanks.

Your next question comes from the line of [Brian Sequino of Barclays Capital]. Please proceed.

Good morning. This is Brian Sequino on behalf of Adam Feinstein. Wanted to get back to your comments, Dave, on the things you are doing now to mitigate the potential for those cuts. I just wanted to know if you could expand on the service level or cost cuts or things like that.

Not so much as a cost cut as minimizing the increases that would happen otherwise. It's stiffens your backbone in terms of projects we take on in terms of central support, IT. It will certainly make us take a hard look at what we give merit increases from the highest level of the organization to the lowest level. But you basically-- we don't anticipate cuts, we anticipate managing the growth of expenses much, much more carefully.

Okay. And those are things that you are proactively taking at this point with the expectation that cuts will go through?

That's right. We were dealing with tens of thousands -- 10,000 plus of employees and what really happens is when all of the employees see the pressure in terms of pricing, it stiffens our backbone.

Okay. And then moving over to the acquisition front on Roto-Rooter, are there -- can you provide us with an update on opportunities to add franchises and potential acquisitions there?

I will say that there are -- in times of a recession is when you get the opportunities; we are talking with some people. One of our -- one of the issues is some of the biggest, best, potential acquisition opportunities in theory are in California, and again, it's a very uncertain operating environment right now and we are waiting for the dust to settle with regard to those operating conditions a bit. The franchisees that we have that are in that state are experiencing some real difficulty.

We were not -- we don't necessarily think we have all the answers to operating a business in that state. But it's -- that has not affected the numbers. In other words, if you look at the total street sales that we are looking to acquire eventually that just reside in that state, it is well more than half of the potential acquisition dollars that we would be thinking about. That's a factor. Yes, we are in active discussions with a couple of opportunities. Sometimes they are viewed as good candidates for our independent contractor program. We complete one on March 31 and I would personally be disappointed if we didn't make, let's say two plus additional acquisitions before the end of the year.

And then one more question. In the past you mentioned with the economy impacting struggling nonprofit providers and I guess them kind of getting a larger share of the referrals, can you provide us with an update on the trend.

I would describe it before as anecdotal. We hear that first of all our admissions are tough all over, according to our industry advocacy group. One of the factors that I think most significant factor for us is that let's say occupancy or people going through our health care system that are traditional are stronger with those and it's our traditional referral sources. If occupancy is down in nursing homes where we get a lot of referrals that affects the total number of referrals we get. With regard to hospitals, if hospital occupancy is down and we have very good relationships with those major metropolitan health care systems that have been strong referral sources, our referrals are down.

What you are referring to is something that we see on an anecdotal basis in several markets where as we are putting the pressure and making sure best practices are employed by our-- basically our sales people, the stories coming back are, boy, it's really tough. We have a lot of referral sources that refer patients to several hospices. We have seen and it's very understandable that some of the not for profits are really struggling. We are seeing the charitable contributions down 30% plus is the report we are getting. And they are crying poor essentially to the referral sources and the referral sources have a lot of respect. These are well run not for profits and they have a lot of respect for the job they do and seen on an anecdotal basis are having an effect on several of our programs. Do we accept that as an excuse for not getting our admission numbers? No. It's more of something that we don't quarrel with as an explanation of one of the factors we were dealing with. But, again, it's something that-- that's the element that if all that is true, those forces are not going away. We have to overcome them.

Okay. Thank you for taking my questions.

Your next question comes from the line of Jim Barrett of C.L. King & Associates. Please proceed.

Good morning, everyone. Tim, could you talk about the three start ups that you referenced. Is that a good run rate for VITAS as we look forward this year and next year and beyond?

We minimized the start up programs so we have a couple two or three going on so that's probably what you will see for a run rate right now. And the licensure is very difficult as far as timing and keep in mind we are in a lot of the markets that are available. There is only about a dozen or so -- of large markets with over a half a million population or so that we're not in and some of them have limitations of licensure. We are very focused on extending satellite offices from our existing large programs and large cities and we don't speak about those, but we are actually accelerating those efforts. So we think we can get some growth there. There will be selective new starts, but I hope to be able to improve those in the future and get higher level and that's the current run rate and there hasn't been any change of thinking for the next couple quarters anyway.

Understand, when we talk about licensure issues, some states like California that won't send anybody out to give the final sign off.

Both California and Texas have a so called "moratorium" just by administrative fiat -- so it will be very difficult to do in those areas. So we look at the places where there are some opportunities. But, as I say, extending market penetration where we are seems to be the best opportunity and looking for selected acquisitions as Kevin mentioned. I'm sure those are going to become available at some point.

So when I look out longer term is more the growth at VITAS likely to come from as much acquisitions as from organic growth and expanding your satellites and your current programs?

We were certainly not pulling back on our outlook for organic growth. We expect to grow very well and we will get through this admission slowdown and grow our top line organically. Yes, as we said, we definitely would like to see acquisitions in our mix. The large ones and the larger metropolitan areas that have high census opportunities, those will be our goal. As Kevin said, we were on the ready.

If you do the math, Jim, if you look at organic growth, where does it come from basically it comes from price increase which you've already talked about, and just with the CPI being down, we would expect our cost of living increase basically to be low, separate and apart from the budget neutrality factor. That's going to be relatively low. You get it from increase in admissions, which we're fighting that but even at the top of our range we are talking about something under 5%. Then you are talking about your average length of stay which again in the hospice field, we are not looking for any big increase.

The way you get big increases in average life of stay is if you have a change in patient mix away from short stay patients to more longer stay patients and that's not anything that any hospice program really pushes for any long term period. That's the basic business. That's organic growth. There is no question that we see the potential for consolidation of this industry as always around the next corner. We aren't sure what the tipping point will be. Again, when you have an industry average, EBITDA margin of 3 to 4% and talk about changes potential changes in reimbursement, after adjusting for inflation, wiping that out, it's not hard to imagine it won't take much to start convincing some of these health care systems to outsource the position of hospice service to a more efficient provider.

Okay. And Kevin, you may have answered my next question, but assuming your Roto-Rooter acquisition-- the few you hope to do this year are modest in size, is the plan for the cash to simply accumulate it and the expectation that larger deals will happen eventually happen on hospice and may some day happen on Roto-Rooter as well?

The answer is yes but I will turn it over to Dave. There are some other things we have done with cash at the right price we've -- repurchased our convertible debentures at a very good return. But Dave, why don't you give our current plan.

The short answer is the cash will accumulate on the balance sheet. We will spend in 2009 a total of $10 million in required pay down of the remaining term loan. $2.5 million a quarter and we'll be opportunistic if the yield of maturities is adequate to buy in our convertible rate debt. But absence of that, cash on the balance sheet available for acquisitions, our line of credit is available for acquisitions.

Okay. Thank you, everyone.

Okay. With that, no more questions. I just want to thank everybody for their attention and we will get back to work here. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.