Chemed Corp (CHE) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Chemed Corporation's second quarter 2009 conference call. My name is Chanel and I will be your conference call facilitator today. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. I would now like to turn the call over to Sherri Warner with Chemed Investor Relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2009, ended June 30th, 2009.

Before we begin let me remind you that the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 applies to this conference call. During the course of this call the Company will make various remarks concerning management's expectations, predictions, plans and prospects which 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 July 30th 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 July 30th 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 second quarter 2009 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 $295.3 million and net income was $17.3 million. This equated to diluted earnings per share of $0.76, an increase of 11.8% 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 $0.97 in the quarter, an increase of 26% when compared to the adjusted earnings per diluted share in the second quarter of 2008.

In the second quarter of 2009 our hospice business segment generated revenue of $211.3 million, an increase of 6.2% over the comparable prior-year period, and adjusted EBITDA of $31.3 million, an increase in our adjusted EBITDA of 19.2%. This equated to an adjusted EBITDA margin of 14.8%, which is 162 basis points higher than our margin in the prior-year second quarter.

The improvement in margin is from a more dynamic process of matching scheduled labor to daily patient census. This is accomplished through a daily scheduling process, rebalancing the clinical resources in our hospice teams and through more cost effective utilization of agency staff.

In the second quarter of 2009 our admissions totaled 13,840, a decline of 0.8% over the prior-year quarter. However, these admissions do reflect a favorable trend line against the first quarter seasonality. Typically, the second quarter of a calendar year has the sequential decline in admissions. The second quarter of 2009 had a modest 2.3% decline in admissions when compared to the first quarter of 2009. This compares favorably to the seasonality decline of 5.7% in 2006, 3.2% in 2007, and 8.3% in 2008.

Regardless, I remain disappointed with our aggregate referrals and admissions. Admissions are very much a locally driven marketing effort. We continue to evaluate our approach in each market in which VITAS operates and are adjusting these local marketing efforts in response to shifting admissions and referral patterns.

During the second quarter VITAS reversed $505,000 of Medicare Cap liability recorded earlier in the Medicare Cap year. This Medicare Cap liability had related to a single provider number with a gross margin in excess of 20%. A modest improvement in admissions run rate effectively erased the necessity of a cap accrual for this program.

Of VITAS' 34 unique Medicare provider numbers, 32 provider numbers or 94%, have a Medicare Cap cushion greater than 10% for the most recent 12 month period, and two provider numbers have a cushion of less than 5%. VITAS generated an aggregate cap cushion of $180 million or 25% of billed revenue during the most recent 12 month period.

Now let's turn to our Roto-Rooter business segment. Net income from Roto-Rooter increased 5.5% in the quarter. We generated this growth in earnings despite a very difficult demand environment. Total job count declined 7.7% when compared to the second quarter of 2008. However, our revenue was essentially flat with the second 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 have been one of the few positive aspects of this recession. The Dayton and Colorado Springs acquisitions were completed in the fourth quarter of last year, and our Detroit franchise was acquired in March of 2009. During the second quarter of 2009 these acquisitions have provided Roto-Rooter with approximately $4.2 million of revenue and roughly $1.3 million in EBITDA contribution.

Since Chemed acquired Roto-Rooter in the 1980s we have acquired roughly half of the Unites States population in company-owned territories. The remaining 50% of the US population reside 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 10 years we have made 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 the markets and are well positioned 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 $211.3 million in the second quarter of 2009 which is an increase of 6.2% over the prior-year period. This revenue growth was the result of increased ADC at 0.6%, a Medicare price increase of approximately 3.5%, the reversal of previously recorded Medicare Cap billing limitations which increased revenues 0.6%, and 1.5% of this growth is attributed to level of care and patient geographic mix.

Average revenue per patient per day in the quarter was $194.33 which is 5.3% above the prior-year period. Routine home care reimbursement and high acuity care averaged $152.42 and $672.57, respectively, per patient per day in the second quarter of 2009. During the quarter our high acuity days of care were 8.1% of total days-of-care.

The second quarter of 2009 gross margin was 23.2%, which is 139 basis points above VITAS' gross margin in the second quarter of 2008. This is the fifth consecutive quarter of margin improvement and, as Kevin noted earlier, is the result of continued refinements of scheduled field labor.

Our home care direct gross margin was 52.1% in the quarter. This compares to 51.5% in the second quarter of 2008, an increase of 60 basis points.

Direct inpatient margins in the quarter were 16.6%, which compares to 17.8% in the prior year. Occupancy of our inpatient units averaged 73.8% in the quarter and compares to 79.1% occupancy in the second quarter of 2008. We now have 27 dedicated long-term inpatient units with 370 total beds.

Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.2% in the quarter, which compares to 17.6% in the prior year. Average hours billed for a day of continuous care averaged 18.5% in the quarter.

Selling, general and administrative expense was $17.9 million in the second quarter of 2009, which is an increase of 3.5% when compared to the prior year.

VITAS' adjusted EBITDA totaled $31.3 million, an increase of 19.2% over the comparable prior-year period. Adjusted EBITDA margin was 14.8% in the quarter, increasing 162 basis points when compared to the prior year.

Now let's turn to the Roto-Rooter segment. In the second quarter of 2009 recessionary pressure continues to impact demand for certain discretionary plumbing and drain cleaning services. This is evidenced by a 15.6% decline in call volume in Roto-Rooter's 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.

Job count in the second quarter of 2009 declined 7.7% when compared to the prior year. Total residential jobs declined 6.3% as residential plumbing jobs decreased 8.5%, and residential drain cleaning jobs declined 5.4% when compared to the second quarter of 2008. Residential jobs continue to represent approximately 70% of our total job count. Total commercial jobs declined 11.1% with commercial plumbing job count declining 13.6%, and commercial drain cleaning decreasing 11.4%. These declines were partially offset by a 20.6% increase in jobs in the "Other" category.

There continues to be a substantial disparity in demand for Roto-Rooter services within the United States, although this disparity has lessened somewhat over the past several quarters. For example, the South Region has experienced a 19.7% year-to-date decline in commercial jobs, while commercial volume declined 10.7% in the Central Region. Residential demand is not as disparate with the South Region residential job count declining 11.4% and the remaining regions have experienced a job count decline ranging from 5.4% to 10.3%.

Now let's look at Chemed's consolidated balance sheet. Chemed's total debt was $154 million at June 30, 2009. This debt is net of the discount taken as a result of FASB Staff Position No. APB 14-1. Excluding this discount, aggregate debt is $192 million of which $187 million carries a fixed coupon interest rate of 1.875% and is due in May 2014. The remaining debt consists of a $5 million bank term loan with a current interest rate of approximately 1.2%. During the second quarter of 2009 we prepaid $4.5 million of the bank term loan utilizing cash on hand. Chemed's total debt is less than 1 times trailing four quarters of our adjusted EBITDA.

Chemed's $175 million revolving credit facility expires in May 2012. At June 30, 2009, this credit facility had $147.2 million of undrawn borrowing capacity after deducting $27.8 million of letters of credit issued under this facility to secure the Company's workers' compensation insurance.

Total cash and cash equivalents as of June 30, 2009, was $16.6 million which represents 10.5% of total current assets. Net cash provided from operations in the first six months of 2009 aggregated $43.1 million. Capital expenditures for the first six months of 2009 aggregated $8.1 million and compares very favorably to depreciation and amortization in the first six months of 2009 of $13.8 million.

Management continually evaluates alternatives including share or debt repurchase, acquisitions, as well as increased dividends to determine the most beneficial use of our capital resources.

Our 2009 full year guidance is as follows. VITAS expects to achieve full-year 2009 revenue growth prior to Medicare Cap of 5.0% to 6.0%. Admissions in 2009 are estimated to be in the range of 98% to 102% of total 2008 admissions and full-year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 15.5% to 16.5%.

We continue to wait for CMS to review the hospice industry's comments and issue a final rule regarding the phase-out of the budget neutrality factor. In addition, the various healthcare reform bills currently being debated in Congress could have a material impact on 2010 hospice reimbursement. All of this makes it very difficult to accurately project Medicare hospice reimbursement beginning October 1, 2009.

As a result, we have elected to maintain the prior quarter's estimate on our change to Medicare hospice reimbursement. This estimate assumes a net reimbursement increase of 1.5% effective October 1, 2009. Full calendar year 2009 estimated Medicare contractual billing limitations, or Medicare Cap, have been further reduced and are now estimated at $2.3 million.

Roto-Rooter expects to achieve full-year 2009 revenue to range from flat to an increase of 1%. 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%. Our Roto-Rooter adjusted EBITDA margin for 2009 is estimated in the range of 17.5% to 18.5%.

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 22.7 million shares, 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 interest expense, and other items not indicative of ongoing operations, will be in the range of $3.75 to $3.95.

I will now turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS.

Thank you, David. As most of you are aware, over the past year we have placed significant emphasis on the importance and necessity of efficiently managing our labor. Every one of our team leaders have been sensitized on balancing patient needs and maintaining appropriate levels of staffing.

I am also pleased that our efforts have materially increased our operating results, expanding EBITDA margins almost 300 basis points when compared to the first quarter of 2008. All of this was accomplished as we continue to provide a high level of care, averaging over 5.5 visits per patient per week which is well above the industry average.

With labor costs in check, VITAS operations are focused on increasing our level of admissions. We have significantly increased our overall investment in the admissions arena. Today we have 283 sales representatives, 119 admission coordinators, and almost 300 admission nurses. Increased spending in the sales and admissions area has resulted in an increase in our total admissions cost of $716,000, or 4.7%, when compared to the prior year quarter.

Although not reflective in our aggregate results, we have seen some positive results from these efforts. Admissions have increased in three of our four top referral categories. During the second quarter admissions per patients in their home increased 2.5%, ALF admissions increased 1.3%, and hospital referred admissions increased 0.3%. Nursing home referrals declined 8.2% in the quarter.

On a geographic basis, admissions increased between 1.1% and over 58% in six of our 15 states, plus the District of Columbia. Our largest state, Florida, increased admissions 1.1%, and our second largest state, California, increased its admissions 4.4%. Our biggest challenges are in the Illinois area, which experienced a 12.6% decline in admissions, and Texas, which experienced a 10.4% decline in the second quarter 2009 admissions.

Admissions are critical to our long-term growth and we are attacking this problem with the same focus and energy we applied to our labor management. We are constantly analyzing each market in detail in terms of segmentation and focus, referral source trends and our marketing and intake process.

VITAS' average length-of-stay in the quarter was 73.4 days, which compares to 73.2 days in the prior-year quarter, and 76.6 in the first quarter of 2009. Our median length of stay was 14 days. Our days of care totaled 1,084,714 days in the quarter, an increase of 0.6% over the comparable prior-year quarter.

Non-nursing home routine home care days increased 4.4% in the quarter. However, this increase was substantially offset by a decline of 7.8% in nursing home days of care. Continuous care days increased 11.8% and inpatient days of care declined 6.8% when compared to the second quarter of 2008.

At June 30, 2009, we had three programs classified as start-ups, all of which are licensed and Medicare certified. These start-up programs had an average daily census of 69 patients with revenues of $946,000 and pre-tax operating losses of $284,000. These same programs had an average daily census of 15, $117,000 of revenue and operating losses totaling $339,000 in the prior-year quarter.

With that I will turn the call back over to Kevin McNamara.

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

(Operator Instructions). Your first question comes from Brendan Strong of Barclays Capital.

Hey, good morning. Thanks for taking the questions. Maybe first to Tim, can you give any additional color on some of the markets where you had these very substantial declines in admissions, and if that's something that's addressable, is it something that you might be looking to divest some centers at some point? Any color you can provide would be helpful.

Well, absolutely, Brendan. First of all absolutely not, we are not looking to divest. You know, the Texas and Illinois market, we mentioned that that nursing home softness and probably those markets have been most impacted by that, somewhat the economic conditions, somewhat the market situations there. The nursing home markets have been impacted probably most by individuals who are in tough economic situations, not going into the nursing homes or even leaving them. I think part of it is we are not doing as well as we should with our local management efforts. Competition is maybe doing a little better in those markets than us and we are looking to change that.

So, I don't see it as a long term issue. We are studying it, we are putting more resources there, we're making changes, and I believe we will make that success there as we move forward.

Okay. And then maybe just a quick one on Roto-Rooter. I'm not sure how to really think about it. On the one hand it looks like trends are stabilizing in terms of some of the declines you have been seeing there, but on the other, you are facing an easier comp there given the larger declines in the second quarter of '08, versus first quarter of '08. So, how are you thinking about that business? Is it stabilizing or does it continue to decline?

Well, let me just say that it's certainly stabilized, I mean it's not spiraling down. I'll say that call demand is still very weak and there's, as we said, some of the issues, we were able to bring sales to the flat level and income to a positive comparison.

But, the bottom line is that when things are tough in the economy these are the kind of consumer choices that are put off when they can be and, as Dave mentioned, in the southern market where our commercial is down substantially as far as jobs. In regions where there was new home building and there is none now you have the new construction plumbers in the market for repair plumbing. Now they can't really get into the residential market in a big way because it takes a big presence in the yellow pages to do that and that takes time to do, but you see them on the commercial side.

So, I guess what I'm saying is we're not out of the woods. We're helped by the fact that we're at record low turnover and that's a big expense item for Roto-Rooter. But, if I was to characterize it I would say we are bumping along, but not spiraling down in any respect.

So, again, is it something we're excited about? No, but at the same time we are encouraged by how responsive the Roto-Rooter management and infrastructure has been to the difficult situation. We're metal against metal, but where any break or any management problem in a region or a break in the business in any region would be very harmful because there would be nothing to prop it up and we've avoided those.

So, in that regard we're just very comfortable that when the economic conditions improve we're going to be very well placed. I mean, to the extent we have some business we were able to hire plumbers out there. There are plumbers available and if there is somebody who is very skilled and if he is like a responsible person we hire him and that's -- we're improving our work force. But, we need the jobs to take advantage of that.

Okay, and then just maybe a quick housekeeping question for Dave. The GAAP interest expense is up about $300,000 this quarter versus the first quarter. Is that, I think, just what we are going to see every quarter due to the convert?

Yes. The short version answer would be yes.

Okay, thanks.

The next question comes from the line of Frank Morgan of RBC Capital Markets.

Good morning. My question would be obviously on the strong cash flow here. What are really your priorities for use of cash right now, I mean, clearly, you've got a lot of different possibilities but I was hoping you could rank your priorities there for the use of proceeds.

And then also just any updates on new program development? Are you considering accelerating new program development over on the VITAS side and if so, any particular markets?

Thanks, Frank. Let me start by saying, setting our priorities. Priority number one always is we are looking for attractive acquisition opportunities for both businesses. That is, Roto-Rooter franchises that are of significant size that we think could either be part of our innovative contractor program or company owned operations and, of course, hospice programs. Virtually any hospice program that comes to market we look at and if it makes sense and there is reasonable valuation we get involved. So, that's always priority number one.

I would say, given the fact that we've paid down about as much debt as we can pay down at this point, something that's kind of probably increased on our priority list is really return to shareholders. Now, over the last couple of years we paid a modest dividend and been very active in repurchasing our stock. Given the current market and how low current returns are I think that it wouldn't be unreasonable -- it's up to the Board -- but I think that higher in management's mind right now is to increase substantially, on a statistical basis, our dividend.

So, that's something that I would expect we'll modify a little bit. Instead of paying very low dividends and being very active in stock repurchase we'll blend those two a little bit better I think, or a little differently, I should say. So, that will be a change. But, with regard to use of our cash I don't want to depart from the fact that we always want to feel we have sufficient powder dry to move aggressively when there's an opportunity with either business.

David, do you have anything else to add to that?

No, I think that's kind of the triage of where we see our cash going.

How much do you have available in your current authorizations on re-purchase?

Fairly significant. I want to say in excess of $50 million, [Art]?

I don't have the exact numbers, $51 million or $54 million.

Okay, and in terms of just any updates on new program developments, because it just seems like, obviously with the admission growth being weak, are there some new market you could go to, or does it make any sense to actually go in and acquire in the markets where you're having these problems with maybe acquiring your competition in Texas or Illinois? Thanks.

Tim, I don't mean to start, I can turn it over to Tim, but just say, if something is for sale we're looking at them and it's a question of some of the entities might fill the bill as you describe it are just not available at any reasonable cost. They're either a not-for-profit or a hospice that has such a different way of doing business, that has a census so low or that it's maybe on the periphery of where we do business, that there's no way it would make sense in our organization from a cost perspective. And, Tim, anything--

Absolutely. I think Dave Williams' phone number is on our press release, so anyone interested in selling, call Dave and we talk every day about it.

So, I would also say, yes, we are very interested, and in the markets where we are not doing as well as we would like that is certainly something we would consider. As far as opening up de novo start-ups I believe we will. We've kind of had a little--

Hiatus.

--hiatus is the best word. In the last couple of years we did about nearly 30 of them, if you look back about three or four years ago, and they're dong well. The licensure got very difficult in the last couple of years because of the state requirements and some moratoriums and not having the surveyors available. There seems to be some movement in some areas because they've moved to the possibility of having some private accreditation organizations be able to do the survey licensure. So, we are beginning to look at that.

In the interim we have been opening satellite offices to penetrate our larger markets further and offer better service to our patients. And we also believe that some of the hospices that we see, the small/medium size, are coming under a little bit of pressure because of the situation with reimbursement and maybe some of the not-for-profits with their contribution pressures.

So, we're looking. We are in very good shape to take on acquisitions and add new locations and, yes, I would hope that would accelerate over the next several quarters.

Is the increased competition that you talked about in Texas and Illinois -- is that on the for-profit side or the not-for-profit side?

It's both but probably more so on the for-profit side, nothing terribly new. We're seeing some competition come from the home health agencies where they're forming hospices and that's not a new trend, it's been happening for several years. It's one thing we've been doing to accelerate our selling marketing effort to home health agencies to let them know we can partner with them to bridge their patients, when appropriate, to hospice. But, I would say no big new trends, but probably coming more from the for-profit sector and home health businesses getting into hospice.

Let me say about Chicago. VITAS has been in Chicago forever. We have had success there. We're not on a winning wicket right now but we don't think that that's necessarily indicative of any long-term trend, and we think, as Tim said earlier, we've had some management turnover there. We've got to do some shoring up of the basic business in Chicago and with that I think that in this type of business if you do a better job, you get more referrals. And we don't think there's anything in Chicago or Texas that changes that basic model.

I know you -- this will be the last one I promise -- I know you mentioned last quarter about you were starting to see a change in referral patterns where some of the not-for-profits seemed to be more aggressive. Are you continuing to see that or is that--

Around the margin. Believe me,the not-for-profits are having some difficulty. I can tell you about a couple of conversations that I've personally had with regard to people at not-for-profits that it's coming at them from all angles. They have reimbursement uncertainty, they have significant declines in charitable contributions, and they have declines in the value of the endowment that maybe their overall healthcare trust has. They're struggling and they're calling out the-- they're saying they need help to their referral sources.

And again, a lot of the ones that I'm referring to are not-- they're out to do a good job, maybe have higher cost structure, aren't as efficient, and they're much beloved just like we like to think our VITAS operations are much beloved. In virtually every market VITAS is in there is a much beloved not-for-profit hospice system, and when they're crying poor, people don't ignore them.

I would say now that sounds like it's bad news. The good news is these much beloved not-for-profits have a lot of sway with the politicians and that's one of the reasons we have a relatively high degree of confidence in they're going to be treated fairly by the political class is because these not-for-profits who are much beloved, are struggling so mightily.

So, it's like a lot of things in life, when they give you something, they take something away. This is the case that there is some good and bad associated with it.

But to answer your question, short answer, we are continuing to see that struggle with regard to referral sources where just if you compare we still are getting referrals from these sources. It just seems to be fewer numbers in many respects and there's a different answer. Sometimes it's well because at the nursing home there are just fewer-- the occupancy is lower. Sometimes the referral source that just says, "Well, I'm doing the best I can," and what that usually tells us "I'm just balancing things." And when we hear that it usually means that they're trying to keep their not-for-profit operating.

But, that's a very general answer to something that we see-- we're putting a lot more money and effort in admissions and we would like to that it turned around in a month or in a quarter, and it hasn't. We are continuing to do a lot of blocking and tackling and we've seen a lot of benefit but, as Tim mentioned, there's two markets and when you look at the overall numbers they're knocking our socks off. Other than those two markets we would be doing in the range of okay.

And that's why we're optimistic. We know the markets we are dong well in. We're making good progress. We have good strategies and the first strategy that always works is to give excellent care to the patients and families. We know we're doing that and we know we're making changes in the markets where we're not performing well and the economic situations seem to be improving, and pressure throughout the industry we believe actually will create great opportunities for us as we move forward. So, I'm fairly optimistic about where we're heading.

Thanks.

Your next question comes from the line of Pito Chickering.

Thanks, guys. It's Pito Chickering in for Darren Lehrich. A few questions here. I guess the first one is -- and I apologize -- going back to Texas and Illinois. After looking at those markets, is the hospice population relatively unchanged in terms the number of people that are available for hospice care or entering hospice care? And then kind of once you've sort of quantified that, if you look at sort of where your referrals are coming from -- you mentioned nursing homes, other for-profit or not-for-profit hospice programs -- how do you quantify there's 5% less population and losing X% from nursing homes and Y% to other hospices? Like is there some ways to quantify, just more details what these market look like?

I'm going to turn this over to Tim and hopeful that he can respond with some specifics. But, let me start by saying, yes, we think that the number of hospice-eligible patients in both those market is up 0.1%. It has not changed significantly over the last 12 months.

I think that one of the things that you have to remember, when we talk about the nursing home population being down in a market, the reason that has such a profound effect on the hospice admissions is that the hospice benefit is largely misunderstood. In some environments patients get a very good explanation of how wonderful the hospice benefit is. If they're in a nursing home they will hear all about it. If they're in a hospital immediately discharged the discharge planner will be very knowledgeable about the hospice benefit.

With regard to the that universe, hospice gets a good set of its admissions. To the extent that the people are at home or not seeing a doctor as regularly for a variety of reasons, they are hospice eligible but they just haven't been instructed quite as well as they would be if they were in a different environment.

So, we start by saying we think the numbers -- nothing has changed with regard to that group. They haven't moved from -- to the South because the weather is better or something like that. That's the same -- and that's one element before I turn this over to Tim -- that's one element that we say that there can be a profound effect on the hospice industry separate and apart from kind of the arithmetic comparison. That's something that we definitely see now.

I'll also add that in Texas we had a fairly high level change in personnel that immediately went to a competing hospice program and we believe that that type of problem every business has from time to time, it tends to be a little bit of unfair competition that is like throwing a rock in a lake. In a short time it makes a big splash, but in a short time things kind of return to normal. We're still dealing with that a little. But, now with that overview, Tim, anything other--

Well, no, I think all of that is exactly right and, no we do not see any changes in the demographics or population opportunities as far as demographics and that's one great thing that continues about our business as we look out over the next three to five to 10 years the demographics are really growing opportunities for us.

I think in both Texas and Illinois the only color I could provide is there is some, in certain nursing homes we've probably seen a little more of maybe captive hospice situations where they're working with a small group of physicians that have their own hospice, and, therefore they're not offering as much choice to their patients with multiple hospices and that comes and goes.

So, what we need to do is, again, offer reasons why the nursing home will want to work with us because of the type of care we give and the advantages we can bring with our resources. So, we are trying to reinforce that with marketing sales efforts. We are trying to upgrade our educational opportunities so we can educate about what VITAS can do, just a little extra and special compared to other hospices, which we believe and we know it's true. So, but that's just been one situation where we've seen a little bit more of the captive hospice in nursing home markets in both Texas and Illinois and that comes and goes. So, we expect to work through it.

I would be shocked. Those two markets have been and are going to continue to get so much attention that, personally, I would be shocked if we didn't have a substantial improvement.

So, because of all of that, I guess what would change -- it sounds as though if you have skilled nursing your volumes are down and the hospice patients that are captive, and then on these home health you know are much more affordable, those guys have a captive audience there. In some ways you receive pressures from your skilled nursing and home health, I guess, what percent of your referrals come from those two categories in those two markets and is there -- what if it shifted back. Is it just an increase in claims -- what would make it go back to the status quo?

Well, we would get about 30% of our admissions generally from the nursing home market -- 25% to 30%. And as far as home health, that's a small situation today as far as admissions that are coming from home health. That's more of a trend as opposed to a large percentage. It's about 5%. And again, as I say, the situation sometimes becomes where you have people start up and they garner some level of patient census and then they find that it's more difficult to grow because they don't have the breadth in the marketplace that we do. They don't have the level of inpatient unit opportunities where we're accelerating our inpatient facilities which is the more difficult side of the care, offering continuous care programs which is a more difficult side of the care.

So, these things sometimes happen. They usually top out and then as the opportunities grow because of demographics and because of our selling, marketing, educational, liaison issues, the fact that we try to offer specialty programs to acknowledge, for example the Hispanic community where we offer Hispanic teams, and because of our size we can do that. So, these are the advantages we think we have and we will add additional resources, and that doesn't mean that the competition won't continue to do well and I'm not expecting a sea change in the next quarter but I expect the decline to abate and estimate slight progress over time.

And, Pito, it really comes down to one of the real mysteries of business, and that's this. You have a salesperson whose been pretty much -- three big customers that he is getting his business from those three and taking care of them and still looking for more, but basically depending on those three. If he loses one what usually happens is somehow magically he gets two more medium sized ones to replace it because he has to, or she has to, and some of that which isn't rational, you kind of say why didn't they keep the three and get the two new ones on top of it? That's just isn't how it's done.

But, yes, that's the type of thing that, to the extent that we're in Chicago and one of our units in Chicago had maybe a group of four nursing home operators that got together and came up with their own hospice and all of a sudden we're getting no referrals from them. We've got to go back and get them from other sources, and over time we have no reason to expect that we won't be successful.

Well, that is very --

There's nothing in those market that is overly worrisome to us.

All right, that is very helpful. So two quick kind of followups here, I guess, looking at those markets from a Medicare Cap perspective as you see admissions sort of beginning to go negative, what are the indications of a (inaudible) because of how much Cap pressure do you guys have, and if trends don't change in the next bunch of quarters, what could that do to the Medicare Cap calculation for those markets?

That's what I'm saying, but let me say, just by statistically, those markets that we described have a cap cushion presently in excess of 10%.

Okay.

Actually, you follow any trend to it's -- beyond a logical conclusion it can lead to problems. But, here again, we have some time and, again, when you start talking abut cap situations it changes the economics such that you can throw a lot of money at a problem and have it still make economic sense.

And what I would add -- this is Dave Williams -- the Illinois and Texas markets have individually all in excess of 10% cap cushion even with this trend line of--

Substantially in excess of 10%. We have a lot of inpatient units in both of those markets. Our average length of stay is below our norm in those markets and so we're making very, very good progress on Medicare Cap throughout the Company and we're not looking for big increases in admissions to sustain the cushions that we have. So, I'm very optimistic on that situation even though we always make sure we report to you that it is volatile and it could change, but we do not see that the admission situation that we're seeing in either of those markets as a problem vis-a-vis cap.

If you don't mind, one other way to say it is, internally we're looking at our lack of success in growing admissions is more of an affect on our top line than it is cap and it's effect on net income. We've just -- we'd like to have our top line going at 2% or 3% higher in getting that from admissions.

And keep in mind that is the other component of the cap calculation is revenue. So if revenue is flattish it doesn't create much of a pressure as long as your admissions are flattish. You still keep your similar range of cushion.

Right. Thanks a lot, guys. I appreciate it.

There are no further questions. I would now like to turn the call back over to Mr. Kevin McNamara.

Okay, this concludes our second quarter 2009 conference call. I want to thank you for your attention. I look forward to talking with you all in October. Thank you.

Ladies and Gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.