Chemed Corp (CHE) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Chemed Corporation's fourth-quarter 2009 earnings conference call. My name is Latrese and I will be your conference facilitator for today. Please note 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 your host for today's call Ms. Sherri Warner with Chemed investor relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2009 ended December 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 February 15th 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 15th, 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 Office of Chemed Corporation; Dave Williams ; Executive Vice President and Chief Financial Officer of Chemed; and Tim O'Toole, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone. Welcome to Chemed Corporation's fourth-quarter 2009 conference call. Chemed's consolidated revenue in the quarter totaled $303 million, and net income was $18 million. If you adjust for certain noncash items, or items that are not indicative of ongoing operations, adjusted net income totaled $24.2 million, and equated to adjusted earnings per diluted share of $1.06, an increase of 7.1% when compared to adjusted earnings per diluted share in the fourth quarter of 2009. In the fourth quarter of 2009 our hospice business segment generated revenue of $218 million, an increase of 5.7% over the comparable prior-year period, and adjusted EBITDA of $34.3 million, essentially equal to the prior-year quarter. This equated to an adjusted EBITDA margin, prior to Medicare cap limitations, of 16.5%.

In the fourth quarter of 2009, our admissions totaled 13,677, an increase of 2.7% over the prior-year quarter. Admissions growth has been challenging in 2009. However, through a combination of increased resources and significant effort by our field-based personnel, we have begun to positively impact our admissions trends. These efforts have generated a 2.9% admissions growth in the second half of 2009. In the fourth quarter of 2009, VITAS recorded a reduction in revenue due to an estimated Medicare cap limitation of $1.8 million. The amount recorded relates predominantly to one program, which is our largest provider number. Admissions for this provider were strong during the quarter. However, revenue increased at a more rapid pace during the quarter due to a decrease in overall discharges and a mix shift to higher acuity days of care. The full-year gross margin for the program, including the Medicare cap limitation, was approximately 28%.

The government's Medicare cap fiscal year begins on September 29. The first quarter of a Medicare cap year has potential to be volatile if the program experiences any unusual admissions or discharge patterns. As the year progresses, individual program Medicare cap calculations become significantly less volatile and more predictable on a year-to-date basis. Actual January 2010 admissions in this one program were more than adequate to eliminate all billing limitations for this program for the four-month period, October 2009 through January 2010. However, consistent application of our Medicare cap liability accounting methodology requires VITAS to recognize this $1.8 million in revenue reduction in the fourth quarter of 2009. VITAS anticipates reversing all or a significant portion of this Medicare cap liability related to this one program in the first quarter of 2010. Of VITAS' 34 unique Medicare provider numbers, 32 provider numbers, or 94%, have a Medicare cap cushion greater than 10% for the trailing 12-month period, with two provider numbers having a cushion of less than 5%. VITAS generated an aggregate cap cushion of $189 million, or 24% during the trailing 12-month period.

Now, let's turn to the Roto-Rooter business segment. Roto-Rooter demand continues to be impacted by the recession. However, through a combination of strategic price increases in individual markets, increased high-revenue excavation jobs, and strict operating expense management, Roto-Rooter generated $16 million of adjusted EBITDA, an increase of 3.4% over the prior-year quarter. Adjusted EBITDA margins in the quarter were 18.7%, an increase of 76-basis points over the fourth quarter of 2008. Both of our business segments performed well in what I would consider an extremely challenging economic environment.

With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $218 million in the fourth quarter of 2009, which is an increase of 5.7% over the prior-year period. This revenue growth was a result of increased admissions of 2.7%, Medicare price increases of 3.5%, partially offset by a shift in patient geographic mix, and the timing within the quarter of admission and discharges. The 3.5% aggregate change in Medicare price was a combination of a 1.3% reimbursement rate increase, effective October 1, 2009, as well as adjustments to the budget neutrality adjustment factor phase out that occurred in February 2009 and August 2009. Our average revenue per patient per day in the quarter, before the effective Medicare cap, was $196.28, which is 3.6% above the prior-year period. Routine home care reimbursement and high acuity care averaged $154.74 and $678.94 respectively per patient per day in the fourth quarter of 2009. During the quarter, high acuity days of care were 7.9% of total days of care. This compares to high acuity days of care of 7.8% in the prior-year quarter.

The fourth quarter of 2009 gross margin was 24.1%, which is 106 basis points lower than the fourth quarter of 2008. The revenue reduction for Medicare cap limitations reduced fourth-quarter 2009 gross margins by 64 basis points. The remaining decline is caused by higher labor costs -- slightly higher labor costs and a revenue mix shift towards higher acuity care, which carries a lower gross margin than routine home care. Our home care direct gross margin was 52.5% in the quarter, a decline of 80 basis points, when compared to the fourth quarter of 2008. Direct inpatient margins in the quarter were 11.6%, which compares to 14.9% in the prior-year period. Occupancy of our inpatient units averaged 71.1% in the quarter and compares to 75.8% occupancy in the fourth quarter of 2008. Our inpatient results were impacted by the expansion of our inpatient capacity. Tim O'Toole will provide additional metrics related to our inpatient strategy later in this presentation.

Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.1%, essentially equal to the prior-year quarter. Average hours billed for a day of continuous care averaged 18.7 in the quarter, a 1.3% increase over the prior-year's average. Selling, general, and administrative expense was $18 million in the fourth quarter of 2009, which is an increase of 4.4% when compared to the prior year. Adjusted EBITDA totaled $34.3 million in the quarter. The adjusted EBITDA margin, excluding the impact from Medicare cap, was 16.5% in the quarter. This compares to an adjusted EBITDA margin of 16.8%, in the prior-year quarter.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $85.7 million for the fourth quarter of 2009, a decline of 0.8%. Despite the decline in revenue, Roto-Rooter's gross margin expanded 61 basis points to 46.2% as compared to the fourth quarter of 2008. This is attributable primarily to favorable technician turnover rates and lower health insurance expense. Favorable technician turnover rates improved margins by reducing hiring expenses and our training costs. Recessionary pressure continues to impact demand for Roto-Rooter discretionary plumbing and drain cleaning services. This is evidenced by a 12.3% decline in our full-year 2009 call volume. The call volume attrition has declined sequentially over the last two quarters, with the fourth quarter of 2009 incurring a 7.3% decline in their inbound phone volume. The revenue impact of this decline in call volume has been substantially offset by selective price increases, favorable job mix shift to higher-price jobs and increased conversion rates of calls to pay jobs.

Job count in the fourth quarter of 2009 declined 6.3%, when compared to the prior-year period. Total residential jobs declined 4.9%, as residential plumbing jobs decreased 3.5% and residential drain cleaning jobs declined 5.6% when compared to the fourth quarter of 2008. Residential jobs represented 72% of our total job count in the quarter. Total commercial jobs declined 9.8%, with commercial plumbing job count declining 13.7% and commercial drain cleaning decreasing 9.7% when compared to the prior year quarter. These declines were partially offset by a 21.5% increase in jobs in the other category.

Now let's review our consolidated balance sheet. Chemed had total debt of $152.1 million at December 31, 2009. This debt is net of the discount taken as a result of new accounting standards. Excluding this discount, aggregate debt is $187 million and is due May of 2014. Chemed's total debt equates to less than one times trailing 12-months adjusted EBITDA. Chemed's $175 million revolving credit facility expires in May of 2012. At December 31, 2009, this credit facility had approximately $146.2 million of undrawn borrowing capacity, after deducting $28.8 million for letters of credit issued under this facility to secure the Company's workers' compensation insurance. Capital expenditures for 2009 aggregated $21.5 million and compares favorably to depreciation and amortization in 2009 of $27.9 million. Our total cash and cash equivalents as of December 31, 2009, was $112.4 million, which represents 56.7% of total current assets and equates to a working capital ratio of 1.5. Our full-year 2009 free cash flow, defined as free -- as cash flow from operations less capital expenditures, totaled $139.3 million. Net cash provided from operations in the fourth quarter of 2009 aggregated $80.3 million.

The fourth-quarter 2009 cash flow was unusually high, due primarily to the liquidation of $50.7 million in accounts receivable primarily at VITAS. During the fourth quarter of 2009, VITAS cleared certain regulatory hurdles allowing for collection of accounts receivables, which had been delayed, mainly by Medicare, due to administrative process delays or compliance audits. Additionally, VITAS received a periodic payment from Medicare of $30.4 million on December 31, 2009, which further enhanced total cash collections during the quarter.

The Company increased its quarterly dividend per share in the third quarter of 2009 from $0.06 per share to $0.12 per share. During the quarter the Company purchased $742,000 of treasury stock, and we have approximately $53 million of remaining authorization under our previously-announced share repurchase program. Management will continually evaluate cash utilization alternates, including share repurchase, debt repurchase, acquisitions, and increased dividends, to determine the most beneficial use of the available capital resources.

Our 2009 full-year guidance is as follows. VITAS expects to achieve full-year 2010 revenue growth, prior to Medicare cap, of 5.0% to 6.0%. Admissions in 2010 are estimated to increase 2.0% to 4.0%, and full-year adjusted EBITDA margin, prior to Medicare cap, is estimated to be 15.0% to 15.5%. Effective October 1, 2009, Medicare increased average hospice reimbursement rates by approximately 1.3%. This guidance also includes $5.0 million of estimated Medicare cap contractual billing limitations during 2010. Roto-Rooter expects to achieve full-year 2010 revenue growth of 1% to 3%. The revenue estimate is a result of increased pricing of approximately 3.0%, a favorable mix shift to higher-revenue jobs, offset by a job count decline estimated at 2% to 4%. Adjusted EBITDA margin for 2010 for Roto-Rooter is estimated in the range of 17.5% to 18.0%.

Based upon these factors, an effective tax rate of 39% and a full-year average diluted share count of 22.8 million shares, management estimates 2010 earnings per diluted share from continuing operations, excluding noncash expenses for stock options, the noncash increase in our interest expense related to the accounting for convertible debt interest expense, and other items not indicative of ongoing operations, will be in the range of $4.05 to $4.20 per share.

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

Thank you, David. Over the past year we have placed significant emphasis on increasing admissions. We have begun to see a return for these efforts, with admissions totaling 13,677 in the quarter, an increase of 2.7%. Our largest market, Florida, increased admissions 4.4% in the quarter, and our second largest state presence, California, expanded admissions 3.5%. We were able to expand admissions in ten of our 16 states, and the District of Columbia. Our most difficult markets in 2009 have been Illinois and Texas. Illinois did generate modest admissions growth in the second half of 2009. Texas remains difficult, with a decline in admissions for the second half of 2009 of 7.3%. However, this trend is improving, with the fourth-quarter 2009 admissions off 3.8% when compared to the prior-year quarter. I anticipate continued improvement in both of these markets in 2010.

Admissions have increased in three of our four top referral categories. During the fourth quarter home-based admissions increased 1.1%, assisted care living facilities increased 7.8% and hospital-referred admissions increased 6.2%. Nursing home referrals declined 6.6% in the quarter. We have also increased our investment in the admissions arena. Today we have 298 sales representative 119 admissions coordinators and 305 admission nurses. VITAS has increased our total admissions staffing personnel 9.2% when compared to the fourth quarter of 2008. These investments in the sales and admissions areas resulted in an increase of our total admissions cost of $1.4 million, or 9.6% when compared to the prior-year quarter.

VITAS' average length of stay in the quarter was 76.4 days, which compares to 83.1 days in the prior-year quarter and 78.0 in the third quarter of 2009. Average length of stay is calculated using total discharges during the quarter. Median length of stay remains stable at 14 days. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,117,742 days in the quarter, an increase of 2.7% over the comparable prior-year period. Non-nursing home routine home care days increased 6.4% in the quarter. However, this increase was partially offset by a 5.8% decline in nursing home days of care. Continuous care days increased 4.3%, and inpatient days of care increased 5.3%, when compared to the fourth quarter of 2008.

As part of our market penetration strategy, we are strategically expanding our inpatient high acuity capacity. This strategy raises VITAS' visibility with key referral sources. In addition, increased care to high acuity patients can have a very positive impact on our billing potential under the Medicare cap formula. In the third quarter of 2009, we opened a 15-bed inpatient unit in San Antonio, and a ten-bed inpatient unit in Collier County, Florida, serving the Naples, Florida, market. In the fourth quarter of 2009 we opened up a ten-bed unit at Columbia Hospital in Palm Beach, Florida. In January of 2010 we began accepting patients to our Courtney Springs inpatient unit in Brevard County, Florida. The costs associated with this expansion in capacity did put some stress on our inpatient margins during the quarter. However, this increase in our high acuity capacity should have a very positive impact on our admissions in these markets on a go-forward basis.

At December 31, 2009, we had a total of 30 dedicated inpatient units with a total capacity of 420. This is an increase of 19.3% over the prior year. In addition to this dedicated inpatient capacity, VITAS has contract beds available at numerous hospitals in the vast majority of our programs to accommodate any unusual spikes in high acuity patient needs. As of December 31, 2009, we had two programs classified as start ups. One of these programs is licensed and has its Medicare certification.

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

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

(Operator Instructions). Our first question comes from the line of [Brian Sikeno] with Barclays Capital. Please proceed.

Morning, just a quick question here. Does your guidance assume any benefit from acquisitions in 2010?

No, there are no acquisitions in our guidance.

Okay, got it. And then moving on to Roto-Rooter, I know you guys mitigated some of the job count losses with a mix to higher-end service, and you mentioned that's also in your guidance for 2010, can you also give us a little bit of color in terms of how you expect that to continue and what's going on there?

Let me just say that the mix shift is largely moving to excavation jobs as opposed to just cleanout jobs. And again, one thing we observed over the last ten to 15 years, there's been a shift in the technology of building drainage systems for houses and small businesses has moved from a clay pipe to a plastic pipe. Plastic pipes have fewer clogs, but when they go bad it's what's known in the plumbing industry as catastrophic, meaning it usually requires a replacement of the plastic pipe or an excavation job. And to the extent that it's a little bit of a different selling job, a little different expertise for it, we're just making sure that each one of our branches has increased emphasis and -- on their capacity to do excavation. And again, to the extent that we still see some branches with -- that aren't doing quite as good a job as the top ten or 15 we see room for improvement, and a continuation of that mix shift.

Got it. And then on the -- just a question here on the Medicare cap exposure, I think you said $5 million, and does that include the reversal of Q4? And if so -- or either way, do you feel like that's a number that can come down as the year progresses since there's only one of your programs in exposure right now?

Well, here's what -- Dave, feel free to jump in here but this is just a -- again, based on current trends, I would expect in the first quarter we reverse -- we will reverse the $1.8 million. We will also -- another $1.125 million will drop out because we -- if we don't have any cap out of our guidance, and then we will just assume -- we just have as a placeholder that there's -- just as far as guidance another $1.250 million remains in the three quarters. Again, over the last couple of years we had it in our guidance and it's never materialized, but it'll remain in our guidance. So this gives you the numbers, just to answer your first question, that is, it's $5 million for the year irrespective of the $1.8 million, which, again, we anticipate to be reversed in the first quarter.

Okay, thanks a lot.

So -- and this is Dave Williams -- just so we're clear on this, we're -- I think guidance assumes the $1.8 million does not reserve -- reverse, and we'll have $5 million of cap. Although, again, if you look at January 2010 the admissions alone would have basically guaranteed the reversal of this but we're being very conservative. Consistent with prior years we're leaving the $5 million of cap liability as a continual reminder to shareholders that it's always a risk, although we think it's highly improbable, but possible, that we could have up to $5 million of expense in the 2010 year.

Our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Thanks, good morning, everyone. I just wanted to ask a few things here and start off with just capital deployment and I know you made some brief mention about how you're thinking about it, but can you just really comment on your priorities at this point, and given the state of the capital markets, what do you think is the most efficient use of your excess capital in 2010?

Well, first and foremost, we want to do acquisitions, intelligent acquisitions that are accretive and financially sound, risk adjusted, so we always want to make sure between the -- our line of credit, as well as our cash on hand, we can do acquisitions. After that it's really a combination of -- and of course, we doubled our dividend, and share repurchases. We have $53 million remaining in previously -authorized programs, and we think right now, given the cash we generate on a per share basis, that's actually probably a very good use of our cash.

Great. And then I guess just speaking hypothetically, in an ideal world, if a series of attractive acquisitions were to come along, how much capital do you think you would need to have on hand to do that in kind of an ideal world? I'm just trying to get a sense from you how much dry powder you think you need to keep in reserve for your first priority in acquisitions and whether -- maybe buy back might become just a more important factor this year, given how much cash and availability you have at this point?

Well, let me just start with one on the Roto-Rooter side. At the time we had the opportunity to buy back -- to buy the two-thirds of VITAS we did not own. Now six years ago, we were in active negotiations with our two largest Roto-Rooter franchisee -- multi-site franchisees for a total purchase price at that point of about $70 million to $75 million, just for those two multi-site providers. Again, they -- both of those programs remain in our sights, I'll say that the improving operating situation and from a legal perspective in California has improve the outlook on those, but that's always not too far in the back of our mind. And with regard to VITAS, Dave, you can -- that's really an up in the air number.

Yes, and it's going to depend on the environment. For example, right now, when we look at acquisitions on the VITAS side of things, it's usually due to something unique about the seller for whatever their needs are. Whether they're looking to exit for an equity event, or they're just tired of the business, but it's unique to them and that is not going to be a huge amount of capital. But if there's an environment change where all the sudden there's reimbursement squeeze, or there's change in conditions of participation that make a huge investment in say IT systems or other regulatory hurdles to continue to get paid for the hospice care, then there could very well be what I'll call a rush to the exit and you'll see a significant consolidation in the industry and then you're talking about in this case, Darren, hundreds of millions of dollars. So right now, we don't see the sea change, but that could happen with a stroke of a pen. But so far 2010, we don't anticipate the mass rush to the exits but we're prepared for it.

And Darren, I'd say that the other thing is, that I would say we do anticipate stock repurchases and dividend increase, though.

Our ultimate challenge, though, is we don't consider the credit markets stable yet. Certainly they were better than they were in March of 2009, but the fact of the matter is, we don't have a high degree of confidence that when acquisitions become available that we'll have access to the capital. So from that standpoint, we have -- we want to keep our revolver available and we want to have a fair amount of cash on hand to be opportunistic. But with that said, we anticipate generating about $90 million of free cash flow in 2010 on top of the $112 million that's sitting on our balance sheet today, so we think we're in a pretty good position to be opportunistic.

That's great. And I just have a couple other things here. Tim, you mentioned you had, I think, two programs in startup mode coming out of 2009, and can you just update us on how you're thinking about new market development at this point, and whether the de novo or startup pipeline will build from here? Is that the go forward number, at any point in time I'm going to have a couple of new programs in development?

Well, absolutely. Yes, that's where we're at right now and we're probably anticipating a handful this year, maybe four or five. Obviously, we've talked before about opening satellite offices in some of our larger programs that's similar because it opens new territory, gives us a presence, so we always have some of those going on. The environment is still difficult for startups because of the crisis at the state level with having the survey teams come out and many states still have a moratorium on, so we have to select our markets carefully and understand it's going to take a longer time to get the Medicare survey completed. It can take several years, so it's a bigger investment and that's why we've slowed down a little bit. And at the same time, there's not that many markets that are opportunities for us. There's only about ten or 15 markets in the country we're not in that are above about 1.5 million of population. So the opportunity is there, we'll probably do four or five this year, and we'll look for satellite openings and also acquisitions to fill in cities where we're not at the current time. But that is what we're looking at.

And just to also to give some color. Just keep in mind that the state that has been the best and most fertile environment for startups for VITAS over the last eight to nine years has been California, and that is really where it has hit a wall. You're going to be providing service for free for a long period of time if you have a startup in California at this point with their financial situation just as far as sending people out to get licensed and certified.

Last question here -- thanks for that. Last question here is just job counts in Roto-Rooter, can you just speak to whether you're seeing any pockets of actual job growth, if you just look at total jobs, and maybe normalizing a bit for the excavation work? Just trying to get a sense for whether there's any pockets of --?

I would say the midwest. Our midwest branches have been, relatively speaking, strong with some job growth. We continue to struggle in the southeast, which, again, it's tough for Roto-Rooter in that the southeast went from Roto-Rooter's fastest-growing region to its most challenged, so it's hard -- until it at least it retreats to the mean Roto-Rooter's going to be facing some difficult comparisons. And it's largely -- when you talk about why is that, one of the major reasons is that was the region where there was the most new home construction that ground to a halt and the new construction plumbers have come into the market, they have to do something, and it's made it very difficult in the commercial market throughout the southeast.

And on the other side, do any declines accelerate at a worse pace?

No. No, I would say that the best number you could look at is -- the most important number for us that we look at, which the decline is slowing, of course, is, as Dave mentioned earlier, is call volume. Our declines in call volume are falling each quarter and as -- to the extent that those numbers normalize and we continue to have good conversion rate and price increases, that's where you'll see some improvement on the reported numbers in Roto-Rooter.

Great, thanks a lot.

And our next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. A couple of questions here. First, I'm assuming that the census and admit numbers include the new startups, I was curious if you have those same numbers on a same-store basis?

We do, Frank, minimal.

Okay. So that's effectively same-store numbers you're talking about?

Yes, they are.

Okay. Second question, on this long-term incentive comp, the $5 million that was imbedded in G&A in the fourth quarter, how do we model that going forward? Is that a once a year thing, is that a quarterly thing, and how much have you embedded in your model relative -- for your guidance, how much of this expense have you put in the numbers?

None. What the -- a little over $5 million pre-tax, though, was paid out in the fourth quarter of 2009, was a three-year long-term incentive program that basically if we had compounded EBITDA growth, before acquisitions of 10% or greater, that would trigger this payment and we hit it actually in October of 2009. These are disclosed in the K, as well as the proxy, but the exact date of if we'll hit these programs or when is difficult to determine.

There will be not be any payment under that EBITDA program for -- the earliest possible event would be three years hence.

So this is a nonrecurring thing and so that's -- it's not part of your guidance?

No.

Okay. In light of the more difficult pricing growth, 1.3% going forward, what do you really have lined up on the cost side to manage under this -- on this slower growth in your base rates?

Well, I think we've talked about it in the last call, being prepared for that. We put some very tough restrictions on it in the field as far as merit increases for existing employees and we've had very good success since August of last year when we started that in the Company. Right now we're fighting a little bit some increases that were put in, for example, in the first quarter of 2009 that still hit us, so it'll be difficult for the next six months in that comparison, but we put in the protections on a go-forward basis to work in this environment. In addition to that, we're looking at all of the cost area, our ancillary cost, things like pharmacy and medical equipment supplies. We know we've got good rates this year compared to the prior year with modest increases, if any, so we feel good about that.

The other thing we're obviously working on is trying to increase the productivity in any areas in the field where we can lower our cost structure. As far as the productivity of our caregivers, as far as how we route them, schedule them, we're working on that diligently and working on some technology improvements that I think over the next year we'll begin to get some modest improvement out of. So it'll be difficult over the next six months and difficult in this environment of a 1% price increase, but we've put the tools in place, we think we're able to keep our cost structure in line with that. And obviously, if we can grow our volume, which we're increasing our growth in admissions and census so our year-over-year volume is growing at a better rate than it was a couple of quarters ago, that'll also help to keep the cost structure in line. So we think we're in pretty good shape, but as you highlight, it's difficult environment with that small price increase.

And I would say, Frank, where the rubber meets the road, we anticipate, even with a 1.3% increase, protecting margins and yet keeping average visits per patient per week the same or higher. So if you ask me what -- if things got tough in the industry, I would -- for instance, if there were cuts in reimbursement, what I would anticipate observing in the industry is a decline in the average business per patient per week. We can live with a 1.3% increase with protecting our margins and protecting our visits per week.

Okay, one final question. The notion of the decline in admits from your source of -- from skilled nursing facilities, is that a fairly new phenomenon? Is that something that's recent, or is that a trend that you've seen for quite some time? I don't know that I've heard you talk about it that much.

Actually, we mentioned it the last couple of calls and it's probably a trend we began seeing about a year ago, and it's part of, again, overall macro trends. With a bigger growth in the assisted living facilities and the nursing home markets flat to even slightly down, many nursing homes have had very difficult environment with the Medicaid reimbursement at certain state levels and so they're holding back a little bit. But we've seen this trend for actually the last three or four quarters and we think we're going to make some progress as we move forward, at least with it -- we don't expect it to continue to decline.

If occupancy in nursing homes is down, our admits are going to be down for that segment. Simple as that.

But I thought most of the occupancy decline was just because you were having more turn in the Medicare patients. Don't you still have those longer-term Medicaid patients that are there for the final haul?

Yes, but again, as we've said, a nursing home is an environment that does a good job explaining the benefits of the hospice program and to the extent that you have -- I'm not really focused so much on the Medicaid side of it but to the extent that you have private pay nursing homes, or assisted living care, and to the extent that their occupancy is down, we're talking about a few percentage points here and there, but to the extent that they're down a few percent, our admits will be down a few percent.

Okay. But it's not because they're bringing hospice in house or there's just -- that markets got -- that segment's got --?

None of that. That's pretty stable. What I would -- if you observe our numbers over the last six years, when they've been doing that, you'll see that our numbers are pretty stable in the nursing home segment, it's just taken the luster. In other words, we have to run pretty hard to keep the numbers stable just because there's a small hole in the bucket.

But Frank, without a doubt there has been a trend for the nursing homes to -- they're getting more aggressive on their hospice programs but there ' severe limitations to what they can do in that regard because the nursing home referral is the second longest length of stay of any referral, the first being assisted living facilities. In any nursing home that enters hospice that doesn't cast a very wide net and attract high acuity patients that are discharged directly out of hospital, they will have a severe Medicare billing cap billing limitation. So that will soften -- anyone who is too aggressive in this area will get caught short, so they're hurting us a little bit on the periphery because that but it won't continue long term.

I got you. Thank you very much.

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

Good morning. Just one simple question for modeling. How should we think of CapEx for 2010?

Roughly let's say $22 million to $25 million.

Okay. And then going to -- you were talking about revamping your admissions sales and marketing strategy, I'm just curious, when you look at that do you see your strategy more as gaining market share from the existing operators in a market, or is it focusing on getting new patients or maybe growing the benefit on a base of patients that maybe haven't had access to it before, and ways you see as maybe the opportunity to further grow access to the benefits?

Well, I think the answer to the question is we're trying to accomplish both of the areas you talked about. We're trying to maintain our market share in competitive markets. Some markets we have very high market share and we're trying to improve our sales effort, both from the professional individuals we hire, and how we train them and oversight them and the material we provide them, and certainly in certain programs where we have smaller market share, some of the new starts that are developed over the last two, three, four years, we're adding sales people, we're trying to grow our market share and we're accomplishing that. And yes, we are going to nonhistorical referral sources more frequently now, as we've developed opportunities to partner with home health companies, personal care companies, various sources out there that we have worked on over the last year, as we saw the hospital market and the nursing home market give us a little less opportunity and that'[s working for us. So, again, just improving the overall selling, marketing effort, having the better responses from our admissions areas to get to people very quickly, and appropriately discuss the hospice option with them. So, again, we're just trying to improve on all fronts and I think we're making some progress in all of those areas.

And to summarize, though, to answer your question, one of the things I can pull away is it's taking market share. In virtually every market in which we operate or are likely to operate in this year there are no underserved markets. We will ba -- in virtually every market we operate, there is a fairly large not-for-profit that's out there that is our major competitor and to the extent that we have programs that are very successful we usually have very successful in competing against that large not-for-profit, and taking market share that they have. That's -- as Tim said, we fight a battle on several fronts, but at this point, we're taking mar -- to improve we take market share.

And that's -- yes, I guess that's what I was trying to get to and I guess the other part of the follow-up is that is your position with the capital you have at your disposal to invest in programs and invest in marketing and sales gives you this advantage that you feel is helping to you take that market share?

Well, one thing that Tim alluded to in Tim's presentation, we've added a lot of, for us, state-of-the-art inpatient facilities in key markets. It's an investment that Tim said stress our inpatient margins a little bit, but that's what's going to help us fight that battle in those markets, having -- again, it's another feather in our cap to have some additional top-of-the-line inpatient facilities.

Great, and then just one last question and I'll jump off. Obviously Medicare's the vast majority of payment in hospice, but any thoughts on state budget pressures on the Medicaid hospice benefit? I know it's a very small piece, but any thoughts there?

Each state has its own unique issues. Every now and then -- Florida had rumblings a couple of years ago. The funny thing is hospice saves the state a significant amount of money, as well as there's some cost shift to the federal government. So most cases, it's not economically sound for the state to screw with it, in blunt terms, but there is always the underpinning of -- a state legislature is capable of doing anything, but typically, it won't make financial sense for them to do it.

Okay, great. Thank you.

And our next question comes from the line of Jim Barrett with CL King & Associates. Please proceed.

Good morning, everyone. Dave, I really have two questions for you. The first would be, what does your 2010 guidance imply for other income and expenses for this year?

Actually, pretty modest. If you strip out the impact of rabbi trust, which is just a reclassification between G&A and other income, what really ends up flowing through is our interest income on our $112 million that we're getting a whopping 25 or 30-basis points per year on. We're very conservative in where we're investing that, which is primarily JPMorgan, overnight funds.

I see.

So a few hundred thousand dollars is about the number. And again, recognizing, if you have $5 million of other income due to the rabbi trust, we have a $5 million increase in deferred compensation expense and G&A the number pretty much washes to nothing.

Understand that, okay. And just to clarify the reversal of the Medicare cap limitation of $1.8 million, if you don't have any contractual billing limitations in the first quarter that should make, all else being equal, for a particularly good quarter for VITAS?

Correct, by $1.8 million -- all things -- everything else being equal, it'll be $1.8 million higher.

Will fall to the bottom line, yes. And then last, and hopefully least, any update on the Department of Justice investigation?

No update. We're continuing to provide documents with regard to. say -- with regard to those, as we've talked about, there's really two. There's one that started about five years ago that has been largely dormant. We have one in the Texas market that we're providing documents and we're providing support for the -- again, the relatively small number of long stay patients that get recertified on a regular basis and we just hope that our documentation is sufficient to pass muster. The unusual thing is to the extent that -- since these take some time and we're talking about terminal patients, virtually all of them die during the period of the investigation of their terminal disease, but that doesn't necessarily end the -- it still becomes a fight over the paperwork and each notation in each patient chart during times of recertification more than that.

So to answer your question, no significant developments. You'll see that we'll con -- I mentioned, that we have a -- it looks like an improvement in the wage/hour type limitations -- or environment in California, and we had one potential class action that has gone away in that case -- in that state. So, again, on a net basis, [yes, regulatory] and legal environment, it is slightly improved this quarter, over last quarter.

Okay. Well, thank you both.

And our next question comes from the line of Eugene Fox with Cardinal Capital Management. Please proceed.

Hello, gentlemen, most of my questions have been answered. Could you just update me on the current status of your existing share repurchase authorization?

$53 million remains in current authorization.

Okay. And when does that expire, David?

There is no expiration date on that.

Okay, thank you.

Well, that is the extent of the questions, so I thank everybody for your attention and we'll be back in a little less than three months. Thank you.

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