Chemed Corp (CHE) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Chemed Corporation first quarter 2010 conference call. My name is Deanna, and I will be your conference call facilitator today. Please note that today's call is being recorded. (Operator Instructions). After the speaker's remarks, there will be a question-answer period.

I would now like to turn the call over to Sherri Warner, with Chemed Investor Relations.

Good morning, our conference call this morning willing review the financial results for the first quarter of 2010, ended March 31, 2010. 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 20, 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 is in the Company's press release, dated April 20, which is available on the Company's website at www.Chemed.com. I would now like to introduce our speaks 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 first quarter 2010 conference call. Chemed had solid operating results for the first quarter of 2010. Our consolidated revenue in the quarter totalled $309 million, and net income was $19.4 million. If you adjust for certain non-cash items, or items that are not indicative of ongoing operations, adjusted net income totaled $21.8 million, and equated to adjusted earnings per diluted share of $0.95, an increase of 1.1% when compared to adjusted earnings per diluted share in the prior year.

In the first quarter of 2010, our hospice business segment generated revenue of $223 million, an increase of 7% over the comparable prior-year period. Excluding the impact of Medicare Cap and the 2008 retroactive price adjustment, our hospice revenue increased 7% over the first quarter of 2009. VITAS provided an adjusted EBITDA of $32.8 million, an increase of 5.1%, compared to the first quarter of 2009. This equated to an adjusted EBITDA margin of 14.7%.

Admission growth had been challenging in 2009. However, through a combination of strategic expansion of our inpatient units in key markets, and an increase in our field-base personnel, we have positively impacted our admissions trends over the last three quarters. These efforts have generated a 2.9% admissions growth in the second half of 2009, and a 4.8% increase in admissions in the first quarter of 2010.

In the first quarter of 2010, VITAS recorded a net revenue increase of $1.7 million due to the reversal of estimated Medicare Cap limitations recorded in the fourth quarter of 2009. This reversal relates primarily to one program, which is our largest provider number. Admissions for this provider were very strong during the quarter, resulting in the reversal of the prior-quarter estimate. We recorded a $35,000 Medicare Cap limitation for one small program, with an ADC of 27 during the first quarter of 2010. The estimated liability for this program represents a shortfall of less than two admissions in the first six months of the Medicare Cap fiscal year. Our current expectation is that the liability for this program will be reversed before the end of the 2010 Medicare Cap year.

Of VITAS' 33 unique Medicare provider numbers. 31 provider numbers, or 94%, have a Medicare Cap cushion greater than 10% for the first six months of admissions in the 2010 Medicare Cap fiscal year. Two provider numbers have Medicare Cap cushion below 5%. VITAS generated an aggregate Medicare Cap cushion of $195 million, or 25%, during the trailing 12-month period.

Now let's turn to our Roto-Rooter business segment. Roto-Rooter demand continues to be impacted by the recession. First quarter 2010 revenue totaled $85.9 million, a decline of 7/10th of 1% over the prior-year period. Roto-Rooter generated $13.7 million of adjusted EBITDA, a decrease of 5.4% over the prior-year quarter. Adjusted EBITDA margins in the quarter were 15.9%, a decrease of 78 basis points over the first quarter of 2009.

A significant number of Roto-Rooter brands that have negatively impacted in the first quarter of 2010 due to severe winter weather causing virtually no business activity in those locations for several days. I generally avoid any discussion on how weather impacts our operating results. Weather has the potential to either positively or negatively impact Roto-Rooter, depending on the type of weather event, and over the full year, these issues tend to have a negligible impact. However, in this case, the poor weather may have masked what appears to be an improvement in call count and job count demand within the Roto-Rooter business. As we enter the second quarter, this improvement appears to be gaining momentum. Although it may prove to be premature, I am becoming more optimistic that we are turning a corner in terms of improvement in demand for Roto-Rooter services as we exit the recession. With that, would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. As Kevin mentioned, net revenue for VITAS was $223 million in the first quarter of 2010, which is an increase of 7% over the prior year. This revenue growth was the result of increased admissions of 4.8%, a national Medicare price increase of approximately 1.3%, and a shift in patient geographic mix to areas with slightly higher reimbursement rates that further expanded our average reimbursement an additional 50 basis points.

Average revenue for patient per day in the quarter, before the effective Medicare Cap was $199.45, which was 1.8% above the prior-year period. Our routine home care reimbursement and high acuity care averaged $154.95, and $678.17, respectively, for patient per day in the first quarter of 2010. During the quarter, high acuity days of care were 8.5% of total days of care. This compares to high acuity days of care of 8.4% in the prior-year quarter.

The first quarter of 2010 gross margin was 22.8%, which is 60 basis points lower than the first quarter of 2009. This decline is caused by higher labor cost for admissions, higher personal costs related to Medicare compliance, the opening of inpatient units, and a slight mix shift towards higher acuity care. Our home care direct gross margin was 51.3% in the quarter, a decline of 20 basis points when compared to the first quarter of 2009. Direct inpatient margin in the quarter were 15.2%, which compares to 17.4% in the prior year. Occupancy of our inpatient units averaged 79.1% in the quarter, and compares to 79.5% occupancy in the first quarter of 2009. Our inpatient results were impacted by the expansion of our inpatient capacity. Tim O'Toole will provide additional metrics related to our inpatient strategy. Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.7%, 160 basis point improvement over the prior-year quarter. Average hours billed for a day of continuous care averaged 18.5 in the quarter, a 7/10th of 1% increase over the prior-year's average.

Selling, general, and administrative expense was $18.1 million in the first quarter of 2010, which is an increase of 3.4% when compared to the prior-year quarter. VITAS adjusted EBITDA totaled $32.8 million in the quarter, adjusted EBITDA margin, excluding the impact from Medicare Cap, was 14% in the quarter. This compares to an adjusted EBITDA margin, excluding the impact of Medicare Cap, in the 2008 retroactive price adjustment of 14.3% in the prior-year quarter.

Now let's turn to Roto-Rooter. The Roto-Rooter's plumbing and drain-cleaning business generated sales of $85.9 million for the first quarter of 2010, a decline of 7/10th of 1%. Roto-Rooter's gross margin was essentially flat at 45.2%, when compared to the first quarter of 2009. Adjusted EBITDA in the first quarter of 2010 totaled $13.7 million, a decline of 5.4%, and the adjusted EBITDA margin was 15.9% in the quarter, a decline of 78 basis points when compared to the first quarter of 2009.

Recessionary pressure does appear to be easing for Roto-Rooter. Our first quarter 2010 call counts held fairly steady at about 35,500 per week, which is 4% below the prior year. This is a significant improvement on a trend basis. March 2010 had a 4.8% increase in call volume, and April weekly call volume is up 9.8% over the prior year. Actual job count in the first quarter of 2010 declined 7.0% when compared to the prior year. During the first quarter of 2010, total residential jobs declined 5.9%, as residential plumbing jobs decreased 3.2%, and our residential drain-cleaning jobs declined 7.3% when compared to the first quarter of 2009. Residential jobs represented 73% of our total job count in the quarter. Total commercial jobs declined 10.0%, with commercial plumbing jobs declining 10.4%, and commercial drain cleaning decreasing 10.2% when compared to the first -- the prior year quarter. The other job category declined 3.8%. This job count decline was significantly mitigated relative to total revenue through a combination of decreased pricing and favorable job-mix shift to more expensive jobs, such as excavation.

Now let's review our consolidated balance sheet. Chemed had total debt of $153.9 million at March 31, 2010. This debt is net of the discount taken as a result of convertible debt accounting requirements. Excluding this discount, aggregate debt is $187 million and is due in 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 2012. At March 31, 2010, this credit facility had approximately $147 million of undrawn borrowing capacity, after deducting $28 million for letters of credit issued under this facility to secure the Company's worker's compensation insurance.

Capital expenditures for the first quarter of 2010, aggregated $5.4 million, and compares favorably to depreciation and amortization during the same period of $6.7 million. Total cash and cash equivalent as of March 31, 2010 was $112.1 million, which represents 48.3% of total current assets. Net cash provided from operations in the first quarter of 2010 aggregated $7.7 million. This first quarter cash flow is lower than normal. VITAS received a periodic payment from the -- from Medicare of $30.4 million on December 31, 2009, which ordinarily would have been received in the first week of 2010. During the first quarter of 2010, the Company purchased $1.5 million of treasury stock on the open market and has approximately $52 million of remaining authorization under our previously announced share repurchase program.

Our 2010 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 between 2.0% and 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%. Our 2010 full-year guidance includes $3.75 million of estimated Medicare contractual billing limitations for the remaining three quarters of 2010.

Roto-Rooter expects to achieve full-year 2010 revenue growth of between 1.0% to 3.0%. The revenue estimate is a result of increased pricing of approximately 3%, a favorable mix shift of higher-revenue jobs, offset by a job count decline estimated at 2.0% to 4.0%. Adjusted EBITDA margin for 2010 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 23.1 million shares, management estimates 2010 earnings per diluted share from continuing operations, excluding non-cash expenses for stock options, the non-cash increase and 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 $4.05 to $4.20 per share. I'll now turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS.

Thank you, David. Over the past year, we have placed significant emphasis on increasing admissions. I am also pleased to say that we are reporting very positive results for these efforts, with admissions increasing 4.8% in the quarter to 14,844. Our largest market, Florida, increased admissions, 6.4% in the quarter, and our second largest state presence, California, expanded admissions 4%. We were able to expand admissions in 11 of our 15 states and the District of Columbia. Our most difficult markets in 2009 were Illinois and Texas. Illinois did generate modest admissions growth in the second half of 2009 as well as the first quarter of 2010. Texas remains difficult with a decline in admissions for the second half of 2009 of 7.3%. However, this trend is improving, with fourth quarter 2009 admissions off 3.8%, and the first quarter of 2010 declining a modest 1.6% when compared to the prior-year quarter. I anticipate continued improvement in both of these markets for the remainder of 2010. I attribute a significant portion of this growth in admissions to our strategy of expanding our inpatient, high acuity care capacity. This strategy raises VITAS's visibility with our referral sources and key markets. 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, Texas and a 10-bed inpatient unit in Collier County, Florida. In the fourth quarter of 2009, we opened a 10-bed unit at Columbia Hospital in Palm Beach, Florida. In the first quarter of 2010, we began accepting patients into our Courtney Springs inpatient unit in Brevard County, FL. And the University of Miami hospital inpatient unit opened in April of this year. The cost associated with this expansion in capacity did put some stress on our inpatient margins during the quarter; however, this strategy has had a positive impact on our admissions in these markets. Additional inpatient unit openings in key markets will continue to play an important role for our growth over the next several years. As of March 31, 2010, we have a total of 30 dedicated inpatient units with a total occupancy capacity of 403. This is an increase of 12.4% over the prior year. I should add we have also closed or consolidated several inpatient units that were either unnecessary or were not optimally located for our patients and families. In addition to this dedicated inpatient bed capacity, VITAS has a significant number of short-term contract beds available in the vast majority of our programs to accommodate the needs of our high acuity patients.

Admissions have increased in three of our four top referral categories. During the first quarter, home-based admissions increased 6%, assisted care living facilities increased 25%, and hospital referred admissions increased 2.8%. Nursing home referrals declined 0.4% in the quarter.

We have also increased our investment in the admissions arena. Today we have 290 sales representatives, 119 admissions coordinators, and 315 admission nurses. VITAS has increased total admissions staffing personnel 5.2% when compared to the first quarter of 2009. These investments in the sales and admissions areas resulted in an increase in our total admissions cost of $1.9 million, or 12.4%, when compared to the prior-year quarter.

VITAS' average length of stay in the quarter was 75.8 days, which compares to 76.6 days in the prior-year quarter, and 76.4 days in the fourth quarter of 2009. Average length of stay is calculated using total discharges during the quarter. Median length of stay remains stable at 13 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 1,109,019 in the quarter, an increase of 5.1% over the comparable prior-year quarter. Non-nursing home routine home care days increased 8.5% in the quarter. However, this increase is partially offset by a 3.1% decline in nursing home days of care. Continuous care days increased 6.9%, and inpatient days of care increased 5% when compared to the first quarter of 2009. At March 31, 2010, we had one program classified as a start up. In addition, we have been awarded a certificate of need by the state of Florida in the Jacksonville community. With that I would like to turn the call back over to Kevin McNamara.

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

(Operator instructions). First question will come from the line of Brendan Strong, Barclays Capital. Please proceed.

Hi, good morning. Thanks very much for taking the questions here. First on the costs in the quarter as well as guidance, are you just -- as I look at it, it seems -- it's not immediately clear to me how you get to the guidance range for the year. So is there something in the cost structure that you expect to change significantly from the costs in the first quarter?

This is Dave Williams. No, if you look at the fundamental results behind what happened in the first quarter of 2010, if you look at the overall guidance compared to what we gave a few months ago when we released the fourth quarter 2009 results, I would say our guidance got a hair more -- because we didn't basically change it. It's probably a hair more conservative based upon the strong fundamentals underlying the first quarter. But in general, we basically expect our cost structures to remain about the same.

Okay. So, maybe what ends up being conservative in the guidance is some of the growth that you are expecting in terms of the admissions side?

That's right. Right now with admissions at 4.8%, that's above our full-year guidance. It also bodes well in terms of where we're starting the second quarter at, say, in terms of our average daily census. But, again, sometimes these things are difficult to forecast out, so we are remaining a hair conservative. But we were actually very, very happy with our cost structure, as well as our top line.

Let me just say that we do not give, we don't give quarterly guidance. We give annual guidance, and obviously just by way of grand summary, but we don't -- we construct our guidance based on our internal budgeting process for each unit. And we were a couple of pennies a share, a few pennies -- a few pennies a share ahead of that in the first quarter. Or in this quarter, first quarter of this year. So when Dave says it's conservative, it just means that -- when you roll everything together, we didn't change guidance. That makes it little more conservative, but it was what we viewed as a solid quarter.

Okay.

No real disappointments.

Very good, and then just one question on Roto-Rooter. You talked about call volume picking up in March, and then again in April. I'm curious, how much of that is maybe weather-related with people delaying some work? And also, I'm also just curious, do you think when that business starts to come back, that there's a lot of room for growth there because there's pent-up demand, or how are you thinking about that ?

My perception is, first part of your question, how much is weather related? Again, if it -- you could be driven crazy or go chasing your tail talking about weather too much with regard to the business. But I will say this, in some of Roto-Rooter's biggest branches, we had unusual amounts of -- Baltimore, Washington, area is a good example of Roto-Rooter's biggest branch. It was closed for about a week. Practically closed anyways, and that was an unusual event that really masked what we think are some changes in demand. And I guess it best describes something I have regularly said with regard to the Southeast region of the United States, that before the recession that was Roto-Rooter's fastest-growing region. During the recession it was the hardest hit, and for a Company the size of Roto-Rooter, it's hard to imagine, really coming into the wind and hitting on all cylinders until what was your best region at least retreats to the mean. And we're seeing that.

We're seeing that. Especially in the Southeast region. So when you combine the regional improvement with what David described as an uptick in call volume slash demand, that gives us some -- that takes it beyond, the weather issue, I believe.

With regard to your second question about pent-up demand, or the upside? We tend to not see that too much. Yes, there -- people put off repairs that aren't essential that don't involve broken pipes and what not, and we'll get a little bit of that, but it's almost not measurable. What we expect to see as the recession recedes is more second jobs, and again, just keep -- our men will be a little bit busier. But we see gradual improvement. Nothing that we can see that consumers have been putting off a measurable amount of jobs, which now will all come flooding in.

Thanks a lot.

And the next question will come from Darren Lehrich Deutsche Bank.

Hi, it's actually (inaudible) calling in for Darren. I guess my first question is maybe if you could, you provided some good color with regard to VITAS, but I was just wondering maybe if you could just talk a little bit more about the volume strength you saw in that segment, and if you are really seeing anything different in terms of the competitive landscape.

Yeah, I don't think -- we tried to talk about some of the trends over the last several quarters with us making enhanced efforts to non-traditional referral sources, and adding our strength at the sales level, as well as making sure we're very responsible on the admission nurse side. When there is a potential referral, to meet the needs immediately of the patient and their families, to bring them on, if that's their choice. So, those are beginning to take hold. The inpatient unit strategy with opening new beds brings in some very short-stay patients, which helps the admission trend, and also over time gives you presence in the referring hospitals, so it builds your home care program as well.

We do believe, that from a competitive landscape, some of the challenges in the industry over the last six to nine months are taking its toll on some of the competition, at least they are not being as aggressive as we are in their growth, and I think we're winning that battle. Just a lot of little things are adding up, and because it's not one easy thing to identify, it probably bodes well for the future. All those little things will continue to work for us. So, just a better tone, and we feel pretty good about the trends we are currently seeing.

And I would say, (inaudible) commentary, we were very happy with the admission trend. We were happy with the census that we held on to, and if -- there's another comment I would make with regard to labor management, which is so important. That remains very good during the quarter on the cost side. Tim alluded to some costs on the administrative side. Some things that were done intentionally. Some of the administrative costs had come from a program of adding inpatient units and more doctors on staff. All of that is intentional, but something we're watching, but I don't want to leave the subject without saying that we had another quarter of very good labor management, which is essential in the business.

And Dave, with respect to the increased staffing that you highlighted in the prepared remarks, how much of that, in terms of percentage of revenue, how much would that have impacted the cogs, and maybe if you could break it out? Was there an impact mostly on the COGS, or did it also hit some of the SG&A in the quarter?

It would have all been in the cost of goods sold. Even the sales personnel in the field --- basically all field costs that related to the program get put into costs of sales.

Okay. Anyway to size up -- well, one, is there a way to size up how much of an impact it had in the quarter? And then, two, is that should we be thinking about those charges as ongoing for the remainder of the year, or was that really just kind of a one quarter thing?

No, it's going to be ongoing. For example, there's been a change in terms of how our docs do certifications and recertification in terms of a write-up, and they actually -- it can't be boilerplate, and they have to electronically or physically sign it. So what happens is we had to beef up the number of docs we have available. And that's permanent.

And Industry wide.

Industry wide. Everyone better be ahead of that curve. Second in terms of the -- the admissions personnel, we view that as permanent. We'll be constantly rearranging where people are assigned and where we put the resources, but if anything, we'll see our admission personnel costs going up, because things are more competitive today than they were a year ago, and two years ago. So we view all of those as permanent costs. The exact measurement of the impact, we gave the sales personnel number. I think it was what $1.8 million, Tim?

$1.9 million

$1.9 million, so you can do the math on that. In terms of the addition to Medicare personnel, we haven't run those numbers, but it was 20 BIPS, probably in the quarter? 25 BIPS.

Probably -- problem something -- we mentioned that the cost increased about 12% year-over-year. That $1.9 million number Dave mentioned. And again, there physician there took an initial -- bringing a patient on, a write-up, instead of just signing a piece of paper with a box checked. They believe they are terminally ill, affected everyone in the industry. We're putting a lot of resources behind assuring that all of the appropriate billing documents are in the file sooner than we have historically with double and triple checks, and that's all paying off. I think what we'll be able to do, if we're continuing to see the admissions trends sticking, which we're feeling good about, we'll get higher growth, and that would a offset some of these costs would be the expected result.

Okay. And then just the last one for me. On Roto-Rooter, just curious to get your thoughts on how you guys are really valuing the opportunities with acquiring the franchises, and how you guys are thinking about valuation with respect to ongoing job declines that you are seeing in that segment?

Well, let me start by saying, with regard to acquisitions, we are -- it's something we have been pushing. We've described them as very difficult to accomplish unless you have a motivated seller, and we don't have them -- announced any recently. So the task has proved daunting. Hard to put a value on those acquisitions when it's almost certainly a question of when, not if? Since -- in 1980 when we purchased Roto-Rooter, we have been the purchaser of 50% of the franchises covering the US population, or franchise covering 50% of the US population. And almost without exception, when one that we were interested came up for sale, we were the purchaser of it. I think that will continue. We have separately estimated that there's about $200 million of street sales in franchises that, under our current form of government of these franchises, that we would like to purchase. It is hard to value that in the valuation formula until you figure out the time frame. It's hard to put a value on it.

But, again, we see the business as continuing to have excellent cash flow. We see that we have fared pretty well during the recession with the Roto-Rooter model. It will be very interesting to see, as demand continues to pick up, how high is up? But when you look at -- the starting point has to be our results of 2007 before the start of the recession, and I think we have made a lot of improvements in the operation since then. So hard to put a hard number on it, but it is something that we look at regularly. And, there's a good number of investment banks and whatnot that volunteer their opinion as well on the subject, and it's one we watch pretty carefully. There's some variables and X-factors as we're starting to turn the corner on the recovery from the recession.

Great. Thanks a lot, guys.

And we have a question from the line of Jim Barrett, C. L. King & Associates.

Good morning, everyone.

Good morning.

Dave, can you tell me why corporate expenses rose quarter-over-quarter, or year-over-year rather?

They are actually pretty -- if you X-out the impact of our deferred comp, I think they were only up modestly, Jim. I'm just flipping through it right now.

Yes, I did look at that, so it's --

Oh, and then in the prior year, there were some accrual reversals in 2009 that impacted the comparability, but I think you'll find our cost, X-the impact of the deferred comp, very consistent, Qs two through four of last year, and what we reported in this quarter.

So you would expect, broadly speaking, that your corporate expenses should be -- should trend up to what degree in 2010 if you exclude these factors?

(Inaudible).

How much?

3%.

Okay. And in the same time, your share count edged up in your guidance. Should we extrapolate from that that you do not have plans to buy back stock aggressively for this year?

No, you shouldn't. What -- one, we just reported what the share count basically currently is at.

Yes.

With the Treasury stock method of accounting for stock options net of the 1.5 million shares we did repurchase in the quarter, we don't put into our guidance future repurchases. We'll just -- we'll adjust our guidance for share count after we have actually completed those share repurchases. We definitely view share repurchase and our dividend policy as use of our cash.

All right.

On a go-forward basis. And we anticipate using the $50-plus million available; we're just going to be opportunistic on how we do it.

Okay. And finally, Kevin, can you talk about the inpatient segment, even though the upfront costs are higher, am I correct in assuming that inherently competition is less there, and represents a more stable flow of patients if hospital admissions remain stable? Is a better business, in your view, than the home care segment?

No. Put it this way, I would say that -- and you have to be careful, because I have often described, one of the biggest differences in the profitability between the VITAS business and many of our not-for-profit competitors, one of the biggest differences is, almost without exception, the not-for-profits have way more inpatient capacity than we end up determining is necessary. So it can be a crutch. But I guess what we have said -- and we have known this, but what we're really looking for is, when we have an opportunity for an additional inpatient unit, in a good market, that's say -- call it in an ideal location, that is something that is going to have a lot of visibility, with a lot of potential referral sources in a market like Florida, for instance, where there is relatively meager Cap cushion, it seems to be a great strategy.

Okay.

But it's -- think of it this way. We don't view it as expanding our inpatient market as much as we view it as marketing expense. It gives us more visibility. It makes things more convenient perhaps for the families of some of the patients, but it's not as -- the goal is not to have more patients that are inpatient. We anticipate that number to be a very stable percentage of our total census regardless of the number of IP -- inpatient units we have.

Jim, I might add, as you talk about competition, generally speaking a hospital would only have one hospice inpatient unit there.

Understand.

Currently if we receive that, and it is in many cases a selection process where the hospital is talking to numerous hospice companies in that discussion. And they are wanting to work with the premier hospice. So, for example, our recent one, which we have opened at University of Miami physician's hospital, we have fellowship programs where some of their physician students will do rounds there. It's a teaching hospital. And they selected us because of our strength in the marketplace and our willingness to do that. And also we have taking existing inpatient units that have been with the hospital for years and years and years, and we are upgrading those facilities to enhance the look of the furnishings, because in certain cases, families that are looking to put a loved one in an inpatient unit, they'll look around and say, "Wow. This one looks nicer than the other." So it's a multi-faceted strategy,but it is a competitive advantage, and we appreciate that.

Jim, this is Dave. One of the things you have to keep in mind too is, it is not separate and distinct patients that end up in, say, our inpatient unit or what we call routine home care. A little over half of our days of care involve patients that were either transferred from routine home care to this high acuity, or they were in the IPU for a period of time, and then they transferred back to home care. So, that fact is, continuous care in the inpatient units are just high acuity care that we need for a complete continuum of care for all of our patients. But it's not like each patient just ends up in one setting.

Okay. Well thank you very much.

And we have a question from the line of Brad Evans, Heartland. Please proceed.

Good morning, everybody.

Good morning.

Thanks for taking the questions. I know this is already discussed a little bit, but it may be a little bit of additional granularity on the labor cost trends that you cited in terms of your outlook for your ability to control labor costs through out there the remainder of the year.

Well, I can give you one comment, and I'll turn it over to Tim, but one of the biggest factors as far -- in addition to right sizing, that is, making sure that the staff-to-patient ratios are correct in as many hospice teams as possible. One measure of the control is changes in pay rate or salary, and August 1 we put a pay freeze that is for just cost of living increases, in at VITAS. When Tim put this in effect, I -- human nature being what it is, I expected to get a lot of people who were special cases, and that overall pay increases were so average, a measurable amount, but Tim has been more successful than I would have thought possible. Tim, you want to speak on what you continue to see in that regard?

Well, yes. I think -- keep in mind we looked at that last summer when the economy was very difficult, and the outlook for our price increase was very nil. And, annual increases, merit increases for our existing caregivers and staff, we have about 9,000 people. We basically put a program in that acknowledged that the annual expectations would be no increase for the next year. And we have done very well at that. So, we -- it's a balance, keep in mind, between your level of pay, your fringe benefit programs, and all of those things worked very tight as we move forward. So, since that went into effect last summer, we will actually be matching up better on a prior-year cost analysis as we move into the summer, and the fall of this year. So that's one reason why in the first quarter, we had a little mismatch on some of the labor comparisons, because they were looking at pay increases a year earlier before that merit expectation of nil went into place.

We feel good about it, we have good structure to manage the new hires. We obviously have 15% to 20% turnover, so it's important that the new hires don't come into the high levels, so we're working on that. And the job market, there's worker's available in all categories. It's -- the economy is not tight, and we feel that helps, and as well as our retention programs and having the employer of choice, we believe, has helped us in that regard. So we feel very good about managing the labor in the next several quarters anyway.

But suffice it to say, if we get 1.6%, 1.9%, depending on how you measure it, increase in reimbursement. I'm very confident that on an apples-to-apples comparison, with regard to pay increases given to our average worker, it's going to be less than that.

Okay.

So we're not losing ground with regard to that.

That's very helpful. I appreciate that color. I'm starting to get a little bit of feedback here, so I apologize. The other question I had was just a reiteration of the guidance for the full year, does that assume another -- I believe you had earlier indicated $90 million of free cash flow for the full year. Is that still your expectation?

It will probably be a little less than that, only because of how we front loaded -- some of the first quarter cash flow was generated in the fourth quarter of 2009.

Yes.

But that $90 million should be probably pulled down roughly $20 million or so, maybe $15 million.

Okay.

But you average out the two years that you fully expect -- our cash flow per share will slightly exceed our adjusted earnings per share.

That ratio remains intact.

Yes.

Very good. Okay. So clearly that balance sheet continues to only get stronger over time here?

That's right.

That's very helpful. And just lastly, if this was discussed I apologize if it's redundant, but with respect to at Roto-Rooter in terms of the service techs retention level, is that also very strong in light of the economy?

Very strong. Again, it's -- this quarter it improved even more from the previous quarter, which was a record. So again, not -- given the state of the economy, not too surprising. Given the fact that we have -- everyone is on commission, so they are sharing the pain. As we reported these last three quarters, there's no place for them to go. They have remained intact. That's one of the improvements we have made. We have been keeping the good people, and the marginal performer have -- the attrition that has occurred is largely in the marginal performers, so it's something that -- when I often say that Roto-Rooter is recession-resistant, it is recovery resistance in some respect in that I don't have any doubt that there's going to be some pent-up desire to leave to a different job when it is available, because it's a tough job. It's just that is something I think we'll deal with when the economy is in full bloom, we will have higher training and hiring costs. I don't have any doubt about that. But we'll hope that the rising creek allows us to cover those additional expenses.

On the Undercover Boss, we saw how much of a job it is.

Yes.

If I just may ask one last question. Kevin, I know you have long counseled us to view the job count that Roto-Rooter be levered to the unemployment rate, so perhaps that's what we might be seeing here is that as the job market gets a little better, you might be seeing a recovery at Roto. And clearly the admits are very strong here in the first quarter, which provides, I think as David indicated, a good starting point for the second quarter and perhaps the remainder of the year. As you look at the guidance you reiterated today, what is the biggest risk to a negative revision to your outlook at this point from your view?

Well, I would have said -- clearly, I would have said before this quarter -- I would have said, we -- we've got to grow -- we have got to grow admits in the key markets in VITAS. And we have got to deviate from trend pretty substantially. That clearly was the biggest risk. If you ask me what we answered in spades in the first quarter, is some of the issues directly related to that risk. So I would have to change course pretty dramatically in talking about the biggest risk, but, we have the advantage of having a business in Roto-Rooter that's pretty stable, very efficient with an uptick in call counts. I don't -- again, our risk there would be call counts. You can't make a silk purse out of a sow's ear. If that uptick would reverse the other direction, that would be an issue.

With regard to VITAS, it's a very predictable business. I could tell -- I could probably say within a very narrow range, what our sales in VITAS were going to be next month. Because census is pretty stable. So, when you talk about a big risk in VITAS, you are only talking about one thing, and that is labor getting out of control. And when I look at the last eight quarters, I would say that it's always a risk, but a diminished risk at this point. If you say, "What are the factors that could cause that to happen?"

If you had a change -- a couple of years ago, California passed a law changing the rules for staffing in hospitals. There was a short-term scramble for nurses, creating some dislocations, both in pay and hiring practices. So if you asked me what our big risk would be, dislocation in our labor formula, which, again, it's -- things are, as Tim mentioned, we're going to be looking at some positive comparisons, come August. Not on a comparison basis -- not on an ongoing month-to-month basis. So -- I'll -- again, there's a very uncertain world. I'll end the question with that, saying, other than those factors, I don't see any risks that would be significant and something we couldn't handle in the relatively short to midterm.

Brad, this is Dave Williams. What I would also add on that is, typical for both of our businesses, the risk factors or the issues we look at for risk, they don't change quarter-to-quarter or even year-over-year. But where we are today versus a year ago, and even just six months ago, the weighting to give to all of these issues are a lot less. There is a lot more clarity on what is going on within healthcare. It is less likely that, now that healthcare reform has been established and settled out, it's less likely we're going to be caught off guard on anything that comes out of, say Washington.

On the Roto-Rooter side, all of the issues remain, but things look better in California in terms of wage and hours. The likelihood of a double dip, in terms of recession, seems more diminished. We have all of the same issues today that we had six months ago, a year ago, but the likelihood of some of the negative things happening, has been reduced quite a bit. And the potential of emerging from this recession on a sustainable basis seems to be increasing. I would say risk for both of our business segments, as a percentage, has dropped.

Okay. Thank you for the great -- congratulations on the great quarter. Thank you very much.

That's our last question.

Yes.

So at this point, I will terminate the conference call, and welcome everyone back three months from now.

And thank you, ladies and gentlemen, for your participation. This does conclude today's presentation. You may now disconnect, and have a great day.