Chemed Corp (CHE) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Chemed Corporation's second quarter 2010 conference call. My name is Maria, and I will be your conference facilitator today. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

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

Good morning. Our conference call this morning will review the financial results for the second quarter of 2010, ended June 30, 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 July 28th 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 28th, 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, David 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 2010 conference call. Chemed had solid operating results for the second quarter of 2010. Revenue in the quarter totaled $315 million, and net income was $18.9 million. If you adjust for certain non-cash items and items that are not indicative of ongoing operations, adjusted net income totaled $22.7 million and equated to adjusted earnings per diluted share of $0.98, an increase of 1% when compared to adjusted earnings per diluted share in the prior year.

In the second quarter of 2010, our hospice business segment generated revenue of $227 million, an increase of 7.3% over the comparable prior year period. VITAS provided an adjusted EBITDA of $33.1 million, an increase of 5.6% compared to the second quarter of 2009. This equated to an adjusted EBITDA margin of 14.6%. Our admissions expanded 4.2% in the quarter and have increased 4.5% on a year-to-date basis. This compares to a 4% decline in admissions in the first six months of 2009. This improvement in admissions trend is attributable to several factors. The most significant has been the expansion of our inpatient units, or IPUs, over the past year. As of June 30, 2010, VITAS has 31 dedicated IPUs with a total daily capacity of 414 beds. This is a 15% increase in IPU locations and 11% increase in patient beds. New IPUs provide increased visibility to the referral sources in the community as well as increased capacity to provide hospice care to our high acuity patients.

Texas and Illinois have also shown significant improvement. These two states were extremely challenging in 2009. Over the past year, we have restructured the field management within these communities as well as refocused our marketing and education efforts. This has resulted in Texas and Illinois locations expanding admissions in the aggregate of 3.9% on a sequential basis, down just a fraction of 1% below the June 2009 year-to-date admissions.

We have also made significant investments in our field personnel, in terms of staffing, training and support. These investments are now providing a noticeable improvement in our overall admissions trends. Of VITAS' 33 unique Medicare provider numbers, 31 provider numbers, or 94%, have a Medicare cap cushion greater than 10% for the most recent 12-month period. Two provider numbers have Medicare cap cushion below 5%. VITAS generated an aggregate Medicare cap cushion of $199 million, or 25% during the trailing 12-month period. In the second quarter of 2010, VITAS recorded a net revenue increase of $35,000 due to the reversal of the estimated Medicare cap limitation recorded for a small program in the first quarter of 2010.

Now let's turn to our Roto-Rooter business segment. I noted, in our first quarter 2010 earnings call, that I was becoming more optimistic that we were turning a corner in terms of improvement in demand for Roto-Rooter services as the economy stabilized and we exited the recession. Demand did continue to strengthen and regenerated positive residential job count growth in the quarter. This trend has continued as we've entered the third quarter of the year. Roto-Rooter's adjusted EBITDA margin did decline in the quarter due to several factors that Dave will talk about later in this call. But overall, we are encouraged by the current activity in the Roto-Rooter business.

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

Thanks, Kevin. As Kevin noted, net revenue for VITAS was $227 million in the second quarter of 2010, which is an increase of 7.3% over the prior year period. This revenue growth was a result of increased ADC of 5.6%, driven by an increase in admissions of 4.2% combined with Medicare price increases of approximately 1.3%. The remaining growth was driven by a geographic mix shift in our patient base. The 4.2% admissions growth in the second quarter of 2010 compares favorably to the 0.8% decline in admissions in the prior year quarter and the 0.7% decline in admissions for a full year 2009.

Average revenue per patient per day in the quarter, excluding the impact of Medicare cap, was $197.89, which is 1.8% above the prior year period. Routine home care reimbursement and high acuity care average $155 and $682 respectively per patient per day in the second quarter of 2010. During the quarter, our high acuity days of care were 8.1% of total days of care. This is essentially equal to the prior year quarter.

The second quarter of 2010 gross margin, excluding the impact of Medicare cap was 22.7%, which is 41 basis points lower than the second quarter of 2009. Increased expenses relating to field-based admissions expansion -- field-based admissions, expansion of our inpatient units and increased documentation requirements in Medicare certification all contributed to this slight margin decline.

Our home care direct gross margin was 52.5% in the quarter, an increase of 40 basis points when compared to the second quarter of 2009. Direct inpatient margins in the quarter were 12.3%, which compares to 16.6% in the prior year. Occupancy of our inpatient units averaged 78.4% in the quarter and compares to 73.8% occupancy in the second 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 21.2%, a 100-basis-point improvement over the prior year quarter. Average hours billed for a day of continuous care averaged 18.8 in the quarter, a 1.6% increase over the prior year's average. Selling, general and administrative expense was $18.4 million in the quarter, which is an increase of 2.9% when compared to the prior year. Adjusted EBITDA totaled $33.1 million in the quarter. Adjusted EBITDA margin, excluding the impact from Medicare cap, was 14.6% in the quarter and was essentially equal to the prior year.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $88.4 million for the second quarter of 2010, an increase of 5.2% over the prior year quarter. Roto-Rooter's gross margin was 45.2%, a 103-basis-point decline when compared to the second quarter of 2009. The recessionary pressure continues to appear to be easing for Roto-Rooter. Our job count in the second quarter of 2010 declined a modest 0.7% when compared to the prior year period.

During the second quarter, our total residential jobs actually increased 0.7% as residential plumbing jobs increased 6.6% and residential drain cleaning jobs declined 2.2%. Residential jobs represented 72% of total job count in the quarter. Total commercial jobs declined 4.1%, with commercial plumbing job count declining 1% and commercial drain cleaning decreasing 5.6% when compared to the prior year. The other job category declined 2.6%.

Adjusted EBITDA in the second quarter of 2010 totaled $15.1 million, a decline of 2.8%. And the adjusted EBITDA margin was 17.1% in the quarter, a decline of 141 basis points when compared to the prior year quarter. This decline in our adjusted EBITDA margin is due to a fairly lengthy list of expense fluctuations, both favorable and unfavorable. The more significant of these were a slight decline in our excavation contribution margin that equated to about $800,000, transition expenses related to a changeover in the field communications of $400,000, and an increase in our casualty and umbrella insurance expense in the quarter of $375,000. This was offset by an improvement in our bad debts of approximately $210,000.

Now let's review our consolidated balance sheet. Chemed had total debt of $155.6 million at June 30th, 2010. This debt is net of the discount taken as a result of convertible debt accounting requirements. Excluding the discount, aggregate debt is $187 million and is due in May of 2014. Chemed's total debt equates to less than one times the trailing 12 months' adjusted EBITDA. Of our $175 million revolving credit facility, it expires in May 2012. And at June 30th, 2010, the credit facility had approximately $146.7 million of undrawn borrowing capacity after deducting $28.3 million for letters of credit issued under the facility to secure our workers' compensation insurance. Capital expenditures for the second quarter of 2010 aggregate at $6.5 million and compares favorably to our depreciation amortization during the same period at $7.5 million. Total cash and cash equivalents as of June 30th, 2010, was $109.1 million. Net cash provided from operations in the second quarter of 2010 aggregate at $12.6 million.

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 second quarter of 2010, the company paid over $2.7 million in dividends. And we purchased $6.3 million of Treasury stock in the open market. The company now has approximately $45 million of remaining authorization under our previously announced share repurchase program.

Our 2010 full-year guidance is now as follows. VITAS estimates full-year 2010 revenue growth, prior to Medicare cap and the budget neutrality adjustment factor, of 6.0 to 7.0%. Admissions in 2010 are estimated to increase 3% to 4%. 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%. And the October 1, 2010 reimbursement rates are estimated to increase an additional 1.8%. Our 2010 full-year guidance includes $2.5 million of estimated Medicare cap contractual billing limitations for the remaining two quarters of 2010.

Roto-Rooter expects to achieve full-year 2010 revenue growth of 4% to 4.5%. The revenue estimate is a result of increased pricing of approximately 3%, a favorable mix shift to higher revenue jobs offset by a job count decline estimated at 2% to 4%. Adjusted EBITDA margin for 2010 is estimated in the range of 17.5% to 18.5%. Based upon these factors, an effective tax rate of 39% and the 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 its stock options, non-cash increase in interest expense relating to the accounting change for convertible debt and other items not indicative of ongoing operations, will be in the range of $4.05 to $4.20.

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

Thank you, David. VITAS, as well as the hospice industry, experienced a reduction in admission trends during 2009. To counter this trend, we made significant investments in our marketing, sales and admission personnel and developed specific market strategies to maximize VITAS' opportunity in all of our locations. These efforts have begun to provide noticeable improvements in our admission trends.

In the second quarter of 2010, VITAS admitted 14,423 patients, which is 4.2% higher than the prior year quarter. And for the first six months of 2010, admissions increased at a 4.5% rate. On a year-to-date basis, our largest state, Florida, increased admissions by 7.1%. And our second largest state presence, California, expanded admissions by 1.7%. Our most difficult states in 2009 were Illinois and Texas. The admissions for both of these states have stabilized. And in the first half of 2010, Illinois' admissions were effectively flat, and Texas declined just 1%. This growth in admissions is in part due to our strategy of expanding inpatient capacity. This strategy raises VITAS' visibility with our referral sources in key markets. In addition, increased care to high acuity patients has a very positive impact on our billing potential under the Medicare cap formula.

We have been methodically changing our inpatient positioning over the past year. 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 up a 10-bed unit at Columbia Hospital in Palm Beach, Florida. In the first quarter of 2010, we began accepting patients in our Courtenay Springs inpatient unit in Brevard, Florida, and the University of Miami Hospital inpatient unit opened in April of this year. And most recently, we opened an inpatient unit at Jefferson Methodist Hospital in Philadelphia in June of 2010.

In addition to this dedicated inpatient bed capacity, VITAS has a significant number of short-term contract hospital beds available in our programs to accommodate any unusual spikes in high acuity patient needs. The costs associated with the expanding inpatient capacity did put some stress on the inpatient margin during the quarter. Excluding the start-up costs of inpatient units in the quarter, VITAS had an inpatient margin of 16.1%. I anticipate that additional inpatient units will be opened in the near term and will continue to play an important role in our growth over the next several years.

Admissions have increased in three of our four top referral categories. During the second quarter, home-based admissions increased 8.1%, assisted care living facilities increased 10.7%, and hospital-referred admissions increased 2.4%. Nursing home referrals declined less than 1% in the quarter.

We have also increased our investment in the admissions area. Today, we have 294 sales representatives, 122 admissions coordinators and 324 admission nurses. VITAS has increased total admissions staffing personnel 6.6% when compared to the second quarter of 2009. These investments in the sales and admissions areas resulted in an increase in our total admissions cost of $2.1 million, or 13% when compared to the prior year period.

VITAS' average length of stay in the quarter was 77.4 days which compares to 73.4 days in the prior year quarter and 75.8 in the first quarter of 2010. Average length of stay is calculated using total discharges during the quarter. The 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 1,145,116 days in the quarter, an increase of 5.6% over the comparable prior year period. Non-nursing home routine home care days increased 8.8% in the quarter. This increase was partially offset by a 2.1% decline in nursing home days of care. Continuous care days increased 2.8%, and inpatient days of care increased 10% when compared to the second quarter of 2009.

At June 30, 2010, we had one program classified as a startup. In addition, we have been awarded a certificate of need by the State of Florida in the Jacksonville community, and we anticipate we will open soon in this new market.

With that, I'll 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 the line of Brendan Strong with Barclays Capital. Please proceed.

Hey, good morning. It's great to see the trends at Roto-Rooter turning around here. Just curious if you can give us any color on what July looks like.

I didn't hear the last part.

July.

Oh, July.

Oh. It's hard to say. I think we made a reference that what we're seeing is continuing. That is, relatively strong top line. I mean, it's not -- if you look at the economy, some of the economists are suggesting that the economy started improving and then started kind of listing to the starboard. We don't see that with Roto-Rooter. We're seeing pretty broad stabilization. And it's not tied to any one region. So just -- I'd say we tried to give the indication that what we saw in the second quarter is continuing.

Okay. And then on the VITAS side, you guys have been spending more on the IPUs and on admissions personnel, and it's had a nice payoff on the revenue growth. I'm just curious, like is there -- do you end up getting some leverage on that later in the year, or do you need to keep spending on that? And I guess the question really is, you guys are guiding towards margin improvement in the back half of the year. And I'm curious what the driver for that's going to be.

Well, I'll turn that over to Tim with one question about -- I mean, we both commented about the IPUs. What we're trying to suggest is that when we're looking at the expense associated with those, they're kind of category benders. I mean, when we report our margin from inpatient, it looks like it's not as robust as you might expect. But part of that is a marketing expense, which we don't really recharacterize for -- except internally. And as far as leverage for that, we just think that's good business that will have, I don't know so much leverage, but continuing benefit.

Absolutely. I think as far as your question of does it create leverage, yes, it does. A lot of times when we do have the startups, the beds are not completely occupied yet. And over time, the occupancy usually runs at 80% or 90% in a unit that's mature. The other thing that begins to happen is the presence in the hospital area then causes our name to be more widely known. And in many cases, we're working in the hospitals while -- with palliative care programs, partnering with them. And that ends up building our home care program as well, which is the goal. So yes, there is leverage. At the same time, we will be adding new inpatient units in the next several quarters that will put pressure. But as these mature over time, it will definitely -- the margins will improve, and it builds the business around that inpatient unit in the marketplace.

You mentioned about the margin in the second half of the year improving. We always generally see that. Keep in mind we do have a price increase, as Dave mentioned, about 1.8%, maybe 2%, effective October 1. So that helps the margins. And then we spend into that over the next 12 months on the labor side. And there's some -- in the early part of year, there's some extra costs for just some minor things like payroll taxes that we absorb. And the way we accrue our vacation time hits the margins a little bit heavier in the first half of the year than the second. So we see good reasons why the margins will expand in the second half based on our current run rates in the business.

To put it in perspective, for the first six months of 2009, if you back out the BNAF for Medicare cap, our EBITDA margin was 14.48%, say 14.5%. We finished the full year 2009 with a 15.1 margin. So as Tim mentioned, that seasonality is fairly significant, or we typically have much stronger margins the last two quarters of the year, (inaudible).

Thanks very much.

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

Thanks, and good morning. This is Brian Zimmerman in for Darren. I guess my first question is, your growth in the hospice segment stands out as very strong, especially in light of weak volumes across the healthcare system. Can you give us a little more color around what you're seeing in your markets? Is there anything new on the competitive front? Or is this a result of internal process changes?

I'm going to turn this over to Tim.

I mean, I think we certainly feel like we're having something to do with it. And again, the increase in the marketing and the sales always has to follow the quality care you give. And so we know that we're staffed appropriately to give the great care. As we talk about, we provide continuous care more so than most companies do. We have more inpatients. These are favorable aspects of the quality of the hospice that we provide. So we think we're doing very well. As referral sources see that, as patients who have had experiences, and family members share that, that helps us.

At the same time, I do believe there's some accumulation of difficulties that are affecting some of the competition, mainly the smaller players. The regulatory components of what we have to do have been increasing constantly over the last several years. As you know, the conditions of participation that came in last year added more regulatory burden. The narrative around the admission of the physician adds more regulatory burden. Many in the not-for-profit sector have seen several years of difficulty in raising donations at their historical levels.

So again, I think we're making progress. We're improving the quality of our hospice care we give. And there is a little bit pressure on some in the marketplace that's helping us as well. Our resources continue to give us an advantage and will in the future. So I expect our good growth to continue.

And I'd just like to amplify one aspect of Tim's answer there, and that is these conditions of participation. The requirements are real. Just to give you order of magnitude as of -- last time I checked, we have 85 more doctors, mostly part time, at substantial monthly or annual rates of pay that, you look at the current run rate, it's between $5 million and $6 million of additional expense, which we've been able to achieve results with those increased administrative expenses. And what Tim is really suggesting is we're making that investment. I mean, maybe it's smart, maybe it's wise, but it's always required. It's necessary. And some of our competitors, I think our smaller ones, are laboring under some of those additional burdens.

And when you look at our business, and you look at -- another way to answer your question is, Florida is up 7% in admits. You've heard us, and Tim gave his list of where we made the emphasis on inpatient units. Several of them are in Florida. That's where we have a lot of success. And there's reason for it. And we're hoping it -- some of the forces that allowed it to be achieved, I think, are persistent.

Okay. That's helpful. My next question is on margins. It looks like the Roto-Rooter business is pressured a bit on margin line despite stronger revenues. How much of that is of the transient types of costs? And do you think margin leverage improves from here, giving the improving revenue growth outlook?

Dave?

Yes, the first thing that impacted our margins, you know, you're talking about looking for about $1.4 million, $1.5 million. Without a doubt, our excavation margins on a direct contribution basis dropped almost 400 [deps], dropping from around 54% in the prior year quarter to about 50%. Still very healthy direct-cost margins, but we're seeing mix shift. Some of the jobs are a little smaller, where you don't have as much pricing opportunity, and as well as some of our costs have gone up a little bit. I expect that to be somewhat volatile, but I think that's probably a permanent change.

Other things, like an increase in our field communication costs of about $400,000, I expect that to go down over the next several quarters. Casualty insurance, we saw an unusual spike that we don't think will continue on a go-forward basis. But those are difficult to predict. The biggest issue we have is we just had great experience over the last several years in insurance claims. We think that will continue. But again, we saw a spike this quarter. We think it will go down, but it's difficult to predict. What we can say, though, is if we see continued strength in our top line, we think that will create opportunity to leverage some of our more fixed or step variable costs. So if the top line continues to show the strength, we think we will be able to offset those. And in the end, margins should march up, if not next quarter, over the next several quarters.

Right. And the only thing I would add is, as your question kind of implied, to start with a growing top line, it gives management something to work with when it's not a situation where many companies have been -- in the last couple years have -- having pretty good profits by cutting and managing everything to a -- fairly well. There is an end to that at some point with the growing top line. I mean, people usually figure out a way to make more money with that.

All right. Thanks a lot, guys.

Your next question comes from the line of Jim Barrett with CL King. Please proceed.

Good morning, everyone. Kevin, could we start with you? And could you talk about the pending acquisition of Odyssey by Gentiva, how that will change the competitive dynamics in the industry, if at all, in terms of recruiting quality personnel, in terms of the amount of competition you'll have for further acquisitions and that sort of thing?

Well, let me start by saying that obviously I'm no expert on what's going on there. But it's interesting that when you -- if we look at our business and say, where do our referrals come from, they don't necessarily come from the home healthcare side of the business, one where we think that that's a possible area of growth in the future, but it's not a real significant element of our referral pattern. So number one, if you ask me what's the most significant impact of that acquisition on us, I would say it's really the fact that they're planning on taking about $30 million, if I understand it, out of the Odyssey side of the business, that is executives and field personnel being jettisoned, with the business being managed, I guess, by the existing home healthcare infrastructure.

I think that creates some opportunities for us. It remains to be seen how well we take advantage of it, but we're going to do our level best. I mean, a question that I thought you were getting to is, where it's a pretty significant development in the field with two major providers, even though I wouldn't say we're -- when you talk about who our big competitors are, our biggest competitor in every market we are in is not Odyssey. It is a -- tends to be a large, not-for-profit hospice company. But the only comment I'd make to it is, no sooner did the deal announce then holy hell developed in the home healthcare market. So I don't know what all that means, but I think it's going to create some opportunities for us and yet not necessarily have any direct impact on our referral patterns which is obviously the most important thing to us in building business.

And could you talk about --

It gave us an opportunity for some regional acquisitions that they just won't be in the mood to be taking on with their consolidation efforts right now. We don't know. But what I would say is they're both -- we respect both of those companies. We deal with both of them, and they're well-run, good companies. So I think it will continue to be that way. I wouldn't expect any big changes.

Understood, Tim. And can one of you comment on the outlook for acquisitions on the hospice side as well as the plumbing side of the business?

Well, let me go the usual on this. On the plumbing side of the business, we have been, for -- certainly since 1980, we purchased the counties that represent about 50% of the US population. We are continuing to hammer away at any viable Roto-Rooter acquisition with -- you think that this would be a good year to do it when you look at it from a tax standpoint. And we're hammering away. Actually, the outlook is so-so on that. And one of the reasons I conclude that is that most of the large acquisitions that are still out there are in California, which is obviously a very populous state. But the -- and we basically -- we only have a couple small operations in California. But it's probably, at this point, the most difficult state to do business in for a company like Roto-Rooter. So our appetite for California acquisitions is still restrained. But with regard to almost every other state, we're doing what we can.

With regard to VITAS, what I've said probably in the last two conference calls is I would be surprised if we did not do at least one acquisition for this year, if only because there is a lot of activity. We are engaging in a lot of discussions. We're making what we think are reasonable and aggressive indications of interest. And if you asked me the environment for hospice acquisitions at this point is we're trying to be very intelligent with regard to our actions in that regard. But there is a -- there are a lot of hospice programs that are for sale, plain and simple. But, Tim, anything you want to add?

No, I would say the same thing. And if you look this year compared to last year, that activity is increased as far as the companies available. And it does seem like the regional, multi-location companies that are out there, they're just a better opportunity for us than they were several years ago.

(Inaudible) the last couple years, the ones that were for sale were ones that were put together by financial players who kind of acquired and/or started a bunch of largely rural hospice programs that were a bunch of small programs and said, we have a 500 census hospice in six states. The ones that seem to be for sale now are very attractive and --

They've gone through the period of consolidating. Maybe some acquisitions are growing. They've faced up to the needs of an infrastructure to support the regulatory compliance, and they've become more mature companies with predictable profits. And acquisitions are difficult, as you know, because a lot of the patients are only with you for a few weeks. And if there's any transition issues, it's a concern and a big risk. So we're optimistic that these larger regional companies that are more stable and solid and have an infrastructure are going to be a better opportunity for us. And as Kevin said, we're in a lot of discussions, and we're optimistic we could bring something to the table soon.

Okay. Well, that's very helpful. Thank you both.

Your next question comes from the line of Frank Morgan with RBC Capital. Please proceed.

Good morning. Most of my questions about acquisitions have been answered. But I'm just curious, as you think over the next couple years, with all that's going on in home healthcare today, would it make any sense, at some point in the future, as things kind of settle out of reimbursement, to actually looking at going in that direction, maybe buying on that side?

The only comment I'd make is there's so much uncertainty right now in home health, and there's so much unknowns relative to a Senate finance investigation, SEC investigation. There doesn't seem to be a positive attitude in Washington towards home health. So it's hard to speculate on something like that, Frank.

I mean, I would -- I think we all feel there would be no major push to do that here. We have so much opportunity in hospice, is the key, so much opportunity to expand in the regions we're not in, which there aren't a lot, but we can do that. Many, many opportunities to penetrate markets further to increase our product. There's big opportunities right now in what's called palliative care programs which are bridging hospice up to be more involved in the hospital arena with consults from our physicians and social workers and nurses about whether people are appropriate candidates for end-of-life discussions. And those are all huge opportunities for us.

So we have great growth in front of us. You might see us do an acquisition where they'd have a little tag on, home health business. We might have a little home health business to supplement components of a palliative care program, but they'll be minor efforts. No decision at all has been made to move into home health. We think there's advantages from being uniquely positioned as a sole source, end-of-life care provider.

And, Frank, let me provide you with some background. When Tim tells me he doesn't have a lot of appetite for expansion in that area it's meaningful to me because it's kind of in his blood. Chemed had a fairly sizeable home healthcare business that Tim was in charge of. He spent many years of his life really knowing the business and living it. And he has always had an interest in it. And to the extent to say at this point, largely due to the reimbursement environment, he's a little cool to it. That kind of speaks volumes to me.

Okay. Any updates on just from a Washington standpoint -- I hopped in late, so I apologize if it was asked -- but just a Washington update. And are you hearing anything, getting any kind of feedback at all about the forthcoming change in reimbursement in the next year or so?

I'll turn it over to Dave, other than just nothing new. Kind of the reductions in the increase that we're going to get. Other than that, Dave, your thoughts?

In terms of wholesale change in reimbursement, really nothing. Basically what's been codified in the law, of course, is, as part of healthcare reform, starting October 1 of 2012, get a few more slices out of our market basket update. But that's already been kind of hashed. The only change, since our last conference call, is about a couple Fridays ago, CMS put out a proposal regarding how the Medicare cap is calculated. There's been a number of court cases that actually summary judgment has gone against CMS in terms of the current application of the formula to calculate Medicare cap liability. It's kind of a clumsy proposal. CMS is in a difficult position to be in compliance with the way the exact law is written. That's going to have some interesting comments, I think, over the next 30 days. But beyond that nuance on Medicare cap, really no change.

The only thing I would add is I -- what could happen in the next short period of time, or intermediate, we're supportive of quality measures that would be brought into the reporting mechanisms for hospice companies to report on the quality of their services, which we think is important to show that we're doing a good job as an industry and as a company. So we would like to see things like that happen. And it's a nuance, but the recent legislation passed some -- some concurrent care models were going to be opened up. And we're hoping to participate in that, where an individual would not have to give up their right to curative care to move into hospice, which we think would be very positive for the reimbursement and the beneficiaries. And we think that is very important. But, yes, no news, as Dave mentioned, on any other fronts.

Okay, thanks.

Your next question comes from the line of Eugene Fox with LLC. Please proceed.

Sorry. Gentlemen, you guys seem to be much more optimistic in the M&A as it relates to hospice than I've heard for quite some time. And I know you guys have been flexible on price. What do you think has changed? And in terms of the candidates out there, my sense was you're reasonably limited geographically by population density. Can you help us a little bit in terms of understanding sort of the what's out there that makes sense for you?

Let me -- before I turn it over to Tim, let me say that, again, I'm summarizing. Previously, it wasn't a matter of price. We didn't like the programs that were available. They tended to be developed over a relatively short period of time, largely because there was very little competition. The areas of the country where there's very little competition tend to be kind of the more rural areas, where, as you indicate, where population density is lower. One of the -- if you look at our company, the model suggests, for good, bad or indifferent, that our break-even point, depending on a couple factors, is in between 100 to 115 census. We think that's tied to quality more than anything else. But that's just a -- for us, it's been kind of an iron rule. We've observed it rather than imposed it.

And so when we look at a program, if it can't -- if a program has, based on our estimates, no capacity to grow to a 200-plus census hospice, it doesn't make sense for us to invest the time and Herculean efforts to grow a program if it's limited, usually by population density. And historically, that's been tied more to whether there's aggressively treated cancers. That is, what's the quality of the hospitals in the area and some other factors.

But what we've seen is, the ones that are for sale are the better, more successful, more professionally run programs that were of great interest. And I would say that there have been at least three or four that we have -- in the last nine months, we were actively pursuing. And just the issue of price, we tried to be aggressive, and we just were -- two of the ones -- somebody had bid substantially more than we did, but they haven't closed over -- one, over a nine-month period. We're just in more of those discussions.

And what's causing my optimism is saying that we -- we're being sensible. The sellers sometimes are being initially guided by what some of the -- sounds higher on paper, that is some kind of big earn-out or some kind of messy element of it that at least on paper looks like more money that kind of falls apart and results in no deal. But ultimately, we're there, professional, with cash to pay to close quickly. We're ultimately going to be the choice at the right price for some nice acquisitions. But, Tim, anything to add?

I think, Gene, what I spoke about before, it just seems like there's a different company available today than there was several years ago. Maybe a couple of years ago, we mentioned that it seemed like people were selling because they had a problem. So they were running up against Medicare cap, or they had a regulatory audit thing that was spinning out of control. And our general view at Chemed is we don't like to buy fixer-uppers. We don't -- that's kind of swimming against the current. Now it seems like the businesses we're seeing are selling because of their strengths. They've got high market presence. They have momentum. They have infrastructure. They have things under control.

And I think VITAS is better prepared with our infrastructure to take people on than we were several years ago, which is probably a plus. But so not going to be bucket loads of deals coming any time soon. But some regional plays, several, I think, would come our way. And then who knows what happens if you look out a few years. There may be rapid consolidation, and we may be able to take on smaller players and fold them in. But we don't know. But we'll be prepared if that happens. But just a different environment, and seems like a healthier time for us to bring in a couple of smart deals. That's all.

Yes. And as Tim -- the thing that we're trying to make sense of, the companies that are available are better, and the price tags are higher. And you have to make sure that everything coalesces. But, yes, that's -- we're, as you said, optimistic.

Just a quick followup on that. Who is the competition to do these deals? And as Jim alluded to, with Odyssey being acquired, do you see that competition changing?

Well, I'll let Tim because he deals with this on a daily, weekly basis, but we've run into Odyssey previously on most deals. I would say that -- on most proposed deals. And like us, I could mention -- I remember two or three particularly where the other -- where we backed off for some major reason, and they did as well. And the reports we get back is, boy, they kind of had that price in the same value as you did. And somebody was talking about a higher price. We looked at the deals pretty similarly. They may or may not be occupied with the transition of their company. But I'm going to turn it over to Tim as far as the other people. There are -- whether it's home healthcare companies, whether it's other regional players are looking to get a little bigger, they're looking to buy something at one multiple of EBITDA and sell it a year later at one or two clicks above, there are people out there.

No, I mean, it's the problem of being in a very attractive industry. Everyone wants in for different reasons. There still are financial players at one end because they see if they can do a good job with it and hire a good team and make the margins. They have a good exit strategy. Clearly, home health companies have been looking to get involved. They've made their own statements about why they think it makes sense. Nursing home companies, they see it as an opportunity, whether it's -- again, the nursing home business, pretty difficult business from a financial perspective with the Medicaid issues and the crisis and those areas.

Healthcare systems are looking to build continuums of care, whether it's a health -- whether it's a hospital system or a physician practice group, we're seeing large systems that think they should own it themself instead of outsource it, so to speak, to us. And we have very good reasons to explain to them why outsourcing to us makes sense and working with us. But those retirement communities that are -- big players are looking at it. So they're coming from all places because it's a very strong business with great growth trends and, managed correctly, a reasonable margin. And that is not the case in some of those other businesses. So they're looking to expand where they think we'll be positive. But no new news, really.

And Tim's answer, though, suggested something I should have pointed out previously. The biggest problem is some of these entities that are -- believe they're in healthcare, but their little segment of healthcare may be -- not look as attractive, and they feel they still know healthcare. And if they know home care, they know hospice because hospice is a form of healthcare -- home care. But the thing is, it's hard to compete with people who are buying a platform. We have a platform. We wouldn't pay anybody for the platform. And I think if we run into price issues on a deal, it's either somebody who doesn't know what they're buying or we're dealing with somebody who's paying up because they have to buy a platform if they want to get involved in hospice at all.

Thanks, gentlemen.

At this time, there are no further questions. I would now like to turn the call back over to Kevin McNamara for closing remarks.

Okay. My remarks are, as usual, brief. We thought we had a good, solid quarter. Dave gave the guidance which is, in all material respects, same as we've had all year. And we're optimistic. And thanks, everyone, for their kind attention in the quarter. Talk to you in a quarter.

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