Chemed Corp (CHE) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Chemed Corporation's third quarter 2011 conference call. (Operator Instructions). I would now like to turn the call over to Sherri Warner with Chemed investor relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2011 ended September 30, 2011. 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 October 25, and in various other filings with the SEC. You're 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 October 25 which is available on the Company's website at Chemed.com.

I would now like to introduce our speakers for today. Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Tim O'Toole, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone. Chemed consolidated revenue in the quarter totaled $341 million and net income was $21.9 million. If you adjust for certain non cash items, and items that are not indicative of ongoing operations, adjusted net income totaled $25.2 million and equated to adjusted earnings per diluted share of $1.20, an increase of 16.5% when compared to adjusted earnings per diluted share in the third quarter of 2010.

During the quarter, our hospice business segment generated revenue of $253 million, an increase of 8.1% over the comparable prior year period, and adjusted EBITDA of $37.8 million, an increase of 6.3%. This equated to an a adjusted EBITDA margin prior to Medicare cap of 14.8%. Our adjusted EBITDA margin has declined 43 basis points in the third quarter of 2011. This is primarily the result of increased costs related to new face-to-face requirements on recertification which impacted margins an estimated 75 to 100 basis points.

We have also accelerated our new start programs which negatively impacted margins by 34 basis points in the quarter. Given these headwinds, I was relatively pleased with VITAS's operating margins for the quarter and year-to-date.

In the third quarter of 2011 our admissions totaled 14,879, an increase of 2.7% over the prior year quarter. On a year-to-date basis admissions have increased 5.1%. Our success in achieving excellent admissions growth is attributed to several factors. We continue to expand our presence in local communities with new or refurbished inpatient units. This provides VITAS with increased visibility to our referral sources as well as increased capacity to provide hospice care to our high acuity patients.

As of October 31, 2011, VITAS has 34 dedicated IPUs, or inpatient units, with a total daily capacity of 458 beds. This is an increase of 10.6% over the prior year quarter. I anticipate that the use of inpatient units to maximize our visibility within the community will be a permanent part of our admissions strategy.

We continue to expand our marketing and community liaison structure in terms of staffing, training and support. The head count for this group has increased 12.4% when compared to the prior year. These investments in personnel coupled with our inpatient units have resulted in significant momentum and overall improvement in the aggregate admission trends.

We continue to successfully manage within the Medicare cap billing limitation. During the quarter VITAS reversed a Medicare cap liability of $384,000. This compares to $117,000 of Medicare cap liability recorded in the third quarter of 2010.

Of VITAS's 33 unique Medicare provider numbers, 29 provider numbers have a Medicare cap cushion of 10% or greater during the trailing twelve-month period. Three provider numbers have a Medicare cap cushion of less than 10% and one small program has a $282,000 Medicare cap liability. VITAS generated an aggregate Medicare cap cushion of $211 million or 24% during the trailing twelve-month period.

Now let's turn to our Roto-Rooter business segment. During the third quarter of 2011 Roto-Rooter increased revenue 2.3%. This revenue growth is a combination of revenue and job count growth in our commercial sector partially offset by a slight decline in job count in our residential business. I continue to see signs of modest strengthening in the Roto-Rooter business that I anticipate will continue for the remainder of the year.

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

Thanks, Kevin. As Kevin mentioned, net revenue for VITAS was $253 million in the third quarter of 2011, which is an increase of 8.1% over the prior year period. However, excluding the impact of Medicare cap, revenue increased 7.9%.

This revenue growth was a result of increased ADC of 6.2% and increased Medicare reimbursement of 2.1%. ADC growth was driven primarily by an increase in admissions of 2.7% and increased length of stay of 1.9 days,or 2.4%.

The revenue growth was marginally impacted by a slight decline in our high acuity care mix as well as normal geographic mix shift within the patient base. Our average revenue per patient per day in the quarter, excluding the impact of Medicare cap, was $201 which is 1.6% above the prior year period.

Routine home care reimbursement and high acuity care averaged $158.83 and $704.73 respectively per patient per day in the third quarter of 2011. During the quarter, high acuity days of care were 7.7% of our total days of care, 22 basis points lower than the prior year quarter.

The third quarter of 2011 gross margin, excluding the impact of Medicare cap, was 22.2% which is a decline of 87 basis points from the third quarter of 2010. This decline in margin is primarily the result of increased costs related to the 2011 mandated physician visit for recertification, expansion of our community liaison program, as well as expansion of losses in start-up locations as well as increased costs associated with the expansion of our inpatient units.

Our home care direct gross margin was 52.4% in the quarter, a decline of 30 basis points when compared to the third quarter of 2010. Direct inpatient margins in the quarter were 12.4% which compares to 12.3% in the prior year. Occupancy of our inpatient units averaged 74.3% in the quarter and compares to 77.4% occupancy in the third quarter of 2010. Continuous care had a direct gross margin of 20.7%, a decline of roughly 40 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care averaged 19.8 in the quarter, a 4.5% increase over the average hours billed for continuous care in the third quarter of 2010.

Selling, general and administrative expenses for VITAS was $18.9 million in the third quarter of 2011 which is an increase of 3.1% when compared to the prior year quarter, well below our increase in revenue.

Adjusted EBITDA totaled $37.8 million in the quarter, an increase of 6.3% over the prior year period. Adjusted EBITDA margin, excluding the impact from Medicare cap, was 14.8% in the quarter, which is 43 basis points below the prior year quarter.

On the Roto-Rooter segment, Roto-Rooter's plumbing and drain cleaning business generated sales of $88.5 million for the third quarter of 2011, an increase of 2.3% over the prior year quarter. Roto-Rooter's gross margin was 45.0% in the quarter, a 42 basis point increase or improvement when compared to the third quarter of 2010.

The Roto-Rooter adjusted EBITDA in the third quarter of 2011 totaled $14.9 million, an increase of 8.7%, and the adjusted EBITDA margin was 16.9% in the quarter, an increase of 100 basis points when compared to the prior year.

Unit per unit job count in the third quarter of 2011 increased 0.5% when compared to the prior year period. Job count is adjusted to exclude acquisitions as well as any location that was converted to or from a contracted location. During the third quarter of 2011 total residential jobs decreased 0.6% as residential plumbing jobs increased 3.8% and residential drain cleaning jobs decreased 3.0% when compared to the third quarter of 2010. Residential jobs represented 70% of total job count in the quarter.

Total commercial jobs increased 3.0% with commercial plumbing and excavation job count increasing 6.9% and commercial drain cleaning increasing 1.9% when compared to the prior year.

The all other residential and commercial job category, which represents less than 2% of aggregate job count, decreased 5.3%.

Now let's review our consolidated balance sheet. Chemed had total debt of $165 million as of September 30, 2011. This debt is net of a 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 continues to equate to less than one times trailing twelve months adjusted EBITDA.

As you will recall in March, 2011, we replaced our existing credit facility with a new credit agreement. Terms of this credit agreement consist of a five year, $350 million revolving credit facility. The interest rate on this credit agreement has a floating rate that is currently LIBOR plus 175 basis points. This credit agreement also provides Chemed with increased flexibility in terms of acquisitions, share repurchases, dividends, and other corporate needs. It also includes an accordion or expansion feature of $150 million. As of September 30, 2011, this facility had approximately $321 million of undrawn borrowing capacity after deducting $29 million for letters of credit issued to secure the Company's workers' compensation insurance.

Capital expenditures for the first nine months of 2011 aggregated $23.5 million and compares to depreciation and amortization during the same period of $22.2 million.

We increased our quarterly dividend from $0.14 to $0.16 per share in the third quarter of 2011. In addition, Chemed has purchased $106.5 million, or 1,871,543 shares of Chemed stock in the first nine months of 2011. As of September 30, 2011, $12.6 million is remaining under the share repurchase program.

Management will continually evaluate cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of our available capital resources.

Our 2011 full year guidance is as follows. VITAS expects to achieve full year 2011 revenue growth prior to Medicare gap of 7.5% to 8.0%. Admissions in 2011 are estimated to increase approximately 5.0% to 5.5%, and full year adjusted EBITDA margin prior to Medicare cap is estimated to be 15.2% to 15.7%.

Effective October 1, 2011, Medicare increased the average hospice reimbursement rates by approximately 2.5%. Consistent with prior years, our guidance also assumes VITAS will incur an additional $1.2 million of estimated Medicare contractual billing limitations in the fourth quarter of 2011.

Roto-Rooter expects to achieve full year 2011 revenue growth of 4.5% to 5.5%. The revenue estimate is a result of increased pricings of approximately 2% to 3%, a favorable mix shift to higher revenue jobs, with job count growth expanding an estimated 0% to 1%. Adjusted EBITDA margin for 2011 is estimated in the range of 17.0% to 18.0%. Based upon the above, management estimates 2011 earnings per diluted share, excluding non cash expense for stock options, the non-cash interest expense related to the accounting for convertible debt, and other items not indicative of ongoing operations, will be in the range of $4.75 to $4.85. This compares again as 2010 adjusted earnings per diluted share of $4.17.

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

Thank you, David. We continue to put significant efforts into our marketing and admission initiatives. One of the most important aspects of these initiatives is appropriately focused field based sales and marketing personnel. As of September 30, 2011, we have 317 sales representatives, 155 admissions coordinators, 363 admission nurses, 170 community liaisons and 26 long term care liaisons. Staffing in these areas has expanded 12.4% compared to the third quarter of 2010. This focus has resulted in VITAS generating 45,971 admissions in the first nine months of 2011, an increase of 5.1% over the prior year period. At this rate VITAS will provide end of life care to more than 75,000 patients in 2011.

Admissions have increased in all four of our largest referral categories. During the third quarter of 2011, home based admissions increased 2.8%. Assisted care living facilities increased 5.1%. Nursing home admissions increased 1.7%, and hospital referred admissions increased 0.1%.

VITAS's average length of stay in the quarter was 80.1 days, which compares to 78.2 days in the prior year quarter and 77.1 in the second quarter of 2011. Average length of stay is calculated using total discharges during the quarter.

Median length of stay was 15 days in the quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,256,542 days in the quarter, an increase of 6.2% over the comparable prior year period.

Non-nursing home routine home care days increased 10.5% in the quarter and nursing home routine home care declined 4.1%. Nursing home days of care represent 22.8% of our total days of care. Continuous care days increased 0.4% and inpatient days of care increased 7.4% when compared to the third quarter of 2010.

At September 30, 2011, we had five programs classified as start ups. Medicare applications have been submitted for three of these locations, and the remaining two have received their provisional state licenses and have met their patient admission requirement and are awaiting their onsite survey. Total operating losses for these start ups totaled $949,000 in the quarter and compares to losses of $92,000 for locations classified as start ups in the prior year period. With that I would like to turn the call back over to Kevin.

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

The first question is from the line of Darren Lehrich from Deutsche Bank. Please proceed.

Thanks. Hi, everybody. A couple of questions here. I guess I would just start out with Roto-Rooter and your comments, Kevin. I guess you said you see modest strengthening, and I just wanted to reconcile that with the slightly lower guidance. Is it just kind of how the sequencing in the quarters have shaped up? Maybe just a little bit of commentary about the change in guidance relative to what you might be seeing in terms of growth in Roto-Rooter.

Let me start by saying what we're seeing is some -- when I say solid, I mean we're talking about the Roto-Rooter business, modestly solid growth in the top line, which is obviously very encouraging. That's the very well run business, but with a 9.1% unemployment rate, it is -- that consumer demand is a limitation of the top line. With regard to the guidance, Dave, why don't you respond to that.

Literally it was what we did for the first three quarters, so on a year to date basis Roto-Rooter's revenue is up 5.1%, so it's softened a little bit. Our old guidance, which was 6.5% to 8.5%, clearly with only one quarter left in the year, it is much more difficult to move the needle, although without a doubt our fourth quarter tends to be our strongest quarter, and we also think we're lapping relatively weak revenue numbers in the prior year .

We didn't get as much bump sequentially in 2010 from Q3 to Q4. But anyway, with year-to-date revenue up 5.1%, we thought it was prudent just to squeeze the margin down to 4.5% to 5.5%, and really our focus is more not so much on the revenue line item -- we think it's going to impact our fourth quarter as opposed to what our margins are going to be. If you remember last year we really got hit with some late large claims for healthcare, and right now it doesn't look like we're going to get that unlikely event, so we kind of anticipate pretty good margins for the fourth quarter and that's a bigger indicator of the profitability than whether we pick up another rough 50 or 100 basis points on

Okay. That's helpful. And then just from a margin standpoint, as I recall you have always had sort of big Yellow Page spend. Is there any change in the way that you do marketing? Can you lower that cost so sequentially we see less spend, maybe more internet based? I am just curious to know if that has any bearing on your sequential margin patterns to Q4.

Let me tell you, I will let Dave respond to the last part of the question. But let me say that you put your finger on it, there is no question that, not surprisingly, marketing is -- it used to be, basically 100% of your effective marketing effort was through the Yellow Pages. That's where people looked to find a drain cleaner or plumber. That's changing,. Approximately 30% of our calls come in from numbers that only appear on the internet now, so a sea change. We do our best to have that change reflected in our Yellow Page pricing, but Yellow Pages are still very important to us, so we feel really that we spend as much on internet marketing as makes sense.

We have an open mind with regard to our internet positioning strategy, and what we're going to be doing over the next several years is trying to blend that with strong negotiation on the Yellow Pages side to reflect the relative deterioration of that medium, but I guess the tough thing is to say that from now for the foreseeable future it is still going to be important to Roto-Rooter, that is in the Yellow Pages. The side. Dave, on the second part of the question, Dave, you can talk about how it affects the margin, but it is certainly is not probably not in the short run.

That's a very intuitive question and point, Darren, because on our adjusted EBITDA schedule we actually have something that we call an advertising cost adjustment. What that really equates to is typically, or traditionally, and this continues to hold, the fourth quarter has more than 25% of a year's drop telephone directories, or Yellow Page books. And the way the accounting requirements is pretty draconian, and basically even though typical telephone directories are in circulation 12 to 14 months, we're required to, under GAAP, expense those immediately. But what we do in our adjusted EBITDA schedules but not in our adjusted earnings per share schedule, we actually smooth that.

For example, on a year-to-date basis, Roto-Rooter, we're reducing our adjusted EBITDA by a little over $1.4 million, so we have increased our expenses for the first nine months of the year but then in the fourth quarter, where typically a big chunk of your books drop, that reverses out. So we actually increase the fourth quarter adjusted EBITDA of that, and on a year-to-date basis we generally don't have anything or very, very small dollar amounts in the advertising cost adjustment line item. Long-winded way of saying, is we smooth out the quarterly margin impact on adjusted EBITDA basis for this accounting for the advertising.

Got it. Okay. Thanks. I went off on a little tangent there, but so let me just go back to hospice. I do have one or two more questions there. I guess just as it relates to your cap guidance, specific to Q4, I mean I know that's always been part of the -- how you guide, but is there any visibility that you have at this moment into realizing that cap or is it just -- continues to be there as a place holder? go ahead, Dave.

It --

Go ahead, Dave. I mean, it's a place -- I will just say it is a place holder, but why don't we speak to what we usually see in the fourth quarter.

That's right. So basically when we do full year guidance we have been putting as a place holder $5 million of cap liability or $1,250,000 a quarter, and so with one quarter remaining in the year we have $1,250,000 in our guidance, assuming that as a pre tax expense. The fourth quarter, though, is the most volatile and unpredictable quarter when we're looking at any potential Medicare cap liability because of the way we do the measurement of it.

So the first quarter of the year -- or the first quarter of the government's cap year is our calendar fourth quarter, basically roughly October 1 to December 31. And we'll look at the total admissions for that three month period, first time Medicare admissions, relative to the total Medicare billing and since we're only looking at a 90 day period we have the risk of having a cap liability in the fourth quarter. And that's happened in 2009 and 2010 in the fourth quarter, and also the following first quarter, so in 2010 and 2011, the first quarter we find ourselves reversing out the vast majority if not all of that cap liability. So we really have a timing issue. Because by the time we report the first quarter of the next year, we now have six months of admissions compared to six months of Medicare billing, and that tends to be more smoothed out. So I would not be surprised to see a Medicare cap liability. It could be more, could be less than $1,250,000, and I would be very surprised if we don't reverse a vast majority of that in the first quarter of 2012. Tim, would you disagree with that?

Yes, and to answer your question, I'll let Tim -- but basically, the answer was, it is a place holder, the $1,125,000 (sic), clearly, or $1,250,000. The issue that we have no visibility on now is the fourth quarter admissions which then get multiplied by four and again if -- but I guess, Tim, jump in here, but I would expect to extend following from past years we would know by the time we released the actual numbers and have this call in the first quarter the number has reversed by then, and in each of the last three years.

We've had it reversed by January. And the only thing I would add is exactly what Dave says. The holidays of Thanksgiving and Christmas in November and December cause us to have a few shorter admissions or less number of admissions in that quarter than the other quarters and that is really one of the reasons why it puts a little pressure on as well and also one of the reasons why we know that we're going to do better in January and February because they're not impacted by those holidays. So we would expect the trends to be similar to prior year, our admissions in October look within the ranges that we're discussing, so I think our guidance is good there.

Okay. And just last thing for you, Tim. Given the growth of IPUs, I guess I would have expected maybe the cancer diagnosis mix to increase and maybe I am thinking about it wrong. Can you just talk a little bit about what kinds of patients you're seeing in the IPUs and whether we should expect to see cancer diagnosis begin to come back again? It has been on I guess a two or three year decline.

Our cancer diagnosis has been very similar over the last two or three years, so I believe it is within one percentage point on the level of our census, so we have not seen any unusual trends in our cancer admits, and we would not expect any. The hospital inpatient units in many cases get the referrals from the patients that have been in that hospital, and so, yes, there is a larger percentage of cancer patients in our inpatient units, but we're seeing no trend where that's increasing or decreasing, so really the inpatient unit activity is firm. Again, we see that as bringing all potential disease states with terminally ill patients and not necessarily focused just on cancer. The strategy remains intact and is working very, very well. The units we built have really enhanced our brand in those marketplaces and allowed us to build our home care referrals in those territories as well, so nothing unusual in the cancer area, though.

But -- and Darren, one way to look at the inpatient units is not so much an effort to drive high acuity patients. They're almost -- think of them almost as billboards, as Tim says. They build the brand of VITAS in the whole healthcare community, and it wouldn't be surprising to us -- we could increase our number of IPUs by 20% and our high acuity patients might go up a couple of percent. They're there for a different function.

I would also add, Darren, so if you look over the last several years, we probably range that the typical corridor is maybe 33% or 36% of our admissions will be cancer patients. If you compare that, the NHPCO data for 2010 should be coming out actually any day now, so we have to lag back a year to do a comparable, but basically we're pretty much right on the line in terms of the industry average for what they're getting for cancer patients, so I really -- I don't see any massive change at all in what we have been doing for years on our cancer admissions.

Okay. That's helpful. Thank you.

The next question comes from the line of Brendan Strong from Barclays Capital. Please proceed.

Hi, good morning. Yes, two questions here for Tim. Tim, the first one, I just want to understand this metric a little bit better that you mention. It was a 10.5% increase in home based care and a 4.1% decline in routine nursing home care. Is that something intentional that you're doing? Is that something that nursing homes are doing?

I think we have mentioned it before. That basically is following the trends of the number of nursing home beds year-over-year. Nursing home beds are declining year-over-year, so we're really just following the marketplace. So that's not anything unusual as far as that goes.

Okay. And then can you give us a sense for what types of conversations that you understand are taking place in DC around hospice and I guess what specifically the industry is saying about this -- to lobby against the potential for this 3% reduction for nursing home based care?

Certainly, well, there is a lot of discussions ongoing in Washington all the time. I think what we're seeing really is the focus of the MedPAC report that was presented in the last year or two about the reimbursement situation, and we're seeing the impact of the budget negotiations where they're looking at every area of Medicare, so again we don't see anything unusual there. There has been some discussions about the nursing home area. There is a perception that maybe there are some economies of scale in a nursing home because you might have patients clustered in the nursing home, and I think they're focused on maybe that as a rationale for a minor reduction in the rate, and again all we would say is we don't have any advantages. We don't have clusters. In some cases we know captive hospices, are owned by nursing home chains, might have that advantage, so they're looking at that. I don't see anything unusual going on, and actually I think hospice is coming out very, very well in all of the discussions that we're familiar with and we're familiar with them.

Brendan, basically it was a six -- it was one report out of MedPAC and it was basically, how do you pay for the doc [fix] and they came up with a number of proposals, of which, they -- was thrown out, have a 6% reduction in the per diem reimbursement for Medicare patients that are in nursing homes. And for us that would have slightly over 100 basis point impact theoretically, because right now we only have about 23% of our patients are in nursing homes. But if you look at our revenue, it is less, because obviously we get more for the high acuity care.

Again, as the industry, what we would say is, is that we have already had a lot of changes in the last couple of years that have increased our cost structure and tightened up the compliance areas dramatically, such as narrative upon on admission, such as the face-to-face, and again we believe that the hospice benefit, keep in mind from a perspective of utilization, everyone wants it to be utilized more. It is favored. It is bipartisan. It is clearly showing satisfaction by the patients and families that use it. In our case we have a 95% satisfaction rate. So again, we don't think anything is happening untoward, and we think hospice remains favored when you look at all the reimbursement discussions going around Washington, so we're pretty pleased.

And it could also -- it would also have potential of perverse impact. For example, there is no debate when an outside hospice like VITAS comes into a nursing home. It is clearly incremental in terms of our plan of care, our nurses, home health aides, counselors, social workers. It is clearly an incremental add on for the patient as they are going through a very, very tough period. The debate of course MedPAC and others have had on nursing homes is how much incremental care is really provided? Some I think do a phenomenal job. Others, it is more difficult to see. But if they go through this proposed cut in reimbursement, they really end up penalizing clearly the players who are providing significant add-on care and to the extent a nursing home may not be providing that more incremental care this doesn't impact them as much. So it would actually hurt the incremental care that's clearly being provided to the benefit of the nursing homes which I think is the opposite of what they were trying to do theoretically.

Yes. And then just one follow-up on that. I think the MedPAC report is the only one that specifically called out hospice. Is that accurate?

Well, I mean, clearly the other focus on it is a recent report from the OIG that they have been focused on the nursing home area for many, many years, and these are the observations of the OIG report. That captives have an inherent conflict and it should at least be looked at whether or not the cost structure in nursing homes gives some advantage that would make adjustment to the rate. Again, our view is the cost structure in nursing homes, for VITAS anyway, does not. We know that we provide a similar amount of visits to all patients and nursing homes compared to our overall programs, and we share that information with the regulators, and so again I don't think there is anything new going on. This area has been focused on for quite some time, and the discussions about some of the minor changes they're making to the reimbursement around that we would not see as anything extreme.

It is not that surprising, this development, if largely because the government views the hospice industry as a -- from a profitability standpoint, a fragile industry, and one that helps their overall goal of reducing healthcare expense by the self rationing aspect that you get through hospice, so -- but to answer your question, yes, we think the reimbursement environment is -- we would like it to be, always like it to be better, but it is okay, and it is not surprising to us that it is okay basically.

We're getting a rate increase of 2.5% this month so that's what we know about the next twelve months and who knows what the heck is going to happen with proposals on any of the reimbursement areas under Medicare. But as I say we know hospice is looked at as a high quality benefit, saves money to the system, extends the life of the patients, so high satisfaction, we think we're on the right side of all these issues.

Great. Thank you.

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

Thank you. Maybe as a follow on to that question about just your outlook for 2012, I know you haven't really given guidance yet, but obviously we know about the rate update, but are there any other kind of conceptual comments that you can give us as we start looking towards putting up our -- or updating our 2012 numbers? Also, just in terms of external growth opportunities, certainly on the acquisition side we haven't seen much there and I am just curious what your thoughts are on the acquisition outlook, particularly with what's going on in home health care, where it looks like they're probably going to be less active. They were always look to be an aggressive buyer in the hospice side. Just any thoughts on how you see that acquisition market playing out as well? Thanks.

I will start with a couple comments. I think it is safe to say that when I look at the cash flow characters of both of our businesses we're going to have a lot of free cash. At these valuations I don't see why we wouldn't be continuing to fairly aggressively buy in our stock. I think it's a great investment for us at this point. So I think that would continue.

With regard to acquisitions, I would say that it is still tough. I mean, I am fairly safe to say that there isn't a significant hospice transaction that occurs that the seller hasn't at some point directly or indirectly contacted VITAS to weigh in on the matter. You can hearken back to the purchase by Odyssey, then Beacon, but it roiled the market. Several of our discussions were pretty far along with regard to acquisitions, and the price of poker just went up for no good reason, and again we backed away in several cases. And Tim, jump in here, you have the regular discussions with these people and at some point you don't let the momentum of the deal take control of the matter, but I think you're to be saluted for that. But that's what you're dealing with every week, practically.

Absolutely. As we have always explained we're disciplined buyers, we're financial buyers, and we buy only high quality programs that are in large markets, that don't have a Medicare cap problem. So that limits the field somewhat, but we're in discussions constantly and we have some interesting discussions that are ongoing today. We did complete an acquisition about six months ago in Alabama as you know. It was about a [75 census] hospice. They're doing well, they are profitable. We're moving ahead in that marketplace, we're very pleased with that. And as you can also see in our report, we have commented that we have accelerated our start up program, so we have five start ups ongoing now, so we have no need to do acquisitions unless they're good acquisitions.

The start up environment is better today than it has been in the last couple of years because the path to licensure is more clear today, as they have allowed the outside accreditation organizations to do the surveys. So again, our trends are good. We look forward to a very good 2012. The acquisitions will come. They'll be structured and they'll be disciplined and our start up program will probably produce a lot of good revenue growth as we move into the next year, so the outlook is good.

Just one follow-up. Are you seeing a lot of other start up activity out in the marketplace from just overall competition and then finally one for Dave. What was the either the end of period share count to reflect the buybacks or what is your current share count? Thanks.

As far as the start up activity we're seeing less new start ups from competitors and other providers now than we were in the last -- two, three, four years ago which is again another reason why it is good for us to accelerate that at this point. Again the overall trends are, yes, we see some of our competitors not doing as well as us. We see the smaller players not doing as well as us. So our resources, our momentum -- we're taking advantage of that.

And Frank, this is Dave. In terms of our primary share count at the end of September, it's about 19.9 million but of course, then of course we have the treasury stock method to account for so -- and we also had slight purchases in October of a little over 200,000 shares, so really as of today we're sitting at about, say, 19.7 million shares primary and just slightly below 20 million is our estimate in terms of a fully diluted basis for the fourth quarter.

Okay. Thank you.

The next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed.

Thank you. My question on the OIG report was asked and answered. But could you comment or discuss a little bit more color as to -- I guess let's call it the slowing growth in admissions, the factors that are contributing to that and what can be done about that?

Well, as far as the slowing growth of admissions, for the industry, I assume you mean.

Or do you just mean that we had a tough third quarter in that regard?

Yes.

Again, our third quarter, we saw a very good July and August, a little slowdown in September, and sometimes that happens. We have had a very strong year to date as far as our admissions being up nicely, and all I would say is October is coming along well so we don't expect that to be a trend for us. The overall industry has seen a smaller growth rate than they have historically because the penetration of the eligible hospice patients and the utilization is increased over the last few years and at some point will grow in line with the healthcare sector overall. I think our growth will exceed the overall healthcare sector for quite some time because really the -- as you know with our situation, for example, half of our patients are only with us for two weeks, and we clearly see all the trends, whether it be the knowledge of the public or the knowledge of the referrals or new initiatives like palliative care programs which are basically educating patients sooner about their end of life choices. Those will continue to allow hospice to go faster as it should, because it's saving the system dollars, than the overall spending overall, so again I think we're in good shape.

And to amplify the first point, September was a little weak in admits. But when you combine it with everything we know, it's not surprising we have a little -- a boomlet one month and a valley the next. I mean, nothing -- you saw by our guidance, we expect to be over 5% for the year in admits and nothing overly concerning at this point.

Okay. Great. Thank you.

Okay. I think that's the last of the questions. I thank you for your attention. I guess the next time we have this call will be on the fourth quarter and we'll give guidance for the following year at that call. Thank you very much for your attending.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.