Chemed Corp (CHE) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Chemed Corporation earnings conference call. My name is Allison and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the call over to Sherri Warner, Chemed Investor Relations. Please proceed, ma'am.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2013, ended December 31, 2013.

Before we begin, let me remind you that the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the Company will make various remarks concerning management's expectations, predictions, plans, and prospects that constitute forward-looking statements.

Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the Company's news release of February 17, and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only, and that the Company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization, or EBITDA, and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the Company's press release dated February 17, 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 now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's fourth-quarter 2013 conference call. I will begin with some of the highlights for the quarter, and David and Tim will follow with additional operating detail. I will then open up the call for questions.

VITAS hospice revenue was negatively impacted in the quarter by a marginal mix shift away from high-acuity care. High-acuity care, which consists of continuous and inpatient care, represented 6.8% of our total days of care, a decline of 81 basis points when compared to the fourth quarter of 2012. This equated to a reduction of the revenue in the quarter of roughly $6 million when compared to the prior year.

This modest shift of less than 1% in the level-of-care mix had an outsized impact on our revenue, given the fact that routine home care has a per-diem rate of $163, and high-acuity care has a per diem that averages $692. However, the cost to provide high-acuity care is significant, resulting in high-acuity care having extremely low margins. In many of our programs, the profit contribution from a day of high-acuity care is less than the contribution from a day of routine home care.

On a comparative basis to the fourth quarter of 2012, VITAS lost approximately $6 million of revenue. However, after adjusting for the impact of the sequestration, recognizing routine home care has a contribution margin of 53.8% in the quarter and high-acuity care has a contribution margin of 11.5%, VITAS's overall margin and profitability was positively impacted by about $1.5 million in the quarter. This is an improvement on a sequential basis, as we adjust our high-acuity infrastructure cost for the slight decrease in demand for high-acuity care.

The key takeaway on a level-of-care mix for all our stakeholders is that the overall hospice business model is not dependent on a level of care. The aggregate dollar profitability differences generated from routine home care versus high-acuity care are relatively insignificant. Said differently, VITAS profitability is based upon overall census. The level of care of patient resides within on any given day does not drive overall profitability.

However, having the capability and depth to deliver high-acuity care on a moment's notice is critical in terms of a hospice's overall quality of care. It is inevitable that a small percentage of patients on any given day will have an episodic event that requires high-acuity care. Maintaining the infrastructure and capability to provide inpatient care and continuous care allows a greater percentage of our patients to remain in hospice, and in many cases in their home, through death. Our review of industry data indicates that providing high-acuity care results in fewer live discharges of patients, and minimizes the number of patients who leave hospice and who are immediately admitted into curative care in the hospital.

Our admissions in the quarter continue to be impacted by dual referrals for patients entering hospice under a primary terminal diagnosis of failure to thrive or debility unspecified. Admissions in this category did have a sequential improvement over the third quarter. However, it is clear we have more work to do in educating referral sources that these patients are hospice-appropriate.

Now let's turn to our Roto-Rooter business segment. During the fourth quarter of 2013, Roto-Rooter's plumbing and drain cleaning business generated sales of $92 million. This is a decrease of 3.4%, and was primarily a result of decreased demand for excavation and jetting services. These services tend to have a lower margin than typical plumbing and drain cleaning services. As a result, Roto-Rooter generated $18.4 million of adjusted EBITDA, an increase of almost 8%, and equated to an adjusted EBITDA margin of 20%, an increase of over 200 basis points.

On a full-year basis, Roto-Rooter has generated total revenue of $368 million, a 1.4% increase, which translated into $70.9 million of adjusted EBITDA, an increase of 22%. 2013 was a record year for Roto-Rooter in terms of revenue and operational profitability.

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

Thanks, Kevin. As Kevin noted, during the quarter, our hospice revenue growth was significantly constrained by a slight mix shift away from continuous and inpatient care, which we refer to as high-acuity care, and into routine home care. The high-acuity care declined 81 basis points to 6.8% in the quarter. Again, since routine home care per diems average $163.13, and high-acuity care averages $691.91, the mix shift negatively impacted revenue by approximately $6 million.

In the fourth quarter of 2013, VITAS recorded a Medicare cap billings adjustment of $3.8 million, which related to two provider numbers. Of VITAS's 37 unique Medicare provider numbers, 33 provider numbers have a Medicare cap cushion of 10% or greater during the most recent 12-month period, 1 provider number has a Medicare cap cushion between 5% to 10%, and 2 of our provider numbers have a cap cushion between 0% and 5%. VITAS generated an aggregate cap cushion of $267 million during the trailing 12-month period.

The fourth quarter of 2013 gross margin, excluding the impact of Medicare cap, was 24.1%, which is a 60-basis-point improvement when compared to the fourth quarter of 2012. This increase was in spite of the 2% sequestration that was put in place April 1, 2013, effectively lowering hospice reimbursement rates 60 basis points when compared to the fourth quarter of 2012. This margin improvement was accomplished primarily through a reduction of indirect field-based support costs.

Our home care direct gross margin was 53.8% in the quarter, a decline of 60 basis points when compared to the fourth quarter of 2012. Direct inpatient margins in the quarter where 5.0%, and that compares to 10.5% in the prior-year quarter, and 1.7% in the third quarter of 2013. Occupancy of our 37 inpatient units averaged 71.2% in the quarter, and compares to 72.6% occupancy in the fourth quarter of 2012, and 68.1% in the third quarter of 2013.

Continuous care had direct gross margin of 16.1%, which is a decline of 220 basis points compared to the prior year. Average hours billed for a day of continuous care was 18.7 hours in the quarter, a tenth of an hour decline when compared to the average hours billed in the fourth quarter of 2012.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $92 million for the fourth quarter of 2013, which was a decrease of 3.4% over the prior year. Again, as Kevin indicated, this decline was concentrated in excavation and jetting services.

Roto-Rooter's gross margin in the quarter was 47.3%, a 223-basis-point increase when compared to the prior-year quarter. Adjusted EBITDA in the quarter totaled $18.4 million, and was an increase of 7.8%. And the adjusted EBITDA margin was 20% in the quarter, which is up over 200 basis points.

Total unit-for-unit job count decreased 4.8% in the fourth quarter of 2013 when compared to the prior-year period. This consisted of residential drain cleaning job count decreasing 10.4%, and residential plumbing job count declining to 0.7%, when compared to the fourth quarter of 2012. Residential jobs represented 68% of total job count in the quarter. Commercial drain cleaning decreased 1.4%, and commercial plumbing excavation job count increased 7.8% compared to the prior-year quarter.

Over the past several years, the relationship between revenue, job count, and adjusted EBITDA for Roto-Rooter has become more disconnected. This is due to the significant disparity and volatility on revenue and cost of a job, as well as determining how to count multiple procedures within a single service visit. As a result of the disconnect on job count and revenue and profitability, on a go-forward basis we'll be providing revenue generated from commercial and residential customers, further broken down by plumbing and drain cleaning services, but will discontinue reporting individual job counts by category.

Now let's turn to Chemed's consolidated balance sheet. As of December 31, 2013, Chemed had total cash and cash equivalents of $84 million, and debt of $184 million. 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.

In January 2013, Chemed entered into a five-year amended and restated credit agreement that consists of a $350-million revolving credit facility. This facility also has an option of an additional $150-million expansion. The interest rate on this facility has a floating rate that is currently LIBOR plus 125 basis points. At December 31, 2013, the Company had approximately $315 million of undrawn borrowing capacity under this credit agreement after deducting $35 million for letters of credit issued to secure the Company's workers' compensation insurance.

Capital expenditures through December 31, 2013, aggregated $29.3 million, and compares to depreciation and amortization during the same period of $32.4 million. During the quarter, the Company repurchased $3.3 million of Chemed stock. This equated to 42,889 shares of Chemed stock repurchased at an average cost of $76.95. Chemed currently has $21.8 million of authorization remaining under the share repurchase plan.

Our 2014 full-year guidance is as follows. Effective October 1, 2012, Medicare increased the average hospice reimbursement rates by approximately 0.9%. Then, effective April 1, 2013, Medicare reduced hospice reimbursement rates 2% through sequestration. As a result, effective April 1, 2013, the 0.9% increase was reduced to a 1.1% decline in Medicare rates when compared to the prior year. Then, effective April 1, 2013, Medicare increased the average hospice rate approximately 1.4%.

VITAS estimates its full-year 2014 revenue growth will continue to be constrained in the first half of 2014. This is a result of the first quarter of 2013 having Medicare rates 2% higher than the subsequent quarters. In addition, VITAS anticipates continued mix shift from high-acuity care to routine home care that will impact revenue comparisons in the first half of 2014. Full-year 2014 revenue growth for VITAS, prior to Medicare cap, is estimated to be in the range 1% to 3%.

Admissions in 2014 are estimated to increase 3% to 4%. And full-year adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.5% to 15%. Medicare cap is estimated to be $5.6 million in 2014.

Revenue, adjusted EBITDA, and admissions growth is anticipated to begin in the second quarter of 2014, with the majority of this growth weighted to the second half of calendar-year 2014. This is primarily the result of sequestration beginning in the second quarter of 2013. This results in the first quarter of 2013 having an additional $5 million of revenue and adjusted EBITDA when compared to the first quarter of 2014.

Roto-Rooter's forecasted to achieve full-year 2014 revenue growth of 3% to 4%. This revenue estimate is based upon increased job pricing of approximately 2%. Adjusted EBITDA margin for 2014 is estimated in the range of 19% to 20%.

Management estimates that the full-year 2014 earnings per diluted share, excluding non-cash expense for stock options, to non-cash interest expense related to the accounting for convertible debt, litigation and other discrete items, will be in the range of $5.90 to $6.10 per share. This compares to Chemed's 2013 reported adjusted earnings per diluted share of $5.62.

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

Thank you, David. As we noted earlier, admissions were difficult during the quarter, aggregating 15,445, which is 3.5% below the prior year. However, this is a sequential improvement from the third quarter, where admissions declined 6.3%.

As most of you are aware, CMS is discouraging the use of the failure to thrive and debility unspecified disease classifications when determining the primary medical condition that results in a terminal prognosis. The final rule issued in August of 2013 eliminates failure to thrive and debility unspecified as the primary coding for a terminal prognosis effective October 1, 2014. CMS encourages the documentation coding of failure to thrive and debility unspecified as additional medical support in reaching a terminal prognosis.

Concerns regarding patients traditionally diagnosed as terminal from the use of failure to thrive and debility unspecified has disrupted referral patterns in our overall admissions. In prior years, approximately 15% of our patients were admitted with failure to thrive or debility unspecified as the primary reason for a patient to have a terminal prognosis. This declined to 10.1% in the second quarter, 6.7% in the third quarter, and was 7.1% in the fourth quarter of 2013. Total admissions, excluding failure to thrive and debility unspecified, actually increased 5.5% in the quarter.

CMS will continue to allow admissions under these two categories through FY14. VITAS is in the process of refining its admission coding criteria, and educating its physicians and referral sources such that the number of patients admitted with a primary coded diagnosis of failure to thrive or debility unspecified will be eliminated by October 1, 2014.

As of December 31, 2013, VITAS employs approximately 1,156 admissions personnel, which compares to 1,145 in the prior-year quarter. During the fourth quarter of 2013, admissions from hospital referrals decreased 4.2%, nursing home admissions decreased 8.7%, assisted-living facilities decreased 5.4%, and home-based referrals decreased 2%. Our per-patient per-day pharmaceutical costs averaged $7.54 in the quarter, which is slightly favorable to the prior year. Our medical equipment per-patient per-day cost in the quarter totaled $6.38, which is 4.5% below the prior-year period.

VITAS's average length of stay in the quarter was 82.6 days, which compares to 80.3 days in the prior-year quarter, and 82.2 days in the third quarter of 2013. Average length of stay is calculated using total discharges during the period. 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 1,305,001 days in the quarter, a decline of 1.9%. Non-nursing-home routine home-care days increased slightly in the quarter, and nursing-home routine home care declined 4.8%.

At December 31, 2013, we had two programs classified as start-ups. Both of these start-ups are state licensed, CHAP accredited, and certified by Medicare. Operating losses for these two start-ups totaled $270,000 in the quarter, and compares to losses of $783,000 for locations classified as start-up in the prior-year period.

With that, I'll turn the call back over to Kevin.

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

(Operator Instructions)

Darren Lehrich, Deutsche Bank.

Good morning, everybody. I had a couple questions.

First, I wanted to just ask about your high acuity mix. It looks like it actually stabilized a bit sequentially. Dave, I know you mentioned in your remarks that you still expect that to decline in the guidance, so I want to understand how are you thinking about it from here? You expect it to just be down year-over-year, given that it doesn't fully anniversary? Or do you think sequentially it also still declines?

We expect it to be down year-over-year only because the Federal Register didn't come out until May of 2013, and that was the beginning of the impact. I'm sorry, the DOJ investigation put a slight cooling on our high acuity care. With that, Darren, quite frankly, we're indifferent.

Yes, it impacts the top line which has a veneer of an important metric. As long as we still have that day of care, we're indifferent. Yes, it's going to impact revenue. We expect it to stabilize about where it is, but quite frankly it's based upon the needs of the patient determined by the doctor within the program.

Darren, let me make a comment. I think that what we observed with the very significant level of scrutiny that maybe some of these subjective physician decision makers were making at the time, we've seen it in the past, in other context, like FMRs and whatnot. There's medical review that you have. It's human nature. You have effect on the subject of the decision.

Almost a month later, we saw this retreat to the mean as you has observed it. If you ask me, if I was guessing for the coming year, since we don't encourage or discourage from an operating standpoint high acuity, I would say use your trend analysis. If the trend is that we were treated to the mean, and I'm going to continue on this basis, that I would not quarrel with that. Dave's point is it doesn't make too much difference in his economic models.

The only other comment I'd make which is interesting when you're trying to analyze this whole situation is to show you how little impact we have from a business model standpoint, in the past six months we've had a California program that was in cap. I've looked at through December 31, the amount of continuous care that we were providing in that program, which is basically we've been providing it for free.

You might say that's pretty expensive but it's driven by the doctors. In other words, we provided 2.5% of patient days of continuous care in that program for that six-month period which is when you look at the low national average of four-tenths of one day, you might say that's six times the national average. That's what the patients require.

Again, the businessman in me says we're providing that for free, but that's what the physicians are directing. That gives you some indication of when I say this is in the hands of physicians, it is in the hands of physicians. To answer your question, we'll go with either way but I think the current trend analysis is you won't be too far wrong on.

Okay, that's helpful. We can certainly see the margin implication here. It's really just from a revenue modeling perspective, and I wanted to get a little bit more inside that in the guidance. Then from a margin standpoint, I guess I'd be curious just to get a little bit more flavor for some of the things you've done.

I think you've mentioned in prior calls that you'd have to rationalize some of your inpatient infrastructure. Where are you on that process? Is that complete, so we're seeing the result of that with these margins? Then just overall, if you think about visits per week, what are some of the metrics there? If you can just think about that, as well.

I'll take a stab at it.

The margins that we have did very well. The mix of our business, it shouldn't change too much more. We hope to grow our routine home care business as a bigger expense, as a bigger revenue growth area for us, and that will make the high acuity smaller.

As far as managing any infrastructure cost, that's always ongoing, and there's still work be done there. We're looking at several inpatient units for making them more efficient. We will not in the future be having inpatient units as loss leaders, so to speak. Again, I think the trends in the fourth quarter with the mix will continue to go down, just as our doctors do a better job of identifying the terminal disease without that category.

We have done a lot of good work with minimizing the infrastructure related to continuous care, so we only have infrastructure in our larger programs now. Then we share some regional resources, which is minimized, that cost structure. Again, I think our margins are in pretty good shape. We will get through the first quarter still taking the negative hit from the sequestration comparing year-over-year, but we feel very comfortable with our outlook for the year that our margins are stable.

Darren, one thing, from my view of the visits per patient per week, there basically within rounding of a tenth of one visit, so those remain stable.

We've seen no change in that from our trends.

Okay, that's helpful. Then, obviously weather's a huge factor here in first quarter. I'm just wondering, I know you get a lot of pipe bursts and things like that that can impact business on the positive. I'm just wondering if you could help us think about whether it is a net positive in your mind? Has there been any disruptions in the ability to service customer calls, et cetera?

It's been positive. As we've said and you can guess, when you have an ice storm in Atlanta, the office is closed. You have two days you have literally no revenue. You have your board. You can't even take additional service calls for a few days. Everyone's at full employment at that point.

It seems like it's a net positive with very cold weather. When the office is closed you don't make it all up just because you can't do the jobs, and the jobs have to be done within a couple days, so they find somebody to do it somewhere. To answer your question, this is good weather for Roto-Rooter. It's not an unalloyed blessing, but it's good and solid.

Again, the Roto-Rooter business is very predictable. I guess it was a two years ago when we had no freezing, literally not a frozen pipe in all of our service areas. Unfortunately, I've had two frozen pipes in my house myself, so I guess I still call it a welcome change.

Last thing here, I appreciate you taking the questions, Dave, we'd love to get your updated thoughts on the timelines for any kind of proposals or rule making, whether this U-shaped policy is going to come out this year, and how you guys are thinking about it?

It seems unlikely that it's going to come out this year. There is a push through the NHPCO, the National Hospice and Palliative Care organization. They're pushing hard for demonstration project with any change in reimbursement, so you can look for unintended consequences.

But with that said, we have no indication that it's going to come out for really, now you're talking, October 1 of 2014 which would be FY15. There's no indication it's going to be coming out soon or by that period.

Our thoughts, Darren, are that as long as they don't screw it up. It's supposed to be revenue neutral for a year. When you look at our numbers, that can't be bad for us. I see numbers that the average for-profit hospice has an average length of stay of 140 days. It's got to be negative for that whole group, anyone close to that. We're just looking at it and saying as long as they do it correctly, it should be fine for us. It's something we'd welcome.

Okay. Thanks a lot.

Frank Morgan, RBC Capital Markets.

Good morning. In terms of the programs that have the cap issues, can you characterize that? Is that more a function of that drop in the shorter stay high acuity, or is it just weak volume trends and admit trends on routine visits because of the drop of those two categories?

Frank, let me jump in here. Tim, if anything you disagree, this is one of the few occasions I'd encourage you to correct me, but, Frank, I'd say this. We're basically talking about the significance of a large California program that's very profitable. Unfortunately or fortunately, the reimbursement for that program because it is a high-cost area is about 50% over our average, but the cap is the same number.

You're starting behind the eight ball in a successful program like that. Frankly, what we had is, call it, one form of bad management is if your top salespeople decide that they prefer to work elsewhere. We had some changes, lost some -- a combination of factors, had some top salespeople leave, and they've returned. We've had an administrative problem with the State of California which again we're treading carefully. We don't want to get the bureaucrats mad at you.

I think both those situations have ameliorated. As I said, the two top salespeople had come back, but it is on management. There's a block and tackling management issue, I think, coupled with the fact that it was in a very high reimbursement environment.

Tim, anything to add?

I would just agree with that. The issues we saw there were not related to the debility issue. That was one of your questions. It was just an overall drop in business. As Kevin mentioned, we're making very good progress there. We're not concerned about the outlook there. We're making good progress. At the same time, as the year unfolds, the cap is volatile because of the issues Kevin mentioned, but at this point we're very encouraged.

Okay. Tim, while you're there, any thoughts or plans around this new upcoming drug reporting requirement, I think, CMS is talking about?

Yes, we're very focused on that. There may be some movement to have that delayed as well, but we're prepared to understand which we do need to do today is going to be more precise. Drugs that are related to the terminal illness versus drugs that are not, and we have been already putting infrastructure in to make sure that the drugs that are unrelated will actually be processed and not be in a bottleneck.

Again, we're in very good shape to handle that. These are the type of regulatory burdens that are coming down. They're becoming very difficult for a lot of our smaller competition.

I would say we may have some extra cost because of this because we need to put technicians in the pipeline to make sure those are managed correctly and efficiently and to be able to follow-up. But we will handle it. We're not overly concerned about it, but we hope it gets delayed, and we hope it gets clarified, because some of the details of it are not helpful.

Okay. Then, just any impact you see on the marketplace in palliative care programs? It seems like there's a lot of the growth going on in that area, and I'm wondering to some degree is that maybe also affecting your admission trends?

Palliative care programs are expanding rapidly everywhere, and most large hospice companies have palliative care initiatives, which we do. In certain cases, you're working with the patients closer in the hospitals, which may reduce actually the period of time they're with you if they come out of the hospital.

But these are the programs that we're working with. You hear people talk about things like care transition programs our of the hospital into home care, so we're doing all of those. I think they're very difficult, again, for small companies to do because you have separate licensure and a lot of legal issues and a lot of scope for the resources of the billing.

We're very pleased with it. What we're doing, we're involved in the big hospitals and some of the big systems because of our palliative care initiatives, and we will expand those modestly. But it's just part of the continuum of care that's pre-hospice services. We want to be in that loop, so we're providing the great care for our patients there and being in the loop with our critical referrals that we can manage them constantly, and get them in the right setting effectively through palliative care.

It's working well for us, I would say.

Frank, you followed hospice for a long period of time. You've heard us say for years that when we've surveyed hospice patients and said why did you opt out of the curative setting and choose hospice, the number one reason they've given has been that the curative setting didn't do a good job treating their pain. That's always been the stock and trade for any good efficient hospice program. To the extent that elements of the curative sitting are doing a better job treating pain, that's the issue really you're identifying.

That has had an effect the last couple of years, and as Tim said, rather than just bemoan that fact, VITAS has gotten very active in helping the curative setting provide those palliative procedures, and as such, has been plugged into that system and has been a natural source for referrals. The answer to your question is yes, I think palliative care has an effect overall on hospice, as Tim says.

He thinks maybe it slows it down rather than prevents it, but I think what we've done is tried to, through a lot of investment in palliative care services, make sure that we get a greater share of our referrals because we've already demonstrated how efficient and how professional we are at the end of that process. But it's something that the whole industry has been dealing with.

Okay, one more and I'll hop. Any additional start-up? I think you said you have two in start-up right now, and quantified the drag from that, maybe $270,000. How do you see development roll-out schedule and the drag from start-up over the balance of year? Thanks.

I think we're probably seeing a similar amount of the drag, as you say, for the balance of year. We'll be opportunistic when we look at these start-ups, so to speak. We're going to be little more aggressive. We've held back a little bit for the last few years, but we see the marketplace is offering some opportunities now.

There are very few companies that are expanding, which gives you a better opportunity. We're also going to be very quick to make sure that it's a good opportunity in the marketplace. We might call it programs that we will develop, and if they don't work we will find another avenue in that marketplace to have our business. The point is we'll probably have two, three, or four more as the year unfolds, and those opportunities, I think, will be good for us.

If you were giving high watermark though, we don't lose that much money on any of (multiple speakers).

No.

We're talking about a number that's going to vary between $200,000 in the quarter, and probably $800,000 in a quarter.

We're going to manage those losses better than we have in the past because we're not necessarily going in right away and putting full infrastructure, suggesting we're going to always be trying to grow the program to 500 census. We'll be a little more conservative in the infrastructure which will minimize the losses, and we won't move ahead aggressively until we see that opportunity in the marketplace.

We're in most of the big markets. There's only about 10 cities that we're not in that are over a million in population in the country, and over half of those are limited by licensure. We'll make progress in the ones we are not in, I'm certain.

Jay Hafner, Skystone Capital.

Hi. Thanks for taking my question. Are you expecting admits to be maybe flat to negative in the first half, due to the coding changes, and then up like 6% to 8% in the second half in order to hit your guidance? Or, do you think you'll be able to mitigate the admit pressure there even in the near-term?

The biggest issue is exactly that. It's the lapping in the first half of 2014 compared to the first half of 2013, and then we fully expect to be recapturing these patients through an education process, both internally and externally. You're exactly right relative to the admissions growth in a second half of year.

We look at the trends. The trends are all positive, and so we're not waiting for the trends to occur in the second half. The trends have already ameliorated.

Got it. Then a follow-up, the last couple of years you've offset inflationary pressure with just increases in productivity, or I should say the last couple of years you've offset less than inflationary rate increases with productivity. This year when I add in all the sequestration, the rate, the PPACA cuts, all those things you're getting a little bit better than flat. Do expect to do the same thing this year, or do you have to do something different going forward to offset that low rate update from Medicare?

You're exactly right. The last two years basically in real dollars we're getting a cut. Said differently, inflation is greater than the increase we're getting out of Medicare through a combination of sequestration, as well as the health care reform, also turns and takes away from the market basket.

The budget neutrality factor, as well.

And the budget neutrality factor which has been there for now five years which is about 60 basis points. Your observation is correct. Before where we were actually getting nice productivity increases, when we were getting a full market, that's now become more difficult. The challenge really is to having increased productivity to try to maintain, all other things held constant, the same margins.

Now what you're also seeing though on a go-forward basis is volatility in our margins because of the mix shifts through a slight reduction in our high acuity care. If you factor that out, we're fighting to keep margins flat to slightly positive.

Got it. Thank you.

Jim Barrett, CL King and Associates.

Good morning, everyone. Tim, a question for you on the Medicare cap, is the 2014 outlook for Medicare cap, is the assumption that the two programs that are experiencing issues continue to experience issues throughout the year, and the cap issues are confined to those two programs?

That would pretty much be our current thinking. At the same time there are other programs we have that are close to a cap if we're not successful. Again, the way the numbers pan out, we feel very good for the quarter we're in. We're seeing very good success, and we project out our results. We would think that we'll be stable in the summer months. Then we've talked about it last year. We had an issue in our fourth quarter which is the first quarter of the next fiscal year.

That issue will be determined based on the progress we make between here and there. Again, to answer your question, yes, the two that we've focused on, we're continuing to focus on. We don't see any others falling into this situation, and we're very pleased with the progress at these two. I hope that helps.

Jim, let me say, we would have -- our guidance is a little over $5 million of cap. We would have $5 million in our guidance in any event. If you ask, is Tim really saying do we have more than a realistic hope of having no cap in those two programs this year? The answer is yes, it's a realistic hope. It's a hope based on trend analysis. But we have the $5 million in our guidance no matter what.

Understood. Tim, reimbursement trends aside, when you look out three to five years, what would you expect your admission growth to be per program, given the longer-term demographics and industry trends?

To answer your question, I think those long-term trends are working for us with demographics. There are more individuals that are in the elderly categories in three and five years than there are today, and that should help us.

I think all the things that we've talked about that we're doing at VITAS with palliative care initiatives, increasing the breadth of what we do. We're always increasing the value of our systems. Yes, I would expect to get some advantage three to five years out from those overall trends. We're continuing to improve our Company dramatically constantly, so I think we'll continue to do well in future.

Jim, I'll tell you, demographics always work for hospice if you say that it's rationing of care which is what obviously the system needs. That's another good factor. But I would say a bigger factor that we're seeing is economic and regulatory issues with our competitors have forced a number of relatively high-profile competitors just to disappear. To the extent that that continues and accelerates slightly, that can have a bigger impact in our admissions than the demographics.

In other words, you'd obviously expect to pick up market share under that scenario?

Exactly.

We expect the pressures for consolidation to be growing, not necessarily by acquisition either. Basically, small hospices are having a difficult time of it.

That should benefit you greatly then. Then my last question, Kevin, you've spoken during the housing recession about the fact that plumbers weren't building new homes. They were competing against Roto-Rooter. With homebuilding now recovering, and I know it is in the early innings, are you seeing any reversal of that trend of competitive plumbers going back into the new homes space, as opposed to competing with Roto-Rooter?

Yes. You've got to remember there's a couple of factors here. Number one, there is a little less overly tough competition on the commercial side. In other words, these plumbers, they can't really put a big ad in the Yellow Pages. They can be on the internet fairly easily. It makes the force that you've just described a little less significant. But to the extent that they get involved in new home construction, that's more profitable for them. They prefer that.

That eases competition a bit, but again with Roto-Rooter, we have to have the plumbers to the extent that they can be competitively and profitably engaged in that pursuit. Building these homes, that means slightly fewer of them are available for us to hire. If you ask me, the net is a positive to us. Again, like almost anything in life, there are factors that cut the other way. But it's a good thing. We prefer to have those plumbers out of the repair plumbing field.

Understood. Okay, that was all very helpful. Thank you very much.

Very good. I think that's our last question, so I thank you for very thoughtful questions. We're already obviously engage in the first quarter, and when we get to the conclusion of it we'll have a call similar to this, and I thank you for your attention.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.