Encompass Health Corp (EHC) 2009 Q3 法說會逐字稿

Good morning everyone. Welcome to HealthSouth's third quarter 2009 earnings conference call. At this time, I would like to informal participants that your lines will be in a listen only mode. After the speakers remarks, there will be a question and answer period. In order to accommodate all callers, please limit yourself to one question and one follow-up question. (Operator Instructions) Today's conference call is being recorded. Your participation implies consent to our recording this call. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Mary Ann Arico, Healthsouth's Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Julie Ann and good morning everyone. Thank you for joining us today for Healthsouth's Third Quarter 2009 earnings call. With me today on the call in Birmingham are Jay Grinney, President and Chief Executive Officer, John Workman, Chief Financial Officer, Mark Tarr, Executive Vice President of Operations and John Whittington, General Counsel, Andy Price, Chief Accounting Officer, Ed Fay, Senior Vice President and Treasurer, and Julie Duck, Vice President of Operations.

Before we begin today, if you do not already have a copy of the Press Release, financial statements and the related 8-K filings with the SEC are available on our website at www.Healthsouth.com. In addition to the required information, we have also provided a set of slides which is are available on our website. The first 16 slides will be referred to during the call. The remaining 20 slides include supplemental information including GAAP reconciliation for Q3.

Moving to Slide One and the Safe Harbor. During the call, we will make forward-looking statements which are subject to risks and uncertainties, many of which are beyond our control. Certain risks, uncertainties and other factors that could cause actual results to differ materially from Managements projections, forecasts, estimates and expectations are discussed in the Company's Form 10K for 2008 and its quarterly and other SEC filings including the Form 10-Q for our Q3 20009 scheduled to be filed today. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, statements made throughout the presentation are based on current estimates of future events and speak only of today. The Company does not undertake a duty to update or correct these forward-looking statements.

Our slide presentation and discussion on the call will include certain non-GAAP financial measures or such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the slide presentation or at the end of the related Press Release, both of which are available on our website (inaudible) the 8-K filed last night with the SEC and with that I'll turn the call over to Jay.

Great. Thank you, Mary Ann and good morning, everyone. We have a lot to cover this morning but before we begin, I'd like to recognize and thank John Workman, for his exceptional service to Healthsouth during these past five years. After John and I talked about the opportunity at Omni Care and his departure from Healthsouth I went back to look at the notes I made when I first interviewed him in June of 2004. Intense, bright, hands-on, likes a challenge were some of the comments I jotted in the margins of his resume. Having now worked with John for over five years I'd also like to add these words and phrases to that list; Leader, a man of integrity, hard worker and all around great guy. John has been a trusted partner, colleague and friend and all of us at Healthsouth wish him the very best as he assumes his new responsibilities at Omni Care.

Although transitions are never easy, John definitely is going out on a very strong note. Same-store discharges increased 5.3% in the quarter compared to the third quarter of 2008 despite some very tough comps. As a reminder, we saw our same-store discharges grow by 8.1% in the third quarter of last year compared to Q3 of '07. Being able to grow 5.3% on top of that benchmark is extremely gratifying and underscores the dedication and committment our employees have to their patients.

Not surprisingly, pricing in the quarter was essentially flat, as most everybody knows, the third quarter marked the end of the Medicare pricing roll back that went into effect in April of last year. With net revenue per discharge basically unchanged from last year, our inpatient net revenues increased 4.8% in line with our volumes. With 11 fewer outpatient clinics, our outpatient net revenues declined $2.6 million compared to the third quarter of 2008 which when combined with our inpatient revenue increase contributed to an overall increase in consolidated net operating revenues of 3.8%.

Andy Price will do a walk through of our expenses in a moment but suffice it to say we also were very pleased with how well our hospitals managed their expenses in the quarter and their success was reflected across all key expense categories. Strong volumes and disciplined expense Management generated $96.4 million in adjusted consolidated EBITDA in the quarter up $17 million or just over 21% compared to the third quarter of 08. Year-to-date our adjusted consolidated EBITDA has increased $35 million or 13.7% compared to the first nine months of 2008.

Improved adjusted consolidated EBITDA and lower interest expense allowed the Company to earn $0.38 per diluted share of adjusted income from continuing operations after adjusting for government class action and related settlements and non-recurring items such as the losses on the interest rate swaps. This compares favorably to the $0.15 per diluted share in the third quarter of 2008.

Another important indicator of our continued strong performance is the free cash flow we've been able to generate. As outlined on Page 11 of the supplemental slides, cash from continuing operations was $135.5 million in the quarter. After deducting $9.5 million of maintenance CapEx, a little over $11 million in swap payments, $6.5 million of preferred dividends and about $7 million going to our JV partners and some non-recurring items, our adjusted free cash flow for the quarter was $98.6 million which compared to $39.6 million in the third quarter of last year. Year-to-date, we've generated $159.1 million in adjusted free cash flow compared to $55.4 million during the first nine months of 2008.

Finally, we realized an important milestone in the quarter, through increased adjusted consolidated EBITDA and $117 million in year-to-date debt repayments we were able to reduce our leverage ratio on a trailing 12 month basis to 4.5 times which we achieved more than a year ahead of schedule. While this clearly is not our ultimate leverage goal, we are very pleased with this accomplishment and have renewed confidence in our ability to get below four point times well before the end of 2012. With that I'm going to turn it over to John Workman one last time and John will then introduce Andy Price and Ed Fay for their comments.

Jay, thank you and thank you for the kind comments about me. You are all well aware of my announcement. It has been a great pleasure working with Jay and the rest of this great Management team over the last five years. The Company is well positioned for future growth and is in stark contrast to the four divisions and mess we inherited five years ago. My departure is no reflection on Healthsouth which is obviously a great company but it's just an opportunity for me to use my background and hopefully add value at Omni Care as well as being closer geographically to our family. There is great continuity in Andy Price and Ed Fay as well as others in the finance function and though the time for leaving is never perfect, this comes close.

Andy Price has been named interim Chief Accounting Officer. Andy has also been here since 2004. We identified Andy early on as a strong performer and he was promoted to a Senior Vice President in 2005 and has been instrumental in leading the accounting area through the reconstruction to a normalization to now a best practices approach. Andy brings with him a solid background in post acute as well as experience as a Senior Manager in an international public accounting firm. Andy has participated in our Board Audit Committee meetings and is well known to the Audit Committee. This will facilitate the transition.

Ed Fay, Healthsouth Senior Vice President and Treasurer was recruited to the Company over a year ago and brings tremendous depth with his prior experience at JP Morgan, Wachovia, Standard Charter and at Regions Bank in Birmingham before joining Healthsouth. Ed has been a key part of Healthsouth derivative strategy and the most recent amendment and extension of the Companies credit agreement. Ed regularly interacts with Healthsouth's Board finance committee which will also ease the transition. Andy is going to cover the income statement areas and Ed will cover the balance sheet including debt related items as well as cash flows. Before I turn it over to them I want to personally thank all of you for your support of Healthsouth.

Thank you, John. I will be referencing the slides we filed on Form 8-K in my comments today. Beginning with revenues which can be found on Slide five, our inpatient revenues increased by 4.8% over last years quarter to $431.3 million. As Jay mentioned discharges on a same-store basis increased 5.3% while pricing as expressed on a per discharge basis remained flat to prior year. Additionally, our length of stay during the quarter was 0.4 of a day shorter than the same quarter a year ago. Despite the shorter length of stay our occupancy improved to 66.5% from 65.6% a year ago.

Sequentially, occupancy declined from 68.8% in the Second Quarter of 2009 due to the inclusion of our 40 bed Mesa Hospital and licensed beds during Q3 of 2009. These revenue and operational statistics can be found on Slide 26. Outpatient and other revenue declined 5.9% from the same quarter a year ago resulting from the closure of 11 outpatient satellites in September of 2008.

Next, I wanted to provide some details on our operating expenses for the quarter which could be found on Slide six. Stated as a percentage of revenue, salaries and benefits were 49.8% for the quarter a decline of 210 basis points from the same period a year ago and a slight increase of 40 basis points from the second quarter of 2009. As we mentioned to you in 2008, we made several changes to our benefit plans including reducing certain aspects of our paid time off program. These refinements have contributed to the salary and benefit improvement from the same quarter a year ago.

In addition, as a result of our recruiting and retention efforts we saw significant declines in the use of contract labor during the quarter which also contributed to the overall decline in cost of labor in our hospitals. We continue to see improvement in labor productivity expressed as employee per occupied bed or EPOB which improved to 3.58 during the quarter as compared to 3.69 a year ago at 3% improvement. These positive trends and salaries and benefits reflect our continued focus on providing high quality patient care, but on a cost effective basis.

I should also note that on October 1st we provided a merit increase of approximately 2.3% to our employees except for Senior Management and that our new Mesa Hospital will have start up costs including salary and operating expenses during the fourth quarter with proportionately lower revenues. Finally in looking at hospital related expenses, which include operating costs, supplies, occupancy and bad debts as a percentage of revenue, these decreased by 80 basis points compared to a year ago and 20 basis points sequentially from the second quarter of 2009.

Turning to the provision for doubtful accounts, which returned to 1.7% as a percent of revenues which was what it was in the first quarter of this year. As we have mentioned on prior calls, our bad debt expense fluctuated in the second quarter of 2009 due to additional provisions for pending Medicare claims that were denied by one of our fiscal intermediaries referred to as ADRs. As a reminder we provide for these claims as they age which can take up to 18 months to adjudicate through the administrative process.

During the third quarter, the intermediaries suspended new ADRs which contributed to the sequential decline in our provision for bad debts as compared to the second quarter. We continue to work through the existing ADR inventory and have thus far enjoyed a strong success rate for those claims that have completed the appeals process.

General administrative expenses excluding 123 R costs were 4.8% of revenue during the quarter a 20 basis point improvement from the prior year. During Q3, we recorded an impairment charge of $4 million which represents a writedown of property and equipment associated with one of our inpatient rehab hospitals to its estimated fair value. The charge resulted from our recurring assessment of the carrying value of our property and equipment which occurs on a quarterly basis.

Government class action and related settlements includes our mark-to-market adjustment for the 5 million common shares and 8.2 million warrants which we agreed to contribute as part of the securities litigation settlement. The increase in the companies stock price from Q2 to Q3 resulted in the charge of 8.2 million during the quarter. Q3 will be the final quarter for this mark-to-market adjustment as the common shares and warrants were distributed at the end of the quarter. With the issuance of the common shares and warrants in Q3, we have removed the associated securities litigation liability from our balance sheet along with the insurance refund receivable. The net impact of these adjustments is an approximate $116 million increase in the companies equity balance as of September 30, 2009.

Professional fees declined slightly compared to prior year. These costs generally relate to amount spent for pursuit of the derivative claims against E&Y and former Officers and Directors and to matters prior to 2003. Interest expense declined $10.8 million quarter-over-quarter due to a decline in LIBOR rates and reductions in debt levels. With the three-month LIBOR averaging approximately 42 basis points compared to 291 basis points a year ago we are seeing favorable interest expense due to the lower rate. The decline in LIBOR resulted in an increase in payments under our 5.22% fixed payment swap agreement which covers $956 million of notion all amount.

As this instrument is not accounted for as a hedge, these payments are excluded from adjusted EPS but are reflected on the cash flow statement and in our presentation of free cash flow. Ed will provide a more detailed discussion of the companies debt structure and impact of the swap agreements later in the presentation. We have a $1.7 million benefit in income taxes this quarter. The majority of this benefit relates to State income tax refunds expected from amended returns being filed for 2004 offset by other provisions.

Turning to adjusted consolidated EBITDA, which was $96.4 million for the third quarter compared to $79.4 million for the third quarter of 2008, a 21.4% increase. We attribute the strong improvement in 2009 over 2008 to strong volume growth, improved labor productivity allowing us to deliver high quality patient care on a cost effective basis and continued management of expenses including G & A. In discussing net income and earnings per share in the quarter, we believe there is some adjustments that should be considered, items either non-cash or non-recurring when considering income from continuing operations. The adjustments to EPS are similar in nature to adjusted consolidated EBITDA but are not identical. The adjustments to EPS generally relate to the professional fees line, mark-to-market, or fair value adjustments to liability and the gain on early extinguishment of debt.

We have also adjusted to a normalized income tax expense to reflect a run rate for this element exclusive of refunds associated with amended tax returns. Considering these items, adjusted income from continuing operations is $39.1 million representing a $24 million improvement in income and adjusted EPS is $0.38 per diluted share representing a $0.23 per share improvement in EPS over the third quarter of 2008. The decline in LIBOR rates from the third quarter of 2008 represents approximately $7.1 million of earnings or $0.07 per share of the $0.23 increase in EPS. On a year-to-date basis, the change in interest rates represents $22.9 million or $0.22 per share of this year-over-year increase in adjusted EPS.

Excluding the impact of the decline in LIBOR rates, the year-over-year increase in adjusted EPS would have been $0.16 per share for the quarter and $0.44 per share for the nine month period. The fourth quarter EPS will reflect a higher share count as a result of the approximately 5 million shares distributed at the end of Q3 related to our securities litigation settlement. Note that the 8.2 million warrants issued in September have a strike price of $41.40 and will not initially be dilutive to earnings. With that, I will turn the presentation over to Ed.

Thanks, Andy. I'm going to begin with a discussion of free cash flow and then move to some balance sheet issues, the amendment to our credit agreement and finally liquidity. Turning now to free cash flow found on Slide 11. We analyze our free cash flow by beginning with cash provided by operating activities of continuing operations. From that number we make certain adjustments for items which are found in the investing and financing activity section of the statement of cash flows and of course, we adjust for certain non-recurring items.

On the third quarter we produced free cash flow of $98.6 million. This result was the product of strong operating performance and favorable working capital trends. One contributed to the working capital improvement will turn to a use in the fourth quarter when our semiannual bond interest payments up approximately $39 million are made. Also annual insurance payments of approximately $10 million are typically made late in the fourth quarter. You'll see on this slide maintenance Capital Expenditures of $9.5 million for the quarter which include funds spent on refresh programs in our hospitals.

We also invested some of the $98.6 million of free cash flow and $10.5 million of discretionary Capital Expenditures which are not of a maintenance nature. These primarily represent payments toward de novo hospital construction in Mesa, Arizona and Louden County, Virginia as well as costs for bed expansions and some corporate expenditures. On the year we have spent $30 million on discretionary projects but we have recently entered a sale lease back arrangement in the new Mesa Hospital. This will add $15.5 million of incremental indebtedness to our balance sheet in the fourth quarter.

Turning now to the balance sheet, available cash was $117.3 million at September 30, 2009. This increase of $68 million during the quarter is attributable to the strong operating results and favorable working capital trends I mentioned earlier, and to the fact that we did not deploy cash toward discretionary debt reduction on the quarter.

Turning to Slide 12, the reduction of long term debt did continue, albeit at a reduced pace and we finished the quarter with a $1.697 billion balance. Debt has been reduced $117 million since year-end 2008. Our leverage ratio has declined 0.8 of a turn from year-end and we are now at 4.5 times based on our trailing four quarters of adjusted consolidated EBITDA. Achieving a 4.5 times leverage ratio was a goal we set with a delivery date of year-end 2010. Having achieved that goal five quarters ahead of schedule, we now believe our longer term goal of 3.5 times to four times by the end of 2012 is likely to be achieved earlier.

While debt reduction remains a priority for the Company we took other steps recently to improve the overall quality of our capital structure, by amending and extending our credit agreement. First of all we pushed out the maturity of approximately $300 million of our term loan up to 2.5 years to September 2015. Please refer to the appendix Slide 28 to see how our maturity profile has been changed by this extension. Also, on this extended piece, we will be paying an increased spread of 150 basis points.

In addition to smoothing out our maturity profile, the amendment permits the issuance of senior secured or unsecured notes to reduce our bank debt. Senior secured notes may also be used to reduce availability under the $300 million loan accordion feature that was already in the credit agreement. Other amendments within the agreement will provide us further flexibility to help improve the capital structure and grow the Company. While speaking of our credit agreement, I want to mention it does contain maintenance covenants, namely a leverage ratio and an interest coverage ratio. We were in compliance of these ratios as of the end of the third quarter of 2009.

Regarding our interest rate swap position there was no change on the quarter. Last quarter, you will recall we bought out $100 million notional of our mark-to-market swap. This and the fact that it is approaching maturity has helped to reduce some of the income statement noise this position creates. In the future we will make every effort to transact only in derivatives that achieve hedge accounting.

Finally, there is a liquidity schedule on Slide 13. Based on our available cash and undrawn revolver, we had $517 million of liquidity at the end of the third quarter. This was an improvement of $177 million over our position at year-end 2008. Please note that we have not had to make use of our revolver for cash or letters of credit since February of this year. With that let me turn it back over to Jay.

Great. Thanks, guys. As we launch our search for a new CFO, the Company will be in excellent hands with Andy and Ed. Both bring years of experience to their areas of responsibility and have worked closely with John, members of our Board of Directors and in the case of Andy with our external auditors. They also have top notch talent in their respective areas of responsibility which will insure a seemless transition. Before taking questions we'll address the status of the E&Y arbitration and our outlook for the remainder of the year and then we'll provide some preliminary thoughts on 2010. John Whittington, our General Counsel, will provide the E&Y update.

Thanks, Jay. Last quarter, I reported that we were in the final stages of selecting an arbitration panel. I am pleased to announced today that the three person panel was seated on September 29th and the arbitration process has begun. As we proceed with this process, we will follow the rules of and the process dictated by the American Arbitration Association. Those rules as well as the specific orders of the arbitration panel require that the process be confidential and accordingly, we will not be allowed to provide you with any updates until the process is complete.

I can tell you, however, that there will be numerous procedural and pre-trial matters that will have to be resolved before the actual trial can commence. We still believe the trial will take six to eight weeks once it begins. I will also remind you it is a three party process involving the AAA, E&Y and Healthsouth, and that we do not unilaterally control the process nor the timing of the process. The arbitration will proceed based on schedules established by the panel and it is now clear that the final resolution of this arbitration will be a 2010 event and not a 2009 event as we had originally anticipated. We are pleased that the process is under way. We remain confident in our claims and we will continue to pursue them aggressively.

Thank you, John. As noted in our Press Release, we're raising our full year adjusted consolidated EBITDA and adjusted diluted earnings per share guidance. Our adjusted consolidated EBITDA range is being raised to $375 million to $380 million up from the previous range of $354 million to$362 million. Our adjusted diluted earnings per share is being increased to a new range of $1.45 to$1.50 per share up from the previous range of $1.15 to $1.25 per share which represents a significant increase from the $0.75 per share we earned in 2008.

You'll recall our adjusted consolidated EBITDA was $87.5 million in the fourth quarter of last year which included approximately $6 million of favorable non-comparable items. Normalizing for these one-time items are adjusted consolidated EBITDA would have been $81.5 million. Given our year-to-date performance, our revised guidance implies a projected fourth quarter adjusted consolidated EBITDA of between $85.9 million and $90.9 million which represents a 5% to 11% increase over the Q4 '08 normalized number.

As has been the case all year, volume will determine fourth quarter performance. Same-store discharge growth in the fourth quarter of 2008 was 9.7% compared to Q4 of 2007. This obviously creates an even more challenging comp for us than our third quarter comp. While we're pleased with our discharge growth through October and with the start to November, we need to see sustained performance through the remainder of the quarter to achieve the high end of these revised ranges. Other factors influencing the quarter will include the 2.5% Medicare market basket increase and the 2.3% merit increase for all non-senior Management personnel, both of which were effective October 1.

While our 2010 budgets haven't been locked down and approved our Board, we have enough visibility into the numbers that we remain confident in our stated growth objectives. Namely, that we will be able to grow volumes in the 4% range, generate mid to high single digit adjusted consolidated EBITDA growth, and drive high teens adjusted EPS growth. As we previously stated, our continued volume growth will occur as a result of our standardized sales and marketing efforts, the addition of beds to those hospitals that are at capacity, and the full year impact of de novo hospitals.

Our ability to meet or exceed these EBITDA and EPS targets will be predicated on hitting our volume objectives, keeping a good portion of our Medicare market basket update, continuing to manage our expenses in a disciplined manner and having LIBOR remain in that 25 to 50 basis point range. Our pricing assumption assumes some kind of healthcare reform will be enacted and that hospitals will have to help pay for this reform through a market basket reduction.

In conclusion, we've had a solid year thus far and we remain confident in both the near term and longer term business outlook for Healthsouth. We have a sound well thought out business plan and have demonstrated we can execute it producing solid results and we have a strong experienced Management team with considerable bench strength that will continue to work as a team to bring value to our shareholders. With that, I'm going to ask the Operator to please open up the lines for questions.

Thank you. (Operator Instructions) Your first question is from the line of Pito Chickering with Deutsche Bank.

Good morning guys. First of all John I want to thank you for all your help and best of luck at Omni Care, you'll be missed. A question is margins continue to improve you're driven by salaries and benefits and other operating expenses. As a percent of revenue have been fairly constant throughout 2009. Can you talk about how your current staffing process will work in the fourth quarter and first quarter when you've higher seasonal volumes and what is your targeted employees for occupied bed for those quarters?

Well what we don't do is provide prospective targets on productivity metrics. Clearly, as I said before, the ability to continue to see volumes at that four plus percent range in the quarter is going to help us achieve solid improvement in our productivity. If you look at it on a net revenue basis, however, remember that we did put in merit increases for all employees, about 2.3% on October 1st. So as we said we don't prospect early go out and say well here is our target and this is what we will try to get to and we are really not going to go down that road and I think the thing to take away from the third quarter and the second quarter, frankly ,is that all year we've been able to manage to volume levels.

First quarter is typically the most busy for us and we see slight reductions in the second and third quarter and yet we've been able to manage and effectively manage our labor through those different volume seasons. And we fully expect that we will continue to do that into the fourth quarter.

Okay, so I guess asked a slightly different way thinking about fourth and first quarter it seems as though from a year to year perspective you guys haven't really increased your staffing levels that much despite these volume gains. Obviously that will keep hiring but do you believe towards this leverage you've seen in '09 you can continue to see that in 2010?

I'm sorry, you--

Yes, so as--

You broke up, Pito. I'm sorry I couldn't hear the question.

No problem. Asked a different way, if I look at the number of full time employees you guys had looking at third quarter '08 versus third quarter of '09, it's relatively, it's actually down year-over-year despite the volume growth which obviously shows in your employees per occupied bed. Those trends have been pretty solid as you ramp up the seasonal volumes. Is there any reason why that should not continue or do you guys see yourselves as fairly well staffed versus your volume expectations at this point?

Well first of all we definitely believe that we are very well staffed. Our first focus is always on quality patient care. And as you can see in the first of the supplemental slides, we really do have a pretty good track record of being able to out perform the market with respect to some of the quality metrics so we certainly have in some hospitals there are going to be vacancies that we're recruiting for but we feel like we are adequately staffed.

The big change really has been in the contract labor and I think there is definitely a correlation between our quality metrics and our decreased reliance on contract labor. And that's going to continue and we really do believe that we do a better job with full time employees who are committed and dedicated and that's something that we feel very good about. We've also installed as we said before some consistent IT platforms such as time clocks that are in all of our hospitals and it gives us the opportunity to start looking at our labor on a realtime basis instead of pay period lag, which is usually about two weeks.

So we're going to continue to focus on our labor costs and I think that you and the shareholders should feel very confident that we've demonstrated we can do that and we'll be able to continue to generate some really strong performance in our labor.

Your next question is from the line of Whit Mayo with Robert W. Baird.

Hi, thanks guys. Good morning and good luck, John. I guess just let me follow-up on Pito's question a little bit. I understand the 2.3% merit increase in fiscal 2010. Can you talk maybe, Jay or John, about some of the other benefit changes that perhaps you made in 2010? I can't remember if you may have changed some of the designs around 401 (k) or anything like that.

No. We didn't change the 401 (k) matching. We did eliminate the automatic enrollment in the 401 (k) last year and that was in very large part because with the economy tightening and the markets going down, we felt that many of our employees wanted to have the option of keeping some of their paycheck instead of automatically having that go into the 401 (k). Most of the benefit changes were made effective on January 1 and probably the biggest was a change in our paid time off program. I think we've mentioned last year that we had maybe I think six different PTO plans that we consolidated into one.

When we did that I think we overshot the mark and had frankly a PTO program while consistent was a little more generous than what we saw our competitors having. So we scaled that back a little bit and adjusted that and I think that those are the major changes. Most of those you're going to see really cycling through on January 1.

And if I just look at and isolate the merit increase or if I look at your salaries what percentage of your total SWB is just the salary expense?

I don't know that I have that right off the top. We can get that to you.

Okay, and then maybe can you frame up just in terms of dollars your contract labor just how much that expense is down year to year? Do you have that?

I'm very sorry. I'm having a hard time hearing you.

I'm sorry Jay, can you hear me better now?

I apologize. I don't know if we're having difficulties with the lines but we're having a hard time hearing you.

I'm sorry, the question was around contract labor, just wanted to know if you could frame up in terms of dollars how much that was down year-over-year in the third quarter.

Yes, we can get that to you as well. The contract labor, what was the dollar amount? About a million, almost million and a half for the quarter, contract labor was down compared to prior year, we had $2.6 million in the quarter and prior year --oh, gosh, we had more than that. We had $10.5 million.

$10 million is our year-to-date. We're down five.

So down five.

Your next question is from the line of David MacDonald with SunTrust.

Good morning guys. Jay, just a quick, can you make a quick comment? Obviously financial flexibility is improving, presumably you guys will get a slug of cash from E&Y at the beginning of the year. Should we expect to see you guys maybe ramp up either bed expansions, acquisitions, de novo, should we each peck a little more aggressiveness on that front in 2010?

We said in the third quarter and are certainly repeating today that we believe we are in a position to look for growth a little more aggressively than we have in the past and clearly the amend and extend gives us the opportunity to do just that. We're not going to go out and do a deal just to do a deal. We're going to be very disciplined as we look for growth opportunities. Certainly, there are opportunities in our existing hospitals. We've done a great job of bringing new patients in and that gives us the ability to add beds and we'll continue to do that.

We have a nice pipeline of development opportunities in existing and new markets so yes, we definitely look for more growth and while we're not going to abandon the deleveraging, that is very very very important to us, there are a lot of ways to de leverage. You can go after the numerator or you can go after the denominator. We want to do both and so we'll continue to pay down debt but we're also going to look for ways that we can bring new EBITDA on, new earnings on and clearly looking to do that through growth is now much more available and much more of a possibility and frankly much more prudent than it was say six months ago and we feel very good about going into 2010 and doing that with our focus on a combination of deleveraging and growth.

And then Jay, have you guys seen just given what's going on in the world any changes in the behavior of the hospitals with some of your hospital competitors maybe more willing to outsource stuff to you, thinking about closing down their ERPS? Are more of those opportunities bubbling up?

You know, I don't see any real change as a result of the economy. What we're finding is the following. There are some hospitals out there with ERPS who are really having a hard time meeting the 60% threshold. They've got 25, maybe 30 beds that are allocated to inpatient rehabilitation and because of the rule, because of some of the other coverage requirements that are coming down the road, they're looking at them saying, we could better use those beds for med surge purposes. And in those instances, we'll definitely want to if we have an existing ERP in that market to buy those units and to consolidate them into our hospitals.

We also are pretty excited about the de novo opportunities. I know it takes a little bit longer to bring those on stream and that's much more of a longer term investment but we're managing this Company for the long term and so de novos are very attractive means of providing sustained long term growth.

So to answer your question, no, I don't see a lot of exogenous issues that are changing the development dynamics. And I think that where we see the opportunities are in new markets. We also see the opportunities where an existing IRF provider is just struggling, they don't have the expertise, they don't have the clinical pathways, and they believe that we could be a very viable alternative to either partner with us or to sell the services to us and then we run that independently.

Your next question is from the line of Adam Feinstein with Barclays Capital.

Hi, good morning. This is actually Brian (inaudible) on behalf of Adam. First off I want to say congratulations to John on your achievements and good luck in your new role. But if I could also ask a question on the cost here as it relates to some of your other operating expenses. It's actually decreased on an absolute dollar basis thus far in 2009. Just wanted to know if you could highlight where you've made progress there and the potential for the expense line in 2010 as your volumes grow.

Well it's really been across-the-board. There's no one single line item that has driven the success. I mean it's really just blocking and tackling, being very focused on every penny that we spend. And clearly we're going to continue to look for ways to standardize some of our practices within all of our hospitals, and looking for compliance with regional or national contracts but there isn't any one secret sauce that resulted in these kinds of results. It's really just very basic blocking and tackling.

As far as our ability to manage through 2010 and into 2010, it's hard to say okay, here is exactly what we're going to do and here is exactly what the targets are. We don't get down into the granular level but I do think that the results of the last seven quarters should give shareholders some comfort that we do know how to manage our hospitals and as the volumes go up, we hope to be able to bring those patients in on a truly incremental basis and we're going to continue to look at all expenses, at the corporate office, in the hospitals, at the regional level to see if there are continued opportunities to improve the efficiency of our operations. So it may not be the answer you want but it's the honest one. Nothing really, there's no one big driver out there. It's just across-the-board looking at everything.

Okay, thanks and just one more question here on the outpatient side, I know you've anniversaried the exit of the 11 facilities, just in terms of the growth going forward, could you give us an indication how we should think about that business and how maybe the longer term goals for outpatient factor into your guidance for 2010?

Outpatient is never going to be a major driver for this Company. We do have the satellites that supplement the existing hospitals. We are always evaluating the profitability of those satellites. In some instances those satellites are duplicative of the outpatient services actually in the hospital and department of the hospital so we're always going to be looking at that. Some of that outpatient business is also home health. We are seeing nice growth in our home health business. We'll continue to evaluate adding additional therapy related home health services. We've got 25 right now and so we feel pretty good about that aspect.

But clearly the outpatient physical therapy is just a tough business. Very low barriers to entry, you get these therapists in and they establish relationships with physicians and frankly patients and with $150,000 they can go down the street, lease some space and boom, they're in business, so it's not a major driver. It's not a major contributor to our revenue base. It's even a less important part to EBITDA and to earnings. So we'll continue to look at outpatient to supplement and to augmenting what we have on the inpatient side but it's not going to be a major component of the Company going forward.

Your next question is from the line of Paxton Scott with Jefferies & Company.

Hi, good morning guys and very nice quarter. Just most of my questions have been answered but just real quick, on the volume growth I was wondering if you could quantify how much of that is coming from taking market share away from other providers in the markets that you operate, and how much of that is coming from increased demand for your services. And then two, if you could just talk a little bit about if there was any change in the procedure mix in the quarter, if there's any trends there worth highlighting. Thanks.

I'll take the question on market share and then I'm going to ask Mark to address the program mix that we've seen. As we've said in the past, there isn't a lot of really good reliable market specific data that we can point to and say okay, in this market, last quarter there were 6,000 strokes and 500 of them went to this hospital and 800 went to us and 400 went to a skilled nursing. We would love to have that information but it just doesn't exist. The best we can do is look at the UDS data that reflects the admissions coming into other UDS reporting inpatient rehabilitation hospitals and that information is available usually on a quarter lag. So as we look at the Second Quarter of this year and we look just at the UDS data, all non-healthsouth UDS reporting sites were basically flat compared to the second quarter of 2008. They showed a 0.1% increase.

Based on this same data, our hospitals were up 4.3% so that compares pretty favorably to what we've seen over the last seven quarters based on the UDS data, we're seeing either a flat, slightly downward trends in volumes whereas we continue to grow our volumes. So we certainly take from that that we are continuing to take market share.That market share is going to be coming from skilled nursing providers, coming from other inpatient rehabilitation facilities in our markets, and again we feel that it's really a reflection of the quality of care and the committment that our employees have to their patients.

I mean this is all we do and we do it extremely well and I think the results speak for themselves. I hope that gives you some flavor. I wish we did have better market specific information but we unfortunately don't but we do have the UDS data and that suggests that we continue to take market share.

That is very helpful thank you and just on the procedure mix.

Yes, Mark?

Sure. We've made a concerted effort to grow our neurological programs the past couple of years. As you know, those are the types of patients that typically fall in the stroke categories. They are also the types of patients that are a little bit higher acuity than what you might have seen in the past in rehabilitation hospitals. In terms of actual case growth, we've had the highest case growth in our stroke and neurological, we've seen a shift away from orthopedic focused programs such as lower extremity joint replacement where we've seen a drop of 11% from our total cases last year in third Quarter to only 9% in total cases this year.

So we think we're focusing on the right types of patients. Those patients that have less issues relative to passing the review on medical necessity and they're just great rehab patients with great outcomes.

Your next question is from the line of AJ Rice with Soleil.

Hi good morning. It's actually Chris Rigg filling in for AJ.

Hi Chris, how are you?

I'm well thanks, how are you?

Great.

At this point most of my questions have been asked but did want to follow-up on the de novo side of the de novo development. Obviously [Select] came public recently and they've been talking about this as an avenue of growth for them. I'm just wondering, have you seen anything change in terms of the competitive dynamics on the de novo side?

Not really. We haven't seen any change. There are going to be certain markets that we're looking at. There maybe other markets that others are looking at but no, we really haven't seen any change on that.

And then on the amendment to the term loan could you provide a little more color as to the timing of the amendment? It almost seems like it would have made sense to see what happened with E&Y, because maybe that could have impacted the revised terms of the agreement. Could you just give us some color as to the thinking there?

Yes. I guess in a perfect world if you had complete visibility into the future and knew what the markets were going to look like in 2010, you might be able to argue that you should wait but I don't know about you but I'm not--we're not very good at predicting the direction of the market. And so our view has always been that we are going to be looking at the capital structure and making changes that make sense at the time based on the best knowledge that we have and we can go back and look at a couple of different major decisions we made where people said well why didn't you wait and then six months or five months later you look back and say boy you guys were really smart doing it when you did.

So it's really heart to answer something like that within the context of what might be because nobody knows what might be, so we looked at our capital structure. So we looked at our capital structure, we recognized that as we talked about a minute ago, we want to move into a more balanced growth and deleveraging posture similar to what we have had in the past before the markets collapsed last year. There were certain restrictions in the credit agreement that we wanted to loosen up and we also frankly thought it made sense to take some of that and push it out for a couple of years. So I think the timing was right. The markets certainly were favorable. We got it done and who knows what next year is going to look like. We certainly don't.

I'll add this is John. One comment, the Company still has a lot of prepayable debt so it was just on a portion of that term loan pushed out so there's still a lot of prepayable debt on the companies books that the Ernst & Young proceeds could be used to apply towards.

Your next question is from the line of Cheryl Skolnick with Polly Capital.

Good morning and thank you for taking my question and just to dove tail on what you just said I think your timing was excellent, because God forbid you don't win E&Y, it would have been much more difficult for you to achieve the things that you achieved. So for what it's worth, I think that your timing was excellent and the market was well primed for it having just done the select medical deal, the terms were very similar and I think the arguments in both cases, well I think your arguments were fairly robust. But I'm going to go back to that and to the term loan and my first question.

Can you give us a sense of as I understand it, you did increase the amount of the acquisition basket and also if I also understand it correctly and this is the question, did you also increase your restricted payments basket that would perhaps enable you to also reduce the amount of either the floating rate notes or the 10.75 notes that are out there? And my understanding was the acquisition amount could be as much as $250 million and the RP basket $300 million or do I have that backwards?

Turn those around. You're right on both counts just turn the numbers around.

So it's 300 for--

Acquisitions.

And 250 for the restricted payments basket, and do you have explicitly the ability to repurchase the FRNs as part of that?

Yes, we do.

Okay, as well as the other 10.75 so you don't only have to use that for secured debt?

No. The secured debt, the $300 million that I mentioned on secured debt, we had an accordion feature already in the credit agreement.

Understood.

So now we can actually use that accordion not just for new loans but also for secured debt an we would not be required to pay the term loan down then if we did secure debt against that accordion feature.

And that secured debt because you aren't required to pay the term loan with the term loan accordion, you can then use it to do other things.

Correct.

Got it, okay. That's very helpful. And I think the timing on that is excellent because if I understand what you're saying and this is dove tailing into my next question, I'm curious about your ability to gain significant market shares as measured by volume growth, as measured by the we'll call it this benchmark of your growing by more than 4%. The rest of the market is not. As to whether or not that fits into your comments earlier, that some of the other either hospital based or small units may be having trouble achieving their target of 60% compliant case growth. Because we sometimes hear that while they may have non-compliant cases making up their occupancy in the beginning of the year as they get closer to the end of the year and due date, they then have to drop their occupancy fairly quickly.

So I'm curious about whether in your market share statistics and in your volume growth statistics how much of that represents compliance case growth and is there a consistency of compliant case growth through the year? And whether that isn't really your competitive advantage in this and the factor that may allow you to acquire and operate these units more effectively and efficiently.

Well I do think that that plays into our competitors, what you just described we are aware and in fact we've seen reports where hospitals have severely limited their patients coming in because of the need to hit that 60% threshold. When we saw the thresholds climbing up and we had to deal with that in the early stages, we learned our lesson then because frankly, we ran into some of those situations several years ago and we made a committment to ourselves that we just weren't going to run into that same situation so we tried to keep that compliance level in that 61% to 62% range. We like a little bit of cushion.

That's obviously an average number for all of our hospitals but our compliant case growth frankly is out pacing our non-compliant case growth. And it's because of what Mark said, the clinical focus on strokes, the clinical focus on the neurological conditions is allowing us to increase the compliant cases at a faster pace than the non-compliant. Does that help, Cheryl?

Your next question is from the line of Ann Heinz, with FTN Equity Capital.

Good morning.

Good morning.

Thank you and John I'll miss you very much. Good luck.

Thanks, Ann.

So just two questions. One Jay I know you spent a lot of time in Washington and we really haven't talked about that so far on the call. Can you give us an update on what you think is going to happen over the next couple of months? And then I guess secondly a longer term question. You've spoken in the past about essentially diverting your business into other post acute areas. I'm sure you saw the rehab announcement yesterday. How do you view that going forward, maybe not over the next 12 months but maybe over the next three to five years? Thanks.

Yes, let me take the question about other post acute services and yes, we saw that and we knew Triumph had been shopped around for a while. And I guess my view is that there's still enough uncertainty around long term acute care that we, this is just us, and every company has a different profile of how much risk they want to take and whether or not it makes sense for them. We have six LTACS today we are very happy with them. I think that they provide a tremendous service to the community. The problem is that the folks at CMS still aren't convinced that LTACS are here to stay. I mean the questions that I hear or the comments that I hear out of CMS are things like well if they're so important why don't we have them in every single market.

There are others who are saying long term acute care is an oxymoron, either it's acute care or it's long term, you can't have it both ways. And so we still look at LTACS as from a provider standpoint, from a provider standpoint as very important from a quality of care standpoint very important. The reality is that the biggest regulator of our business, CMS, doesn't quite view it that same way and there's a moratorium today. We don't know if there's a moratorium next year if this is extended. So for us, LTACS are important and as we look at it as providers, we think it is a very very important part of the continuum.

We're concerned that the regulator, i.e CMS, doesn't view it that same way and so until that uncertainty is resolved, we're going to be focusing in the near term on opportunities to expand our footprint in the rehab space. So that's going to be the bed additions, the de novos, the market acquisitions that we believe we'll be able to achieve either partnerships or out right acquisitions through our development pipeline.

Longer term, we do believe that there are opportunities-- If there's clarity from Washington on LTACS, and that's a big if. If there's clarity we think again because we like it as a provider, we think that that's a terrific area to pursue and to grow but at this point, there's too much risk for us and it's just that's our profile. We also think that longer term if we move into a bundling environment as we pilot the bundling, there are going to be opportunities for us to get synergies from our sales and marketing and our back office looking at other post acute services like home health, long term acute care and then on a very very isolated basis, potentially skilled nursing but that's down stream.

Right now as we look at '10 and '11, we'll be putting our emphasis on expanding our inpatient rehabilitation base because we know we can bring those kinds of hospitals on and do it almost effortlessly given the very very strong platform that we've established. The integration risks of doing that would be virtually non-existent, so that's kind of our view on growth and again. In summary, short-term, '10 and '11 and really focusing on the IRF platform and longer term evaluating the changes coming out of Washington, looking at what might be coming down the road in terms of bundling these services and then opportunistically look for acquisitions that might be a little bit off of the IRF profile.

In terms of Washington, I think that it's anybody's guess what's going to happen. I was intrigued to hear Senator Reed say this may get pushed into 2010 and I think that there are a lot of balls obviously in the air, a lot of work that still has to be done. Our view is that what the hospital industry negotiated with the finance committee in terms of our paying for some of this reformed through market basket reductions while not ideal-- we love to and think we deserve a full market basket, we understand. We're going to have to pay for something and we'll have to help pay for this, so that's what we've built into our model and into our budget for 2010, is this market basket minus 25 basis points which is in the Senate finance committee package.

But I think it's really very difficult to predict with complete accuracy what's going to happen between now and say the end of the year, early next year. Frankly, the elections yesterday in New Jersey and Virginia, that may come into play. There maybe some blue dog democrats out there and moderate democrats saying wait a minute, there's a growing legitimate concern about this deficit that continues to grow and grow and do we really want to add additional expenditures, trillion dollars over 10 years on healthcare reform. And I'm not here to argue the position one way or the other but the reality is people are starting to realize that the economy is really being burdened by this debt and we'll have to do something about that.

So if I had to bet right now and I'd say yes, there's some kind of reform, I don't know what it's going to look like but I bet there's going to be something. And if we have to pay our fair share as a hospital with other hospitals, we'll do that and if it's in that 20 to 25 market basis point reduction in the market basket, not ideal but we can certainly manage through that. We'll have to continue to be disciplined with our expense control but I think that we'll be able to do fine.

Great. Thanks.

Your next question is from the line of Gary Lieberman with Wells Fargo.

Thanks, good morning.

Hi, Gary.

Thanks for all of the color around the volumes and the market share gains. It might be helpful if you could give some color around what's involved in the standardized sales and marketing that's going on at Healthsouth now versus two or three years ago. And also anything else that you're doing differently that's helping you get the robust volume growth that you're seeing?

No. It's really the same thing that we talked about before which really was a complete rebuilding of the entire-- all of the steps between identifying a patient who may benefit from inpatient rehabilitative care to getting that patient in one of our beds. And it looked at the processes, it looked at the systems, it looked at decision trees, it looked at the kinds of employees we had in those roles, it looked at the turnaround times, it looked at the role of physicians in that process. And what we did is we tried to streamline it focusing on the needs of the patient, focusing on the needs of the case Manager at the acute care hospital that's being forced to get that patient out of the acute care environment and into some kind of post acute setting.

So what we did in the latter part of the 2007 and then through 2008 was really focus on making sure that we built up this new system and did that throughout all of our hospitals. We then in 2009 rolled out to what we refer as the sustainability module so it was a comprehensive effort to get everybody on the same platform. We then supplemented that with additional training with additional refinements to that process that continued to generate some pretty impressive results.

I will tell you one of the things that we were able to do which I think is a pretty significant contributor to our sustained volume growth is we expanded our footprint. And we challenged our hospitals to look beyond their traditional sources of patients and expand that both geographically, and in terms of the kinds of referral sources that might have a patient that could benefit from inpatient rehabilitative care. So in a given market, five years ago, the Sales and Marketing team maybe only going to two acute care hospitals and it's the same two hospitals that they've gone to for the last 10 years.

With a more refined, a more efficient sales and marketing process which gives the Sales and Marketing folks the ability to be more productive and more efficient, at the end of the day, they have some time left over they can travel a little bit further. They can go to that other acute care hospital that maybe hasn't been able to refer us patients in the past so it's really a combination of all of that that's allowed us to continue to grow our market share.

I will tell you though at the bottom, at the core of all of this, at the core is the fact that our employees to experts. We have clinical pathways, we have physicians, we have the best in terms of inpatient rehabilitation services and outcomes and ultimately that's what brings patients in and what brings patients back.

Maybe one quick follow-up. I guess as time goes by in the strategy what's your concern, what's the likelihood that your competitors respond by maybe implementing some of the same types of changes that you've made or are they just structurally not able to do that?

Most of our competitors are standalone departments inside acute care hospital walls. And so is it possible, I guess everything is possible but for us it was about a $12 million investment that we had to make over a year period to break this down, to create and then to rollout and to sustain. So I don't know that think about it-- It's a community hospital and the community hospital CEO is sitting there thinking about what do I do with the bad debt coming in through my emergency room, how do I accommodate the radiologists who want a new 64 slice CT scanner, I've got surgeons who are threatening to pull out and take their business elsewhere.

That's what the hospital CEO is focusing on in an acute care hospital. That's really what most of our competitors are so the ability for a 10 or 12 bed, 10 or 12 ADC unit inside an acute care hospital to create what we've created I think is pretty remote. So maybe there's an opportunity in some of the other smaller ERF players but we haven't seen it yet.

Your next question is from the line of Alan Fishman with Thomas Weisel Partners.

Hi, Jay. How are you?

Good morning Alan.

Good morning. First I guess on the efficiency improvements as you look out to 2010, we're seeing impact of the teamwork exercise on sales and referral improvement and the operating or EBITDA margin was very good in the third quarter and you attribute it to contract labor. As you look out to 2010 and 2011 where do you think your efficiency on SWB and operating expenses can go particularly SWB as you rollout another (inaudible) efficiency improvement process?

Alan, I think that's kind of the same question that Pito asked at the beginning and maybe Whit touched on it as well. What don't want to do, trying to go line item by line item and trying to forecast specific targets on any of those line items. We want to try to focus everybody on bottom line results and the ability to get there through continued growth on volumes.

I'll tell you that we're never going to sit there and assume that we've done all we can with respect to labor efficiency and quality of care. We made an investment this year in standardized time clocks in all of our hospitals. We made an investment in IT platforms that will allow us to then look at our labor on a realtime basis. We will make an investment at some point down the road in some kind of teamwork approach on labor productivity. Right now, we don't know how much variability exists on a realtime basis in our hospitals and what the potential is to reduce that variability and move the entire portfolio to best of class performance levels.

We know that the systems that we've just talked about will give us that information and then we'll be able to say okay, there's a lot of upside, there's a little bit of upside, there's upside that we'll achieve over an extended period of time. But without saying what exactly we're going to be targeting in terms of SWB as a percent of net or EPOV, I think it's very fair to say that we're going to continue to make that a priority and a lot of that is going to be coming through our ability to continue to bring patients in.

Fair enough, and then secondly, I guess you spoke about the expansion of referral sources and sites. Could you also talk about as the Company has increased the acuity mix of patients in the inpatient rehab hospitals, are you expanding the level of patient that you can see and is that also expanding the addressable market even in particular markets?

I am going to ask Mark to give some color commentary on that.

As I mentioned earlier, as we have expanded our neurological base programs and other programs that have a tendency to take care of higher acuity patients, we have had to do a number of things including bringing on a different skill set in some of our nursing positions, we have done additional education for our staff themselves. In some cases, we have brought on a different mix of medical leadership into our hospitals, (inaudible) to help take care of these different types of patients that have a higher acuity. We have had to incorporate different technologies inti our programs, into our hospitals. So, yes, we've changed our platform, our resources as neccessary to take care of these higher acute patients.

Your next questions is from Miles Highsmith with RBC.

Good morning, thanks for all the color on a long call. I just wanted to clarify from and earlier questions, a bond related question. In terms of the amend extend, I guess my read was correct, it was an increase in the life time basket on the restrictive pay on that credit agreement from 100 to 250. I'm just curious, if I remember correctly, you had about two thirds of that 100 available and you had the 50 roughly every year that renews every year and didn't have any bond buybacks in the third quarter.

So I'm just curious as to why the expansion is is just pure flexibility and you had a chance to do it? Or is this the type of thing where you chip away at --call it the floaters you been buying in recently--chip away at the floaters couple years and enables you to call them in a couple years. Am I reading too much into this or is there anything specific around that expansion?

Miles you've got the right idea. The floater, if you look at the appendix, it shows that the maturity of the extensions pushed out to 2015, contingent on us finishing to refinance the floaters or for us to repurchase them all. So we've reloaded the baskets so that we could handle the floaters either way, either repurchasing or refinancing.

Perfect. Thank you. John, best of luck.

Thank you Miles.

Your next question is from the line of Rob Hawkins with Stifel Nicolaus.

Good morning Rob. How are you?

Good. John, hate to see you go. And have some fun up there in Cincinnati, I guess they'll trun you into a Reds fan or maybe a Bengals fan.

I don't think so. He's die hard Chicago Bears.

Okay. You gone into quite a bit of color around volumes and some of the strategy ideas. I'm intrigued by the home health and maybe some of the de novo things that are going on and looking at your development activity that you've done with some of the big systems, like some of the academic institutions, like Virginia, Vanderbilt, Washington U. With home health, JV de novos, a lot health reformers pushing towards this integration. And I know we've seen this before and it's tricky to pull off. But do wither the de novos-- what opportunities are you thinking about in terms of this home health expansion and maybe some of the de novo expansion possibly with bigger systems encompassing a bigger part of the market rather than 40 bed one-off things?

Well first of all even in the situation where we might partner with a large system. Most of those that we are considering are going to be in that 40 bed range. That is a very good model for us so I don't see us going to a an 80 bed model, just by virtue of lining up with a large system. I can see if a large system had that kind of inpatient rehabilitation business that they were discharging from their hospital, chances are we would be looking at multiple sites. Or like what we did up in Bristol, Tennessee, where we have a satellite that is a smaller facility that's supported by a larger unit close by.

So I think that the home health side of the equation is very intriguing to us. We focus most if not all of thos services on therapy related home health services. That's our sweet spot, that's what we feel pretty good about. As we are able to, we will look to add additional agencies. As you know many states that's restricted by certificate of need. It's tough to get those in some of the markets because, frankly, the home health segment is very fragmented.

And there are some markets, like in Houston-- I was with a couple of the home health CEOs about a month ago and I spent 15 years in Houston and they wanted-- we were talking about how competitive it is, and they said well how many agencies do you think are in Houston today? I was going to s ay maybe 120, 150-- it's 800. So it's not tightly regulated. The barriers to entry are nonexistent. It's a very very tough market if you are going to do the full range. I think our focus is on bringing on home health agencies that supplement the care needed for the patients who are discharged from our hospitals and requires some additional services in the home.

So it's not going to be a major driver for the Company's growth. The major driver for the Company's growth is going to be bed additions, transactions in new or existing markets with individual hospitals or de novos that plant the seeds for long terms growth that the shareholders would b able to benefit from for years going down the road.

Okay and you still envision along those lines for the hospitals still the same 4 to 5, 4 to 6 number to get you into that 5% to 8% EBITDA growth?

Yes, what we see is that the 4% is going to be as we've said all along, is going to b a function of same store plus bed additions plus de novos going downstream. The acquisitions would be seen in a separate bucket. Operator does that conclude all the questions?

Yes sir. There are no further questions at this time.

Very good well thank you so much.

If you have additional questions, we will be available later today. Please call me at 205-969-6175. As a reminder, we will be attending the Lazard Health Care Conference in New York on November 17th. Thanks again.

Thank you all for participating in today's conference call. You may now disconnect.