Ensign Group Inc (ENSG) 2008 Q1 法說會逐字稿

Good day and welcome to The Ensign Group Inc. third-quarter fiscal year 2007 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Stapley, General Counsel. Please go ahead, sir.

Thanks, Robbie. Good afternoon and thank you to everyone for joining us today as we discuss The Ensign Group's financial results for the third quarter of 2007. A press release highlighting some of the key financial results for the third quarter '07 was issued after the market closed on Friday, December 21. Hopefully everyone has had a chance to see and review the release.

For those who have not seen the release it is available in the press release section of Ensign's website at www. Ensigngroup. net. In addition, our 10-Q for the third quarter was filed the same day and it's also available for review in the investor section of the Company website. Additionally, a replay of this call will be available until 5 PM Pacific time on January 9, 2008. The replay can also be accessed through our website by clicking on the events and presentations link.

Now before we began I would like to just take care of a few housekeeping items. First, I want to remind you that during today's call we will be making forward-looking statements that relate to possible future events. These forward-looking statements are based on management's current expectations, assumptions and beliefs about our business, financial performance and operating results in the industry in which we operate.

Such statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those expressed or implied on this call. Participants are encouraged to review the Company's periodic filings with the SEC including the 10-Q that was filed last Friday for a more complete discussion of such risk factors and other factors that could impact any forward-looking statements.

Participants should not place undue reliance on any forward-looking statements. Also except as required by federal securities laws, Ensign does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changing circumstances or any other reason after the date of this call.

Second, participants should note that each Ensign facility is operated by a separate wholly-owned, independent operating subsidiary that has its own management, employees and assets. The use of we, us, our and similar words in this call is not meant to imply that these facilities are operated by the same entity.

Third, we find it helpful to use EBITDA and EBITDAR, which are supplemental non-GAAP financial measures in addition to and in conjunction with results presented in accordance with GAAP. They reflect an additional way of looking at aspects of our operations that when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. They should not be replied upon to the exclusion of GAAP financial measures. A more ample discussion of these non-GAAP financial measures and a reconciliation to GAAP are also available on the investor section of our website.

Finally, I would like to say a word about the timing of this call and the filing of our 10-Q. Under applicable SEC regulations, newly public companies have 45 days following the offering to file their first quarterly report. Accordingly, our 10-Q is not actually due until today, December 26. However, we originally planned to file our 10-Q and hold this call on December 18 and we issued an announcement to that effect.

On December 17, one day before the planned filing and call, our independent registered public accounting firm informed us that it had received a subpoena in connection with the government investigation which was discussed in Ensign's recent S-1 filing. The subpoena requests documents regarding the Company and certain of its skilled nursing facilities. The filing and conference call were delayed to permit the performance of additional review work and allowed the independent accounting firm time to complete their FAS 100 review of the third quarter results.

Although little is known regarding the investigation, it is believed to be focused on claims submitted to the Medicare program for rehabilitation services provided at one or more of our skilled nursing facilities. The subpoena reconfirms the Company's previously reported belief that the US Attorney has been conducting such an investigation. To our knowledge, however, neither The Ensign Group Inc. nor any of its operating subsidiaries or employees has been formally charged with any wrongdoing, served with any subpoenas or related requests, were directly notified of any concerns or investigations by the US attorney or any government agency.

Also to our knowledge, this is the second document request issued by the US Attorney for records involving Ensign. The prior request an authorized investigative demand which is similar to a subpoena was issued in February 2007 and requested documents from the Company's bank. The US Attorney voluntarily rescinded that demand before any records were delivered. We'd like to apologize to our stockholders for the delay in holding this call and filing the Q and we will do our best answer any questions you may have about this matter or anything else during the question-and-answer portion of this call.

I would now like to turn the time over to Christopher Christiansen, our President and Chief Executive Officer. Following Christopher's comments, he will turn the call over to Alan Norman, our Chief Financial Officer for an overview of the financials for the third quarter and first nine months of 2007. Following Allen's comments Christopher will provide a brief conclusion and then we will open up the call to questions from the audience. Christopher?

Thanks Greg. Hi everyone. Before we discuss the third quarter, I wanted to note that this conference call is The Ensign Group's first conference call as a public company. We completed our initial public offering on November 8 with the sale of 4 million shares at an IPO price of $16 per share for approximate net proceeds of $56. 5 million after underwriting fees and operating expenses. In addition, the underwriters also exercised their option on the entire 600,000 share overallotment in November.

I want to take this opportunity to welcome new stockholders to the Company. As you know, the recent completion of our IPO adds strength to our already strong balance sheet. We believe that among other things it enhances our ability to continue executing on our disciplined growth strategy which I will discuss further in a moment.

A preview of Ensign's third quarter 2007 operating results was included in a free writing prospectus distributed during our recent IPO road show and included in the final prospectus for our offering. The final results for the third quarter were consistent with the guidance provided in that free writing prospectus. Highlights from the quarter include an increase in overall occupancy from the second quarter to the third quarter of approximately 70 basis points and we expect to show an increase in skilled mix on the heals of that growth in Q4.

We continue to see occupancy trending upward. Sequential revenues were up 3. 8% over Q2 as well. In addition, our revenues were up 12.7% over the prior year quarter to $104.1 million and total revenue year-to-date was up 15.8% to $302.3 million compared to the first nine months of last year. These revenue increases were primarily due to the revenue generated by acquired facilities and the growth rates mentioned were achieved in spite of generally lower occupancy rates and relatively lower skilled mix and quality mix in recently acquired facilities. For purposes of these financial results, we have defined recently acquired facilities as those facilities that were acquired on or after January 1 of 2006, and same or same-store facilities as those facilities that were acquired prior to January 1 of 2006.

At our current 78% overall occupancy as of the end of September, we have excellent opportunities for organic growth within our existing portfolio. We are working to improve occupancy, especially in the facilities that we have most recently acquired.

Over roughly the last 18 months, we've added 15 new facilities, representing approximately 25% of our total portfolio. Nearly all of these facilities were underperforming in multiple key areas, both clinical and financial, at the time we commenced operations and the combined occupancy rate on these 15 facilities as of the end of third quarter of 2007 was only 64%. Aggressive renovation activities at several facilities have also adversely impacted overall occupancy.

Since incremental margins improve as we move toward the higher end of the occupancy scale, we believe that we have significant opportunities to grow both revenues and earnings by filling beds within our existing portfolio of facilities. We are currently working to increase (inaudible) across the entire organization.

We are also continuing efforts to shift our overall patient mix to higher acuity and higher reimbursement patients. Our skilled revenue, or revenues from Medicare and managed care payers, is generally lower in new acquisitions and has usually improved over time as we have improved the clinical performance and reputation of those facilities. This ongoing improvement in clinical quality and payer mix can have a significant effect on revenues and earnings.

We are excited about the prospect for organic revenue and earnings growth through improved clinical performance, increased occupancy, and enhanced patient mix. That's where we expect to focus much of our attention in 2008.

But beyond organic growth, we're focusing on acquisitions as well. Of the 61 facilities in our portfolio as of September 30, a total of 23 were owned and 38 were leased and we held purchase contracts or purchase options on 13 of the leased facilities.

I am pleased to report that Ensign subsidiaries have recently closed on one of those contracts using approximately $12.8 million of IPO proceeds to acquire two skilled nursing facilities in California and one assisted living facility in Arizona, bringing our total of owned facilities to 26, or about 43% of the portfolio. We expect to continue closing these contracts and exercising these options as they mature.

Our acquisition strategy is focused on identifying both opportunistic and strategic acquisitions within our target markets. We are pleased with the volume of opportunities that we are seeing in the target markets and we continue to search for underperforming assets that we believe we can improve and we'll selectively acquire facilities as quickly as we can recruit and develop the necessary leadership talent to operate them.

With our IPO proceeds in hand and significant equity in our existing portfolio, we believe we are in a better position to take advantage of attractive acquisition opportunities than those of our competitors who are dependent on the capital markets to fund their growth plans. With that as an overview, I'll turn the call over to Alan Norman, our CFO, to review the Company's third quarter financial results. Alan?

Thanks, Christopher and good afternoon, everybody. As Greg mentioned previously, we released our third quarter 2007 financial results and filed our 10-Q after the markets closed on December 21, 2007. As also mentioned, a preview of the third quarter operating results was included in the free writing prospectus distributed during the IPO road show and included in the final prospectus for our offering.

The third quarter results for the metrics discussed in the free writing prospectus were consistent with the guidance provided. Specifically, for the quarter ended September 30, 2007 total revenue was $104.1 million, up 12.7%, compared to $92.3 million for the prior year quarter. For the nine months ended September 30, 2007 total revenue was $302.3 million, up 15.8% compared to $261.1 million for the first nine months last year. These revenue increases were primarily due to the revenue generated by acquired facilities and the growth rates mentioned were achieved in spite of generally lower occupancy rates and relatively lower skilled and quality mixes in the recently acquired facilities.

The Company reported net income for the third quarter of 2007 of $4.5 million, or $0.26 per diluted share, compared to $6.4 million, or $0.38 per diluted share for the third quarter of 2006. Net income for the first nine months of 2007 was $14.3 million, or $0.85 per diluted share, compared to $17.2 million, or $1.03 per diluted share for the first nine months of 2006.

These decreases were due in part to expected costs associated with recent acquisitions, a higher provision for employee health insurance primarily due to the number of unusually large claims submitted in the third quarter 2007, increased professional fees and wages primarily associated with preparation for becoming a public company, increased depreciation expense related to the recently acquired facilities and an increase in stock-based compensation expense of which approximately $0.5 million related to a single set of transactions of a type that we do not expect to re-occur in the future.

Incidentally, I would like to note that because our option plans were unable to issue options to employees for several quarters prior to the IPO, we expect to make a relatively sizable set of grants to deserving employees in early 2008. We do not expect to make any grants to existing senior management at that time and we further anticipate that the flow of option grants will normalize in subsequent periods.

EBITDAR, or earnings before interest, taxes, depreciation, amortization and facility rent cost of services, was $13.9 million for the quarter which was down from $15.7 million in the prior year quarter. EBITDAR for the nine months was $43.5 million compared to $44.5 million for the same period in the prior year.

Other key metrics for the third quarter include an overall occupancy rate of 78.0%, skilled revenue of 40.7%, quality revenue of 53.9%. And while revenue growth has continued to be solid, as we've previously indicated, margins have not been up to management's expectations. Among other things, margins have been impacted as we've layered in the 15 recently acquired underperforming facilities with their relatively low census level and other challenges and key metrics during the last 18 months.

In addition and as discussed in our road show presentation, our Flagstone Group, which is based in southern California, began to underperform in late 2006 and the underperformance continued into 2007. As we have previously discussed, Christopher took over temporary leadership of Flagstone during Q2 2007 and under the guidance of local facility leaders, Flagstone is making a strong recovery.

In fact, we expect that the performance improvements are well underway and Flagstone is ready and will be transitioned to a new leader in Q1 2008. We expect solid contributions from both the recently acquired facilities and from Flagstone in 2008.

As of September 30, 2007 cash and cash equivalents were $6.4 million. On a pro forma basis, after including net proceeds from the IPO, the Company's cash and cash equivalents was $62.9 million. At this time, we are not providing financial guidance for 2008. Guidance for the 2008 year will be provided on our next quarterly conference call which we expect to hold in March of 2008.

Also, before I turn the call back to Christopher, I'd like to mention that we've announced earlier today that our board of directors has declared a quarterly cash dividend of $0.04 per share of Ensign common stock payable on or before January 31, 2008 to the shareholders of record as of December 31, 2007.

Ensign paid annual cash dividends in 2002, 2003 and has paid quarterly cash dividends since the first quarter of 2004. We have historically paid roughly 10% of our pretax earnings out of dividends and retained the other 90% to invest in the business and we continue to expect to do so on a quarterly basis for the foreseeable future. This concludes the financial comments and I'll turn the call back to Christopher to wrap up.

Thanks, Alan. We are very pleased to have the demands of the IPO behind us and we're looking very much forward to focusing on our business in 2008. We believe the demographics and trends remain favorable for the industry in general and for Ensign in particular. We expect that 2008 will bring attractive acquisition opportunities at reasonable valuations and we believe that Ensign is poised to take advantage of compelling growth opportunities as they arise. We also fully expect to continue growing organically through higher occupancy rates and a shift in patient mix to higher reimbursement rates.

As a first-year filer, our next regular filing, our 2007 10-K, is due in March. We will look forward to updating all of you on our progress again at that time and quarterly thereafter.

Before I close, I would again like to welcome our new stockholders to the Company. We're especially appreciative of your support and confidence. I can assure you that we will strive to deliver against the objectives we've set for ourselves for both our stockholders and our residents.

At this time, we'll now turn the call back over to the Operator for your questions. Robbie, if you could instruct the audience on the Q&A procedure.

(OPERATOR INSTRUCTIONS) Eric Gommel, Stifel Nicolaus.

Good afternoon. My first question really is related to your disclosure in the 10-Q. I'm curious if you could comment at all about what are the implications I guess of a grand jury investigation as opposed to other types of investigations that maybe are conducted by the DOJ? And I think, it's a two-part question. The other part is I think you said this at the start in your disclosures but are there any criminal implications here that we should be concerned about?

Well, this is Greg. The fact that there is a grand jury subpoena out there is something we take very seriously. The Assistant US Attorney that is issuing the subpoena as we understand it, is involved on the criminal side primarily. And so we do expect questions that would involve some kind of criminal behavior to be asked.

We're looking forward to answer those questions. We have openly asked for opportunities to get in front of the US Attorney and to find out what their concerns are and see if we can't help them to allay those concerns. We have also been very diligent I think internally in looking at our systems and processes to make sure that we don't have any criminal activity going on.

We have recently conducted an investigation, an internal investigation and it is not quite complete. But the evidence and progress thus far is suggesting that not only do we not -- are we not able to find any evidence of criminal behavior within the organization or even systemic issues that would promote negligence or recklessness or fraud but we are also very pleased that as we have gone through our ongoing improvements and upgrades to our system over the past couple of years, we have put a number of new systems and things in place that we think will make our record-keeping -- which we expect that these concerns would be focused on -- that will make our record-keeping more accurate and more reliable, more timely and easier to trap when we have to go back and assemble those records. So I hope -- did that answer your question?

Yes, and I would like to follow-up because you mentioned the internal investigation that you previously disclosed and were conducting. Is that at all tied do you think to the stuff that the DOJ is looking at or I mean is that --?

That's a good question. Initially it was not because we began that before we knew of the DOJ investigation. However, it did eventually become tied to us because as we started to do our investigation, we identified a number of facilities at random that we wanted to look at for the kind of issues that we thought that we should be looking for. And we did bring in an outside investigator who is a professional, who is an attorney who has done these things for 20 years and who is very good at them to assist us in that process.

When we got that first -- for a lack of -- I'll just call it the subpoena that went to our bank back in February, when we found out about that in March, we looked at the list of facilities that the DOJ was then interested in and we added the facilities that they were interested in that they were not already on our investigation list to the list, extend that list. And so, we have looked hard at the facilities that were on that list and to date feel pretty good about the results of those reviews.

I noticed you have, I guess a contingent liability related to the internal investigation or accrued for some claims that you don't have documentation for. At this point, do you have any -- I mean, is there any other -- do you have any idea what the potential exposure could be at this point to what the DOJ might be looking out?

Well, since we know very very little about what the DOJ might be looking out, I don't think we could answer that question. The reserve that you saw on the Q was calculated based upon the files that we reviewed in the course of our investigation.

As we opened those files and they were all at least two years old, as we opened those files we did not find much in the way of errors in them. There were a few math errors and things like that that you expect to find but we did have some trouble in some places assembling backup documentation.

We have been through most of those files now and have found most of the backup documentation. We have not finished those files but in order to get our Q out we went ahead and took the ones where we knew that we were not going to find the backup documentation plus the ones that we had not finished yet finding the backup documentation we took a number off those and we put it on the book.

Great, and I'll -- just one more question and I will jump out of the queue here or jump back into the queue. I mean, you're comfortable that as you look at it from The Ensign point of view that there is no criminal issue or negligence on your part in how you're doing the billing and the things that internally are going on at Ensign?

I can tell you that thus far we have not been able to find anything regarding the way that services are rendered, the way that billing is done, the way that documentation is done that concerns us except that some of the documentation is a bit disorganized two years down the road and took some significant effort to assemble. I think one of the things that we learned in the course of this process is that we need to do a better job of keeping our documentation together and we will work on that as we go forward.

James Bellessa, DA Davidson.

Good afternoon. In your 10-Q you talk about the possible -- or allegations of possible reimbursement irregularities and I think you just discussed that and the charge that you took in the third quarter of $241,000. What is the potential additional charge that you might have seen since you'd taken the third quarter charge?

We don't anticipate at this time any additional charge. That $241,000 was comprised of roughly $157,000 of charges and then the rest of it was interest payable on those claims. We do hope very much that when we finish scrubbing those files down that the number will actually go down and go down significantly. To the extent as long as we don't have any reason to open other old claims which have already been reviewed and put to bed we would not expect any other charges.

In your Q I think you talk about qui tam litigation. I'm not certain about the legal term there or the Latin but I think it relates to whistle blowing. Can you elaborate?

Sure. As you correctly recognized a qui tam suit is a whistleblower suit and they usually get started when somebody goes to the government and says I think a company or a person is engaged in some kind of illegal activity. The beauty of it for the whistleblower is that if the government decides to pick up the case and run with it and then eventually recovers anything as a result of the suit that person can participate in the recovery.

The process as I understand it and we have very competent outside counsel who was a former US Attorney and prosecutor who has given us some good guidance during this process, as we understand it, the process is that once the claim goes to the government it starts out at the criminal division and the criminal division looks at it and determines whether there is a case there. At some point, if they decide that they do not want to pursue the case, they kick it down to the civil division which takes another look at it.

They may simultaneously look at it with the criminal but has a chance after criminal is done to take a look at it and see if they want to pursue it as a civil matter with the lower standards, burdens of proof associated with civil matters. If the civil division does not want to do it, then the qui tam relater, the original whistleblower has the opportunity to pursue the thing on their own. Most qui tam relaters do not have the financial wherewithal to pursue claims on their own and so it is important to them that the government pick that up and use government resources to explore the claim. Does that answer your question?

Yes, on the qui tam relater at one point you tell us that a letter had been sent to a current employee requesting a meeting last June. Could they be one in the same?

No, the letter that was sent to our current employee last June was sent by a federal investigator who simply asked for a meeting to talk to that employee. The employee was a person who is intimately involved in the Medicare billing and reimbursement process and is somebody that we would loved to have put in front of them because they think that person would given them very good information about our systems and practices. However, when they discovered -- when we called to make the appointment for the employee to go, the government investigator changed their mind and declined to follow through with the interview.

Now the relater, you don't know who that is or you aren't told or you can perhaps guess but you don't know?

We don't know who the relater is. We would not be told who the relater is. In fact, the government has not directly told us anything about this investigation or what they are concerned about or what they might be looking at. We look forward to finding some of that stuff out some day.

In the financials, in your first half both for '06 and '07 you had tax rates very close to 40%. Then in the third quarter they dipped to 35% and they did so on the same quarter this year. Can you explain what reasons occurs, what happens to have the tax rate go down?

Jim, it's Alan. Let me respond to you on that. The primary reason for the difference was differences between the provision that was done at December and the actual amount that was filed in September when the return was filed. And we did receive greater than anticipated California and federal hiring tax credits for 2006 and also there was some final Texas regulations and they have a new margin tax structure in Texas. And we finally got the regulations [that mail out] tax credits we hadn't anticipated in December.

The other thing that we did have was that some of the uncertain tax positions that we had accrued and accrued interest against under FIN 48 actually closed with the statute of limitations closing on the tax year with the filing in September and that was the reason for the reduction in Q3. We do expect that Q4 and going forward we are back to the approximately 40.2% tax rate and we're going to try and do -- to see what can be done to get a better fix on the employment tax credits that aren't really determined until much later.

In the most recent quarter your occupancy percentage ticked up and I think on the road show you said you had a goal for reaching 84% occupancy rate in the fourth quarter of '08 on a same-facility basis. Is that correct, that that is still a goal?

Yes, as was stated on the road show, for our same-store in the fourth quarter we -- our goal is to hit 84% occupancy.

And the quarter is almost over. Do you see that the trend that you ticked up in the third quarter will continue to tick up in the fourth and sequentially through the 2008 period?

From the trends we see, we fully expect that, yes.

Any view of the -- you aren't telling us about '08 guidance but any view on the '07 period that is about to close and how your quarter is wrapping up?

Jim, we're still in the wrapping stages and haven't closed the month. At this point we're still collecting the information to really go forward with the 2008 projection and would prefer to get the quarter closed. We are seeing improvement, there's no question.

Jim, as I said in my remarks, this is Christopher. You'll note that our skilled mix has increased or I said in my presentation our skill mix has increased in Q4 and our overall census has also continued to increase and so we feel comfortable with where we're headed in Q4. Obviously Q4 is almost done now but we feel comfortable with the results that we produced in Q4.

Good. And then on the narrative of the formal presentation you talked about stock based transactions. Can you go quickly over what you just said in that sentence? I was writing fast but I didn't catch it all.

What I said, Jim, is one of the increases that we had that impacted the profitability was an increase in stock based compensation of approximately $0.5 million related to a single set of transactions of the type that we do not expect to re-occur in the future.

And then you indicated that you anticipate sizable grants in early '08. Can you give us a magnitude of that? What might be the impact on EPS or something that might give us -- get our arms around it?

Jim, this is Greg. We're still in the process of formulating what those would be. We did want to give the market a little preview of the fact that we were going to have a spike there. But it should just be a onetime spike and it's simply because once the IPO train started rolling in late 2006 for us we were not able to make any option [grants]. Anybody who knows our company knows how important the concept of shared ownership is to us and we have a lot of really good employees out there who we'd like to recognize with ownership. So it will be a onetime thing. We can't at the moment give you a number.

Could it be in the order of 1% or less -- the increase in shares outstanding?

We would expect it to be slightly higher than that.

Okay thank you very much.

(OPERATOR INSTRUCTIONS) [Ross Haberman, Haberman Fund]. [Mr. Haberman] your line is open. Please check your mute switch. We'll go next to Eric Gommel with Stifel Nicolaus.

Thanks, just a couple of follow-ups. I know you had to increase the investment on your G&A line for additional professional services and things. If I look at third quarter sort of G&A percentage as a percentage of total revenue I mean should we expect to see an uptick in that as we go forward or is there like a target percentage that maybe you're looking to get to as it relates to revenue? I'm curious if you could give us some insight into that.

Right now, Eric, I think that the G&A we have seen through 2007 certainly has the component in there for the cost of preparing to go public and I think on the go-forward basis, what we expect is that there will be additional costs in the G&A on both the accounting and the legal side but we should see an improvement overall in 2008. And we have a lot of leverage in that G&A. As we continue to add facilities that percentage will go down, there's no question.

So I mean if I look back just sort of over the last few quarters and things it looks like it's been around 3.8% to 4% of revenue. Is that something that we could look at as a way to model going forward in that kind of range?

Looking at coming into the public market I guess I'd hesitate to say that. And I think especially in 2008 with our 404 or undertaking there will be additional costs that will be kind of unique to 2008. Then once we get through that we will be able to stabilize. We will be able to give better clarification on that in the fourth quarter when we present 2008 guidance.

But Eric, this is Christopher. If your question is do you expect it to go up or down significantly, I think the answer is no. We had a lot of onetime charges in '07 however we also recognize that we will have a lot of onetime charges in '08 to as the go through the 404 process. But I think that because of our increased costs in '07 we don't expect them -- we don't anticipate them going up in any significant way in '08.

Great, and then this is my last question; on fourth quarter, do you feel like your -- sort of the gross margins are trending better than say third quarter? Just looking at what you have right now, I mean, you haven't gone through -- I haven't looked at the numbers completely at this point but do you think that some of the things you talked on the road show and stuff, I mean, trends are improving there on that end?

Yes and then I think as Christopher commented that one of the things we expected to see going into the fourth quarter was an improvement in the skilled side of the business and we are seeing that.

And then -- this is my last question -- so on the tax -- from a tax perspective, this third quarter sort of lower tax rate appears to be a recurring item because you had it happen last year about this time but you're going to try to find -- I mean the issue is that on a go-forward basis we should really be looking at 40% and you know you're going to look at some way to smooth that tax rate out. Is that the way I understood your comment?

Yes, we are going to look at -- and most of that timing is driven by the employment tax credit and we are going to look at ways that we can get better visibility to those earlier and right now we're using internally a 40.2% tax rate for Q4.

(OPERATOR INSTRUCTIONS) James Bellessa, DA Davidson.

Hello, I'm looking at my numbers and trying to discern what you just told us and you've indicated that G&A had a number of unusual items in it this last year. You don't expect in the next year, '08, to have that G&A line change much up or down? Is that what the answer was to the previous question?

Yes, I think, Jim, at this point as we go forward and look for preparing for the 2008 guidance we prefer to be specific at that point in time. And then some of the additional costs that we have seen in 2007 with the public undertaking we do know will be replaced by additional costs related to for example the implementation of Sarbanes and the 404 requirement. We haven't at this point quantified that yet and are going through that process as we start the activity. So I'm a little reluctant to put a number out there right now at this point but we will do so with the fourth quarter results.

Sequentially in your -- from the second quarter to the third quarter, your average revenue per patient day didn't change materially. Do you have any characterization how it might look fourth quarter and going forward into the next year?

I think in the fourth quarter what we are seeing, as we've mentioned previously, an improvement in the skilled mix which will also end up with an improvement in our average daily revenue rates.

Thank you very much.

Thank you. It appears at this time we have no further questions on the phone. I'd like to turn the call back over to Mr. Christiansen, CEO, for any additional or closing comments.

Thank you to any everyone for taking the time to be on this call. As I mentioned earlier, we are pleased to have the demands of the IPO behind us and we are very excited about 2008 at The Ensign Group. Again, we're grateful for your confidence and your support and look forward to updating you on all of our progress again in March.

Thank you everybody.

That does conclude today's call. You may disconnect your lines at anytime.