Chemed Corporation (CHE) Q2 2008 Earnings Report, Transcript and Summary

Good morning. Our conference call this morning will review the financial results for the second quarter of 2008 ended June 30, 2008. Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the Company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the Company's news release of July 28, and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the Company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today’s call, including earnings before interest, taxes, depreciation and amortization, or EBITDA and adjusted EBITDA. Our reconciliation of these non-GAAP results is provided in the Company's press release dated July 28, which is available on the Company's website, www.chemed.com. I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation, Dave Williams, Executive Vice President and Chief Financial Officer of Chemed, and Tim O'Toole, Chief Executive Officer of Chemed VITAS Healthcare Corporation Subsidiary. I will now turn the call over to Kevin McNamara.

Good morning, everyone. Welcome to Chemed Corporation's second quarter 2008 conference call. I will begin with an overview of the quarter. I will then turn over the call to David Williams, Chemed's Chief Financial Officer. This will be followed by Tim O'Toole, Chief Executive of our VITAS Subsidiary, for a discussion on some of our hospice metrics. I will then open up this call for questions. Chemed consolidated revenue in the quarter totaled $283 million, and net income was $17.3 million. This equated to diluted earnings per share from continuing operations of $0.73. If you adjust for non-cash items, or items that are not indicative of ongoing operations, earnings per diluted share were $0.77 in the quarter. Our VITAS business segment had revenue of $199 million in the quarter, an increase of 7.2%, and generated adjusted EBITDA of $26.3 million, equating to a 13.2% adjusted EBITDA margin. VITAS gross margin in the second quarter of 2008 was 21.9%. This is 183 basis points above the gross margin for the first quarter of 2008. We accomplished this sequential improvement in gross margin through reinforcement of existing labor management tools such as daily scheduling meetings, rebalancing the mix of nurses and home healthcare aides in our hospice teams, and through more cost-effective utilization of agency staff. Long-term, we need to revise our scheduling process to aid each of our 200 hospice teams to appropriately flex their staffing schedules as the size of our census and the needs of our patients change. Tim O'Toole will get into more detail on this later in the conference call. VITAS did not have any billing restrictions related to Medicare Cap for its second quarter 2008 operating activity. As of June 30, 2008, VITAS has not accrued any Medicare billing restrictions for the 2008 or 2007 cap years. Now VITAS 36 Medicare provider numbers, 31 provider numbers or 86% have a cap cushion greater than 20% for the year. Three provider numbers are between 10% and 20%, and two provider numbers have cap cushions of approximately 6%. Our Roto-Rooter business segment is being impacted by the slowdown in the economy. This is evidenced by a 14% decline in second quarter customer calls into Roto-Rooter's centralized call centers. We have been able to substantially offset the revenue impact of this decline in call volume through a combination of selective price increases, favorable job mix shift to higher revenues per job, increased excavation work, and increased conversion rates of calls to paid jobs. I believe the Roto-Rooter business model is recession-resistant. This is a result of Roto-Rooter's focus on emergency plumbing and drain cleaning jobs that customers find difficult to defer. In addition, we have a variable cost structure that minimizes the negative financial impact when demand is soft. This is primarily through the utilization of plumbing and drain cleaning technicians and are paid exclusively by commission. Both of Chemed's business segments are well positioned to weather the current challenges in our economy. In addition, given our strong balance sheet and capital structure, a difficult economy may provide us with future opportunities relative to our competition. With that I would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $199 million in the second quarter of 2008, which is an increase of 7.2% over the prior year period. This revenue growth was a result of increased average daily census of 3.9% and a Medicare price increase of approximately 3.2%. Average revenue per patient per day in the quarter was $184.64, which is 3.2% above the prior year period. Routine homecare reimbursement and high acuity care averaged $145.68 and $642.30, respectively per patient per day in the second quarter of 2008. During the second quarter of 2008, high acuity days of care was 7.8% of total days of care. Quarterly high acuity days of care have averaged between 8.0% and 8.4% in 2007. Any shift in our days of care mix will typically have a noticeable impact on overall revenue, given the significant disparity in reimbursement. However, the marginal decline in high acuity days of care was more than offset by a geographic mix of high acuity patients residing in areas of higher reimbursement rates. In addition, continuous care average 18.5 hours per patient care day in the second quarter of 2008, which is a 2.2% increase over the second quarter 2007 average of 18.1 hours. Our selling, general and administrative expense was $17.3 million in the second quarter of 2008, which is an increase of 6.2% over the prior year quarter, and a 3.9% increase on a year-to-date basis. Adjusted EBITDA totaled 26.3 million, an increase of 5.7% over the prior year, and equates to an adjusted EBITDA margin of 13.2%. During the second quarter of 2008, VITAS' direct routine homecare margin was 51.5%. This compares to 49.5% in the first quarter 2008 and 51.1% in the second quarter of 2007. Direct inpatient margins in the quarter were 17.8%, which compared to 18.9% in the prior year. This margin is in line with our historical inpatient margins, which has ranged between 15.9% and 20.1% over the past six quarters. Occupancy of our inpatient units averaged 79.1% in the quarter, and compares to 79.0% occupancy in the second quarter of 2007. Continuous care, the least predictable all levels of care, had a direct gross margin of 17.6% in the quarter, which compares to 17.7% in the prior year. Continuous care margins have ranged between 16.5% and 20.0% over the past six quarters. Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $84 million for the second quarter of 2008, 1.8% lower than the $86 million reported in the comparable prior year quarter. Adjusted EBITDA in the second quarter of 2008 totaled $14.8 million, a decrease of 18.2% over the second quarter of 2007, and equated to an adjusted EBITDA margin of 17.6%. Job count in the second quarter of 2008 declined 9.8% when compared to the prior year period. This does compare favorably when you consider aggregate call volume declined 14% in the quarter. Total residential jobs declined 10.4% and consisted of residential plumbing jobs decreasing 8.0% and residential drain cleaning jobs declining 11.5% when compared to the second quarter of 2007. Residential jobs continue to represent about 70% of total job count. Total commercial jobs declined 8.5% with commercial plumbing jobs declining 6% and commercial drain cleaning decreasing 9.2% over the prior year quarter. There continues to be substantial disparity in demand for Roto-Rooter services within the United States. The South region has experienced a 15.9% year-to-date decline in commercial jobs, where the Northeast region had a modest 1.0% decline in commercial volume. Residential demand is also following a similar pattern in the South, with job count declining 11.2%, while the remaining regions have experienced a job count decline ranging between 3.5% and 10.1%. We have marginally adjusted certain metrics in our full-year Chemed guidance based upon the second quarter results. The net result is that we have tightened the range of our earnings estimate and are now guiding to the higher end of our previously announced earnings range. The components of this 2008 guidance is as follows. VITAS is estimated to generate full-year revenue growth prior to Medicare Cap of 8% to 9%, admissions are estimated increase 5% to 7%, and full-year adjusted EBITDA margins prior to Medicare Cap is estimated to be 13% to 14%. EBITDA margins are forecasted to improve sequentially throughout 2008, with an adjusted EBITDA margin averaging 13.8% to 14.3% in the second half of 2008. Full-year 2008 Medicare contractual billing limitations are estimated at $2.5 million. This guidance now assumes the hospice industry will receive a net Medicare basket price increase of only 2% beginning in the fourth quarter of 2008. This 100 basis point reduction in our estimated reimbursement increase is the result of CMS phasing out of portion of the hospice industry's inflation adjustments received in prior years by CMS eliminating the budget neutrality inflation factor. Roto-Rooter is estimated to generate full-year 2008 revenue totaling $341 million to $347 million. This guidance assumes revenue of approximately $82 million to $84 million in the third quarter of 2008, and $88 million to $92 million in the fourth quarter of the year. Adjusted EBITDA margin for 2008 for Roto-Rooter is estimated in the range of 18.0% to 19.0%. Based upon these factors, an effective tax rate of 39% and a full-year average diluted share count of 23.5 million shares, we estimate 2008 earnings per diluted share from continuing operations, excluding non-cash expenses for stock options and charges or credits not indicative of ongoing operations, will be in the range of $3.15 to $3.20 per share. I'll now turn this call over to Tim O'Toole, Chief Executive Officer of VITAS.

Thank you, David. In the second quarter of 2008, VITAS focused its efforts on a daily scheduling of field labor with the goal of insuring proper levels of staffing, notwithstanding length of stay and census fluctuations. This involved not only the efficient utilization of existing field based labor management tools, but the implementation of several new tools. This resulted in some modest changes in staffing levels and the elimination of certain inefficiencies, while still responding to patient care needs and achieving quality outcomes. We also eliminated 162 positions in the quarter and absorbed aggregate severance of approximately $200,000. Over the long-term, VITAS expects to continue its investment in labor management and scheduling tools with the goal of using its resources in a more leveraged way. While this will not eliminate the inherent volatility in our labor costs as a function of admission trends and patient care acuity, we should have more consistency in scheduling direct labor with the daily flexibility needed to meet patient care needs. We continue to expand our investment in the admissions process. At the end of the second quarter 2008 VITAS increased staffing of sales representatives, admission coordinators and admission nurses by 8.5%. This resulted in an additional 1.4 million of field based expenses in the quarter when compared to the prior year. Our discharge rate continues to moderate, increasing 2.6% in the second quarter of 2008. Our discharges for extended prognosis totaled 3.5% of all discharges. This discharge rate was equal to the first quarter of 2008, and is a 70 basis point improvement over the prior year quarter. VITAS average length of stay in the quarter was 73.2 days, which compares to 76.6 in the prior year quarter and 71.5 in the first quarter of 2008. Our median length of stay remains at 13 days. Our days of care totaled 1,078,028 in the quarter. Routine homecare days increased 4.1%, inpatient days of care increased 2.3%, and continuous care days increased 0.5%. We currently have five programs classified as startups. Three are licensed and three are Medicare certified. These start programs had an ADC of 41 patients with revenues of $519,000 and pre-tax operating losses of $427,000. These same programs had an ADC of six, revenue of zero dollars and operating losses totaling $742,000 in the prior year quarter. With that I would like to turn the call back over to Kevin McNamara.

At this point, it's appropriate to take questions.

(Operator Instructions). The first question comes from the line of Jim Barrett, CL King & Associates. Please proceed. Jim Barrett - CL King & Associates: Good morning, everyone. Kevin, can you talk about California and what sort of plumbing trends you're seeing in that marketplace relative to the total U.S.?

Jim, I'll put it this way. California is -- we don't have many operations in California, just a couple. That's where our major franchise, our multi-source franchisees have their locations. We have a couple. We are getting reports from them that their call volume is down substantially, and their sales are down substantially. But it doesn't really have much effect on us. But as far as they have alluded to, the demand shortfall with Roto-Rooter is in the Southeast. It is something we followed pretty carefully, is a review of our bottom ten units. And of the bottom ten units, about six of them are in Florida. So it's a double whammy of -- the fact that there is no new construction for houses, it forces all plumbers into repair plumbing and drain cleaning. And it makes commercial jobs very tough, makes it very difficult to get large jobs in that type of a market, because you get bids and you get some of the plumbing outfits making bids just on -- no profit margin, just to keep everyone busy. But the answer your question, generally speaking, is California has very little effect on our business. Reports that we are getting are that things are tough in California. But again, given the fact that we don't have company operations, we just have really one pretty good size operation in California, so that does doesn't have much effect on us. Jim Barrett - CL King & Associates: Would you expect acquisitions of franchisees likely to increase if this economic downturn continues?

I'll put it this way. The answer to your question is yes, and we are getting more inquiries, we're having negotiations. As we mentioned in the past, it seems it's not so much going to be tied to the economics. It's tied to the fact that most of our significant franchisees are second generation franchise holders who are nearing retirement. And given that there's likely to be substantial changes in capital gains tax rate, and or estate taxes depending on how the election goes, that seems to be more of a factor than does the current economic condition. Although no question about it, this type of situation reminds people that trees don't grow to heaven with regard to some of these businesses. Jim Barrett - CL King & Associates: Okay and then finally, Tim, can you give us some sense of CMS -- the proposals by CMS are implemented, what are your general expectations for VITAS margins as you look forward?

As far as the CMS, I assume what you're referencing is the regulation they put through to lower the price increases that we get in the future. Jim Barrett - CL King & Associates: Correct.

Basically that's been put in as a proposed rule, and we expected to be put in as final, and we will see if someone challenges that or where it goes. But basically, the cost of living increase that we would expect just based on what is in the rules, the regulation right now takes 1.2% of that away from us for the twelve months beginning October of this year, and 2.2% of following year in 1.2% the following year after that for about -- whatever that is, 4.5%, 5% reduction over three years. That's very manageable for us. We'd certainly be pleased if that didn't happen or it went away, and I guess it could always be rethought, but again the good news is hospice seems to be favored and has a bipartisan support when people in Congress put forward their budgets and. So, basically that will put pressure on us. That goes right to the bottom-line, those reductions. So as far as our margins, we expect our margins to be increasing in the environment that I just laid out. And we're just going to work very hard to keep our expenses in line and do everything we can to become more productive, and I expect increasing margins in that environment that I just mentioned.

Let me just jump in and say, as Dave mentioned, the fourth quarter of this year we have in our previous guidance assumed about a 3% increase, that we would get about a 3% increase. We adjusted that to 2% increase without reducing our guidance. So yes, we think generally speaking, we will certainly deal with that. But our general orientation is going to be to protect margins. The real question is how realistic is that given the fact that we have -- from all indications significantly more visits per week than the national averages with regard to hospice visits. Given the way we have better controls and hopefully we will be better able to flex labor, I think we're better situated than almost any of our competitors to deal with this type of situation. So, it creates issues. I mean it’s – the going gets tough, we’re going to have to be tougher. I think we have realistic hopes of doing our number one goal in this regard is, I would say number one, to protect margins. Tim, who is making all the plans and structure, his goal is to have them continue to increase slightly. So, at the very least, our orientation is protect margin. Dave, do you have anything to add?

Hey, Jim. A couple of things to put in perspective on this because it really is a dynamic environment. Right now, based upon net tax report from about six to eight weeks ago, on average there is about a 4% EBITDA margin in the entire industry. And half of the hospices actually lose money before charitable contributions actually get them to the positive end of things. So, what’s going to happen is if CMS goes final with the rule as put in the federal register in April, if they go final, basically they are going to start squeezing things. The end result is going to have to be, you have to get more efficient to survive. In some of the smaller hospices out there they can’t survive, there’s going to be squeeze on quality of care, because they can’t afford to go bankrupt. They have to continue providing care. So, what’s going to happen is you’ll see at the lower end of hospices, care is going to suffer a little bit if CMS continues in this approach of squeezing. The larger hospices, and VITAS with certainly be the largest, we’re going to take advantage of that. We have leverage, we have expanding margin because of great efficiency on our central support costs. We’ve identified a number of ways where we can get more efficient in routing our nurses and home health aides to do more with the same people. So, we really think the end result is going to probably benefit the large hospices and put serious, serious financial pressure on the small hospices. At the same time we think CMS is still reviewing all the comments from the proposed rule, and although it should come out in the next week or so, it’s also a possibility they may relax the phasing time period, recognize the significant pressure this will put on the smaller hospices. But we think we will come out ahead in the long run. But we think this will be very, very damaging to small markets and the small not-for-profit hospices.

Understand. Thank you all.

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

Good morning guys. This is Pito Chickering in for Darren. Quick question on July volumes on Roto-Rooter. During July, were there any signs of rebounding, or is it still looking like 2Q was a good run rate for the next few months?

Let me just start, let me just make one comment. And it goes back to what I said about our review of our bottom 10 units, which we go into great detail in reviewing that. It’s like sequence some specific knowledge on that. We saw almost without exception the bottom in weekly sales for those 10 units was reached in May or early June. There is still some room for improvement. But if you are looking with regard to our bottom 10, I would say we’re seeing some bottom. Again, as I previously suggested, the Southeast is over-represented in this group. But, that gave me some comfort with regard to overall sales. I mean they continue to be tough. If I would say that order of magnitude as we look at this, if they were an extra $100,000, $150,000 per week in total, I would feel a lot more comfortable. But generally speaking, we think we have a good hand on the Roto-Rooter business. As we’ve described, it’s an issue, and there is no question the economy is an issue with regard to Roto-Rooter. But it’s one that’s been getting a lot of attention from people who talk to us. And I guess we’re pleased to report that it’s an issue that, given the recession-resistant nature of Roto-Rooter, both in type of business and how we provide the service, it’s something that’s been very manageable. Dave, do you want to make any comment with regard to overall outlook with regard to sales?

No, I mean when we released the guidance at the end of the first quarter, the second quarter pretty much came out exactly as we thought. Actually the revenues fell right in the middle of our range for the second quarter. Since we didn’t hit the high end of the range in our second quarter, which would have meant about $85 million, we did soften our fourth quarter outlook. Although, I’m still optimistic we will see a significant upside due to the seasonality patterns of Roto-Rooter, particularly in November and December. So, that’s just a long way of saying is we see steady as she goes. Without a doubt there is pressure on the growth on the revenue, top line for Roto-Rooter. But things actually look very stable over the next couple of quarters.

Great, and then on fuel costs, [this is] out of curiosity, how is that going to impact your cost structure for Roto-Rooter?

It doesn’t impact it very much at all, only because our technicians pay their own fuel costs. So, it’s something we look at very carefully is, we want to make it, Roto-Rooter a good job. We don’t want our turnover statistics to go south. So, we’re not oblivious to fuel cost increases, but they don’t have a direct impact on us.

Yes, would you keep in mind, we pass through, it worked out on average to be a 5% price increase, which our technicians are commission based. So that puts two of those points in their pocket. Now, we look at these results carefully and we know what they are paying out of pocket to support their truck they own and their fuel, and they are down in earnings about 1% compared to the prior year. However, we have also been reducing our labor force slightly because we are down in job count. So, we think once this settles out, we will have slightly less men, and of course we have slightly less jobs. Revenue was roughly flat. So, we think the net result is the remaining technicians will offset the higher fuel cost with their increased earnings by December 31st of this year. So, it will come out breakeven.

Great. And then, what was the ending share count for the quarter?

Pardon me.

What was the ending share count for the quarter?

Ending share count, we will dig that out. We purchased I think 22.9 million shares. And so for the numbers, because I expect this question to come up, the first quarter as we reported we purchased 300,000 shares. In the second quarter through June 30th we purchased another 830,000 shares. And early in the third quarter we purchased 260,000 shares. So, the total share count reduction since January 1st has been 1,390,000 shares. We can anticipate continuing with the share repurchase that could commence as early as next week.

Okay. And then last question for you and I’ll jump out of the queue. I believe that you guys typically grant option grants during the second quarter. I guess going forth from all expected, is 1.5 million pretax stock option expense a good run rate for the third and fourth quarter, or will that change?

It’s going to change slightly because that was a prorated number in the second quarter since the options was granted in late May. The run rate for actually Q3 and Q4 for the option expense is going to be $2.2 million in the third and fourth quarter on an after-tax basis.

Okay.

I am sorry, pretax, $2.2 million pretax. After taxes, about 1.4.

Great. Thank you very much.

Your next question comes from the line of Dawn Brock of JP Morgan. Please proceed. Dawn Brock – JP Morgan: Good morning guys. Very quickly, I just wanted to go through guidance a little bit. The operating metrics going forward in both divisions were revised down slightly, despite the tightening of EPS. In particular, it looks as though admissions came down, i.e. full-year revenue for VITAS. But with all of the investments that you’ve made in the field and clinical and admissions force, workforce, over the last 9 to 12 months, how do you reconcile those? How are you looking at it going forward, not just for the second half of the year but as we look to ‘09?

This is Dave Williams. I’ll answer the guidance adjustment, and then leave it to Kevin, and Tim to comment on some of the go forward in terms of the operations mechanics. But basically, of course, you’ll look at the second quarter results and you’re going to tweak up and down what you see for the full-year as now you’re six months into actual results. So for example, we originally estimated revenue growth of 8% to 10%. Based upon the second quarter we revised that slightly downward. Low end stayed at 8%, now it’s 8% to 9%. Admissions went from 5% to 8% to 5.7%. Year-to-date they’re a little over 5%, our admissions. On the other hand, we also increased our guidance for our EBITDA margins for VITAS. So, we’re basically tweaking as we see the actual results come in, but pretty modestly, which is why the end we’re actually able to guide to the upper end of our guidance as opposed to keeping the range roughly the same. If admissions turn out to be exceptionally strong in the third quarter, we will do the same in terms of we will probably tweak it back upwards. Relative to our investment in the feet on the street, the selling effort, I’ll defer to Tim O’Toole.

Let me – this is Kevin, before I turn it over to Tim, just say that – make one point. And that is that first of all, when the admissions relate to census, which relates to revenue, they also called cover Medicare Cap. And the fact to matter is we have been getting the admissions in the programs we needed them, and we have an improving situation with regard to Medicare Cap. So, we are getting the admits in the right places where we put a lot of focus. So when you talk about increased spending generally, a lot of that was targeted increases, and we’re getting what we need. With regard to what we think long-term, we will continue to invest in the, call it the admission process, whether it’s sales, marketing, it’s the intake personnel. It’s making sure that process goes as smoothly as possible. We’re happy with that. We’re continuing those investments. At the same time as you mentioned Dawn, they’re substantial. So, turning to the second page, we’re constantly internally questioning those expenses in areas where we are not getting the results that – and I’m talking about geographically here, where we don’t seem to be getting the results that we’re paying for. We’re making some adjustments, but they’re relatively minor. The overall program I would say -- and I’m going to turn it over to Tim here -- from my perspective, we’re getting a lot from those efforts. We could be getting more, but my stage one analysis of it is that we’re getting something for what we’re paying for. Tim O’Toole: I would just echo those comments. I think to reinforce in the second half of last year we did increase the number of sales representatives, the admission nurses and the staff to take patients on. And I think it’s worked pretty well. As Kevin mentioned we’ve got admissions in the places we focused on. So, the admission nurses, for example, are highly critical to be able to get to the patients and their families quickly when we have a referral, because they are in a situation when they need our help quickly. And we filled some spots that were open in the company, so part of that was just getting to where we needed to be. Like everything, when we have a big increase in our sales representative force, which we did again in the second half of last year, I think we’re now going into the process of refining that spending to make sure we are getting good efficiency out of all the individuals and we will be making changes where appropriate. So, I think it’s a matter of -- I do not think those expenses will grow rapidly in the future. They will be more in line with our sales increases, and we expect to get better efficiencies out of those individuals. But the good news is we’re well staffed up in the admission process, which is critical as part of pleasing everyone, both from the referral source and clearly meeting the needs of the patients and their families. And now we need to make some of those positions do a few more visits a day here or hopefully help them be more effective in utilizing the spending we have built into the P&L. So, I expect it to moderate, but it was a good decision and we’re well positioned. Our goal as we move forward is to not only grow with the market but to take share. And you need to do that through the marketing effort, educating everyone in the communities and the referral sources about why VITAS is the hospice they should choose. And we’re doing a good job with that. So, I feel good about it. Dawn Brock – JP Morgan: Thanks guys. Tim, of the 162 reductions, could you just give us a little bit of a breakdown between nurses, maybe home health aides, admissions people, just give us a broad stroke of what the makeup of that was? Tim O’Toole: Sure, I’d be happy to. I mean it’s probably breaks down about half and half, half nurses and the other half home health aides. And there are a few positions in the managerial level or the other members of the team such as a chaplain or social workers. And mainly that was a situation where we’ve had some units that over-hired compared to their census growth, or where census had gone backwards a little bit. They had not made the appropriate adjustments to their staffing. So, mainly that was getting units in line that had gotten out of line based on our historical analysis, and what they needed. So, it was about half nurses and half home health aides to answer your question.

And Dawn, this is Kevin. Generally speaking, one thing that I observed was -- and it’s human nature. When an organization is going through really cuts for the first time with regard to teams, because previously almost every -- we were playing catch-up in the staffing of almost all of our established units. If you’re cutting staff and you have your choice between cutting home health care aides and nurses, because nurses are hard to hire, and hard to find and the first choice almost always in the first cut in cutting the staff was, let’s cut home health care aides first. And if you’re not careful, it leads to a big mix shift, which was the substantial part of the shortfall we saw in the first quarter. As Tim alluded to the fact that as we got into that, and have a bigger part in each one of those decisions, a better mix was found. And it’s again, we were dealing with an element of human nature, but I think we’re in much better shape on that issue and will be in the future, too. Dawn Brock – JP Morgan: Okay. And just lastly, you talked a little bit about the visits per week. You guys have always averaged well above the industry average, well above 5. Are we going to see some shift here? So, you’re trying to right size the interdisciplinary teams. You’re trying to make sure that utilization of high-efficiency is high. Are you anticipating a little bit of a shift there, not only because of your own P&L, but simply because you are potentially facing a rate reduction from CMS?

The first part of the question is that what you do when you right size each team for the right census. Something that happens automatically is you get an appropriate number of visits. If you’re unproductive, it doesn’t mean people are sitting around, it just means they make more visits. People work, if they are working eight hours they make eight hours of visits. And if you -- to the extent that we have some -- what you have been -- what you see is when you have teams with maybe too much staffing for the census, what you see is their average visits per week might go to 6.5. So just by making sure you have the right number of staff to census, it automatically declines without making any major policy decision to reduce level of care, because of the change in reimbursement. So, that’s the first point. So we expect to see improvement in that number just by the emphasis. With regard to the second part of it, and that is, will level of care be reduced based on the fact you’re getting a 2% increase rather than a 3% increase? The answer is not in the observable form. I mean, slowly over time to the extent that our competition is going bankrupt or having financial difficulties, I think that generally speaking, over a long length of time, if people aren’t being paid to provide the care, a little less of it will be provided. But it won’t be observable in the short run, I don’t feel. Dawn Brock – JP Morgan: Okay. I’m going to ask one more question. It gets back to admissions. And I am really not trying to be skeptical here, I guess I’m just looking at the last couple of years of admissions growth. And implicit in the guidance is a 5% or better growth rate for the next two quarters. And if we look back, that’s been a tough feat over the last couple of years. So, I’m just looking for your confidence level in that as we move forward, what you’re seeing in the market right now that gives you that confidence.

Okay. I’ll turn it over to Tim, but let me just say, again, repeating something. It is over 5% for the year-to-date. But Tim, with regard to the second -- next two quarters, anything specific? Tim O’Toole: Again, we don’t see any reason why we can’t achieve in the future what we have in the past, and as Kevin mentioned, what the year-to-date figure is, we’re trying to always provide a higher quality product in the field. And therefore, we’re going to garner a bigger market share I believe is how we’re going to accomplish that. Everyone does realize that a large portion of our business is in Florida, where we have high market share. In those operations it’s harder than in the small market opportunity to grow your business and your admissions. We have at least 10 programs where we’re under 150 census and there is no reason, if we do our job well, those programs won’t double in the next 18 months just say, with high admission rates. So, it would be a blend of the smaller programs growing at higher rates and the more mature programs growing at rates that are lower. But again, we’re comfortable and we’re always trying to upgrade our sales force. We’re trying to train them to have higher abilities to educate people about, first of all, why hospice, secondly, why VITAS. And we’re comfortable that there is no changes in the marketplace. If anything we do see difficultly from some of the small market players where we believe we’re able to move forward and they are struggling on many fronts that we’re doing well with. So again, our sales force should continue to improve in size and quality, and the quality of our service will continue to improve because of the strengths of our company and the resources we’re putting into our company. And with that we believe that the range has been suggested in our guidance is achievable. And that’s how we feel about it.

Look Dawn, clearly when you look at the last quarter, April was excellent for admissions growth. The next two months were less good. I mean as David said, lower than hoped for increase in the second quarter. But if you notice one of the reasons that our EBITDA margin was a little higher is because what we saw was a lot of the admissions that we get on the shortfall, our short-stay admits, in markets where we have a relatively small cap cushion, we chase those admits like crazy. In the other programs they are less significant. So to the extent that we have a shortfall, given the fact that our margin increased, that tells me is the ones that we didn't get were largely shorter stay, that we weren't going to make any money on anyways, and as you saw from our overall cap statistics we didn't really need them for the quarter. So it wasn't alarming, but at the same time the lifeblood of any hospice program is growing census. You grow census by getting admits, and there has nothing that we have seen in the overall market that suggests the 5% to 7% is overly ambitious, other than to say we are at the lower end of that now. And we are going to -- Tim takes comfort in the fact that he sees a lot of problems with competition, and they won't have the money, the extra money to put into more marketing, more feet on the street, better admissions, processes, whereas that is our game plan. So that's answer your real question, and that is why we have confidence, in that we are better capitalized. We are going to continue to do the things that you have to do to get the admits. We see our competition less able to make those types of investments.

Dawn, this is Dave Williams. Also, the other issue, of course, admissions drive average daily census, but one other factor that drives increasing ADC is increasing length of stay. And we have zero assumption; we are assuming length of stay stays flat as we remove the noise from the higher discharge rate from the prior year, the fact of the matter is we do see a little bit of increase in length of stay. That should also help on the average daily census. So I feel very comfortable with the components of our guidance. Dawn Brock – JP Morgan: Okay. Great. Thank you.

And your next question comes from the line of Frank Morgan of Jefferies and Company. Please proceed. Frank Morgan - Jefferies & Company : Yes, couple of questions. First, I guess I'll ask Tim here, any anecdotal evidence that you see out there kind of real time in the marketplace of where smaller for profit or not-for-profits, how they are being impacted by the cap? Certainly the larger public guys all seem to have their arms around this issue now and just it is not as bigger deal. But what are you seeing out there real time? And then also, what are you seeing out in the marketplace in terms of just any program closures, and who -- if you are seeing any, who is it?

No, I wouldn't be able to pass it on as far as information on closing of programs. I am not suggesting that we are seeing that. I think as far as the cap, keep in mind that any one hospice in any one location, you run into a cap problem if your census goes sideways or goes backwards. So anybody that is pulling back a little bit because maybe they have some issues with their margin or they are worried about the rate next year or FMR or all these things, they are going to run into some cap problems, and to the extent they are in a cap already, and they are in a loss, they are raising money in the community, if they are not-for-profit, they are just going sideways and allows us to move forward. But, I don't think there is any broad anecdotal information out there. There is slowness in some of the hospital census has been reported by the hospital companies, which makes referrals a little more difficult to achieve. And you just have to go to other referral sources where the patients are going and directly to the patients to bring them in, because they need our service even if it is for a short period of time, we do many, many things for patients that are helpful even if they are only with us for 13 days or under. We have a lot of patients like that. But there is a lot of pressure on competition. You see information put out by the hospice industry that shows that Medicare Cap dollars are growing and putting more pressure, and we do see that and I think because of our aggressiveness and our size and putting the resources into our quality product and the sales efforts, we are moving ahead, and I expect that to continue.

Frank, this is Dave Williams. As part as the process of some of our legislative initiatives, we had a number of things scored what it would cost a Federal government. Part of that scoring process was to obtain a complete list of all hospice programs and whether they had cap or not. And going from 2005 to 2006, the last available set of information, there was a significant increase in the number of programs and the dollar amounts of those programs that were in Medicare Cap. Now the report doesn't tell us the financial problems this creates, because we don't know how deep any of those programs are, but there is a significant increase in the number of provider numbers that hit Medicare Cap. And anecdotally the NHPCO is getting a lot more complaints and concerns coming from the membership regarding what the NHPCO was doing regarding relief on Medicare Cap. So the pressures are increasing, but CMS was doing with getting less than inflation is will only exacerbate the pressures. We also heard significant screaming just when our Palmetto had a hard time making the [HIP] payments in the month of June, and they were basically as late as almost two weeks in some cases. We heard screaming immediately on the pressures that put on some hospices who are hand-to-mouth in terms of making payroll. So there was -- without a doubt there was increasing financial pressure on hospices, but the exact tipping point on that pressure is hard to say. Frank Morgan - Jefferies & Company: Tim, if you are not seeing any anecdotal evidence of closures, are you seeing any anecdotal evidence of new people entering the market in any of the markets you serve, are you seeing new competition come in?

Not really new competition. Actually it is very hard to open up a new hospice today because of the licensure requirements and the length of time that it takes for both the state license and the Medicare license seems to be lengthening. So if anything, the new openings have slowed down from the last several years.

We are hearing of closures in three states we are not in, though. There has actually been closures in Utah, Oklahoma and Mississippi, but again, we just hear about it. We don't follow it because we have chosen not to enter those states. Frank Morgan - Jefferies & Company: Dave, what are you seeing so far with regard to emission trends since the end of the second, so far in the third quarter? How are things trending right now?

We are seeing about what we have seen year-to-date, so in the 5% range. Frank Morgan - Jefferies & Company: Okay. And one last question, somebody asked about fuel costs on the Roto-Rooter side. What about on the VITAS side? Is it just the rising gas and fuel cost impact that, or is it paid out of allowances, and is that changing?

No, it does impact us. We have seen about a 15% increase in our reimbursement. We reimburse on a mileage basis for individuals that are using their car to drive around from job to job, from patient to patient. And it increased and again, it is probably increasing at about a 5% or 6% on volume and the rest is the price increase. We increased it in February at about a 12% increase over the prior year, and hopefully gas will stay about where it is at, and that will be where we keep it for the balance of the year. But that is a cost that has been growing higher than our sales increase so far this year.

We don't necessarily reimburse at the maximum IRS level. So that is a little bit in our power, so you can't just do the math by that increase is -- calculated increase, it is something to keep in mind.

It is pretty straight, but we have absorbed to the P&L and that accounts for some of the volatility in margins. It is the cost of doing business, which we don't think the reimbursement we get out of CMS takes that into consideration. Right now it is absorbed into the P&L.

But no question, we have a lot of people driving around in cars providing --

It highlights even more reason to take a very hard, close look at the efficiency of our routing of individuals and saving miles driven. We are obviously paying them their hourly rate or their salaried rate, so we need to get more efficient in having the routing system done in a better manner, and we believe we can do that. We are working on some projects right now where you use GPS, and hopefully know where your people are at to schedule them more effectively, and drive time better, but we're not there yet, but clearly you would understand that a business like ours that has a lot of labor moving in around needs that type of product, and we are working on that and I think it will be -- something we will make some headway on over the next year or so.

We'll probably absorb about $100,000 a month extra in fuel costs, so maybe a little over $1 million extra fuel costs in '08 over '07? It is manageable, but it's putting a crimp on us. Frank Morgan - Jefferies & Company: Okay. Thanks.

Your next question comes from the line of Kemp Dolliver of Cowen & Company. Please proceed. Kemp Dolliver - Cowen & Company: Thanks. Dave, in your prepared remarks on VITAS, you made reference to an improved geographic mix in the quarter. Were these locations that have been open for a while, or are they some of the newer startups?

They're going to be locations open for a while, and literally it was coincidental that we saw the downtick in high acuity days of care offset by the average reimbursement. Just to put it in perspective, if you just look at the average rate last year to this year it was up a little over 5%. Obviously, we only got about a 3.2%, about a 3% nationwide, so again it shifts to the more expensive areas. San Francisco is a lot more than Cincinnati -- change next quarter or two. It fluctuates. Kemp Dolliver - Cowen & Company: Got you. How are you performing in New Jersey? That had -- as I recall, that is a market that had a relatively long ramp for a group of startups.

New Jersey is doing well. I don't know that we give out total detail, but we are over 300 census in New Jersey. We have been over in there for three or four years. Our census growth has been good over the last year. And probably if you go back two years ago we were going sideways and not performing very well. So, I think it has done well in the last year or so, last couple of quarters, and the opportunity there is very, very large. So I expect that 300 to be a good solid base, and high growth from there.

We have been treading water there for relatively speaking -- as you said, how it normally tracks to startups. But we are seeing positive indications there. It tells us that kind of the risks you take when you open up units like that. They don't all follow the exactly the same path, but we think we have good management there, and we're on the right track. Kemp Dolliver - Cowen & Company: That's great. Thank you

Your next question comes from the line of Brian Sekino of Lehman Brothers. Please proceed.

Good morning. I have a question going back to kind of your guidance. Your guidance for Roto-Rooter margins show that you are improving to 18% to 19%. Can you kind of elaborate on what your expectations are regarding the back half of Roto-Rooter?

Yes. Typically, the best margin is actually in our fourth quarter for Roto-Rooter. And that's usually off the charts. So, to a certain degree, I am waiting to see what the final weighting turns out to be in terms of the seasonality on Roto-Rooter, but we see margin improvement typically throughout the year. We did actually see some margin pressure on Roto-Rooter in the second quarter, just in terms of our claims experience for our health care and casualty that actually put a little pressure on the quarter. We are actually making the assumption that pressure continues throughout the year, but we are anticipating increased margins in the fourth quarter, and roughly flat in the third quarter.

Okay. And my next question is regarding the cap. I think you mentioned there you are expecting some increase in length of stay in the back half of the year. Is this kind of the basis for your expectations regarding the cap accrual?

Not at all. Consistent with the last year, as well as, all this year we are making the assumption of 1.25 million per cap because it is a volatile number. We didn't have any really practical cap last year or this year. We keep as a quarter ticks off. We reduce our cap guidance by a 1.25 million. With a more of a reminder to all shareholders and investors that cap is a risk that we think is manageable. So, we are going to keep it into our guidance. From a practical standpoint, we don't have any projected cap for the 2008 year, but we all know that just a downturn in one program could trigger modest cap. So we leave it there.

Generally speaking, I would say in general increases or in length of stay would not bother us until they were up another 25 days. With targeted increases in length of stay versus admissions, that is what leaves the cap problem, but overall I would like to see our overall numbers up 10, 15, 20 days.

But we are talking about a modest increase; we anticipate based on the trendline of we are talking one to two days, going from the low 70s, from 71, 72 to 73 to 74. So very modest, we are still sitting in an excess of $200 million if we could aggregate all of our cap cushion, and we are very comfortable.

Okay. Thanks. And last question, I just noticed that kind of your trends for your census show that your homecare is increasing as a percentage of total census versus nursing home. Just wanted to know if you can provide some color on that trend.

Well, I would say that has been an ongoing trend, and its mainly because there has not really been much growth in the nursing homes being put up or the beds available. The big growth area has been assisted living. So we are growing with that. That's all it is.

Okay. Thanks a lot.

And next question comes from the line of Jerome Lande of Millbrook. Please proceed.

Good morning. There was some talk in the last quarter about plans to partner with nonprofit hospices that maybe experiencing financial distress where you might keep the nonprofit brand, let them fund raise on the basis of that, but actually provide the service and collect the reimbursement. Has anything come of that?

I'll just say this. There was concrete discussions with regard to that subject, but those discussions are still ongoing. Tim, anything?

No, I'd echo that. We would look for any mechanisms to partner with a not-for-profit in a community where we can grow our census quicker and provide great care and any entrees they can give us that helps us accomplish that, we are open to.

Keep in mind, for some length of time we have said that we think that is a very persuasive rationale with regard to acquisition of not-for-profit. That is to say to the extent they currently are staying in business because they are getting 8% of revenue as far as charitable contributions. If we were to acquire a hospice in that area, in that geographic region, we wouldn't have any problem with them to continue to solicit the customer base, so I don't know why they wouldn't continue getting that stream of charitable contributions. I admit, just given the fact that we have some discussions going on, which I think are very interesting with regard to providing service in some areas that are restricted in some regards by certificate of need or otherwise, where basically we provide the service. The not-for-profit continues to have a presence and continues their fund-raising. That's again something that I think has got an advantage that exists in a hospice area because it's one where, generally speaking, the industry, the not-for-profit side of the industry does very well with regard to charitable contributions. And to the extent that they continue to do that, it doesn't affect our business model at all. And we don't get anything up in order for them to continue to get those.

Right, I know, it sounds like a very rational proposition, that's why I am wondering do you expect to enter any such arrangements in the near future?

Yes, we hope to. Again, there's ongoing discussion along those lines with at least one entity, and I am interested to see how they turn out.

It probably depends on how much financial pressure they all feel as the squeeze continues.

There is no question. There is inertia still that is at work here. And whether the environment helps us overcome that those inertial forces, we will see.

Okay. And somebody asked earlier and you talk very briefly about turnover among plumbers in Roto-Rooter. And I am wondering how much you've seen, if you could quantify it, because I'm particularly curious. I know you pay them on a commission basis, so it's completely variable. But for fringe that you do pick up, I am wondering if you're getting any benefit from that fringe as people roll off?

A little bit. Our numbers have moderated a little bit. We still are hiring, we are still looking for plumbers in almost any branch we have. And our turnover statistics remain very good. Big improvement over two to three years ago. We can't kid ourselves. Right now there is nowhere for them to go. In the industry they can change -- a drain cleaner can say, okay, I will do something else. That's -- we can't kid ourselves. Right now those options are limited in a lot of the markets. Our view is we have got, we watch take-home pay very closely on the Roto-Rooter side. And we know that we don't want the people to leave at their first opportunity. So we are not in a fool's paradise, but the answer your question is, the statistics are good. Time will tell whether we have done a good job of cementing their relationship with Roto-Rooter as other opportunities open up for them, but in the meantime we are doing what we can to improve our stock of experienced plumbers.

In that regard, we've actually seen an increase in people calling us asking if we have openings available, and that's coming from experienced plumbers.

I will put it this way. Generally speaking, in at least half of our units we do no advertising now for open positions that we change staff based on people coming to us, which is very unusual. But not unexpected, given the economic conditions and the collapse of the new construction for housing and what effect that has on a good section of the plumbers, especially in the Southeastern markets.

Okay. I have a question on the bad debt in VITAS. I'm starting with the assumption that the bad debt that you have is purely related to the non-Medicare portion of revenue, which is below 10%. I don't know what the exact number is, but let's say I'm pretty sure it's below 10% non-Medicare pay. Is that the case? And if so, that seems even at 1%, which admittedly isn't a big number, it seems high as a proportion of your non-Medicare reimbursement. What is driving that?

Actually, part of it is your assumption wouldn't be correct, although the commercial side, say the non Medicare-Medicaid, it's a small percentage, only about 3% or 4% of our total revenue. It does count disproportionately to our bad debt, but no we'll get just allowance on debate whether someone should have had continuous care, we'll adjust it downward to routine homecare. What we will have during the FMR process, we could get nipped a little bit on our reimbursement. And really that accounts for the bad debt. But I would point out, though, we modestly took off our bad debt accrual from 90 basis points to 100 basis points. Actually not based on any quantifiable information, we're coming up quite well on our FMRs. But just the entire process of increasing number of FMRs throughout the industry.

FMRs are focused medical reviews. It's just basically where the financial intermediaries put each file under a microscope, and if there is one technical problem in the file, you could have difficulty getting paid. It's just mathematics. There is a sense that they are doing more of those, we have -- it's sensible to have more reserve.

With that said, our days and receivables still range in the low 40s, and we're very comfortable with our bad debt accrual. It's extremely conservative.

Okay. Thank you.

You have no further questions at this time. I'd like to hand the call over to Kevin McNamara for closing remarks.

I'll be brief. I'll just conclude our second quarter 2008 conference call, and I want to thank you for your attention and I look forward to talking with you next quarter.

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