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Executives

Kevin J. McNamara President, Chief Executive Officer, Director

David P. Williams Chief Financial Officer, Executive Vice President

Timothy S. O'Toole Executive Vice President, Director

Sherri Warner Investor Relations

Analysts

Darren Lehrich Deutsche Bank

Dawn Brock JPMorgan Chase & Co.

[Brendan Strong Barclays Capital]

Jim Barrett CL King & Associates

Eric Gommel Stifel Nicolaus

Kemp Dolliver Cowen and Company

Craig Rosenblum Millbrook Capital

Gene Fox Cardinal Capital Management

Chemed Corporation (CHE) Q3 2008 Earnings Call October 22, 2008 10:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Chemed Corporation’s third quarter 2008 conference call. (Operator’s Instructions) I will now like to turn the call over to Sherri Warner, the Chemed Investor Relations. Please proceed.

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the third quarter of 2008 ended September 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 October 21, 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 October 21 which is available on the Company's website at 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.

Kevin J. McNamara

Thank you, Sherri. Good morning everyone. Welcome to Chemed Corporation's third 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 $288 million, and net income was $17.9 million. This equated to diluted earnings per share of $0.79. If you adjust for non-cash items, or items that are not indicative of ongoing operations, earnings per diluted share were $0.90 in the quarter.

Our VITAS business segment had revenue of $205 million in the quarter, an increase of 8.7%, and generated adjusted EBITDA of $31.1 million, equating to a 15.2% adjusted EBITDA margin. VITAS’ gross margin in the third quarter of 2008 was 23.6%. This is 183 basis points above the gross margins in the prior year quarter and 170 basis points increase sequentially.

We accomplished this 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.

VITAS did not have any billing restrictions related to Medicare Cap for its third quarter 2008 operating activity. September 30, 2008 VITAS has not accrued any Medicare billing restrictions for the 2008 or 2007 cap years. Of VITAS’ 36 unique Medicare provider numbers, 30 provider numbers or 83% have a cap cushion greater than 20% for the 2008 cap year. Three provider numbers are between 10% and 20% and three provider numbers have cap cushion of less than 10%.

Our Roto-Rooter business segment continues to be marginally impacted by the slowdown in the economy. This is evidenced by a 13% decline in third quarter customer calls into Roto-Rooter 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 revenue per job, increased excavation work, and increased conversion rates of calls to paid jobs.

We are in preliminary discussions as well as final negotiations to acquire a number of Roto-Rooter franchise territories. This significant increase in activity is attributable to the current state of the capital markets, the potential increase in tax rates and the recessionary difficulties that our franchisees are experiencing. The timing or actual completion of these acquisitions cannot be predicted; however, we intend to be highly disciplined in terms of valuation and risk to ensure these acquisitions will be immediately accretive to our earnings.

I believe the Roto-Rooter business model continues to be 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, our variable cost structure minimizes the negative financial impact when demand is soft. This is primarily achieved through the utilization of plumbing and drain-cleaning technicians that are paid exclusively by commission.

Both of Chemed’s business segments are well-positioned to weather the current challenges in our economy. Given our string 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 this teleconference to David Williams, our Chief Financial Officer.

David P. Williams

Thanks, Kevin. As Kevin mentioned, the net revenue for VITAS was $205 million in the third quarter of 2008 which is an increase of 8.7% over the prior year. The revenue growth was a result of an increased ADC of 4.4% and a Medicare price increase that average to approximately 3.2%.

Our average revenue per patient per day in the quarter was $185.13 which is 3.8% above the prior year period. Routine homecare reimbursement and high acuity care averaged $146.57 and $645.75, respectively per patient per day in the third quarter of 2008. During the quarter, our high acuity days of care was 7.7% of total days of care. Quarterly high acuity days of care have averaged between 8.0% and 8.4% throughout 2007.

Any shift in revenue mix will typically have a noticeable impact on our overall revenue, given the significant disparity in reimbursement between routine homecare and high acuity care. However, this marginal shift in the high acuity days of care typically has minimal impact in overall profitability.

During the third quarter of 2008, VITAS’ direct routine homecare margin was 52.4%. This compares to 51.5% in the second quarter of 2008 and 51.0% in the third quarter of 2007. Again we’ve shown a nice progression and improvement of margin that is coming from our labor management.

Direct inpatient margins in the quarter were 16.6%, which compares to 15.9% in the prior year. This margin is in line with our historical inpatient margins, which had ranged between 15.9% and 19.3% over the past six quarters.

Occupancy of our inpatient units averaged 76.9% in the quarter and compares to a 79.2% occupancy in the third quarter of 2007. Continuous care, our least predictable of all levels of care, had a direct gross margin of 18.0% in the quarter, and this compares to 16.9% in the prior year quarter. Continuous care margins have ranged between 16.5% and 18.0% over the past six quarters.

Our selling, general and administrative expense for VITAS was $17.1 million in the third quarter of 2008, which is an increase of 9.3% over the prior year quarter, and 5.7% on a year-to-date basis. Our adjusted EBITDA for VITAS totaled $31.1 million, an increase of 26.1% over the prior year, and equates to an adjusted EBITDA margin of 15.2%.

Now, let's turn to our Roto-Rooter segment. Roto-Rooter's plumbing and drain-cleaning business generated sales of $83 million in the third quarter of 2008, which is eight-tenth of a percent lower than the $84 million reported in the comparable prior year quarter. Our adjusted EBITDA in the third quarter of 2008 totaled $13.7 million, which is a decrease of 12.1% over the third quarter of 2007, and equated to an adjusted EBITDA margin of 16.4%.

As Kevin mentioned, our job count in the third quarter of 2008 declined 11.6% when compared to the prior year period. To break that down, our total residential job declined 12.0% and it consisted of residential plumbing jobs declining 10.3% and the residential cleaning jobs declining 12.9%, again when compared to the third quarter of 2007. Our residential jobs continue to represent 70% of our total job count.

The total commercial jobs declined 10.6% with commercial plumbing job count declining 9.6% and commercial drain cleaning decreasing 10.8% over the prior year quarter. In the third quarter of 2008, recessionary pressure continued to impact demand for certain discretionary plumbing and drain cleaning services. This is evidenced by the 13% decline in call volume in our call centers. This decline has been substantially offset by increased pricing, favorable job mix, and increased conversion rates from calls to paid jobs.

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, while our Northeast region has a modest 1.8% decline in commercial volume. Residential demand is also following a similar pattern in the South with job count declining 12.0% while the remaining regions have experienced a job count decline between 5% and 10%.

Roto-Rooter has had a material increase in healthcare expenses in 2008. As of September 30, 2008, Roto-Rooter has expensed an additional $1.7 million in medical expense. This increase is driven by the number of large claims as well as the severity of these large claims. This unusual experience has been moderating over the last couple of months as some of the claims reached our staff law of insurance as well as a moderation in the severity of new claims. We anticipate returning to more historical large claims experience in 2009.

Now let's take a quick look in our consolidated balance sheet. As of September 30, 2008, Chemed’s long-term debt aggregated $217 million. $200 million of this debt which are convertible to venture, which carries an interest rate of 1.875% and is due on May 2014. Our remaining debt consists of $17 million bank term loan with a current interest rate of approximately 4.7%. Chemed's total debt divided by the trailing four quarters of our adjusted EBITDA reflects a very conservative debt adjusted EBITDA leverage ratio of 1.35.

Chemed has a $175 million revolving credit facility that expires in May 2012. At September 30, 2008, this credit facility had approximately $148 million of undrawn borrowing capacity after excluding $27 million of letters of credit that are issued under this facility to secure the Company's workers' compensation insurance. The credit facility carries a varying interest rate at the lower prime or LIBOR plus 100 basis points. Letters of credit issued against the credit facility are charged to spread over LIBOR, which again as I mentioned is a 100 basis points.

Chemed’s year-to-date net cash provided from operations aggregated $90 million. Capital expenditures for the first nine months of 2008 aggregated $13 million and compares favorably to Chemed's $21 million of depreciation and amortization bought (ph 00:16:08) through the first nine months of 2008; with approximately $7 million of cash on hand at the end of the quarter.

The components of our 2008 earnings guidance is as follows. VITAS is estimated to generate our full-year revenue growth prior to Medicare Cap of 8.0% to 8.5%. Admissions are estimated to increase 4% and full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 14.1% to 14.3%. This guidance assumes VITAS continues to receive its Medicare basket price increase of 2.6% which became effective October 1, 2008. Full calendar year 2008 Medicare contractual billing limitations are estimated at $1.25 million.

Roto-Rooter is estimated to generate full-year 2008 revenue totaling $340 million to $344 million. Adjusted EBITDA margin for 2008 for Roto-Rooter is estimated in the range of 17.7% to 18.0%. Although we are in current discussion with a number of our Roto-Rooter franchisees regarding potential territory acquisitions, we have assumed zero Roto-Rooter acquisitions in our guidance.

Chemed's effective tax rate has increased to 42.9% in the third quarter of 2008 and is estimated approximately 40.1% for the full-year of 2008. This unusually high tax rate is a direct result of the interplay of severe volatility in the stock market as it relates to certain deferred compensation investments and the required GAAP tax accounting.

The stock market volatility does not have any material impact on Chemed's reported pretax earnings. It does impact general and administrative expenses; however, this fluctuation has been directly offset by an adjustment to other income. Excluding the impact of taxes associated with this deferred compensation issue, Chemed's effective tax rate in the third quarter and for the full-year 2008 is estimated at 39%.

Based upon these factors, a full-year average diluted share count of 23.4 million shares, management estimates 2008 earnings per diluted share from continuing operations, excluding noncash expenses for stock options, and the tax rate impact from this deferred compensation investment issue, and any other charges or credits not indicative of ongoing operations, our earnings per share will be in the range of $3.30 to $3.40.

I will now turn this call over to Timothy S. O’Toole, Chief Executive Officer of our VITAS subsidiary.

Timothy S. O'Toole

Thank you, David. In the third quarter of 2008, we continue to focus our efforts on the 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. We continue to refine our approach to staffing levels and eliminate inefficiencies while still responding to patient care needs and achieving quality outcomes.

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.

Admissions were difficult during the quarter, declining slightly less than 1%. Although disappointing, this did not impact our overall ADC growth which expanded 4.4% in the third quarter averaging 12,033 patients. Offsetting the admissions rate was preferable discharge trend which declined 0.9% in the quarter.

VITAS average length of stay in the quarter was 74.1 days, which compares to 76.7 days in the prior year quarter and 73.2 in the second quarter of 2008. Our median length of stay was 15 days. Our days of care totaled over 1.1 million days in the quarter. Routine homecare days increased 4.7%, inpatient days of care declined a modest 0.6%, and continuous care days increased 1.7%.

At September 30, 2008, we have five programs classified as startups. Four of which were licensed and three are Medicare certified. These start-up programs had an ADC of 58 patients with revenues of $825,000 and pre-tax operating losses of $451,000. These same programs had an ADC of 21, revenue of $237,000 and operating losses totaling $214,000 in the prior year quarter.

With that I will turn the call back over to Kevin McNamara.

Kevin J. McNamara

Thanks, Tim. Now, it would be appropriate to entertain questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Darren Lehrich – Deutsche Bank

Thanks, good morning everyone. I have two questions. I'll start first with the plumbing segment. Dave thanks for giving us some additional color there with regard to the healthcare benefit expenses. I guess my question really relates to plumbing segment margins. Revenues were down about 1%. Your segment profit was down double digits. Aside from the higher benefits or medical expense you referenced, is there anything in the cost side that caught you off guard and the broader question would just be how are you adjusting the cost structure to the reality that we're in a potentially prolonged down cycle economically?

David P. Williams

Yes. This is Dave Williams. Nothing caught us off guard relative to the expenses of Roto-Rooter. If you look at the entire segment, 50% of the costs are directly variable. The other 50% are rather what I call step-variable or fixed. And without a doubt, inflation, although we fought to keep revenue flat, inflation has eroded the overall EBITDA margins. It’s been a challenge on healthcare, on top that kind of combined, made it a little more difficult. Again, I'll just point on healthcare because of its large claims. Typically, in a recession, you’ll see a lot of utilization of healthcare as people are afraid to lose their benefit and you see a lot of small claims. Again, this is just the opposite. These are claims in excess of $20,000, a number of them well in excess of $100,000 which is why again why we don’t see this recurring in 2009. But without a doubt inflation is eroding our margin to a degree. Well, with that said, we are very, very pleased with the way Roto-Rooter is holding up relative to a softening in demand and we see this holding up going into 2009. It’s going to be challenging but we also think there's going to be a number of opportunities that this recession is going to create that will actually well position the Roto-Rooter on a go forward basis.

Kevin J. McNamara

And there's one additional thing I see, if you look at the Roto-Rooter business, I'd say expense control is going very well. They said there are some fixed expenses which you can't do much about when jobs are down. But also keep in mind that one of the areas where we have gotten a lot of favorable mixed ship (ph 00:24:21) to keep our revenues relative decline, it’s excavation which are bigger jobs. Again, in this era of a lot tougher competition, that is, there’s no new home construction in the South or the Southeast. It really means that for bigger jobs, you'll occasionally face some pretty strong competition with regard to bids. Excavation jobs very often are jobs where we have to give up formal bid and stick with it. So when you talk about margin not so much on the expense side. We feel that's in excellent control. It's just a little─ it's just competitive pressures a little bit which we think we're very much on top of. I mean we're─ it's─ excavation is a bright spot.

Darren Lehrich – Deutsche Bank

Got it.

Kevin J. McNamara

─for─ it's not in any way viewed as negative.

Darren Lehrich – Deutsche Bank

In (inaudible 00:25:14) there with regard to the medical costs, I understand what you're saying about some moderation that you're seeing in recent months, how does this impact your outlook for health benefits and premium increases going into next year or is there any change in your experience that would make your costs much higher next year?

Kevin J. McNamara

Let me respond to that. First of all, when we talk about the situation's really unusual. Something we follow pretty carefully is our bottom 98%. Those are –let's call those the small normal predictable claims. Those are up just a couple of percent over last year. And this year we had a very low premium and it was really just some modification. Arguably, it's a no premium increase to our technicians. But basically, those claims are very─ doing very well. The top 2% of the claims are up over 35% which is getting not really predictable. We will make some change in our premium structure just to guard against that reoccurring but, again, there's no reason to presume that that will reoccur next year. They said that, again it's─ we're already having in the last four months. We've already had two months where we had kind of a normal level of large claims. So it's something that we feel that will not be a problem in 2009.

Darren Lehrich – Deutsche Bank

Okay. Thank you. Then my second question here is related to hospice. Obviously, we've seen some nice improvement in the margins with the variation has been the greatest, I think, since '04 when you brought this in. My question is can you give us your perspective and where you see the margins leveling out longer term and does the stability that we've seen in margins and the improvement that we've seen recently, does that give you any further confidence about being a consolidator looking at '09?

Kevin J. McNamara

Well, I will turn this over to Tim with just starting by saying yes on the consolidation issue and if the─ I want to give you the rationale. My biggest rationale per se saying a strong yes at this point. Yes we think we're the high quality, most efficient provider. But you got to remember that the reason our real competition is still in business, that is, the Natural Profit, and its charitable contributions. And it'd be hard to keep your head above water especially where you have─ especially if it's in a metropolitan area that's connected to a hospital that has a lot of short-stay referrals. Those are generally low margin. They stay in business because of charitable contributions.

Well, given the fact there is just less highly appreciated stock to give away on a charitable basis, given the fact that times are tough, I have a feeling that those are going to be the forces that most impact consolidation, but we'll see.

With that overview, I just want to turn over to Tim and talk─ Tim give your comment on margins and really talk about, I think, what you did to increase margins and you're tied to labor management and your confidence and your ability to continue it.

Timothy S. O'Toole

Very good. Well, we talked at our last quarterly call with you about many of the actions that we began to put in place in the later part of the first quarter in the spring. And mainly they were around implementing some tools to get a better handle on our labor on a real time basis. And to maybe oversimplify it, we have historically had systems that allowed us to have a check on our labor in the field maybe every two weeks, so twice a month. And in the last three or four months, we've been able to change that system to where we can have a check on labor once a week, four times a month. And so really, I think that's critical and then having that labor focused on a budgeted margin at a program level based on their level of ADC they're accomplishing in the current time period. So those things have worked and I think we've made a big improvement with about a couple of hundred basis point improvement over the last three or four months in the field─ expenses are going down and that's dropped to our EBITDA line.

We've also put better controls into the company on the annual pay increases for all workers throughout the whole companies where there's more controls for any increases above a modest rate and that's working very well. We have better controls in the company about the salary levels─ wage levels of workers that we hire when we need to replace people that have left and our turnover's doing well. We have our turnover down another point or two this year from last year to about 23%.

So I think all of these things would allow us to feel very good about having a stable situation on our labor from here moving forward and I should also add we do believe long term that through the use of some technology and better logistics, vis-à-vis, the drive time, use of things in this manner that we can even squeak out some work productivity and hopefully enhance the care at the bedside at the same time.

So, with that said, I think we feel very comfortable with our margins. Our goal is to sustain them and to improve them over time and some of that is a function of our top line growth rate. We are able to enhance our margins at a higher level with better top line growth. And keep in mind how we do that is we have very tight control on our fixed cost structure at the administrative level at the field and at the corporate level. So our goal is to always have those fixed cost grow at a lower level then the revenue rate. We kind of have a rule to thumb we try to have that grow about half and when we do that the margins do quite well and could grow from here. So we feel pretty good about that.

As far as our consolidation opportunity, as Kevin says, it's probably a better opportunity today than it was a year ago both from the perspective of the company being better prepared and the market place probably allowing us some opportunities. So we're not aggressive but we certainly─ that's a key component of our growth strategy and at the right time, I feel certain we will implement.

Darren Lehrich – Deutsche Bank

Thanks a lot for that. I appreciate it.

Operator

Your next question comes from the line of Dawn Brock with JPMorgan. Please proceed.

Dawn Brock – JPMorgan Chase & Co.

Good morning guys. I actually have three questions. The first is I just wanted to focus quickly on hospice volumes and get your thinking around the softness and what you think could drive a resurgence. I mean at this point in the quarter in particular, does current trends moved in your favor ADC, obviously, excellent cost management, it offset the volume decline. But I would think that volume growth is going to be mediocre in the medium and long term. So, then maybe just your thoughts around that?

Kevin J. McNamara

Let me start by saying the softness was in admissions and there's a couple factors I'd like to point out. We try for all admissions, long stay, short stay, critical patients, whatever. I think what we saw in the quarter when you look at this broad data, it comes out at you. We saw our median length of stay went up 2 days. So fewer short stay patients. When you have fewer short stay patients, it helps your margin. The longer stay patients are more profitable. Is it a long term problem if you have admissions problems? Yes. You have Medicare cap situation. What we saw in the quarter that was in the markets where it was critical or near critical, we had pretty good experience. Our cap cushion overall remained well over 200 million on a company-wide basis which is just (inaudible 00:33:44) if not determinative.

But basically, I would say that we saw during the quarter was a little disappointing 'cause it's a figure that's important your overall admissions growth. But I think that─ the good news is it seemed to be represented by the short stay patients that we didn't get as many as we have been getting.

It's not the end of the world especially in the last quarter of the government fiscal year for the cap determination purposes. Now, real question, okay. Where do we go from here? I would say there's no question about it. We have made a significant investment in personnel, that is, admission nurses or what have you. As we've talked about in previous quarters spending well more than a million dollars of quarter on increase on that type of personnel to call the sales effort as it were on the hospital side.

We're in the process─ we've identified opportunities where we need on the doctor side more help at the physician level and we have identified pool of dollars (ph 00:34:59) that we're willing to shore up that side of the business as well. So do we think we have to improve admissions? No question about it. Do we have a plan to do so? Yes and I also think that we're not quite getting the fruit from our previous efforts on some of our investment that I think we will.

So those are my─ I mean we've talked this almost exact question shortly before the call. So I mean that's kind of a light came out of it, but Tim, anything to add?

Timothy S. O'Toole

No, I think those are all exactly what's going on and we had─ there's been numerous people talk about that the troubles in the economy in general have caused some modest slowdown to activity in the healthcare sector for example, in hospitals, and whether that's true or not, who knows? But we do know that hospital census has been lower than normal. That's been reported by hospital companies and we see it reported by our field information that we receive. They usually ebbs and flows so to the extent that you see that soft. It usually picks up and we usually see things pick up dramatically in the fall at this time of year and in the winter especially in the South, and we expect that to happen.

We had a couple of unusual events not to get too down into it, but we had a serious situation in Houston with the hurricane moving through and that caused a few blips in the admissions but I shouldn't move past that without thanking and applauding the excellent efforts of our staff in Houston. It was an incredible job they did and took great care of our patients.

A few Florida weather events with hurricanes early in the quarter that caused rain for over a week in North Florida softened things a bit. So, never good to talk about the weather but I guess I just did, so we hope those things keep working for us. I will say what Kevin said. We have a lot of resources in the sales effort both in the admission nurses to be available when we have a referral and in the marketing and individuals talking to the referral sources out there. The best way that we'll continue to show improvement and have continued success is give great care and great service levels. And I think we're moving forward and doing even a better job today than we've ever done historically.

We do have some activity which will help us a bit in South Florida. We expect on the next several months to open two new inpatient units in very positive areas for us. And I would also say that we're making some very interesting progress and some new emerging partnerships that we're creating with palliative care programs at hospitals where they're beginning the end of life care discussions sooner and we can send our physicians in to talk with them and work with them as well as our nurses and counselors. And that seems to be something that's going to be a big opportunity and I think we're very well positioned for that.

So again, no big changes at all. Just keep putting the resources there. We are seeing pressure on competition and we think that will benefit us over the long term.

Dawn Brock – JPMorgan Chase & Co.

Okay, great. The second question is just based around the cap cushion baskets that you give us every quarter. This quarter again very high, 83% with the cushion greater than 20%. Could you give us some idea of the operating margins for each of these groups and really the crust of my question is the upside potential that you might identify in the programs that fall into the high cushion basket?

Kevin J. McNamara

Well, we don't device this other─ we don't manage the business like that. But I was going to say yes, there's no question about it to the extent that if there is a program that has a big cushion, number one, we would─ if the cushion has great room for growth, if we found in one of those markets within that provider number if we saw hospices that had a cash problem and they were─ and nothing they can do when they were going out of business. So it'd be a great program to add to that existing program. It gives─ the program show a lot of cap cushion and have a big upside as far as growth. There's no question about it. The problem is we're doing pretty much everything we know to do to get more patience in those markets currently but even having said that, there's still room for growth. With regard to margin as you can imagine. In fact, in every program where we're close to the cap cushion, those are our higher margin programs. As they said, if you were─ if this was─ if we had our choice, we'd be right at the cap cushion of every program. Our margin would be probably up 7 points. I don't know. It'd be huge. We don't manage the company like that. We manage to avoid cap problems but just in doing our normal blocking and tackling, we try and churn up that cap cushion. No question about it. Do you have anything to add to that?

Timothy S. O'Toole

I would only say that the function of your cap issue generally is not related to the profit margin of that specific location. It's related to their growth year over year and continues to grow their business because as you know, it's a function of your number of admissions times a static number. And of course, if your admissions grow, well that cap limitation grows and you can have more revenue. So you can have a mixed bag. Like I say, you can have a program, have a cap that's got a lower margin because their admissions aren't growing, their sense is going backwards. You have big opportunities there because a lot of times, you have low market share so you enhance greatly the selling effort and you ought to be able to make progress if you have the right people in the right places.

If you have a large program that's in a cap situation, it also offers you many opportunities because you have many ways to go to change the nature of how you go to the market, and again, many, many resources to hopefully enhance the growth. Every location has to be looked at separately with a separate local marketing effort understanding the cap situation, where you're at now and where you're heading six, nine, twelve months out. But we feel pretty good about it but everybody understands if our admissions need to go, and so we're focused on that and we expect them to.

Kevin J. McNamara

Dawn, again, I've talked a lot on this issue but let me say this. With regard to the programs we see, you can imagine in a market where we're the dominant provider in the market and we've been there a long period of time, just hypothetically, a large Florida market. There's no question that in a market like that, it's going to be high margin. We are going to gradually approach the end of the cap cushion as we've said for the last four years.

That's not a big problem. You're not going to blow through cap in a program like that. You're a dominant provider. There's limits to growth. Your margins are going to be high. You're just going to gradually approach that number to the extent that yes, we would expect to see our large dominant programs over time to all move into that category of less than 10% cap cushion. That's just almost definitional. The issue that you hope to avoid is a small program that just doesn't have any access to short stay patients which you're going to have an intrinsic problem. Or, as we had a year and a half ago, we had a couple of fast growing programs that just grew out of balance but they were very healthy programs. With regard to how we manage this, the problems are more a fast growing program that is out of balance. When you do that, you're looking at potentially providing a lot of service for free, where you're getting no reimbursement and that's what we're really managing to avoid.

Timothy S. O’Toole

Kevin's commented on it in the past. One of the things we wanted to show, and we've done that, is sometimes if you do have a program move into a cap, it can move out of the cap, so there's things to do. So we've demonstrated that if a program does move into a cap, we can grow out of it. It could happen from time to time. We've been very fortunate the last couple of years and our expectations are we'll continue to make all the right actions to be in good shape. But I know we're continuing to highlight that issue in our guidance in the future that it's volatile and it could happen. But we're feeling pretty good about it right now.

Dawn Brock – JPMorgan Chase & Co.

Okay, great. Just very, very quickly, did anything on the reimbursement side, anything out of the courts, or are you guys just looking to the next couple years of cuts?

Kevin J. McNamara

I went over it the other day but let me bottom line say you know the budget neutrality factor. We tried to get ahead of it. I think we are ahead of the power curve on that. It's being fought but Dave's very close to the people who are kind of leading the charge on that. Dave, what do you--

David P. Williams

Nothing major. There's a few things going on. Actually, we came very, very close when they passed the─ whatever they call it─ the bailout package for lack of a better word, that we almost got stapled into a six-month moratorium on the budget neutrality factor phase-out. Unfortunately, the association missed the deadline for our response back to Congress in terms of some other issues, so we weren't stapled to that.

The only reason I bring it up is the opportunity may present itself again whether it's post-election or early next year. But that points to Congress is inclined to do something for hospice. The association on their own are challenging CMS in terms of the phase-out of the budget neutrality. They're going for a stay on this cut and of course the likelihood of that is very, very difficult to determine.

What I would say is there is an appetite within Congress, they recognize a severe pressure being put on hospice and they're inclined to do something. What that materializes out to be, difficult to determine. We're making the assumption on a go-forward basis. We will get no relief and we're going to manage our costs on a go-forward basis anticipating squeeze on the reimbursement side so we have to be more efficient and more productive in this deal to make up for it. We think that'll actually create a number of opportunities in terms of acquisition. But right now, we assume to get no relief and there's a possibility it may emerge but we're not counting on it.

Dawn Brock – JPMorgan Chase & Co.

Okay, thank you very much.

Operator

The next question comes from the line of Brendan Strong with Barclays Capital (ph 00:46:11). Please proceed.

[Brendan Strong – Barclays Capital]

Hi, good morning. Maybe following up on that question just a little bit. As you think out over the next year or two, what are some of the specific things you think you can do to try to manage down your costs so that your cost inflation isn't higher than what you end up getting from Medicare?

Kevin J. McNamara

The first thing is we're going to continue to do what we've made great progress with, and that is making sure that each hospice team─ that's how we provide service to the patients in each hospice program, by a team─ making sure that hopefully every team is productive; that is, that the number of people assigned to it and the mix of providers is the right mix to handle the particular census that the team is handling on a day-by-day basis. It varies on a day-by-day basis. So we have to be flexible. We have to what David P. Williams referred to as flex or labor.

We're making headway on that point. We're in no way at the end of the improvement process for that. That's still an area where we will get some headway. Tim mentioned a second headway which is just to the extent we're able to grow our central support cost at half the rate of our overall sales increase. We make headway as far as margin in that regard, too.

At this point, I would refer generally to the fact that yes, we have on average, one more visit per week than the average hospice provider. That's out there. Frankly, we don't see any reason that we would want to discontinue that advantage in quality that we have, which is what helps to drive us to make us the referral first choice to so many referral sources.

There are those elements out there. One of the things that makes Tim's job a little bit easier is when he's talking to the clinical people in the field are saying okay, we've got to be more efficient. We have no fat. We've got to be tough on salary increases. Well, they know the issue. They know about the budget neutrality factor. They know that if you're in a business that gets a 2% price increase in a year, you've got to manage your business within those confines. It's not something we're making up. That's just the real world. Tim, anything else to add to that?

Timothy S. O’Toole

No. I think all of those comments are exactly right. I don't think we can kid ourselves. There's high demand for healthcare workers still in this country and especially certain of the skilled categories. So it's competitive. At the same time, we have decisions that we can make if we have to on the wage levels we pay and on the increases we give and so forth. But at the same time, we'd like to look at every area in the company that's not labor and make sure we're doing it as efficiently as possible.

One of the areas that we historically have found some advantages are our medical equipment division, which we do it in-house and we're moving to handle that all in-house. Hopefully, we'll get 70-80% of the company handled by the time we move into the next six months. We're now about 60% in-house and we think our cost structure is at least at a 40% discount to outside bids that we see.

We're continuing to do a good job to manage our pharmacy cost and the utilization of the outlier drugs, which is called non-mugs in the industry. So that's going over to our medical supplies. We certainly can pull back in areas of corporate spending even from the levels that we've talked about. It's a good time frankly to be cost conscious with things still tough in the economic environment out there. People are much more willing to listen to it today than they were two years ago for what it's worth, and we will press it down to the extent we need to.

[Brendan Strong – Barclays Capital]

Okay, great. And then just one other question on hospice. You talked about this a little bit before but again, just looking at the admissions, it seems like really, it was the admissions growth back in the first quarter that continues to drive average daily census this quarter. How sustainable is that and how do you see that changing in the 4th quarter? It would seem like admissions have to come back in the 4th quarter otherwise, average daily census would start dropping as well.

Kevin J. McNamara

As I said before, I think that it was again, not because anything we did intentionally, but in the 3rd quarter, we had fewer short-stay patients just relative to the previous three quarters. That affects your admissions fairly significantly. It's a number we're looking to improve on in the 4th quarter. We're doing some things that I think will have some direct effect on it. But I think if we just return to our normal mix-- I guess my question is if we return to having a median length of stay of 12 days instead of 15 days, I think you're going to see a couple of percent improvement in our admission just for that alone.

Believe me, if you said what is, not just next quarter, but over the next three quarters, very important, I want to maintain a $200 million cap cushion company wide─ let's put it that way─ we are going to spend a lot of effort in improving our admissions and improving them broadly. We've already mentioned a couple. I don't want to repeat myself, but it's a high priority. There are some things that we're going to do and we're in the process of doing a lot of them now. My first point is, the number of growth on that growth of admission was not necessarily alarming. There was not a big increase in average length of stay. We're still comparing to a year ago, when the average length of stay was artificially high because we had an unusual number of discharges for extended prognosis, which is skews your average length of stay a little bit higher than it is for purposes of calculating revenue. So we're in pretty good shape.

Is our current average length of stay sustainable? The answer is a direct yes. That was one of your questions. To the extent that I really think that you're going to see-- There's nothing that's consistent throughout our competitive region that suggests that we're not going to achieve what Dave had indicated in our guidance, is a year-to-date growth in admissions of 4%-plus.

David P. Williams

Brendan, this is Dave Williams. Just to put this in perspective, if you look at EBITDA over the last say 20 quarters, five years, typically, actually one, occasionally two quarters out of four quarters in a row account for the majority of our pop in admissions and then you kind of go flat for a little bit. To get two quarters in a row of pretty weak admissions, we're certainly disappointed but it's not shocking I guess is the way to put it. Typically, a couple quarters of weak admissions does signal that you'd anticipate a strong quarter coming up. A strong quarter actually then, you wouldn't be surprised to see admissions going flat.

For us, the 3rd quarter is the most challenging for us because of our concentration of business in Florida and that the population of Florida in terms of the snow birds kind of leave in the summer months, a combination of that as well as hurricanes affecting Texas made this even more weak than we would have expected. If you take out actually Texas, we would've been positive over 1% in admissions. Still not exactly a barn burner but I guess typically you'll see one quarter out of four sequential account for the majority of your jump in admissions.

[Brendan Strong – Barclays Capital]

Thank you very much for the color on that. Then just maybe one question on Roto Rooter. It was really impressive to see the pricing there and essentially offset the volume declines. I'm just wondering how sustainable that may be. Is there going to be more seasonality because of that? Maybe excavations are tougher in the winter months.

Kevin J. McNamara

Actually, the winter months, seasonality, are stronger months in Roto Rooter. You get frozen pipes and what have you. The excavations are still done. Generally speaking, the ground might freeze, boilers are a couple inches (ph 00:55:29). We get a lot of questions about Roto Rooter. Our deal on Roto Rooter is that things have been tough for a good part of the year. Our calls have been down double digits, not just starting the last month. For the year, Dave says it's been focused in the regions where there was a lot of new housing starts and now there are none.

Those are the areas we're having trouble but frankly, what we see pretty consistently and we saw it consistently throughout the 3rd quarter, the quarter was not deteriorating in any respect, our sales are a couple hundred thousand dollars a week below what they should be in a normal economy. They're not deteriorating. It's a stable situation. We pointed to a few expense items that suggest things being a little easier for us. But to be fair, the downside, anytime you talk about the fact that there's one region of the country that is giving us more trouble than others, it's very logical to say “Well, what happens if the other regions of the country get just as bad?”

Well, that's possible but I think that if I was to characterize the problem in the Southeast, there is a reason why the Southeast is different, why the South and Southeast are different from the North and the Northeast. That has to do with what plumbers were doing a year and a year and a half ago and what they're doing now. They're not working on new construction. Now they're in the market. The economy in Florida has been bad for a year.

I guess what I'm really saying is we get a lot of questions. Look at what the analysts write about the company. A lot of fear about Roto Rooter. Maybe we're whistling past the graveyard but we don't see it. We see that as a pretty stable business. We're down to metal against metal on that. The jobs that we're doing now are pretty darned hard to defer. We're already down in second jobs and what not. In good times, we convinced somebody to just get two or three things handled as long as we're there.

Again, we could be whistling past the graveyard but we're very confident in Roto Rooter's ability with regard to controlling expenses and things have been pretty stable. I'd say things have been pretty stable since early June. Not good, but stable.

David P. Williams

This is David P. Williams. We're not giving guidance for 2009, not that we're being coy. In early December, Kevin and I sit down with the operating units. We go through the entire business plan, kind of a zero-based budgeting. With that said, the macro things we see on our go-forward basis, there will be opportunity to pass through pricing. The exact amount, we're not sure of. The fact that the phone isn't ringing is what's causing our decline in job count but the reality is, when the phone rings, they need us. So there's pricing opportunity. There's inflation in the marketplace and we're going to pass that on.

We don't see the opportunity to increase excavation in '09 as much as '08. We think we can make some ground, but not nearly as much. On the other hand, we certainly see a flattening in terms of the decline in job count. We expect to stabilize because the deferrable jobs have already happened. It can't go on indefinitely. So we see significant stabilization in Roto Rooter going forward in '09 and we certainly anticipate acquisitions then adding to that in terms of top line as well as bottom line. So we see some very, very solid stability of Roto Rooter on a go-forward basis but with that said, we'll be refining our thought process and getting you specifics in early February on that.

Kevin J. McNamara

And let me get one last comment because we've already mentioned this. Whenever things are tough in the business, one of the silver lining fellows will say “Well, things are tough but it's tough for our competitors so we'll consolidate and make improvements because things are tough on our competitors.” the element that we've predicted is really coming true, to the extent that with a potential change in administration, change in capital gains rates, change in overall taxation rates. The acquisition area for Roto Rooter is becoming wide open. We probably won't take every opportunity that presents itself just because we want to manage it and make sure everyone's a success and everyone's accrued earnings.

Again, I don't want to leave Roto Rooter without saying that it's not something that we see as a huge problem. It's one that we think is relatively stable with finally, some real good acquisition opportunities at very reasonable prices.

[Brendan Strong – Barclays Capital]

Thanks a lot.

Operator

The next question comes from Jim Barrett of CL King & Associates. Please proceed.

Jim Barrett - CL King & Associates

Good morning everyone. Kevin, I just have one question that sort of follows up on the one you just answered. The franchisees you're negotiating with, I know back in the '90s, the opportunity was, you were able to very successfully grow their top line. Are the new franchisees you're bringing in, will it be more a function of assimilating them from a back office perspective or do you see meaningful top-line opportunities to grow their businesses once you bring them into the Chemed umbrella?

Kevin J. McNamara

Jim, I'm glad you mentioned that because what we're facing is several of these opportunities. One I'll just say is a good sized franchisee that does no plumbing, has a very good operation doing only drain cleaning. We'll double their potential just by adding plumbing. Another one that we're talking to has a big infrastructure that will totally disappear. So that'll be more profitable than it is on the top-line growth. Having said that, their pricing is only slightly more than half of what we charge in an adjacent territory. So there's the opportunity for sales growth on their business just by adopting the premium pricing model, which we'll do gradually. Again, we're not looking to upset the apple cart.

But the point of the matter is it's unusual to see significant sized franchisees that don't do any plumbing. We're talking to one that does none. It's a mixed bag but yes, the answer is what I-- The reason I'm excited about these special acquisitions is, is they generally present a variety of opportunities for improvement. And again, it's one of those rare situations where the acquiring company probably knows more about the profit potential of the business that we're buying than the sellers. So that usually gives you a pretty big advantage on the acquisition front. So, again, your question is right on point and it is one that we are seeing a mixed bag.

Jim Barrett - CL King & Associates

Okay, well thank you very much.

Operator

The next question comes from the line of Eric Gommel with Stifel Nicolaus. Please proceed.

Eric Gommel – Stifel Nicolaus

Thanks for taking my question. I noticed you recently put out a couple of press releases announcing some managed care contracts. I wonder if you could just talk a little bit about what the opportunity is for managed care and hospice and maybe talk a little bit about pricing relative to Medicare and maybe the structure of the reimbursement there?

Timothy S. O’Toole

Sure, absolutely. Basically for a couple of years now we have been focused on this major trend which is the Medicare beneficiaries and getting insurance in this country are being moved to the managed care, the choice plans, the five or six big insurance companies that have Medicare managed care choice plans. So clearly nine out of ten of our patients are Medicare patients. So it just made sense to us to begin discussions at the national level with these companies and try to get national contracts.

On the pricing front, when a hospice patient comes off of a Medicare insurance program, they come off of their rolls and come onto our rolls and we bill the government directly. So there is no discussion about price with the Medicare patients at all which is a great situation for us. At the same time we do the contract though we also enter into the commercial contract side of it. And basically we seek, and in most cases receive, the exact same price on the commercial side as we received for the Medicare reimbursement and it is adjusted each year. So we think this is a big opportunity, we want to be the hospice of choice to all these large players in the industry. And one of the unique things that we are providing to them, we are obviously providing great service and a great amount of detailed information.

For example, we can provide customer surveys from after the patient passes away to get a survey to their family members about how the service was. We can get surveys directly for just the referrals from that specific insurance contract and give that to them. We can give them statistics about how our pain management lowered the pain of the patients we take on over several days. We can give them statistics on death attendance. So we can do all of these things for them but in addition what we are doing is we are starting a program, we are educating their case managers at the insurance companies about hospice. Because the insurance companies want their case managers to know about hospice and use it because it is something the public wants and deserves and also it is basically best practices and disease management for these patients to be moved into the hospice program. And in many cases these are high cost patients that are on the rolls of the insurance company and when they understand it and know that VITAS can do a great job, they are very pleased to work with us and then that choice is offered to the patients.

So we think it is a big opportunity, we are putting some reasonable resources in it, and we do not see that changing in the future and we expect to be positioned better than any hospice company to deal with that.

Kevin J. McNamara

And good news, bad news─ I don’t know which it is more─ but on the Medicare side of that, not the commercial insurance side, generally speaking Republicans like Medicare advantage, Democrats do not. I mean to the extent that you think Democrats are going to get more in control, I just think that─ I guess the good news on that is I do not anticipate great upheaval in the hospice market over the next couple of years probably either way, but even less so if the Democrats are in charge.

Eric Gommel – Stifel Nicolaus

I was looking at it more as an opportunity on the commercial side.

Kevin J. McNamara

No question. There is not a lot of opportunity in the commercial side. Keep in mind that most of the commercial side are younger patients. And they are individuals who in many cases do not have terminal illnesses. There are certainly some that end up with cancers and other terminal illnesses and we are very happy to provide hospice service to them. But today we provide about 5% of our revenue stream comes from commercial insurance and we would not expect that to dramatically change. We hope it increases. What we are working on is to make sure when we do that work we get paid, and we are doing a pretty good job of that. And in some situations unless you have a contract for both the commercial side and the Medicare side, you cannot even get into a contract situation at the field level for any of these patients because that is the policy of the insurance company.

So, we are going around signing up everybody who wants to work with us, it is picking up momentum and I think they are seeing it as a very positive thing to be affiliated and partnering with VITAS, these insurance companies.

Timothy S. O’Toole

And, again, we have a good footprint, a good geographic footprint for a lot of these companies. We are in the major metropolitan areas.

Eric Gommel – Stifel Nicolaus

Great, thanks.

Operator

Your next question comes from the line Kemp Dolliver with Cowen and Company. Please proceed.

Kemp Dolliver - Cowen and Company

Hi. Thanks. Over the last couple of years you have mentioned with Roto Rooter that pricing has improved or price increases. And this only needs to be brief, just talk about when you do pricing how much of this is decisions that are made at corporate to put in price increases? When was the last increase that went through? Just some perspective on the contribution from pricing and how it might…

Timothy S. O’Toole

Let me start to respond and then I will get Dave because Dave is a big part of the pricing policy at Roto Rooter. Let me start by saying that the prices are not imposed by headquarters, they kind of drift up from the field. That is kind of in each market, we are in over 100 markets, what are the opportunities? And generally speaking, as those float up we are a moderating factor on some of those. Given the nature of this business, you can get your price on a job.

The question is you do not want to be viewed as a gouger, for the second or third job down the line. And the market intel floats up from the field and we generally do it by not just overall price increases but various lines of work. Let me give you an example of that, and that is generally speaking we see in some markets there is a lower, a different price for main lines and branch lines.

Over the last year and a half of so one of our biggest price increases have just come just having more normalization between the pricing of those two very similar services. So it is not just an imperial dictate that comes down from the headquarters, but it is more a culmination of information that comes from the field. And, again, there is nothing that we are hearing from the field that suggests we are at the end of our ability to set prices in that regard. Dave, anything more to add on that? Because you are closer to it than I am.

David P. Williams

Yes. Actually in the past several years it has averaged out to 5% and that is pure coincidence. Each branch looks at the pricing and looks at the competition. Literally looks at supply and demand for plumbing and drain cleaning services. This past year was a push to price branch lines, because the cost to deliver a technician and a truck is the same whether you do a branch line or a large main line. So they adjusted that. Two years ago we took a hard look at our plumbing rates relative to what our costs of labor are on drain cleaning and we made those similar. Some branches this year had zero price increase; some had almost double-digit. So it fluctuates. We think it is going to be harder to pass through price increases in ’09 but we still see opportunity. The exact amount, we need to see in early December. But we think it is going to be low single digits, certainly in the two to 3%, if not higher. But there will be opportunity, it is not an (inaudible 01:11:12). Each location will look at their pricing across all matrixes of services provided and we will adjust accordingly. Again, the competition, supply and demand.

Timothy S. O’Toole

And, Kemp, let me add one other factor just to give you some color to this. And I mentioned it before, it is anecdotal but the one thing, what type of complaints come to me as CEO of the parent company from dissatisfied customers, and increasingly, everything has fallen to the wayside except one complaint that I periodically get and that’s this: and that is somebody said─ I couldn’t get anybody else, I got somebody on a Saturday at 9 o’clock, they came, they gave me a quote of $212, they did it, I paid $212. I later found out that a neighbor had it done for $100 or some other provider. Shouldn’t I get $100 back?─ or something like that. And of course we respond, “no.” But what that really demonstrates is increasingly after probably 4 p.m. we are the only provide you can when you are trying to call somebody. Especially during a weekend. And to the extent that the blue collar workforce is aging and less willing to work the unusual hours. And less willing to have a yellow page advertisement illustrating that fact. We become the only provider. So it is not just numbers we pick out of the air, but it is supply and demand. There is not much supply of emergency plumbers during the off-hours at this point, in most markets. So I just wanted to give you that anecdote of why it is that we are still setting prices.

Kemp Dolliver - Cowen and Company

That is helpful. And last question is, are these pricing decisions ongoing through the year or is there a concentration, say, around January 1?

Timothy S. O’Toole

Actually, typically by late to mid-December they are finalized and put in place.

Kemp Dolliver - Cowen and Company

Great. Thank you.

Operator

Your next question comes from the line Craig Rosenblum with Millbrook Capital. Please proceed.

Craig Rosenblum – Millbrook Capital

Good morning. Can you give any color on the potential size of the franchise acquisitions you were talking about and how that effects your ongoing buy-back plans?

Timothy S. O’Toole

Well, we don’t─ I probably have said too much about them already. But other than that I’m excited about them they are not our largest franchisees. Or the largest markets held by our largest franchisees. They are good size markets, good opportunities, but they are not necessarily going to be transformational acquisitions for Roto Rooter. They are just going to be nice additions to our stable of repurchases which we have intentionally avoided over the last couple of years just to get some price discipline in the market. So I do not want to say too much more other than they are not transformational, they are not our one or two or three largest franchised territories.

David P. Williams

And this is David P. Williams. And somewhat related to that, we certainly expect it to be a contributor to growth in Roto Rooter next year, but it is not going to take Roto Rooter to double-digit growth. But it will certainly be solidifying in terms of profitability. In terms of what we are going to be doing with our cash, at this point given how bazaar the capital markets are, even though our stock price extremely attractive at its current levels given our cash flow, at this point we are inclined to build cash in our balance sheet and take advantage of our positioning in the fact that we have access to capital and we are accumulating cash and use it to acquire businesses in the hospice and Roto Rooter. We are not inclined to do share repurchases until we see the capital markets reopen. So we view it as a competitive advantage that we are going to utilize to our full capabilities.

Craig Rosenblum – Millbrook Capital

Thank you.

Operator

Your next question comes from the line Gene Fox with Cardinal Capital Management. Please proceed.

Gene Fox – Cardinal Capital Management

Hi, guys. Two questions. First of all, as it relates to trends in Roto Rooter. Any sense that the declines you have seen in the south-east may start to moderate as you basically feel the effect of the housing crisis in Florida and some of those states? Have you seen anything that would indicate any stabilization there yet?

Kevin J. McNamara

No, I would say, Gene, is what I would say is we have seen stabilization. I mean it is not like things are continuing to get worse in those markets. They are just not getting appreciably better. Okay? I think that we lost─ one way of saying it is, and again I hope I’m not whistling (inaudible 01:16:22)─ it looks like we have lost what we are going to lose and we are fighting the good fight. I happen to think that in the south-east it is one of those examples where we have a very strong manager in the south-east. The manager in the south-east was our best performing region for a couple of years. We have had little turnover there. And we have good managers in the south-east; they have a relatively stable situation that needs improvement. And when I say that, is that wishful thinking? I do not know.

One of the advantages you get in those type of situations, you have the ability to hire good plumbers that now are available. And, again, we have seen over time in Roto Rooter that if you have a qualified plumbing staff, the business will follow. I think that in normalized economic conditions if we have improved our stable of plumbers, those branches will do very well.

Gene Fox – Cardinal Capital Management

Let me try to rephrase it, Kevin. Once you have sort of lapped difficult comparisons for ’08, is there any reason to think that we would continue to see comparisons at that level going forward? And I am really asking for a definition for what stabilization means.

Kevin J. McNamara

I think we are talking about job counts that are flatish in those regions once you have lapped them. Now having said that, Dave had already mentioned that we have not given guidance for ’09. We have not gone through the process. But just to answer your question, I would expect our budget for Roto Rooter is to be up single digits in sales next year, not down. Not down 1%, not down nine-tenths of a percent, but up. And probably up in a relative, in what we would normally expect to see Roto Rooter budget. And what that has been over the last few years is single digits. It may be the lower single digits rather than the higher single digits, but increases.

Gene Fox – Cardinal Capital Management

Okay. Second question. As it relates to VITAS, any sense that you are benefiting from the competitive environment or the credit crisis in terms of market share or your ability to win new business?

Kevin J. McNamara

No, I would say at this point, no. No sense that we are benefiting at this point. Now every time I look at the newspaper and see that our healthcare system is having problems with the capital markets, they can’t raise money, they cannot issue a bond, I say boy, that has got to be helpful to us. It has not yet. Believe me, what I describe as the pot of gold at the end of the rainbow is having some of these big healthcare systems outsource the hospice part of their service offering to us. They have not done it yet.

David P. Williams

But, Gene, related to that, the financial pressures are just beginning. The increase that (inaudible 01:19:41) was October 1st did not cover inflation. Charitable contributions which are typically strongest in the fourth quarter for any not-for-profit come in a combination of gifts to get the tax deduction before the end of the tax year as well as appreciated stock. Both of those are going to be horrible in the fourth quarter of 2008 as well as they go into ’09. So all of the true operating financial pressures that are going to come to hospices are just beginning to start now. So I think it is going to take several quarters before that pressure materializes to the bottom line and the realization that they have to do something kind of comes to their awareness.

Gene Fox – Cardinal Capital Management

In terms of your operation, either David or Tim or Kevin, what are you doing to position yourselves to take advantage of that? Are you doing anything differently?

Kevin J. McNamara

Well let me give you an example of one thing we have done differently. Dave and I went to a conference of healthcare systems slash hospital CFOs. It was one of those ones where we had to pay a not insignificant amount of money for us in order to get in front of the groups. We chose the ones to have one-on-one meetings with, that is programs with hospices. They chose the people that they wanted to talk to and we had two full days of meeting with these people, at least trying to put the bug in the ear that we have something that could really help them. We could buy their hospice and they would outsource it to us, they would get better service, they can continue to get charitable contributions and everyone would be─ the proverbial win-win situation. Got no negative feedback on it, just have not gotten much headway on the subject.

But that is the type of thing that we are doing. What other things we are doing? We are reaching out to our couple of remaining major accounting firms that we deal with one way or the other and saying to the extent you have healthcare systems that you are working with that are casting about vainly in the darkness for something to do, to handle some of their financial pressures, tell them that we are there. That is the kind of thing we working, doing. But there is the hurdle of dealing with the not-for-profits, it is not their first option, is not to say hey, I will outsource hospice to a for-profit company. It is going to be something that comes out of necessity, not out of invention.

Gene Fox – Cardinal Capital Management

Thanks, Kevin.

Kevin J. McNamara

And I believe that is the last of our calls. A lot of calls this month, but we were happy to have them. We were real happy with our quarter. And we will talk and have a similar discussion at the end of the next quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a good day.

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Source: Chemed Corporation, Q3 2008 Earnings Call Transcript
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