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Chemed Corporation (NYSE:CHE)

Q2 2014 Earnings Conference Call

July 24, 2014 10:00 AM ET

Executives

Sherri Warner – IR

Kevin McNamara – President and CEO

Dave Williams – EVP and CFO

Tim O’Toole – CEO, VITAS Healthcare Corporation

Analysts

Darren Lehrich – Deutsche Bank

Frank Morgan – RBC Capital Markets

Jim Barrett – C.L. King & Associates

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Chemed Corporation Earnings Conference Call. My name is Derrick and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Sherri Warner, Chemed Investor Relations. Please proceed.

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the second quarter of 2014 ended June 30, 2014. 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 23 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management’s current view only and that the company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today’s call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company’s press release dated July 23, which is available on the company’s website at chemed.com.

I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Tim O’Toole, Chief Executive Officer of Chemed’s VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin McNamara

Thank you, Sherri. Good morning. Welcome to Chemed Corporation’s second quarter 2014 conference call. I will begin with some of the highlights for the quarter, and David and Tim will follow with SOME additional operating detail. I will then open up the call up for questions.

As most of you are aware, in March 2013, CMS issued proposed rules in regards to coding of the principal reasons for a terminal prognosis. Then in August 2013, CMS issued the final rules effective October 1, 2014.

The essence of these rule refinements is the elimination of the principal diagnosis codes, debility and failure to thrive. CMS’ intent was primarily a documentation refinement. And based upon explicit explanation in the federal register, they clearly did not anticipate that these coding clarifications would create limitations or barriers for eligible Medicare beneficiaries to access hospice.

Unfortunately this change did cause significant admissions disruption to VITAS and the entire hospice industry. From a process standpoint, CMS requires hospice providers to select a principal code as the single primary medical reason for terminal prognosis.

For VITAS, 85% of admissions have had enough medical indicators for a doctor to reach a terminal prognosis for a specific condition. We historically utilize debility or failure to thrive as a principal code for about 15% of our admissions when it was difficult, if not impossible, to determine a single principal condition as the medical reason for a terminal prognosis.

These are typically patients with severe multiple chronic or co-existing conditions that taken collectively contribute to the physician concluding that the patient has a terminal prognosis.

CMS is directing hospices from patients with severe multiple chronic conditions to assign a principal code for one condition most contributory to the terminal prognosis. Basically, use of the most severe condition of the patient as some principal prognosis even though the patient would not be considered terminal for that single condition.

CMS then requires the utilization of additional sub-codes to report all co-existing or additional diagnosis related to the physician reaching a terminal prognosis. Unfortunately the industry misinterpreted the change in the coding process as a change in hospice eligibility for some patients that would have been considered debility or failure to thrive.

Over the past year, VITAS has spent considerable efforts in dialog with referral sources, doctors and internal admissions personnel in every single hospice program regarding these type of patients. These efforts have been successful in returning our admissions to more traditional patterns. As a result, our admissions decline has been reversed.

During the second quarter, VITAS had a 4.4% admissions decline in April 2014, a 3.1% admissions increase in May and 2.7% admissions growth in June. Admissions in debility and failure to thrive which averages 15% of the total admissions prior to CMS’ proposed rule change was down to 3.3% in the most recent quarter.

Now let’s turn to our Roto-Rooter business segment. During the second quarter of 2014, Roto-Rooter’s plumbing and drain-cleaning business generated sales of $96 million. This is a revenue increase of 2.7%. Overall Roto-Rooter had a solid quarter and generated $19.1 million of adjusted EBITDA, an increase of nine-tenths of 1 percentage point and equated to an adjusted EBITDA margin of 20%.

2014 is on track to be another record year for Roto-Rooter in terms of revenue and operational profitability.

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

Dave Williams

Thank you, Kevin. Net revenue for VITAS was $264 million in the second quarter of 2014, which is an increase of $500,000 or 0.2% when compared to the prior-year period. This revenue increase consists of a Medicare reimbursement rate increase of 1.4%, offset by a 1% decline in average daily census.

In the second quarter of 2014, VITAS recorded $100,000 in estimated Medicare Cap billing limitations. VITAS has 38 unique provider numbers. At June 30, 2014, we had two programs with an estimated 2014 Medicare Cap billing limitation. Of the remaining 36 Medicare provider numbers, 33 provider numbers have a Medicare Cap cushion of 10% or greater for the 2014 Medicare Cap period; two providers have a Medicare Cap cushion of between 5% to 10%; and one provider number has a cap cushion between 0% and 5%. VITAS generated an aggregate cap cushion of $248 million during the trailing 12-month period.

The second quarter of 2014 gross margin, excluding the impact of Medicare Cap, was 22.1%, which is a 9 basis point decline when compared to the second quarter of 2013. Our routine home care direct gross margin was 53.4% in the quarter, an increase of 101 basis points when compared to the second quarter of 2013.

Direct inpatient margins in the quarter were 6.9% which compares to 3.6% in the prior year quarter and 4.2% in the first quarter of 2014. Occupancy of our 35 inpatient units averaged 74.7% in the quarter and compares to 69.7% occupancy in the second quarter of 2013. Continuous care had a direct gross margin of 70.5%, an increase of 290 basis points when compared to the prior-year quarter.

Average hours billed per day of continuous care was 18.8 in the quarter, a slight increase when compared to the average hours billed in the second quarter of 2013.

Now, let’s turn to the Roto-Rooter segment. As Kevin mentioned, Roto-Rooter’s plumbing and drain-cleaning business generated sales of $96 million for the second quarter of 2014, an increase of 2.7% over the prior-year quarter.

On a unit-per-unit basis, commercial drain-cleaning revenue increased six-tenths of 1% and commercial plumbing and excavation decreased 1.6%.

Overall, our commercial revenue increased 0.5%. Residential plumbing and excavation increased 2.4%, but was partially offset by a 3.2% decline in residential drain-cleaning revenue. Overall, unit-per-unit residential sales increased 4.3% primarily driven by increased revenue in the other services category.

Now let’s look at our consolidated balance sheet. As of June 30, 2014, Chemed had total cash and cash equivalents of $28 million and debt of $160 million.

In June 2014, Chemed entered into a five-year Amended and Restated Credit Agreement that consists of a $100 million amortizable term loan and a $350 million revolving credit facility. The interest rate on this facility has a floating rate that is currently LIBOR plus 125 basis points. At June 30, 2014, the company had approximately $253 million of undrawn borrowing capacity under this agreement.

Capital expenditures through June 30, 2014, aggregated $19.5 million, and compares to depreciation and amortization during the same period of $16.2 million.

The company repurchased $25.5 million of Chemed stock during the quarter. This equated to 300,000 shares of Chemed stock repurchased at an average cost of $85.04 Chemed currently has $63.3 million of authorization remaining under this share repurchase plan.

Our 2014 full year guidance is as follows. VITAS’ revenue growth was constrained in the first half of 2014. This is primarily the result of the 2% Medicare Cap cut implemented in the second quarter of 2013, as well as mix shift from high acuity care to routine home care. These factors negatively impacted revenue comparisons in the first half of 2014.

Our full year 2014 revenue growth for VITAS, prior to Medicare Cap, is estimated to be in the range of 1% to 2%. Admissions in 2014 are estimated to increase 2% and full year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 14.5% to 15%. Medicare Cap is estimated to be $3.7 million in 2014.

Roto-Rooter is forecasted to achieve full year 2014 revenue growth of 3% to 4%. This revenue estimate is based upon increased job pricing of approximately 2%. Adjusted EBITDA margin for 2014 is estimated in the range of 19.5% to 20%.

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

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

Tim O’Toole

Thank you, David. As Kevin mentioned earlier, our admissions patterns had been disrupted over the past few quarters for patients who traditionally would have been admitted with a principal hospice diagnosis of debility or failure to thrive. Through a very detailed process of training and reeducation of referral sources as well as our admissions personnel, doctors and nurses, we have significantly reduced the number of admissions that are admitted under with the principal diagnosis of debility or failure to thrive.

Admissions with these two diagnosis were 3.3% in the quarter and compares to 6.7% in the first quarter of 2014 and 15.3% in the first quarter of 2013. As you would expect, admissions under other principal diagnosis have experienced significant increases.

During the second quarter of 2014, admissions from hospital referrals decreased 1.2%, nursing home admissions increased 0.7% and assisted living facilities decreased 2.1%. Home-based referrals were essentially equal to the prior year quarter.

Our per-patient per day pharmaceutical cost averaged $7.26 in the quarter, which is 3.8% favorable to the prior year. Our medical equipment per-patient per day cost in the quarter totaled $6.76 which is 3% above the prior-year period.

VITAS’ average length of stay in the quarter was 82.4 days, which compares to 84.8 days in the prior year quarter and 81.8 days in the first quarter of 2014. Average length of stay is calculated using total discharges during the period.

Median length of stay was 16 days in the quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,322,818 days in the quarter, a decline of 1%. Non-nursing home routine homecare days decreased 1.6% in the quarter and nursing home routine homecare increased 1.6%.

At June 30, 2014, we had one program classified as a start-up and have already admitted patients in the third quarter of this year to this program. This new start is Medicare certified with the ability to begin billing under an existing provider number.

With that, I would like to turn the call back over to Kevin.

Kevin McNamara

Thanks Tim. Now appropriate to take some questions from anybody who is interested in asking questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Darren Lehrich, Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. Good morning everybody. I wanted to start out with just a question around Roto-Rooter. And Dave, I think I missed some of the numbers you mentioned here, but can you just run through your job count growth in the various segments of the business, and then just maybe a comment or two about how you’re thinking about job growth and volume in the plumbing side?

Dave Williams

Yes, as we’ve mentioned several quarters ago, Darren, we’ve actually gotten away from talking about job comp by segment, primarily because there was too much of a variability related to the prices of jobs.

Kevin McNamara

And mix shift.

Dave Williams

And mix shift. So the numbers weren’t consistent. So job count just isn’t a good metric to track in terms of what’s going on within Roto-Rooter, which is why we’re not just talking about revenue by product service segment.

We compile it, and we study it, but we think that very often again it’s misinformative more than it is informative.

Darren Lehrich – Deutsche Bank

Okay. It’s fair. So just so I’m clear on the numbers and maybe I can just go back to the transcript then, but your revenue by segment there. You’re breaking it down now into two buckets per, in both, residential, commercial and you’re not spiking out the others. Is that right?

Dave Williams

That’s right. So we’re primarily talking about a 2x2 matrix; commercial, residential. And then down would be plumbing and drain-cleaning. There is a third category that we talk about as other. And other gives a combination of commercial and residential.

So to restate it again, so for commercial drain-cleaning, that revenue was up six-tenths of 1%, commercial plumbing and excavation decreased 1.6%. Overall commercial revenue increased 0.5%. Residential plumbing and excavation increased 2.4% and residential drain-cleaning declined 3.2%. But overall the unit-for-unit sales increased 4.3% and that was driven by the other category.

Darren Lehrich – Deutsche Bank

Got it. Okay. That’s helpful. All right, and then just I guess going back to your comments, the real shift that you saw inter-quarter here stands out. Is that relates to your ability to get these adult failure to thrive and debility under different primary diagnosis. So I guess I just wanted to hear a little bit more about what exactly you’re doing, and when you think about the remaining at this point 3.3% of your admissions going into the October 1 timeframe, would you expect then all of them to ultimately fall under different categories?

Tim O’Toole

Let me start at the end just – sorry for the trouble, it’s Tim. The answer is, it will be zero on October 1 as a matter of – and then of course we expect – and they have been really making the point, this law was change of the regulation, never meant to reduce the opportunity for hospice for anyone with a terminal diagnosis. We’re certain that we have in our organization I think the reenergizing around the education, again talking to the referral sources, we’re taking a lead in that area and everybody appreciates it. And yes – to answer your question, yes, we do not expect any fallout from that as we move into the end of the year.

Kevin McNamara

You are asking the question partly. One part of one of your question I think is a question I’ve asked several times. Obviously when it was 15% and they put this cloud over it, there was dislocation. You might say, if it was 0% in the third quarter – in the second quarter, there would be no dislocation associated with going from zero to zero. Here we’re going from 3.3% to 0%. Do we expect some dislocation?

I would say maybe a little bit, but you got to remember that from my perspective and I am one step removed, to the extent that so many of our patients are with us just a few days. A large group of the remainder is my sense is the group that is so ill that – and they are going to be with us. Certainly they are going to be alive such a short period of time, the coding physician just doesn’t want to go to that much effort to the extent that they are still in other category available. No sense doing the paperwork. For some reasons, they’re only going to survive two, three or four days.

So to the extent that number one, from an economic standpoint, those patients are not a great moment to the extent that there was a dislocation, but as again I am not saying it’s not impossible to come up with a primary diagnosis for those, but I guess what I just want to say is, I feel from an operational standpoint that there will not be much dislocation with that last 3.3% disappearing.

Then I know that was kind of the last part of your question. I am just trying to focus on – do you another question related to that?

Darren Lehrich – Deutsche Bank

No, it’s helpful. I think the numbers you gave make it pretty clear that there has been some fundamental shift with the referral sources and how you’re able to get at this issue. So Tim it sounded like it went from negative at the beginning of the quarter overall admissions to positive in May and June. Is that…

Tim O’Toole

Yes, that’s correct. Absolutely. That’s correct. And if you just wanted to say, I mean these numbers we’re talking about if I remember correctly last year we had 62,000 admits. Is the number going to be higher this year? Yes. I mean is it going to be in the range of 64,000 something or other? That’s our best guess at this point.

We’re half way through the year. If you look at the trends, we’re very comfortable with that. That doesn’t – to the extent that somebody says and we’ve looked at some of the analyst reports who say, well, that’s the one element of our guidance that looks mathematically speculative, but from our perspective – we’re comparing in lower basis, the second half of the year. And if we just keep doing what we’re doing, we’re going to hit those numbers.

Darren Lehrich – Deutsche Bank

Okay. That’s great. And then just a last thing for me here is just relative to Medicare in the proposal for 2015, it was sort of silent about any kind of refinement. So curious just to get your thoughts about timelines and what you’re hearing from CMS? And then any comment you might have on just the Part-D issue and how that’s resolved and how that might change your outlook, if at all?

Dave Williams

Yes. On the CMS, it has not projected any date for a change in reimbursement methodology or strategy. Although we do know on Med pack in late June of this year, sent a letter trying to incentivize or encourage CMS to come up with that that change in reimbursement, but right now no dates are set. We do have a dialog and we would encourage CMS once they come up with a new reimbursement methodology, we would really like to see them test that reimbursement before they do a big bang, just to make sure we can identify any unintended consequences, but that’s just long way of saying there is no changes anticipated in the near-term. And they appear to be just very thoughtful on how they are approaching it.

Tim O’Toole

No, I think that’s right, as Dave said. And I’ll just comment on the Part-D. That’s been working now very well for VITAS and we have not seen much increase at all in our cost of drugs for our patients because of a shift from unrelated to related to their diagnosis. And we have put in a very healthy process internally where we’re proactively reaching out to help all of our patients on referral sources if they need a prior authorization for the unrelated drugs which they do now under the rules, where they didn’t before. We have actually implemented a very favorable system that’s accomplishing that and getting great service and quality of their care for our patients. And I know some other hospice companies are not doing well with that.

So the Part-D is not gone badly for us. We’re handling it very well. And there is even some discussion among the regulators that they need to make sure that gets implemented in a timely way with transition so the beneficiaries aren’t hurt. So we’re handling it very well, don’t see it as a problem.

Dave Williams

And under the service there amid classic, this is the way in the world. And from a strategic standpoint because VITAS is the largest and I think the best organized hospice program. They are more nimble. They were able to deal with something that obviously is a headache very well that gives them a strategic comparative advantage which they’ve been able to make some headway with. But to the extent that it goes away, that’s good for everybody, but we’ll have to look for – number one, we’ll look for other strategic advantages, number one; but number two, it gives me some confidence of their nimbleness to deal with what are inevitable changes that come on down the pike one by one.

Kevin McNamara

But Darren think about it from a process standpoint. So CMS is a responsible for trying to manage the overall cost of the Medicare and Medicaid system. They came up with this proposed Part-D and it probably went too far, but they listened to what the industry said. They listened to individual providers like VITAS. They listened to the NHPCO, and they refined that approach to the four categories of drugs that are predominantly palliative related.

And I think they came up with a very pragmatic answer that was appropriate for the providers, for the Medicare beneficiaries and for CMS as the payor. So we are kind of very encouraged in terms of how CMS responded appropriately to our concerns and it was really a good end result.

Darren Lehrich – Deutsche Bank

Great. Thanks for taking the questions.

Operator

Your next question will be from the line of Frank Morgan, RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Couple of my questions were answered in that series, but I would – I am curious, I think I understand the dynamic with admission trends turning, but obviously the length of stay continue to decline and had sort of a pressure on your senses. I am curious, do you attribute that decline in length of stay. Is that purely as a result of this change in these categories where you’re seeing fewer of these patients in that group or is there some other driver there?

Tim O’Toole

I would say no, it’s not material. And keep in mind our median is going higher. So there is lot of revenue in that under 16 day category that overall helps, so it balances out, but there is nothing material going on with that. I guess as Dave said it’s kind of noise moving around.

Dave Williams

Yes, next quarter if you asked this, if we were – we flip the coin whether it was going to be higher or lower by the time we get to the end of the current quarter, half a day or a day. Nothing that is ascertainable by trends.

Frank Morgan – RBC Capital Markets

Okay. And back to the Part-D discussion, just to be clear here, the revised guideline that was issued here in the last few weeks, that is where they limited it to just a number of couple of drugs. Maybe you could just describe to us what was it going to be before and what is it as a result of these revised guidelines that just came out?

Tim O’Toole

They just made it a little more clear about the categories of drugs and the detailed analysis related to the terminal illness, unrelated, realizing the palliative is not necessarily unrelated, so just giving clarification and again nothing that unusual.

Kevin McNamara

Yes, but their starting point was all meds would be hospice-related and then they carved it out of the four drug categories for pain, anxiety, nausea and constipation. And those are the drugs, if you look at our top 10 drugs, that’s what they tend to be related to. So they focused it appropriately on things that relates to palliative care.

Frank Morgan – RBC Capital Markets

And so while it was never a real issue for you, certainly some other players in the industry were suggesting it was going to be up a significant incremental cost, you’re saying now that this is not again for you.

Tim O’Toole

This was an issue for us to deal within the organization to get it to process right. And I think we’ve done that better than most. So when you admit a patient and if the drug is related to hospice, we cover it. If it’s unrelated, it goes to Part-D Medicare, but we have to put a prior authorization into the system that day that you admit the patient or when they try to get the unrelated drug, it gets blocked at the pharmacy. That was causing problem.

So we connected our systems with the pharmacy. So we could accomplish that prior authorization the same day we admitted our patients, geared up pharmacy tax, did it ourself, communicated with the nursing homes and it worked very well for us. All we know is many hospices were not able to do that as well as us and it’s been helpful to us. Most importantly very helpful to our patients because if it’s not done right, they all of a sudden get their drug from the retail pharmacy not paid for, and they think it’s something to do with hospice, when it’s not, it adds confusion. And we certainly don’t want that to be a limiting factor to hospice access which we all know is very important.

So we’ve held it well. The industry is done okay. CMS responded to the issues. I do not see it as a concern going forward for VITAS.

Frank Morgan – RBC Capital Markets

Okay. One more and I’ll hop. Just any kind of general thoughts that you have regarding, just the overall industry backdrop specifically for acquisition activity? We’ve seen some growth in palliative care. Some companies – there has been a few transactions on the hospice side. What are you seeing out there in terms of – do you sense the frequency of opportunities is big, percentage is more or less and where do you see valuations and how do you think it may play out given all these changing dynamics? Thanks.

Kevin McNamara

All right, well Tim I can jump in. I’ll start by saying I haven’t seen any significant change in valuation. And I just really, what I am saying as it’s because of that, I haven’t seen anything that makes hospice acquisitions for VITAS less Chemed more attractive at this point. I don’t think that – probably what we’ve said in the last few conference calls, it would be surprising to me if there was a big transaction that occurred given what’s going on in the market.

I haven’t seen a significant change in that regard. Again we’ve obviously seen – there has been some – a lot of headlines on the home healthcare side that spills over into hospice, but I don’t think the hospice end of it has been at the driving force behind those combinations or proposed combinations. Tim, anything…

Tim O’Toole

Absolutely. I’d only comment on your thought about palliative care and acquisitions. All I would say is we developed our own palliative care programs for the last three years within VITAS. And most of our large programs have a palliative care program running and it’s very helpful to provide bridges and relationship with referrals and help our patients.

So we have that under control. And what Kevin said about acquisition is exactly right, no big change there.

Frank Morgan – RBC Capital Markets

Thank you.

Operator

Your next question is from the line of Jim Barrett, C.L. King & Associates.

Jim Barrett – C.L. King & Associates

Good morning everyone.

Tim O’Toole

Good morning.

Jim Barrett – C.L. King & Associates

I just had two questions. One was for you, Kevin. Are those entities seeking to acquire hospice assets, any shift between strategic acquirers and financial buyers over the last year or two, or has that remained unchanged?

Kevin McNamara

Jim here. I’m in again. There has only been a couple, so it’s hard – I mean it’s not like we’re having a big [indiscernible] from my perspective I think a hospice is an add-on. I think that the leverage and the operational advantages that are strongly perceived on the home healthcare side. And to the extent that there is, like in the case of Gentiva [ph] there is obviously a very significant hospice portion as well. That’s I see now the case maybe to their strategic planners. I don’t think that’s a driving factor.

So and again – and part of that is the nature of hospice. It’s a per diem. It’s your doctor – referral sources that come from a wide variety of places, there is channel conflicts. It’s hard to build – and again there is so much – like most service businesses, the labor such a big component of it. So hard to see operationals on the hospice side. I don’t see those driving combinations within the sectors. The issue probably that remains is from usually three public companies that were purely hospice, now there is one.

Your other question goes when to – more of the financial versus strategic. There is just not – from my perspective, there is not much activity on the financial purchase side. There is some rearranging of the deck chairs. Some people are taking positions that were fairly stable with the financial buyer side, but on the strategic side, I haven’t seen that much activity over the last couple of years.

So it’s just other than I don’t want to ignore Amedisys following – their failure to buy Odyssey. That was a fairly significant purchase, but from a strategic standpoint, it’s not surprising, because we’re brilliant but when we said several years ago, look we’re not going to sit around and wait for an acquisitions and all the vagaries dealing with what are pricy acquisitions, we started opening up our own programs. And as Tim said in his presentation refer to some of our start-ups.

That has become probably the smarter strategic option over the last couple of years for operational companies. If you have no hospice and you want a hospice, and you think you can pull together a concatenation of small programs and sell it to somebody at a profit, okay that’s a financial buyer.

There isn’t much of that going on in for any significant programs that are 500 sensitive programs out there. This is not out there.

Dave Williams

But Jim you’ve bring up an interesting point in terms of there has been an observation going on in the industry that the small and medium – hospice is still very fragmented. In the small provider numbers to medium sized average daily sense of provider numbers. Some of the concerns I’ve seen when we say, for example the med pack letter that came up in June concerns on some of these small providers and medium providers. They are not providing high acuity care because they lack the infrastructure to be able to do it without losing a lot of money.

There seems to be a concern that size matters relative to scale, so you can efficiently deliver quality end of life care. So I’d say we’re beginning to see the momentum building for consolidation just from that end.

If pressure is put on small hospice providers, they really should be living up to the conditions of participations and providing all three key levels of care. I think they are going to have to get bigger so that might trigger consolidation.

Kevin McNamara

And I don’t want to make too much of it, Jim, but one element of our lawsuit would be justice department. Again [indiscernible] one aspect. Focus on their press release where they focus is that they say, look how much continuous care VITAS does. Something has got to be wrong there, because they do so much and other people do so little.

The lever CMS is kind of supportive of saying a lot all along. If the question is, look, it’s got to be one or the other. Either VITAS is doing too much or everyone else is doing too little.

It’s pretty clear that everyone else is doing – the smaller ones are doing too little if 55% of hospices do not. Okay, so it’s some confirmation of something that we think is a central tenant in our – I don’t necessarily focus on defense to that action but more an explanation of VITAS and it’s various levels of care and where they fall out. So we’ll see. And we saw that was – we thought that CMS was in [indiscernible] was had their heart in the right place as they said, if we’re going to hold people to give hospice, eligible people the rights that they have and that’s a right they really four levels of care.

Hospices out there should all be required to give them. And as Dave said, to the extent that you have to have a certain size in order to have the wherewithal to do that effectively more good for us, we’ll see.

Jim Barrett – C.L. King & Associates

Okay, understood. And again I think you should be commended on your capital allocation over the years really by avoiding dilutive acquisitions. And then speaking of capital allocation, Dave, you clearly certainly this year increasingly have put your surplus cash to work, share repurchase. If the share price continues to appreciate, what’s the thinking in terms of shifting funds to dividends or should we conclude that this continue to be a heavy emphasis on share repurchase even though the company is, I think financially is quite capable of providing a much higher dividend to its shareholders?

Dave Williams

Well we look at share repurchase, dividends and acquisitions all in the same line. It’s all about what creates the most shareholder value, and you do it when it’s appropriate. Although we think a dividend is important, for one, certain funds require dividend to hold our stock. And methodically increase in dividend it is projection of strength, but all of us recognize a dividend is very, very tax inefficient. So I think when we’re talking about returning capital to shareholders, share repurchase will still be the much, much more predominant than a dividend, but we will evaluate all of those on a regular basis on what makes the most sense at the right time. And we certainly like to be opportunistic in our share repurchase, but we certainly look at over the past several years and dollar averaging of our share repurchase also makes sense.

Kevin McNamara

Jim, our dollars right now – last time I looked out was $59 a share. So we have been able to do that opportunistically, that’s number one. Number two; unless the board changes it, the board is basically committed to an increasing dividend. Again we’re talking about healthcare company and they tend to have little bit lower dividends than other companies, but the board is, as I can guess we should – they expect an increase in dividend every year.

But your point is at the end, like boy it’s one thing to buy the stock at $59 and other if it’s a $103. And yes, we look at that. We look at that very carefully and we always – if there is one argument that could be made against a dividend, a stock repurchase program where you have a lot of free cash flow. The one argument is that, lot of these managements they buy at the wrong time. They buy high and sell low and they end up with a high average. That’s something that we are very – we recognize that is a situation to be avoided if we want to say that we’ve been good safe-guarders of the company’s assets.

So we do keep that in mind but – and again it makes you gulp a little bit if you say, Chemed is at an all-time high and it was $72 a year ago, and it’s $102 now. Are you still aggressively buying stock? That’s a kind of thing that it makes a tougher decision. We wouldn’t just go and do that willy-nilly without pretty full analysis.

Jim Barrett – C.L. King & Associates

Okay. Helpful. Thank you both. That discussion was very helpful.

Kevin McNamara

Okay. I think there is no more questions, but I want to thank everybody for their attention and we will reconvene in about three months.

Operator

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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