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Executives

Ralph Gronefeld - President and Chief Executive Officer

David Miles - Chief Financial Officer

Derwin Wallace - Director of Investor Relations

Analysts

Kevin Ellich - RBC Capital Markets

Kevin Campbell - Avondale

Richard Close - Jefferies and Company

Jim Macdonald - First Analysis

Greg Williams - Sidoti & Company

Eugene - BB&T Capital Markets

Hank Ralsh - Liberty Mutual

ResCare, Inc. (RSCR) Q4 2007 Earnings Call March 11, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the ResCare, Inc. earnings conference call. (Operator Instructions) And as a reminder this conference is being recorded Tuesday, March 11, 2008. And I would now like to turn the conference over to Ralph Gronefeld, President and Chief Executive Officer. Please go ahead sir.

Ralph Gronefeld

Thank you Jennifer. Good morning and welcome to the conference call reviewing ResCare’s results for the fourth quarter and year ended December 31, 2007.

I'm here today with David Miles, our Chief Financial Officer and Derwin Wallace, our Director of Investor Relations who will now present our forward-looking statements. Derwin?

Derwin Wallace

We provided notice of this call in a public news release and we welcome those joining us through the simulcast web transmission.

Our fourth quarter and year-end 2007 earnings release has been distributed to the financial media, filed with the SEC and is posted on our website rescare.com.

From time to time ResCare makes forward-looking statements in its public disclosures including statements relating to expected financial results, revenues that might be expected from new or acquired programs and facilities, its development and acquisitions activities, reimbursement under federal and state programs, compliance with debt covenants and other risk factors and various trends concerning privatization of government programs. In our filings under the federal security laws including our annual, periodic and current reports, we identify important factors that could cause ResCare’s actual results to differ materially from those anticipated in forward-looking statements. Please refer to the discussion of those factors in our filed reports. We also would note that the information being provided today is as of this date only and that ResCare does not assume any responsibility to update those forward-looking comments. Ralph?

Ralph Gronefeld

Thank you Derwin. 2007 was a exciting year for us. We improved the profitability of our employment training services segment and grew community services segment revenues by 15%.

We completed 12 acquisitions in total adding projected annualized revenues of approximately $130 million. These acquisitions will help to expand our services to greater populations and diversify our revenue strength.

The acquisition of Kelly Home Care Services early in 2007 gave us the national footprint we needed to build our private-pay home care business to the elderly and drive organic growth. Home care is a readily growing sector and should continue to be as baby boomers age. Home care revenues have reached an annual run rate of approximately $300 million.

Late in the fourth quarter of 2007, ResCare also enters the international market with the acquisitions of Maatwerk and Biscom. Maatwerk has 18 locations in Netherlands, Britain and Germany and Biscom has six locations in Britain. Both companies are private providers of government funded work force services that include job training and job placement assistance. We believe that this is an excellent opportunity for us to expand work force services into a new market and diversify our pay resources. Maatwerk and Biscom were at projected analyzed revenues of approximately 35 million. Also during the year, our employment training services segment made steady progress and obtained new contracts and renewing existing ones where we were awarded 35 new contracts adding annual revenues of approximately $37 million offset by contract losses with annualized revenue of 8 million.

Also I am pleased to report a new personnel development that occurred in the fourth quarter. Pat Kelly who has 19 years of experience with ResCare has been named President of the Community Services Group, our largest operating segment and I am proud to have him and he has hit this ground running.

Now we will briefly review the fourth quarter financials. Revenues for the fourth quarter of 2007 increased 9% over the prior year period to a record 367 million. The increase over the prior year period was due primarily to the impact of domestic acquisitions in our community services segment in late 2006 and 2007. This quarter was a 64 consecutive quarter, a period of 16 years in which revenues increased over the prior year period. Diluted earnings per common share from being operations was $0.36 versus $0.35 in the prior year period. I was especially pleased to report that our cash flows from operations increased to a record 86 million in 2007 and DSO’s down to a record 49 days.

Before I turn it over to David for a more detail review of the fourth quarter, I would like to comment on the funding in economic environment. 2008 will not be without its challenges. We will continue to face difficult reimbursement and regulatory issues. Safe budgets are already being impacted by the current economic climate. Recruiting and retaining our work forces will be critical to our success as we expand our business. We have proven over the past 34 years we can be successful in challenging the economic periods.

We are confirming our 2008 guidance of diluted earnings per common share in a range of $1.44 to $1.50, our projected revenues are approximately at $1.55 billion to $1.62 billion. The 2008 guidance assumes no reimbursement rate changes, an income tax rate of 36.5% and share based compensation expense of $0.09 per diluted share. Now I would like to turn the call over the David Miles our Chief Financial Officer. David?

David Miles

Thank you, Ralph. Fourth quarter earnings from continuing operations were $12.1 million compared with the $11.7 million in the prior year period. EBITDA for the fourth quarter of 2007 was $27.6 million versus $25.3 million in the prior year period. In the fourth quarter of 2007 diluted earnings per share from discontinued operations was less than $0.01 compared to a net loss of $0.08 in the same period of 2006. Pre tax share based compensation for the fourth quarter 2007 was $1.3 million or $0.03 per diluted common share compared to $1.4 million also $0.03 per diluted common share in the same period of 2006.

The effective income tax rate was 32.5% versus 27.3% in the fourth quarters of 2007 and 2006 respectively. The 2007 fourth quarter rate included the impact of certain tax law changes in Texas. The 2006 fourth quarter tax rate included a full year impact of work opportunity tax credits which were retractably extended by congress in December 2006.

Our community services segment reported revenues for the fourth quarter of $271 million up from $243 million in the prior year period. As Ralph stated earlier the 11% increase over the prior year period was primarily due to the impact of domestic acquisitions in late 2006 and 2007. Operating income was $29 million for the quarter up 1.6% from the prior year period. Operating margin was 10.7% compared with the prior year period margin of 11.7% and a third quarter 2007 margin of 10.5%. Operating income includes depreciation and amortization attributable to the operations.

In the fourth quarter Kelly Home Care Services operating under the ResCare home care brand added approximately $12 million to our top line with the modest contribution to operating income and our pharmacy operations added approximately $10 million in revenue also with the modest contribution in operating income.

Job Corps training services revenues for the quarter were $41.3 million which was flat compared to the prior year period. Operating income was $3.9 million in the fourth quarter compared to $4.5 million in the prior year period. Operating margin was 9.5% compared with the prior year period of 10.8 %.

Employment training services revenues were $50.5 million compared to $46.7 million in the prior year period. Operating income was $3.7 million for the quarter compared to $3.3 million in the prior year period. Operating margins were 7.2% compared to 7.1% the prior year period. For all 2007 margins were 8.7% compared to 7.4% in 2006. For 2008 we except annualized margins to continue in the 2007 range.

International results were not significant in the fourth quarter of 2007. For the Company as a whole net interest expense for the fourth quarter was $4.5 million compared with $4.7 million in the prior year period. Corporate, general and administrative expenses for the fourth quarter were $14.6 million or 4% as a percentage of total revenue compared with $15.9 million or 4.7% total revenues in the fourth quarter of 2006. Cash provided from operations for the quarter totaled $18.8 million. We closed the quarter with cash of $10.8 million. Total debt EBITDA at 12/31/07 was 2.1 times. Total capital expenditures were $7.8 million for the fourth quarter of 2007 consistent with our plan. Our current DSO is the lowest in Company history. Day sales Outstanding were 49 days as of December 31, 2007 compared with 49.5 days at September 30, 2007.

That completes our prepared remarks Jennifer please open the call to questions.

Question-and-Answer Session

Operator

The first question comes from the line of Kevin Ellich with RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Good morning guys. Thanks for taking my questions.

Ralph Gronefeld

Good morning.

Kevin Ellich - RBC Capital Markets

First of all, can we get some more color on the revenues? It looks like the last few quarters have been a little weak relative to your guidance. What caused the visibility to be off? Is it due to contract losses and if so what’s your visibility going forward on new contract wins?

Ralph Gronefeld

Are you speaking about the Company in general or are you --

Kevin Ellich - RBC Capital Markets

Yeah, as a whole.

Ralph Gronefeld

Well, in general there is a couple of things driving it Kevin. First is the timing of acquisitions. We anticipated doing the international acquisitions earlier in the fourth quarter than when we did get those deals closed. Same thing is true with the community services group. Towards the end of the year, acquisitions slow down. Folks want to spend more time with their families and those types of things and also because of tax planning issue for some of the sellers. So I think those were the two things that drove the bulk of it. We also within employment training services had Glane Indiana in that contract as far as that differs in revenue for us that should come back or will come back on a go-forward basis. So from our standpoint it’s purely timing. The positive is our revenue is fairly consistent. Without any real growth, CST revenue remains flat quarter-over-quarter.’06 to –- I mean Q3 ’07 to Q4 ’07 and that includes some seasonality that occurs with our home care business as far as holidays and those types of things when people are more with their families as opposed to receiving services. So I think that all in all the visibility of our earnings -- of our revenue is very positive and it just comes down to timing of the contracts roll out and also the acquisitions.

Kevin Ellich - RBC Capital Markets

Okay. And then just following up on that, can you talk about the international efforts, what are the plans now? How is the integration going of UK and the Netherlands and what’s the visibility on any further acquisitions on the international front?

Ralph Gronefeld

Well, right now the integration is going on. It’s in early stages. We are managing through some integration issues that you always have with a transaction of these sizes and then we are moving through those. We do feel like that we need to do at least one or two more acquisitions to build out our infrastructure and that does not mean that we are not going to be going after new contracts. We think that we can assume new contracts on a go-forward basis but we want to expand our infrastructure a little bit if we can and from that standpoint then we’ll be looking more at organic growth and adding new contracts to the international business.

Kevin Ellich - RBC Capital Markets

Okay. I will hop back in queue. Thanks guys.

Ralph Gronefeld

Thank you.

Operator

Thank you and the next question comes from the line of Kevin Campbell with Avondale. Please proceed with your question.

Kevin Campbell - Avondale

Thank you. Could you guys comment a little bit more on the revenue line with regards to Kelly. I think you said the revenues were maybe $13 million or so in the quarter or $12 million in the quarter, if I recall that’s down a little bit from the third quarter levels. Can you comment -- and I think down from maybe what the annualized levels are what people were expecting from when you made the acquisitions, so can you talk about the revenues in that segment and perhaps why they are down and what we might expect going forward?

Ralph Gronefeld

Sure Kevin. It’s Ralph again. It’s down for two reasons. One is the seasonality that occurs in the fourth quarter. The second is that this; during the fourth quarter we completed our integration getting Kelly on our systems and as you put these operations on the system then you need to focus on that integration piece and getting the operations on the system which means you take the after ball from a revenue standpoint and a growth standpoint. We are confident that going forward that we will see Kelly bounce back to our anticipated revenue range for about $55 million annualized and grow from there. We are positioned well to grow our Kelly business; our Home care business and we are very excited about the opportunities, so.

Kevin Campbell - Avondale

And just may be to follow up on that, obviously we are pretty well into the first quarter; are we seeing it return to those better levels?

Ralph Gronefeld

We have seen a bounced back. Yes.

Kevin Campbell - Avondale

Okay thank you.

Operator

Thank you and the next question comes from the line of Richard Close with Jefferies and Company. Please proceed with your question.

Richard Close - Jefferies and Company

Yes thank you. Congratulations on a good year. I wanted to ask a couple of questions here, David you mentioned something about the tax rate in the fourth quarter can you go over that really quick again, I missed that?

David Miles

It was during the quarter it was 32.5% and that is a largely attributable to a tax law change in Texas where we are going to be able to realize a benefit of certain tax credits.

Richard Close - Jefferies and Company

Okay and then on a go forward basis what is your’08 guidance assumed?

David Miles

36.5

Richard Close - Jefferies and Company

Okay. And then just really quickly on the profitability just going over some of the numbers you are through out there, community services I guess year-over-year a 100 basis point drop in that operating margin, you had what’s that a 130 basis drop on the Job Corp and essentially flat on training year-over-year operating margin. Can you -- will you just talk a little bit maybe what the change was year-over-year, what caused those decreases and then sort of gauge that your thoughts are on margin improvement going into 2008?

Ralph Gronefeld

Okay Richard let me comment about the CSG and on community services group there is two primary drivers to the margin, both have to do with revenue with very little contribution; the first was the Kelly acquisition, which generated about $12 million in the fourth quarter in revenue and others is the pharmacy which is about $10 million. So you have that $22 million in revenue with modest contribution of significantly less than 10% with those two areas. Arbor, the employment training services section that’s going to be choppy. The way we are going to have to look at this business is on an annualized basis from a margin standpoint. You’ve got some contracts that are cost based with a fee and as those cost increase, your revenues increase, but the fee doesn’t. You got some that our performance based so you are going to have incentive bonuses that you receive at certain points in time during the contract and then you have got the third which is the winding down and start ups of new contracts and then contracts that you loose. So those things that are going to drive the margins for employment training services and those are the things that we have to continue to manage through we are still coupling in the margin range around that 9% or may be a little north of 9% on a go forward basis but quarter-over-quarter it is going to be some what choppy. Job Corp is very similar into Job Corp is a cost based program plus fee and as you increase your cost your revenue goes up but your fee is going to stay relative flat as well except for the performance incentives that you may receive. So those are really the drivers of the margins for our businesses.

Richard Close - Jefferies and Company, Inc

Okay, and then just a follow up with respect to your guidance, you mentioned that I am just looking through my notes here that you are assuming no change in the reimbursement. May be if you can just sort of talk in around that assumption, you mentioned it in the funding a difficult environment and is it a situation where the assumption of the no change in the reimbursement that we still have half of the current fiscal year for most of the states still in place. Would you expect significant changes I guess for the out coming budget environment. I know here in Tennessee they have talked about cutting services to the disabled and all that, so may be you can elaborate a little bit on the funding environment and the no change in reimbursement assumption in your guidance.

Ralph Gronefeld

Sure Richard. We are probably knowing enough to understand that we are probably going to have some areas where we will get some cuts. We are going to have some areas where we are going to get some increases. As far as visibility right now, we really don’t have any visibility about what’s going to happen mid year with rates other than we know that the current economic climate is cloudy at that, that states are struggling, tax revenues are down, cost are going up and these are all issues that the state budgets are going to have to deal with. Having said that the good news is that from a adversities stand point we are very strong. No governor wants to sign a bill that’s going to reduce services for people with the disabilities if they don’t have to. It actually provides a positive climate forces as far as the tuck in opportunities because other providers are going to have the same issues they were having and so as they face those challenges it should increase our tuck in pipeline and third is it helps us from a standpoint of workforce services as far as people needing jobs, peoples being employed and trying that opportunity force as well as providing available staff for opportunity services group. So we think they we are positioned well, the manage through the economic downturn is just not going to happen and it’s just not going to happen in the reimbursement area and we are prepared for that and we will continue to fight for that and lobby our calls but at the end of day states are facing some challenges and we are going to help states face those challenges and solve some of the issues.

Richard Close - Jefferies and Company, Inc

And then just on a follow on that with respect to the Kelly or the private paid home care, how large is the private pay part of your business and what would be your best guess in terms of any impact negative from the challenging economic environment. Will that impact revenue of that business at all?

Ralph Gronefeld

Only the private paid portion of our home care business is about a $100 million Richard and we are not anticipating a big impact there. I mean it does impact because you are talking about discretionary income, the staying of that income, but the folks that we support they need the services and whether it’s long term care insurance or whether they paying for it out of their pocket or whether family members are helping they are still going to need the service. The other thing that is an advantage to us in the home care space is the fact that providing these services in folks homes are considerably less expensive than in nursing homes and as they face the budget turnovers that we are going to face they are going to have to figure our a way to maybe move some of those dollars out of nursing homes into home care which will be an apportioning force as well. Wish to anticipate a double digit growth on that $100 million in 2008. We are very positive about that piece of the business and at this point we haven’t seen any real negative because of the economic environment that exists in the private sect.

Richard Close - Jefferies and Company, Inc

Have you seen any move outs from nursing homes to the home care? Is there any legislation sort of being bambtered about?

Ralph Gronefeld

There’s a lot of session. A lot of states are looking at elderly waver, which is very similar to waver for people with disability services and so yeah, there is a lot of discussion right now as states go through the budget process to serve elderly folks in their homes and their community.

Richard Close - Jefferies and Company, Inc

Okay, thank you.

Ralph Gronefeld

Thank you.

Operator

Thank you and the next question comes from the line of Jim Macdonald with First Analysis. Please proceed with your question.

Jim Macdonald - First Analysis

Yeah, good morning guys.

Ralph Gronefeld

Good morning Jim.

Jim Macdonald - First Analysis

Could you go through how much you have got from your international acquisitions in the fourth quarter? How much of that revenue came through and that’s going to be in the other segment?

Ralph Gronefeld

That’s correct Jim; however there were no operating results for the network in Biscom acquisitions in 2007. We have elected to report operating results on a one month lag, so the balance sheet reflects the purchase price but the operating results for December which was the first month, will not be reported until the first quarter of ’08.

Jim Macdonald - First Analysis

So could you explain that a little more; will you be presenting kind of four months worth of revenue in the first quarter or how does that work?

Ralph Gronefeld

We’ll just have -- we’ll be on a one month lag and effectively on November 30, year end for the foreign operations, so for purposes of international reporting all of our foreign service will be on a one month lag which is not unusual.

Jim Macdonald - First Analysis

Okay and then, the G&A was a bit lower than I would have expected. Can you mention if there is anything unusual in the fourth quarter and kind of what your expectation is going forward?

Ralph Gronefeld

Well we did do a very good job of leveraging G&A. We had some adjustments in the fourth quarter as well to reduce some bonuses for executives as did not meet certain of our internal targets, our performance targets for purposes of incentive compensation, but as we moved forward we will expect to see that percentage of revenue go up. I think we reported 4% in the fourth quarter, 4.2% for the full year. In 2008 we would expect that to increase not dramatically but modestly as we expand monies to further develop our systems for the various home care business and marketing for the home care business, build up the international as Ralph indicated earlier and so those factors should see us increase that G&A percentage.

Jim Macdonald - First Analysis

Right thanks very much.

Ralph Gronefeld

Thanks Jim.

Operator

Thank you and the next question comes from the line of Greg Williams with Sidoti & Company. Please proceed with your question.

Greg Williams - Sidoti & Company

Good morning everyone and thanks for taking my call. You guys previously shared us a profile reacquisition pipe line, 80% home care, 20% tuck in, but now with international ETS business in the mix, can you really give us an update to that pipeline mix?

Ralph Gronefeld

We have got a couple of international that’s in that mix. It doesn’t change the percentages, excuse me Greg we are still in that 80, 20 range you know, maybe it’s 78, 20, and two or something but we don’t have a strong pipeline internationally yet. We are looking to build that so that we can make sure that if we do additional international acquisitions, they will make sense to us on a go-forward basis. So the pipeline hasn’t shifted much from when we talked about it in the third quarter.

Greg Williams - Sidoti & Company

Okay. And just following up, your acquisitions in ’06 is a little north of $100 million, in ’07 it looks like it was $70 million and I guess that makes the question what should we look for in terms of acquisition spend in 2008?

Ralph Gronefeld

2006 showed, say $100 million which included ACS, a rather large deal for us. Yes, the answer to your question generally is that we would expect to deploy our free cash flow as acquisition spend in 2008 similar to what we have done historically, ex any very large transactions that may come about.

Greg Williams - Sidoti & Company

Okay. So you’ll fund primarily using free cash flow generation?

Ralph Gronefeld

That’s correct.

Greg Williams - Sidoti & Company

Okay.

Ralph Gronefeld

And put available under our credit facility at this point in time.

Greg Williams - Sidoti & Company

Got you. And just last question, just to reiterate Ralph, did you say around 9% for ETS margins? Is it good?

Ralph Gronefeld

Yeah, that’s what we anticipate on an annualized basis and again I want to emphasize that the way the business works -- it’s just going to be choppy, it’s going to bounce around a little bit. Especially if we have the year similar in 2008 that we had in 2007, we will have a large -- some large contract wins. But yeah we are anticipating around that 9% range.

Greg Williams - Sidoti & Company

Okay, thanks.

Ralph Gronefeld

Okay thanks.

Operator

Thank you and the next question comes from the line of Newton Juhng with BB&T Capital Markets. Please proceed with your questions.

Eugene - BB&T Capital Markets

Good morning guys. It’s Eugene standing in for Newton. Most of my questions have been answered but I do want to piggyback off Richard’s question about the budget deficits that some states currently face. I was wondering if you see this as a potential catalyst for privatization of some of the Archimedes services as states look to maximize the banks for their box so to speak?

Ralph Gronefeld

Yeah, I think that’s a good analogy. I think that’s going to happen. Most states have privatized a substantial portion of their community services. Still there are states out there that did have some large buildings that they operate, that brings services to the disabilities at a higher cost than what could be provided in that community. So I think that that is an opportunity for us. I think states will look at that and determine whether or not they can make their move. The biggest challenge that states have is that the employees in those buildings are state employees and so it’s very difficult for legislatures and elected officials to basically eliminate jobs which is what would basically happen but if we could work out some type of an integration transition type of arrange where we would hire those employees, I think it could become a win-win for everybody and those are some of things that we would look at.

Eugene - BB&T Capital Markets

Okay, great. And just a couple of more questions. One, you mentioned that the Indiana contractor, there was a little bit of delay on that but Arizona, that is running at its full run rate as of Q4 of ’07, correct?

Ralph Gronefeld

Not at full run rate but it is on track with where here expectations were. It is moving as we expected.

Eugene - BB&T Capital Markets

Okay, okay and finally CapEx was a little heavy in the quarter. I think it was around 2.1% of revenue, I think previously anywhere between 1.1 to 1.3, is this kind of a good run rate to use on a go forward basis considering some of the investments you guys are planning to make in the international side of the business?

Ralph Gronefeld

Not necessarily Eugene. I think its going to level out a little bit lower than that 2.1 at the end of every year, we typically see a little bit of a spike in our capital expenditures on maintenance CapEx typically as it relates to our information systems the likes of the IBM or the world are pushing discounts on some of the network equipment so forth and we typically try and take advantage of that opportunity when it presents itself.

Eugene - BB&T Capital Markets

I see.

Ralph Gronefeld

Little bit heavy in that, little heavy in the fourth quarter of each year. We should level it out down some more in that 1.75 -- 1.5 to 2.

Eugene - BB&T Capital Markets

Okay just a one more follow up I mean I know you mentioned that G&A was a little bit lighter than your expectations based on some bonus payments that were not made out but were there any other type of reclassifications between thoughts and G&A?

Ralph Gronefeld

No, none of any consequence.

Eugene - BB&T Capital Markets

Okay great thank you for taking my calls guys.

Ralph Gronefeld

Thank you.

Ralph Gronefeld

Thank you.

Operator

Thank you and the next question comes from the line of Kevin Ellich with RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Thanks for the follow up. David can you remind us how much debt is fixed versus floating and more specifically how much is tied to LIBOR?

David Miles

Absolutely Kevin. We’ve got about 223 million in debt outstanding at the end of the year, just under one fifty of that is fixed on our senior notes settle, even 2013 we have 69 borrowed under our $250 million credit facility which is priced currently at LIBOR plus 138 and then we have miscellaneous seller notes and capital leases out there, but the bulk of that is sitting in those two transits.

Kevin Ellich - RBC Capital Markets

So you said you have 69 out of 250 on the credit facility so that you got 180 of dry powder for acquisitions?

David Miles

We’ve got 51 under letters of credit for insurance program which leaves about 130.

Kevin Ellich - RBC Capital Markets

130. Okay.

David Miles

And then you know I want to make sure that you understand we obviously some working capital needs inter-month, working capital needs that would dig into that to that availability.

Kevin Ellich - RBC Capital Markets

How much would that account for?

David Miles

Anywhere from 30 million to 40 million.

Kevin Ellich - RBC Capital Markets

Okay at least a 100 million off the credit facility, got it and then in the prepared remarks during the press release you guys made a comment about the acquisition market place and valuations. Can you talk about how the valuations have -- what we are seeing in the acquisition front and the valuations change over the last 12 months and what’s your expectation for 2008?

Ralph Gronefeld

Yeah this is Ralph, Kevin. The acquisition pipeline has remained pretty consistent, valuations as well between that 4 to 5 multiple of EBITDA range. We have not seen any pressure today on the valuation of the acquisitions and we anticipate it to go forward and this is the climate that we have seen not only in 2007 but 2006 as well and even prior to that. There’s not many players out there; that provides an exit strategy for other providers in our space and we are able to buy at this four to five range pretty consistently. We look to be able to continue that.

Kevin Ellich - RBC Capital Markets

Would the valuation be the same internationally or is the dynamic different.

Ralph Gronefeld

I would -- well, we anticipate that the international of course be in that range, maybe it might creep up into the fixed area depending on the acquisition but now we are looking for that to stay in that same general range.

Kevin Ellich - RBC Capital Markets

Okay excellent, thanks guys.

Ralph Gronefeld

Thank you

Operator

Thank you and we have a follow up question from Kevin Campbell with Avondale. Please proceed with your question.

Kevin Campbell – Avondale Partners

Thanks. I just wanted to ask you on the international front with regards to the revenues that perhaps you earned in December but didn’t book in the quarter, can you give us an idea was it about and I think you said the annualized revenues for those two acquisitions was $35 million, so is that about $3 million maybe per month, would that be about right looking at the potential revenues that you didn’t necessarily book on the income statement in the fourth quarter.

Ralph Gronefeld

No Kevin as with other employment services. There is ramp ups for contracts the revenues going to be some what bouncing around little bit for all the same reasons with employment services, so with $35 million as an annual number that we anticipate ramping up to in 2008.

Kevin Campbell – Avondale Partners, LLC

Can you give us a better sense of what the number was in December even if you didn’t book it on your income statement?

Ralph Gronefeld

It was in a $2 million range.

Kevin Campbell – Avondale Partners, LLC

Okay, thank you.

Operator

We have a follow up question from Richard Close with Jefferies and Company. Please proceed with your question.

Richard Close - Jefferies and Company

Yeah, I was wondering if you could talk about the organic growth may be by division, what is sort of implied in your guidance for 2008.

Ralph Gronefeld

Yeah Rick, this is Ralph; CSG community services we are looking at a 3% to 4% organic growth rate, we hit 3.37% for the year in 2007, so we are going to bump that up a little bit but that, it’s in 3% to 4% range. Employment training we had a pretty significant organic growth if you look at the last half of the year versus last half of the last year from the new contracts that we won in 2007 versus the contracts that we lost in 2006. So the annual number of the growth doesn’t reflect where we are and we are looking at it, winning a few contracts and losing a few, so there is going to be some growth in that arena. I would say that it’s going to be substantial, but it’s probably going to be in that low single digit range as well on the employment training services. Job Corp will be basically flat from a revenue stand point and then the scores international again as we give the infrastructure within an international, we look at growing that business as well.

Richard Close - Jefferies and Company

And then with respect to the earnings guidance obviously a lot of talk of inflation and all that here recently although it’s been existent prior to all the press here and I'm sure you guys have been feeling it. Has that -- any rise in cost, has that been incorporated into your guidance previously and maybe some thoughts in and around any pressures that you are seeing throughout your business?

Ralph Gronefeld

Richard, we are seeing increased cost pressures as everybody is seeing those cost pressures, from insurance to gas and oil to utilities to wage pressures, even dietary, we are seeing dietary pressures from a cost standpoint and with all that being baked into our guidance, we anticipate growing as we have in the past, growing through tuck in’s, growing through home care, adding higher margin business to kind of combat those cost increases and we have done an effective job of doing that in the past and we anticipate that we will continue to be able to do an effective job of doing that through 2008, but there is no doubt that if we weren’t growing the business we would see margin contraction because of the increased costs.

Richard Close - Jefferies and Company

Okay, is there anything specific that you are doing or maybe that is benefiting margins and offsetting some of those costs increases?

Ralph Gronefeld

Really the only thing is growth, Richard. I mean back in 2001, you may remember we really did an incredible job of putting systems in place to help us become as efficient as we could. Those systems have been around for a few years now. They have done a good job for us, we are doing the same thing on the home care. We are implementing systems that will help us get the information to effectively manage that business on a day-to-day basis. That will help for the $100 million worth of private pay that exist today and will help us grow that business but we are pretty lean and mean and we have run a pretty tight shop and so the reality of it is that we are going to combat the compressed margins and increase positive growth.

Richard Close - Jefferies and Company

Okay. And then I guess one final question. We saw Provident Services Corp, another company we cover here do an acquisition of a company called LogistiCare which essentially got them into a new business line. Don’t -- obviously don’t -- not going to ask you directly whether you looked at their business but is there anything in your pipeline that might be a different potential service offering or something that you would consider out of your normal wheel hour so to speak of your community services group or Job Corps or training, employment training?

Ralph Gronefeld

Currently our focus is diversifying revenue through growing private-pay and growing international and that’s really our focus right now. As we look at potential acquisitions and ancillary businesses such as pharmacy which we are growing that business as well, we will evaluate those and see if there is a good fit. Now the primary thing that we are going to look at on any expansion of services is; A, does it -- number one, does it meet our missions, does it assist people and obtaining their highest level of independence, and B, do we have the core competency to do the service. If we get past those two hurdles then we are willing to look at anything that would fit. I would say that currently in our pipeline is as I mentioned the bread and butter tuck in to the home care is what makes up the primary portion of our acquisition pipeline.

Richard Close - Jefferies and Company

Okay thank you very much and congratulations again.

Ralph Gronefeld

Thanks Rich we appreciate it.

David Miles

Thanks Rich.

Operator

Thank you and the next question we have comes from the line of Hank Ralsh with Liberty Mutual. Please proceed with your question.

Hank Ralsh - Liberty Mutual

Good morning thank you. I had to drop off the call for a second so I might have missed this but I was wondering if you could comment a little bit on recruiting and retaining employees and how the economic environment may help or hurt your ability to do that?

Ralph Gronefeld

Hi this is Ralph. Actually during the economic downturn us being able to track the employees actually does help, it helps us retain employees during when the economy is growing and booming as more of a challenge for us and so we would be able to manage that more effectively during the downturn as far as having more folks available to do the work that we asked him to do, reduction in turn over and possibly reduction over time and those things become available to us and the other piece is in our employment services group there is more folks out there to meet our services and need help finding employment so from our standpoint I think that we are good defensive play for a down economic climate.

Hank Ralsh - Liberty Mutual

Great thank you.

Ralph Gronefeld

Thank you.

Operator

Thank you and Mr. Gronefeld, te are not further questions at this time I will now turn the call back to you. Please continue with your presentation or closing remarks.

Ralph Gronefeld

Thanks Jennifer. We commend our management team and employees for all their hard work in 2007 and we look forward to pass the 2008 operating results. We have robust pipeline and anticipate that the acquisition market place will remain favorable valuations reasonable. We will continue to diversify and broaden our ResCare security and growth strategy acquiring small providers primarily in home care intellectually and development disability sector and the international job training assistance markets. In addition we will continue to expand our existing home care business and bid for new contract and expand service offerings in our existing contracts. Well, I thank you for your interest and support in our Company and I look forward to talking with you again at the end of the first quarter. Thank you, Jennifer.

Operator

Thank you ladies and gentlemen that does conclude the conference call for today we thank you very much for your participation and we ask you to please disconnect your lines.

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Source: ResCare, Inc. Q4 2007 Earnings Call Transcript
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