Res-Care, Inc. Q1 2008 Earnings Call Transcript

May. 8.08 | About: Res-Care Inc. (RSCR)

Res-Care, Inc. (RSCR)

Q1 2008 Earnings Call Transcript

May 8, 2008 9:00 am ET

Executives

Derwin Wallace – Director of IR

Ralph Gronefeld – President and CEO

David Miles – CFO

Analysts

Kevin Ellich – RBC Capital Markets

Kevin Campbell – Avondale Partners

Eugene Goldinberg – BB&T Capital Markets

Tom Smith – First Analysis Corp.

Richard Close – Jefferies & Co.

Paul Nouri – Noble Equity

Greg Williams – Sidoti & Co.

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the ResCare First Quarter 2008 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, May 8, 2008.

It is now my pleasure to introduce Ralph Gronefeld, President and Chief Executive Officer. You may go ahead, sir.

Ralph Gronefeld

Thank you, France. Good morning and welcome to the conference call reviewing ResCare's results for the first quarter ended March 31, 2008. I am here today with David Miles, our Chief Financial Officer, and Derwin Wallace, our Director of Investor Relations who will now present our forward-looking statement. 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 first quarter 2008 earnings release has been distributed to the financial media, filed with the SEC, and is posted on our web site, 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 acquisition 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. The first quarter of 2008 was an excellent start to the New Year. We are pleased with our operational results. ResCare's leadership team has demonstrated their ability to manage through reimbursement and regulatory environments. We were able to achieve double-digit revenue growth and improve profitability year-over-year. Our growth can be attributed to the domestic and international acquisitions, new contract awards, and the expansion of service offerings on existing contracts.

During the first quarter of 2008, we completed three acquisitions, adding annualized revenues of approximately $10 million. Of note, during the quarter, we acquired Kids in Focus, a Virginia-based residential diagnostic and therapeutic program for children in crisis. Annual revenue is expected to be approximately $6 million.

We are proud to announce that ResCare's Excel schools have received three contracts in Louisiana; top-rated schools have not met the state's standards. Excel schools are providing improvement plans and helping schools to obtain their academic goals. We expect annual revenues of nearly $2 million from these new contracts.

After the quarter, we closed the acquisition of Select Health Care Services, a home healthcare agency located in Texas and serving people in 30 counties in the Houston area. Select Health Care Services is expected to generate $7 million in annual revenues. In April, we also closed on homecare businesses in California, Florida, and North Carolina with combined annual revenues of $9 million. Year-to-date, we have closed nine transactions with annualized revenues totaling $28 million.

Through our Job Corps operations, the company was awarded a $14 million, two-year contract by the U.S. Department of Labor to continue operating the 300 student Tulsa Job Corps Center in Tulsa, Oklahoma. The term of the contract is from June 1, 2008 through May 31, 2010, with three one-year options for renewal. The Tulsa Job Corps Center has been operated by ResCare since 2003.

On our Workforce Services front, Arbor Education and Training has received an 18-month contract with another 18-month renewal option to continue as a contractor to the New York City Human Resources Administration relating to its WeCARE program. Revenues to be $32 million annually. Arbor was originally awarded the contract in December 2004.

We appreciate the continued partnership with New York City's Human Resources Administration in this ground-breaking effort to address the employment and health needs of its most vulnerable populations.

I am also pleased to report that seven of the company's direct support professionals have been awarded top state honors from ANCOR in the organization's annual national "Direct Support Professional of the Year" awards. ANCOR, American Network of Community Options and Resources is a national providers organization that advocates for the rights of people with disabilities and for better wages for the caregivers who support them. Direct support professionals provide critical services to people with developmental, intellectual, and cognitive disabilities.

Now, we will briefly review the first quarter financials. Revenues for the first quarter of 2008 increased 11% over the prior-year period to $375.4 million. This quarter was the 65th consecutive quarter, a period over 16 years, in which revenues increased over the prior-year period. Diluted earnings per common share for continuing operations increased 16% to $0.36 versus $0.31 in the prior-year period.

We are confirming our 2008 guidance of diluted earnings per common share in the range of $1.44 to $1.50 on projected revenues of approximately $1.55 billion to $1.62 billion. The 2008 guidance assumes no reimbursement rate changes, an income tax rate of 36.5%, and a share-based compensation expense of $0.09 per diluted share.

Now, I would like to turn the call over to David Miles, our Chief Financial Officer. David?

David Miles

Thank you, Ralph. First quarter earnings from continuing operations were $12.1 million, compared with $10.3 million in the prior-year period. EBITDA for the first quarter of 2008 was $28.9 million versus $25.4 million in the first quarter of 2007. In the first quarter of 2008 and 2007, diluted earnings per common share from discontinued operations was a net loss of less than $0.01.

Pre-tax share based compensation for the first quarter of 2008 was $1.1 million, or $0.02 per diluted share, compared to $1.6 million, or $0.03 per diluted share in the same period of 2007. The effective income tax rate was 36.5% versus 36.7% in the first quarter of 2007.

Our Community Services Group reported revenues for the first quarter of $268.9 million, up from $244.6 million in the prior-year period. The 9.9% increase was primarily due to the impact of acquisitions. Operating income was $29.6 million for the first quarter, up 6.5% from the prior-year period, and operating margins was 11%, compared with 11.4%. Operating income includes depreciation and amortization attributable to the operations.

Job Corps Training Services revenue for the quarter were $41.7 million, flat with 2007. Operating income was $3.1 million in the first quarter, compared to $2.9 million in the prior-year period. Operating margins was 7.4%, compared with 7%.

Employment Training Services revenues were $53.1 million compared with $46.7 million in 2007. The 13.7% increase was primarily due to new contract awards and the expansion of service offerings on existing contracts. Operating income was $4.9 million for the quarter compared to $3.1 million in the prior-year period. Operating margins were 9.3% compared to 6.6%. The increase is attributable to improved contract performance during the quarter and the ramp up of contracts that had startup costs in 2007.

The other segment, which includes alternative education and international operations, posted revenues of $11.8 million, compared with $5.5 million in 2007. The increase was primarily due to the international acquisitions of Maatwerk and Biscom. Revenues from our international operations were $7.1 million during the quarter and contribution was modest as a result of integration and startup costs.

For the company as a whole, net interest expense for the first quarter was $4.6 million, compared with $4.5 million in the prior-year period. Corporate, general, and administrative expenses for the first quarter were $14.8 million, compared with $13.1 million in the first quarter of 2007. Both periods were 3.9% of total revenues.

Cash provided from operations for the quarter totaled $20.8 million. We closed the quarter with cash of $16.8 million. Total debt to EBITDA at March 31, 2008 was two times.

Total capital expenditures were $4 million for the first quarter of 2008, consistent with our plan. And I am pleased to report that we were able to maintain our DSO of 49 days during the quarter.

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

Question-and-Answer Session

Operator

Are we ready for questions, sir?

David Miles

Yes, please open the call for questions.

Operator

Thank you very much. (Operator instructions) Our first question is coming from the line of Kevin Ellich from RBC Capital Markets. You may go ahead, sir.

Kevin Ellich – RBC Capital Markets

Good morning, guys. Thanks for taking the questions. I guess it looks like you are making a headway in the home care and home health businesses. Can you talk about those businesses that you acquired in the first quarter, and any characteristics that you are willing to provide? And also what the pipeline for the home care segment looks like for the remainder of the year?

Ralph Gronefeld

Yeah, Kevin, this is Ralph. The characteristics of the acquisitions in the first quarter for our home care and especially in April mirror what we have been doing historically. Select Health Care does have a piece of it that's Medicare, which is not necessarily unusual, per se. We have got some of our other operations that have some Medicare piece, but it's only approximately 30% of the total business, and that's the comfort level that we are okay with.

As far as the pipeline, the pipeline continues to be strong in health care – home care, I am sorry, at approximately 80% of the total acquisition pipeline that we currently have.

Kevin Ellich – RBC Capital Markets

Okay. And then have you guys provided any guidance in the past about how much you think home care will contribute to 2008 revenues or operating income?

Ralph Gronefeld

Well, historically, we have talked about that. Currently, our run rate is about $300 million in home care. We anticipate growing that business in the high-single digit, low-double digit rate, combined, both organically and through acquisitions.

Kevin Ellich – RBC Capital Markets

Excellent. That's helpful. And then, also the international operations, I was wondering if we could get any update on how the integration process is going, if it's – work is completed. And also, what's your thoughts are on expanding the international business?

Ralph Gronefeld

Sure, Kevin. The international integration is progressing, it is moving forward. It's not complete. We still have some challenges and opportunities to get it fully integrated, but we are working through those. We did see improvement month over month during the first quarter as we integrated the operations. We want to make sure that we do get them integrated, we do have them operating, as they should, before we look at future growth, but our goal is to grow. This has established our platform in the European Union for growth in Workforce Services, and we anticipate doing that through the course of the year, both by looking at additional acquisitions and looking at new do contract awards.

Kevin Ellich – RBC Capital Markets

Okay. And then just looking at the ETS business, if I do the math right, it looks like the operating margin improved significantly sequentially and both year-over-year. Is that due to better rates or what's going on in that segment?

Ralph Gronefeld

There is a couple of factors. I would say that probably the – first off, as we mentioned in the last call, last conference call for the fourth quarter, we are going to see some ups and downs in the margins for Workforce Services. You are going to have startups of new contracts, you are going to have ramp downs of old contracts, those types of things. You are going to have performance-based incentives that we receive at certain points in time. And we anticipate on a smoothing out basis to be in that 8.5% to 9.3%, 9.5% range as far as our margins are concerned and that's were we ended up in the first quarter this year. Compared to the first quarter of last year, primarily it was startup cost associated with our new contracts in Arizona and in Indiana, and also the ability to win new contracts that helped us expand that margin year-over-year.

Kevin Ellich – RBC Capital Markets

Okay. And then last question, what are you guys seeing on the reimbursement and funding side of the business from various state budgets? Have you picked up anything new or any increased pressure from any of the states?

Ralph Gronefeld

I think that the pressure has increased on state budgets since our last call, not enough to give us any concern that we are going to do anything except be flat from a reimbursement standpoint this year. We continue to work with states that – where they pop up with challenges and work through and try to as best we can at least keep our rates where they are as mentioned when we did – we talked about our guidance that we do anticipate some states having some cuts and some states having some increases, but in the aggregate we are very comfortable with it, we are going to remain flat at this point in time.

Kevin Ellich – RBC Capital Markets

Okay. Thanks, guys.

Ralph Gronefeld

Thank you.

Operator

Our next question is coming from the line of Kevin Campbell from Avondale Partners. You may proceed, sir.

Kevin Campbell – Avondale Partners

Thanks. Just a follow-up on the states and the budget outlook. Could you comment at least generally on some your larger states? I know Texas, or California, Florida, maybe what the outlook looks like there? I guess Texas only meet every other year, so perhaps that was already set. So if can give us an idea as to maybe how some of your larger states are shaking out if they have already passed their budgets?

Ralph Gronefeld

Yes, yes, sure Kevin. Well, Texas, you are right. They are on a two-year budgetary cycle, and we did get a rate increase last year from Texas, which will carry us through – all the way through the next year. Kentucky is our second largest state within CSG. That's going be flat as we know it now. They are talking about having some new slots come out to expand people in service, but that's yet to be seen. Indiana, which is currently our largest state within Community Services, we anticipate there – to be flat in the state of Indiana. Georgina, we are currently working and we don't anticipate any (inaudible) in Georgia. And in Florida, Florida is a challenge for us. Florida is a challenge for us not only within Community Services, but also within Employment Training Services. Florida's budget is very challenging for them right now, and we continue to work hard to keep revenues at least flat, keep our rates at least flat, and so far that' where we are, but it's a moving target and Florida is scramming [ph] a little bit do deal with some of their economic issues. The same is true with North Carolina. North Carolina is having some economic issues both from a budgetary standpoint and with CMS and Medicaid and we are working hard with that state to maintain status quo as well.

Kevin Campbell – Avondale Partners

Okay, thank you. And looking at the ETS segment, any early color on what the procurement cycle looks like there for July 1, any contracts already been awarded or lost? And how many are you bidding on? Some details there would be helpful.

Ralph Gronefeld

Well, just kind of top level, we expect that approximately 20% of our contracts will be up for re-bid during the course of 2008 July 1 and to the balance of the year, which is approximately $40 million. The contracts win to-date have been minimal. We have won contracts and we are on the plus side, but it's been minimal. And the cycle will begin here mid-year, and we are confident that we'll do fairly well with those renewals.

Kevin Campbell – Avondale Partners

Okay, and then looking at Kelly Home Care, can you give us an update on how that's looking? Did it – did we see sequential improvement here in the first quarter in terms of revenues?

Ralph Gronefeld

Well, Kelly, during the last six months, the last three months of last year, and the first three months of this year, we have really accelerated the integration once we got them on our systems. And so we closed branch offices, rolled them up into our current home care businesses, Southern Care. Kelly by itself now would not really tell a good picture because they are rolled up into other operations. But, I will tell you that home care was flat with the fourth quarter. We did a see it bounce up towards the end of the quarter, a lot of that seasonality, November, December, January as far as holidays. Some of it is just focus, us focusing on integrating offices and those types of things. But we are comfortable with it on a go-forward basis. We will continue to grow that business.

Kevin Campbell – Avondale Partners

Okay. And then, lastly, looking at the (inaudible) contracts in Indiana and Arizona, could you give us some color as to how those are ramping?

Ralph Gronefeld

Okay, sure. Arizona is fully operational, fully ramped up as of the first quarter. Indiana is progressing, and we anticipate that it will be fully operational about mid to end of the fourth quarter of this year.

Kevin Campbell – Avondale Partners

Okay. So you said mid to the end of the fourth quarter?

Ralph Gronefeld

Yes.

Kevin Campbell – Avondale Partners

Okay. Thank you very much.

Ralph Gronefeld

Thank you.

Operator

Our next question is coming from the line of Newton Juhng from BB&T Capital Markets. You may go ahead.

Eugene Goldinberg – BB&T Capital Markets

Good morning guys. This is Eugene standing in for Newton. Just a couple of questions. On the CSG segment, that showed some solid operating margin improvement, but can you just provide a little bit of detail behind the sequential decline in revenue and what may have caused this?

Ralph Gronefeld

Well, sure. I mean there is nothing about our first quarter revenue in CSG that creates any sense of alarm for us at all. Historically, we have seen first quarter revenue either slight tick up or slight tick down from the fourth quarter for a couple of reasons. One, you have got the number of days that decreases in the first quarter and two, it always takes a little bit of time to ramp up our acquisitions after the holidays and after folks have spent time with their family (inaudible) to get it ramped back up. So, historically, we have seen revenues in CSG dip 50 basis points, to increase 50 basis points, but it's never been a bigger move than that over the history of Community Services. So, we are not alarmed by that at all.

Eugene Goldinberg – BB&T Capital Markets

Okay, good, great. And can you just talk a little bit about the recent pick up of (inaudible) and Select Health and has there been any change in your acquisition strategy to kind of more high-touch skilled care?

Ralph Gronefeld

No, not necessarily. We see that as just a natural extension of our services, our community care. From our standpoint, if we are providing services to somebody in their homes that needs certain – they have certain needs whether they pay us private pay, Medicaid or Medicare, we are going to be able to provide those services. We are not looking at really becoming a home help agency at all. We still want to stay with the care piece. But it's a natural extension of what we are doing. And as an example, if we had a (inaudible) that was operating 30% private pay and 30% Medicaid, and 30% Medicare, we wouldn't be excited about that at all other than the fact we have been providing services to multiple payors.

Eugene Goldinberg – BB&T Capital Markets

I see, okay. One more thing. We saw margins improve nicely in both CSG and ETS, but Job Corps was a little bit low. Seasonality aside, do you see kind of that stabilizing at current levels or kind of tick back up right away?

Ralph Gronefeld

Well, again, Job Corps is a management contract. And so, that margin is going to fluctuate based on how dollar is (inaudible) because that – revenue is driven by cost plus fee. So, if you spend more, even in higher revenues, which is going to decrease the margins because your fee stays the same. If you spend less, you are going to have lower revenue, which will increase the margin because your fees stays the same. So, it's basically a – it's a management fee and so the margins are just – they are going to stay in that 7% range historically as we have seen it with the reallocation of some G&A that we did (inaudible) G&A that we did to Job Corps, but it's going to stay right in that range.

Eugene Goldinberg – BB&T Capital Markets

Okay, great. Thanks for taking my questions guys.

Ralph Gronefeld

Thank you.

Operator

Our next question is coming from the line of Jim Macdonald from First Analysis. You may go ahead.

Tom Smith – First Analysis Corp.

Hi, it's Tom Smith in for Jim. On the revenue and EPS, you had mentioned in the past that you received incentive payments. I just wanted to see if there were any one-time incentive payments in this quarter's results?

Ralph Gronefeld

No, Tom.

Tom Smith – First Analysis Corp.

Okay. Going back to the international acquisitions, I had expected there to be some minority interest component associated with that with your acquisitions. Where is that being classified?

Ralph Gronefeld

It's in other income. It's not broken out in our income statement that's on the press release. It's – at this point, it's immaterial and I believe it's buried in corporate, general, and administrative expenses.

Tom Smith – First Analysis Corp.

Okay. And then I just want to talk about the WeCARE contract. It seems that you were able – well that came up for renewal earlier than we had expected. Is there anything – just can you comment on that why that may have happened, if that's the case?

Ralph Gronefeld

I am not sure if that' true.

Tom Smith – First Analysis Corp.

Okay.

Ralph Gronefeld

I think it followed the time table that we anticipated back in 2004. It was a three-year contract. Came for renewal in 2007, and we got all the paper work everything approved here in early 2008.

Tom Smith – First Analysis Corp.

Okay. Okay, great. Then, I think you had mentioned reclassifying some G&A. G&A was flat sequentially, was it? Were you able to improve? That came in a little lower than we had expected. Anything in particular or–?

Ralph Gronefeld

No. We just continue to manage our G&A effectively and I think that we did do so re-classes, but we re-classed the period for comparative purposes. So, what you are saying is comparative from a re-class standpoint. We continue as our business model is predicated on growth and leveraging our indirect and G&A cost and we continue to implement that business model.

Tom Smith – First Analysis Corp.

Okay, great. Thanks a lot guys.

Ralph Gronefeld

Thank you.

Operator

Our next question is coming from the line of Richard Close from Jefferies & Co. Please go ahead, sir.

Richard Close – Jefferies & Co.

Yes, thank you. Congratulations on a good quarter. Quick question, I guess, with respect to the pipeline, you had mentioned 80% is on the home health side of things. What don't you remind us again on the difference in I guess profitability, operating margin of home health versus regular group home business.

Ralph Gronefeld

Okay, sure. And it's not home health, Richard, it's care. We are still focusing on home care.

Richard Close – Jefferies & Co.

Home care, alright, sorry.

Ralph Gronefeld

That's okay. The margins are slightly higher, 200 to 300 basis point at the gross profit area. The real – there is a couple of real advantages that we have with home care. The first is this, we are growing the private pay piece, which is market driven and not subject to state budgets. I mean as we see cost increase such as gas increasing right now, as your pizza guy comes to your door and has a tack on fee for increased gas, we can kind of do the same thing in the private pay arena if we need to, which we can't do that with the states and the rates set by the state. So that's an area that's exciting for us. The second is that it's very low fixed cost. You provide an hour of service you get paid for an hour service as opposed to group home business you have got fixed cost with the home, you've got fixed cost with the utilities. You've got the dietary. You've got all those things associated in the group home business. That will drive cost and also will create issues for you if you have vacancies in those homes where with us if we don't provide the hour of service we have got little bit – very little cost for not providing that hour of service. So, that's the primary differences between the two lines of business. And again, we are providing services not only in home care, but also people with developmental disabilities, people with other disabilities, kids, people that need rest bed and supports after a long stay, all kinds of things like that. So it really does increase our market as well.

Richard Close – Jefferies & Co.

Okay. And then when we look at the 80% of the pipeline being home based, how is that divided between I guess the MR/DD services home based versus maybe elderly care?

Ralph Gronefeld

Of that 80% I'd say that 70% to 75% is elderly with small drops in there for people with developmental disabilities.

Richard Close – Jefferies & Co.

So, 70%, 75% is really on the sort of diversified elderly care?

Ralph Gronefeld

Yes.

Richard Close – Jefferies & Co.

Okay. And then when we think about the $300 million in run rate, first of all, how does that compare, if we took a step back to a year ago, what was your run rate in home care versus that $300 million? And then second of all, with respect to – well help me with that first.

Ralph Gronefeld

A year ago we were approximately slightly north of $200 million.

Richard Close – Jefferies & Co.

Okay. And is there a reason why you are seeing more on the elderly front than I guess the MR/DD, which was your first entrance into the home care side of things?

Ralph Gronefeld

Well, yeah, I think well there is a couple of reasons. One is that's an area that we are focused on as far as diversifying our revenue going towards private pay. Second is that not all states have waivers that allow in home service to people with disabilities. And then the third is that we have got some large states with (inaudible) services providing services for people with disabilities that will be very difficult to grow anyway just because we got a such a high percentage of market share. So, those three things are kind of driving I think the pipeline analysis [ph] right now.

Richard Close – Jefferies & Co.

Okay. And then the private pay was – I wanted to touch base on as well – how much of the $300 million in run rate is private pay?

Ralph Gronefeld

Right at a third, about $100 million.

Richard Close – Jefferies & Co.

Okay. And then I guess some pretty open-ended questions. As we sit here today, what is your – what are you most excited about in terms of the business and the opportunities that lie ahead and what are you most concerned about?

Ralph Gronefeld

Well, I am very excited about our pipeline. It remains very, very strong and even during tough economic times we are seeing our valuations remain what we have seen in the past. I am excited about the opportunity internationally as a way to, again, diversify our revenue streams. Very excited about that. The current economic environment creates some opportunities for us from a staffing perspective within Community Services, tuck-in opportunities within Community Services as the smaller providers are struggling with the current increased cost and flat rate environment. So, those are things that we are very excited about.

The things that create concern for us is the reimbursement climate, the pressure on, not only state budgets, but also the federal budget as it relates to employment training and CMS. We are – one of our challenges is controlling our cost. Gas is increasing. Facility cost is increasing. We have got an increased dietary. We haven't seen inflation in the dietary arena for several year since I have been here at ResCare. We are starting to see some pressure on that. So, we have got some increased cost. We think that our business model, which would grow and (inaudible) leverage, our indirect cost and our G&A will offset those cost increases. And then that's where we are focused on. It's a balancing act. There is plenty of opportunities out there for us and there is plenty of challenges and we just need to make sure we take advantage of the opportunities and focus on the challenges.

Richard Close – Jefferies & Co.

Would you – I guess your opinion here as we sit today. Do you feel more comfortable with your business here in May 2008 versus the year ago?

Ralph Gronefeld

More comfortable, I will say that I am as comfortable as I was a year ago. I think that there is – may be a year ago I may have been a little more excited about our opportunities because of the economic environment and being able to take advantage of those opportunities. Now I may be a little more cautious of making sure that we take advantage of those opportunities while at the same time focus on our work (inaudible) done on a daily basis as far as providing services and taking care of our staff. So, I mean, I am still very, very high on where we are. I think we have positioned ourselves extremely well by growing in private pay, home care, by getting the international acquisition down late last year, our very strong conservative balance sheet. I think we are positioned very, very well to weather through the economic environment that we are in right now. Anybody that would say they are more excited today than they were a year ago no matter what business you are in I think would – I'll have to ask them why, but I am not concerned. And I think that that's important that people understand that we have got a business model. We have got plenty opportunities out there and we are both a growth play and we can be a defensive play in a down market.

Richard Close – Jefferies & Co.

And then one final question I guess may be if you can give us an update on the pharmacy side of the shop as well as the – what's that other initiative you have going with remote monitoring.

Ralph Gronefeld

Rest Assured, yeah. The pharmacy performed very well in the first quarter. We were at a run rate of about $40 million in revenue. We generated about 5% margin, I think, in the first quarter. So, it's in the black. It – our Virginia pharmacy that we opened up late last year achieved breakeven. Our Kentucky pharmacy is doing well. Texas pharmacy is doing well. We have continued to add what we call non-affiliate business for competitors who want to purchase our pharmacy services from us. And we will continue to focus on that long term and also we will be opening up one or two more pharmacies this year. So, that's going extremely well.

Rest Assured, we have got tremendous opportunities out there on Rest Assured. We continue to hear (inaudible) positive feedback in presentations that we make. We have met with CMS during the fourth quarter of last year to make sure that they understood what the services are provided by the remote monitoring and they were acceptable to those services. They told us how we can help states get their written into their waivers. And so we are working on that. It's also an opportunity for us in the private pay elder care market as well. We do have one pilot going in Florida right now that's doing very, very well. And so I think that we anticipate a pop in that at some point during this year based on all the positive feedbacks that we have been getting over the last several months.

Richard Close – Jefferies & Co.

And then, going back to the pharmacy, where do you expect that 5% margin to go over time?

Ralph Gronefeld

Well, it's going to move up and down because as we open new pharmacies and have startup cost with those pharmacies it will go down. And then we'll get up too. It's going to be a long-term process before it gets up to that 7.5% to 9% range that everything is fully loaded and fully operational because we have got 38 states that we want to be in from a pharmacy standpoint and that's going to take us some time to do. But as we continue to grow it that 5 will tick up, it may go down to 4 or 3 as we open, going up, and then it will level out at a 5, then it may go up to 6, and drop down to 5, may go up to 7, drop down to 6. That's kind of what we are anticipating long term.

Richard Close – Jefferies & Co.

Okay. Thank you.

Operator

Our next question is coming from the line of Paul Nouri from Noble Equity. Please go ahead.

Paul Nouri – Noble Equity

Hi, you mentioned before that you were having potential reimbursement issues in Florida and North Carolina. We would be interested in knowing what percentage of sales that represents?

Ralph Gronefeld

Well, Florida is our largest state for the company and that's about 5.7%. North Carolina is not in our top list for Community Services, so it's going to be in that 5 or less range as well.

Paul Nouri – Noble Equity

So, even if there is reimbursement issues spread across so many states that had – the risk is spread I guess?

Ralph Gronefeld

Yeah, I mean again part of our diversification. That in case is in – currently we are 38 states, you got different Medicaid issues, different issues. And again, that's why we can say that we think that we are going to be flat in the aggregate with some states down and some states up.

Paul Nouri – Noble Equity

And as far as future acquisitions are most of those going to be outside of the U.S. now or–?

Ralph Gronefeld

No, no, not at all. We are very bullish on our domestic opportunities and we are not looking at really accelerating acquisition internationally until we have got integrated and performing and we are going to do with some caution, make sure we have got some success and then kind of go from there. So, I would – well, we will continue to focus domestic acquisitions through the course of 2008.

Paul Nouri – Noble Equity

And I am not sure if you mentioned it before, but why was the Community Services margin pressured year-over-year?

Ralph Gronefeld

Just primary increased cost, the bulk of it in the area of insurance.

Paul Nouri – Noble Equity

Okay.

Ralph Gronefeld

But I do want to comment on our margins. We did bring our margins back up to the range. It did improve over Q4 and that was because our home care operation, primarily the acquisition, the Kelly acquisition we did last year where we did get our margins what we anticipated because of the full integration – integrating that operation.

Paul Nouri – Noble Equity

All right, great. Well, thank you.

Ralph Gronefeld

Thank you.

Operator

Our next question is coming from the line of Greg Williams from Sidoti & Co.. Please go ahead.

Greg Williams – Sidoti & Co.

Thanks guys, and thanks for taking my call. Just wanted to get a handle on these cost pressures. Maybe you can give me a rough guess as to what percentage of your income statement is fuel versus facilities versus dietary.

Ralph Gronefeld

Dietary is in the 1.5 range, fuel is not even really on the radar screen. In supply, the total supplies is about 4, fuel is less than 1% of that. Facility cost runs – total facility cost runs about 10% and with rent running 3% to 4% and so we are not talk – again, our biggest cost in our area of business is our people, wages, and benefits. So, we are not talking about big dollars here. We want to talk about cost pressures in these areas. But they still have an impact as we move forward, but we are – we are talking about – in most cases. The minimum is may be 50 basis points here, 30 basis points there as far as what the impact would be.

Greg Williams – Sidoti & Co.

Okay, thanks. And, David, have you talked to the banks? I know you said briefly that the banks have restricted covenants on your abilities to authorize a share buyback plan. Are you in talks with them renegotiating that?

David Miles

Not at this time, Greg. We are – we do have a basket within our current facilities to – up to $5 million worth. But as we have stated before, our strategic goal is to deploy the free cash flow back into the business in the form of acquisitions. I mean our pipeline is robust, the pricing is good, and we really don't have an interest at this point of going back to the banks and trying to renegotiate a larger basket for repurchases.

Greg Williams – Sidoti & Co.

Okay. And just one last question on the international front. Are the contracts in general structured the same way, cost plus or cost plus performance?

Ralph Gronefeld

Yeah, the contracts look very similar to the contracts that we have here in the U.S. Most of them are performance based and – with incentives and minimum performance requirements. So they look very similar to what we have been doing here in the U.S.

Greg Williams – Sidoti & Co.

Okay, great. Thanks guys.

Ralph Gronefeld

Thank you.

Operator

(Operator instructions) And we have a follow-up question coming from the line of Kevin Campbell. Please go ahead, sir.

Kevin Campbell – Avondale Partners

Thanks. I just wanted to ask on the G&A, I might have missed this earlier, if you could go over exactly what the reclassifications were there and may be where we should expect corporate G&A as a percentage of revenue to fall out in the future.

David Miles

Kevin, this is David. The re-classes principally were focused on Job Corps. There were – there are certain departments within the resource center here in Louisville that had previously been classified as corporate G&A, but they are solely devoted to Job Corps operations and we elected to reflect those costs in the facility and program contributed and we have restated all those – all the periods. In terms of the percentage of revenue, we would expect it to remain in that 3.9% to 4%. While we have leverage as we grow, there are going to be some incremental cost in terms of marketing and into our private pay space, perhaps infrastructure and investment in international. So, they should offset each other to where the 3.9% or 4% range would be reasonable for modeling purposes.

Kevin Campbell – Avondale Partners

Okay. Thank you.

David Miles

Thank you.

Operator

Mr. Gronefeld, there are no further questions at this time. I will turn the conference back to you for closing remarks.

Ralph Gronefeld

Okay, thank you, France. ResCare is successfully implementing a strategic plan, which include diversifying our revenue streams and focusing on organic growth and acquisitions, primarily in the home care and international markets. We are meeting our goals, delivering on revenue and profitability growth, and most importantly, our 44,000 employees are providing the services our customers expect. We look forward to the remainder of 2008, both the challenges and the opportunities. We have been in business for 34 years. We have a sound, strategic plan and experienced leadership team capable of operating successfully in all business environments. Thank you for your continued interest and support.

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