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Edited Transcript of CHE earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Chemed Corp Earnings Call

CINCINNATI Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Chemed Corp earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Williams

Chemed Corporation - Executive VP & CFO

* Kevin J. McNamara

Chemed Corporation - CEO, President & Director

* Nicholas Michael Westfall

VITAS Healthcare Corporation - CEO & President

* Sherri Warner

Chemed Corporation - Director of IR

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Conference Call Participants

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* Frank George Morgan

RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Hello, and welcome to the Chemed Corporation Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce Sherri Warner with Chemed Investor Relations.

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Sherri Warner, Chemed Corporation - Director of IR [2]

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Good morning. Our conference call this morning will review the financial results for the second quarter of 2019 ended June 30, 2019. 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 25 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 25, 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 Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [3]

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Thank you, Sherri. Good morning. Welcome to Chemed Corporation's Second Quarter 2019 Conference Call. I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I will then open the call for questions.

The second quarter 2019 results were very solid. At the higher end of various operational metrics for both VITAS and Roto-Rooter. In the quarter, Chemed generated revenue of $474 million, an increase of 7.2%. Our consolidated net income in the quarter, excluding certain discrete items were $3.36 per diluted share, an increase of 19.6%. VITAS' admissions were solid in the quarter, increasing 3.8% over the prior year. Our Average Daily Census expanded 5.9%. And our adjusted EBITDA, excluding Medicare Cap, increased 25.6%. Roto-Rooter generated solid growth and continues to show excellent growth in our core plumbing and drain-cleaning service segments. I was also pleased with our water restoration service demand in the quarter, expanding 14% when compared with the prior year.

As I discussed last quarter, there are number of Roto-Rooter initiatives that in the short term increase our expenses, primarily in the areas of field labor as well as increased costs related to training as we expand our technician commission-based force. I anticipate the margin impact from these initiatives will continue to be reduced over the coming quarters.

As most of you are aware, earlier this month, we acquired franchise territories serving Alameda County, and portions of Southwestern San Joaquin County, California. The service areas include the Cities of Oakland, Berkeley, Hayward, Fremont, Livermore, Pleasanton and Tracy, California. The newly acquired territory has an annual sales of $11 million and service a population of approximately 1.7 million people. This acquisition follows our purchase of 5 neighboring Northern California franchise territories in October of last year. These acquisitions are immediately accretive, while we're -- it typically takes several months of reengineering and infrastructure realignment to get newly acquired territories to perform at the level of our Roto-Rooter operational benchmarks.

Typically, we update our annual guidance midyear when we issue our second quarter earnings. However, given the magnitude of potential changes in hospice reimbursement, Chemed will issue updated guidance in August, early August, following CMS issuing the final rule on the Fiscal Year 2020 Hospice Wage Index and Payment Rate update.

With that, I would like to turn this conference over to David.

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David P. Williams, Chemed Corporation - Executive VP & CFO [4]

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Thanks, Kevin. Good morning. In the second quarter of 2019, VITAS had net revenue of $313 million, which is an increase of 5.4% when compared to the prior year period. In the second quarter of 2019, VITAS did accrue $3.2 million in Medicare Cap billing limitations. Of this amount, $847,000 relates to prior year Medicare Cap redeterminations and $2.4 million relates to the 2019 Medicare Cap year. At June 30, 2019, VITAS had 30 Medicare provider numbers, 3 of which have an estimated 2019 calendar year of Medicare Cap billing limitation of approximately $9 million.

Average revenue per patient per day in the quarter for VITAS was $189.64, which is 0.5% above the prior year period. Reimbursement for routine home care and high-acuity care averaged $165 and $751.12, respectively. And during the quarter, our high-acuity days-of-care were 4.2% of our total days-of-care essentially equal to the prior year quarter.

The second quarter of 2019 gross margin for VITAS, excluding Medicare Cap, was 23.7%. This is a 208 basis point increase when compared to the second quarter of 2018. Adjusted EBITDA excluding Medicare Cap totaled $54.8 million in the quarter, which is an increase of 25.6%. And adjusted EBITDA margin, excluding Medicare Cap, was 17.3% in the quarter, which is a 267 basis point expansion when compared to the prior year period.

Now let's turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $161 million, an increase of 10.9% over the prior year. Revenue from our water restoration service segment totaled $28.2 million, a healthy increase of 14% when compared to the second quarter of 2018.

Roto-Rooter's gross margin in the quarter was 48.7%, a 121 basis point decline compared to the prior year quarter, and a 164 basis point improvement over the first quarter of 2019. Adjusted EBITDA on the second quarter of 2019 totaled $38.8 million, an increase of 6.2%.

I'll now turn this call to over to Nick Westfall, President and Chief Executive Officer of VITAS.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [5]

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Thanks, Dave. Overall, I was pleased with VITAS' operating results in the second quarter. Our Average Daily Census in the second quarter of 2019 was 18,681 patients, an increase of 5.9% over the prior year. Total admissions in the quarter were 17,491, this was a 3.8% increase in admissions when compared to the second quarter of 2018.

During the quarter, admissions increased in 3 of our 4 preadmit locations. Hospitals, which typically represent roughly 50% of our admissions, increased 2.6%. Home-based admissions increased 4.2%, and nursing home admissions expanded 4.6%. Assisted living facility admissions did decline a modest 1.1% in the quarter. VITAS' average length of stay in the quarter was 91.1 days, this compares to 91.3 days in the first quarter of 2019 and 89 days in the second quarter of 2018.

Our median length of stay was 16 days in the current quarter and compares to 17 day median length of stay in the prior year quarter. Median length of stay is a key indicator of our penetration and is a high acuity sector of the market.

With that, I'd like to turn this call back over to Kevin.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [6]

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Thank you, Nick. I'll now open this teleconference to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from the line of Joanna Gajuk with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [2]

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So first, I guess, on the quarter, which was significantly above our estimated consensus. So can you describe to us how does it compare versus your internal expectations?

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David P. Williams, Chemed Corporation - Executive VP & CFO [3]

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I'll turn this over to Kevin. This is Dave Williams. But for the headline, both VITAS and Roto-Rooter exceeded our expectations in the quarter in a variety of operating metrics, and we consider it a continuing trend line. We would be surprised if this doesn't extend into the third and fourth quarters. But I'll turn it over to Kevin for more color.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [4]

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All I was going to say is that, as Dave said, kind of on a thorough-going basis, it exceeded our expectations. But this year, as we said from the start, following a year like last year was, we were going against some tough comparables, particularly in the first half, with regard to Roto-Rooter. But it was just a lot of blocking and tackling, and there weren't a lot of unusual items. It was just -- again, some thorough going good results out of variety of fronts.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [5]

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So just to stay on that topic. So VITAS' margins were exceptionally strong this quarter, and I guess, Q1 as well. So can you just talk about -- flesh it out a little bit more in terms of what drove that strength? And to your pointing out, is that sustainable? Because, I guess, your original guidance was kind of calling for margins to be down year-over-year because of the strength in the last year's margin, too, but can you just flesh out the kind of the drivers of the strength in VITAS margins?

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [6]

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Sure. So this is Nick. Our strength is, of course, as you may have imagined, a combination of a lot of different factors going on, not only from a top line growth perspective but from a full execution on a lot of operational fronts as well that help to drive efficiency and at the same time improving our overall quality of care. So as we look at it on a go-forward basis, as Dave alluded to, feel comfortable with continued execution on the VITAS end of the marginal performance we've seen for the first half of the year and being mindful of our continual pressure from an expense perspective of attracting and retaining high-qualified caregivers in the workforce and what that looks like from a cost and wage perspective going forward. So long-winded way, Joanna, is saying, if you feel very comfortable with how we've executed for the first half of the year, then those trends should continue for the second half.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [7]

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Okay. That's helpful. And if I may, the last on the VITAS side of things. So obviously, the hospice final regulation is pending, that's why you are waiting to update your full year outlook. So as I was proposed, we had estimated it would be a $40 million or so annualized benefit, just on the Medicare side of things. So first, are we in the ballpark? And also, the Market Basket update was pretty strong. So what's the difference there versus what's included in the guidance -- in the prior guidance?

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David P. Williams, Chemed Corporation - Executive VP & CFO [8]

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Yes, Joanna, we -- for the guidance we issued in the first quarter for the full year 2019, we had an estimated increase for VITAS from the federal government of 1.5% starting October 1, 2019.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [9]

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Okay. And any comment on the estimated impact we had for -- from the rebasing? Are we roughly in the ballpark?

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David P. Williams, Chemed Corporation - Executive VP & CFO [10]

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I defer you to the proposed rule that did an analysis by Medicare provider numbers, but we really want to wait until the rule goes final, because there could be -- we know every now and then the rules comes through exactly as written and every now and then it comes through radically different. So we need to wait.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [11]

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Right. I agree with that.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [12]

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As various commentaries have suggested it, it's going to be a nice improvement for us.

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David P. Williams, Chemed Corporation - Executive VP & CFO [13]

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Oh, absolutely. It's significant, and CMS alluded to that, and they worked out to be an average increase of, what, 2.7%. But without a doubt, when you're running a 35% or 40% increase in high-acuity care, that will more than offset the $24 million haircut we took at the last rebasing.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [14]

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That is a couple of years ago.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [15]

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Right. So if I just close the topic, so I guess, the industry comments that CMS do the proposal included a request to phase-in of the rebasing? So what's your view there? And this will be my last question?

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David P. Williams, Chemed Corporation - Executive VP & CFO [16]

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Yes. I'll turn this over for Nick and Kevin as well, but CMS very consciously has recognized an issue, where reimbursement wasn't adequate to get high-acuity care provided to the patient base. So we'd be very surprised to see a phase-in because that means CMS is acknowledging high acuity care will be phased in for the Medicare beneficiaries who really need it today. So we'd be surprised by that, particularly since -- even if routine home care is kept relatively flat, based upon the analysis and the proposed rule, CMS still considers the reimbursement under routine home care too high. So we think a phase-in is always possible. We don't think it's likely, but again, that's all the reason why we wait for the rule to go final.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [17]

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And my understanding is that, as far as without the phase-in, it's still revenue-neutral on the whole.

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David P. Williams, Chemed Corporation - Executive VP & CFO [18]

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It's completely revenue-neutral. It's a question of motivation on providers.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [19]

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That's right.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [20]

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Joanna, the other component when you think about it from a care delivery system across the overall industry, the piece we really liked irrespective of the output for VITAS was the recognition, as Dave alluded to, of the value, and frankly, the requirement for hospice providers to provide all 4 levels of care. And so we're very encouraged by that acknowledgment by CMS because what it really allows for is recognition and rewarding of mature hospice providers that are following the conditions of participation and able to provide care for patients when they experience a period of crisis, keeping them on the hospice benefit and avoiding unnecessary revocations to go back in the hospitals, et cetera, which really diminish and dilute overall patient and family satisfaction. So take the economics away from it as well. It's something that will be beneficial for the country and beneficial for patients and families going forward.

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Operator [21]

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And our next question comes from the line of Frank Morgan with RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [22]

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I guess staying on that topic, anything beyond this final rule coming that we should be looking forward to or anticipating with regard to policy initiatives? And just wanted to also -- obviously, there is this discussion around this carve-in of hospice on a voluntary basis with MA plans. But anything else like that, that we should be mindful of or on the look out for as we move into the latter part of the year?

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David P. Williams, Chemed Corporation - Executive VP & CFO [23]

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This is Dave. No, not at this point. We really think CMS is kind of ahead of the curve on expectation of what they're doing with hospice. But since you've brought up that demonstration project on the carve-in, CMS is certainly scrambling and CMMI is scrambling to try to get a demo project design and implement it, but we're talking about years before you would see any impact on the overall approach to reimbursement. It will take probably another year to get the steady rolling, a couple of years to actually do the study and analyze the data. So the carve-in, carve-out is a great discussion, but we don't see a lot of major impact on hospice reimbursement coming from that in the near term.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [24]

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And Frank, some of the other demonstrations that are rolling out just help defer to reinforce the value of the hospice benefit. So while there's nothing that is significant outside of the finalization of the wage rule and the potential demonstration project from a directional perspective, they are all indicative of trying to find ways to identify how to provide education out in the community and increase -- or increase access to hospice and increase earlier access to hospice, which we find encouraging for both VITAS as well as the industry.

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David P. Williams, Chemed Corporation - Executive VP & CFO [25]

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And Frank, we were -- and the NHPCO and ourselves, we were taken a little aback by the magnitude of the rebasing. We didn't see it coming from CMS. We consider it very, very, very positive. That's just another way of implying. Things always take us offguard, but everything we've seen CMS do regarding hospice has to encourage the utilization and the expansion, not hold it back. So we think it's the opportunity for increased penetration and better utilization of hospice is still coming down the road.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [26]

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Got you. Two more, more company-specific and industry-specific. On -- in terms of just the labor availability, obviously, you had good labor productivity management in the quarter on the VITAS side. But how do you see the overall marketplace, given these pressures from a low unemployment environment in terms of pressure on rates and availability of labor? And then my last question was just one on potential -- should we stick to really see any kind of changes on the M&A side? I know you've done some franchises on the Roto-Rooter side, but anything that -- any change in your view on the M&A market either in Roto-Rooter or in VITAS?

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [27]

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So Frank, this is Nick. Let me take the first question regarding the labor market, then I'll turn it over to Kevin for an M&A -- to answer your M&A question. On the labor market side, how we look at it is -- I don't want to make a macro comment as it's very much market-by-market specific and discipline-by-discipline specific. The things we've been able to do, that's allowed us to be successful is really hone in on building education and awareness as to what drives people to VITAS and what drives people to stay at VITAS. And the type of individual we're looking for really aligns with our culture and mission, and we found -- while it takes a little bit of work and effort to identify that clinician. Once they're heading onboard, we do an excellent job at continuing to retain them, grow them and provide them plenty of opportunities for growth. So -- while a lot of commentary comes regarding the shortage of the labor force, while it's -- we do have unique challenges on certain markets. Overall, I'm pleased with where we stand today to attract and retain. And I can tell you there's not a single day that goes by without us focusing on how we can improve that as a company because that's ultimately going to continue to determine how successful we are going forward, the quality of our people. I'll turn it over to Kevin on the M&A side.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [28]

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Just to reflect on the M&A side, Roto-Rooter, as we said, really started 6 months ago. We paid up -- with the change in tax law allowed us to increase the amounts we are paying for Roto-Rooter franchise -- franchises and we've got their attention. To be honest with you, we've already completed 2. And it will surprise me to accept to see further activity there. On the VITAS side -- nothing -- I mean, the biggest impediment on the VITAS side is not there will be lot of multiples, even if they're being paid. It's fitting within the VITAS base, that is programs that have the potential to be large, professionally managed hospices, that is we're talking about programs, certainly, higher than 120, but may be with a -- in a market that has the potential to get to, say, 250 or 300. The acquisition targets that you see out there, that's not what they are composed of. So that's the biggest impediment, but to the extent that there is -- to the extent there's almost anything in Florida county we're not in or us with large programs, where we're struggling not for profit that's large in a major metropolitan area. We'd certainly be interested, but that's not what we're seeing at this point.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [29]

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And Frank always is constantly weighing it against the alternative: if we wanted to enter in those certain markets, what's the most appropriate market entry strategy. Is it a de novo approach versus an acquisition and really continue to build that into our strategic footprint and making sure that we get lift up, operate it and grow it quickly and effectively like we've done here in the last few years with the few of the new starts and some of the small acquisition, tuck-in acquisitions, we've done.

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Operator [30]

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And I'm showing no further questions at this time. So with that, I'll turn the call back over to Kevin McNamara for closing remarks.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [31]

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My remarks will be limited to thanking the employees for delivering a very good solid quarter. I think it was well planned out to the extent that we exceeded our expectations. I think that was metric-driven. It's again stronger -- there's a little stronger business out there. And we're looking forward to the next 2 quarters, and we will be getting back to you in any of them, in relatively short order when the wage rule becomes final. But other than that, I thank you for your kind attention, and we'll talk again in 3 months.

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Operator [32]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.