Chemed Corp (CHE) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Chemed Corporation’s Conference Call for the third quarter of 2004, ended September 30, 2004. My name is Dennis, and I will be your Conference Call Facilitator today. Please note that today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star and the number 1 one on your telephone keypad. If you would like to withdraw your question, press star and the number 2 two on your telephone keypad.

Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the Company will make various remarks concerning management’s expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the Company’s news release of October 25th 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 October 25th, which is available on the Company’s website.

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

I will now turn the call over to Mr. McNamara.

Thank you. Good morning, everyone. Welcome to Chemed Corporation’s Third Quarter 2004 Conference Call. I will -- we We will begin with an overview of the quarter and certain strategic developments. David Williams will provide financial detail as well as updated earnings guidance. Tim O’Toole will follow with specifics on our hospice operations. I will then open up this conference for questions.

First off, I would like to address the turmoil that seems to be impacting the hospice healthcare sector in the past several months. I believe hospice is one of the most under-utilized and cost-efficacious programs Medicare and CMS offers today. Hospice is a compassionate program that provides significant physical and spiritual comfort to the terminally ill patients and their families. This is serious, important work. That is why we support groups such as the NHPCO, who have the goal of continually raising the bar on quality palliative care. Benchmarking industry standards and encouraging all hospice providers to meet or exceed these high standards is critical for providing such exceptional hospice care. In fact, we have been instrumental in defining these standards that allow consumers to measure quality hospice care.

At VITAS, we are committed to providing the highest level of hospice care. That is our mandate, demanded by our patients, families, shareholders, and employees. It is also good business. The VITAS hospice approach produces a very stable, scalable business model that offers end-of-life care in a thoughtful, compassionate manner. This model is built on a foundation of strong internal systems that allow for careful documentation and monitoring of plans of care provided to all our patients. To that end, we have invested, and will continue to invest, significant resources in technology to maintain and continually improve these systems. ‘

It is our goal to track and document every appropriate metric down to the patient level to ensure every concerned group that VITAS provides outstanding care in a manner that is consistent with the literal interpretation, as well as the intent of the Medicare hospice benefit.

Now, let’s talk about the quarter. Chemed continues to generate strong, fundamental performance. On a consolidated basis, our revenues increased 181% to $211m. Our adjusted EBITDA was $23.8m, and our pro forma diluted earnings per share were 0.63 cents, exceeding the upper end of our 5 five-quarter guidance, as well as analysts’ expectations.

The Q3 2004 Roto-Rooter segment sales of $66.8m was an increase of 5.4% over the prior year quarter. This growth continues to be generated across all revenue segments in both commercial and residential markets. This is the sixth consecutive quarter of positive sales trends at Roto-Rooter. This revenue growth was leveraged into an 87% increase in net income, primarily through benefits derived from our reorganization and centralization strategy. Elimination of certain duplicate expenses are in this restructuring, as well as basic expense management.

VITAS continues to exceed our expectations. Our average daily census increased 17% to 8,949. Revenue for the quarter totaled $135.1m, and our adjusted EBITDA was $16.8m. We did experience a modest shift during the quarter to a greater concentration of routine home care. David will comment on the impact this has had on our margins later in the conference.

We currently have ten startups in progress as of September 30, 2004, including our small acquisition made in Atlanta. These new programs generated operating losses of $1.4m in the quarter. We view these losses as cost-effective investments that will play a crucial role in generating long-term sustainable growth for VITAS.

We continually review our internal processes for opportunities that will allow us to become more efficient. One area of potential opportunity we identified is in our pharmacy program. VITAS will spend over $30m in pharmaceutical procurement and delivery over the next 12 months.

To best coordinate the purchasing and timely delivery of our meds, we have just signed a comprehensive hospice pharmacy program with Omnicare, Inc. Omnicare, based in Covington, Kentucky, is a leading provider of pharmaceutical care, serving residents in long-term care facilities, comprising over 1 million beds in 47 states. This strategic alliance will provide VITAS access to Omnicare’s complete pharmacy resources, which include clinical expertise, geographical coverage, and innovative, cost-effective programs custom designed for VITAS’ hospice care.

In addition, through this relationship, VITAS will have the opportunity to develop new relationships with Omnicare’s existing customer base of skilled nursing and assisted-living facilities that blanket the United States. We believe this will provide VITAS an excellent opportunity for census growth over the next several years.

Now, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. First, let’s talk about the Roto-Rooter plumbing segment. As Kevin mentioned, the third quarter of 2004 was our sixth consecutive quarter which showed increased revenue over the equivalent prior-year quarter. Gross profit margin in the third quarter of 2004, excluding depreciation, was 45.4%. This is 160 basis points above the prior-year quarter. This improvement in gross profit margin is a combination of a 1.9% increase in job count, approximately a 4% price increase, partially offset by a shift in job mix. Adjusted EBITDA for the plumbing and drain cleaning segment totaled $9.6m for the quarter, which was an increase of 35% over the prior-year quarter, solid . Solid results. --

Now, let’s go to the hospice segment. In the third quarter of 2004, VITAS generated revenue of $135.1m, an increase of 19% over the prior year. Adjusted EBITDA in on Q3 was $16.8m, an increase of 50% from the third quarter of 2003. The Q3 2004 adjusted EBITDA margin was 12.4%, and it this compares to the adjusted EBITDA margin of 9.8% in the third quarter of 2003, and equal to the second quarter of 2004’s EBITDA margin.

Gross margins in the quarter were 21.8%. This ; this compared to margins of 22.2% in the prior year. However, included in the second quarter of 2004 was $1.4m in operating losses from startups, as compared to $500,000 in losses in the prior year. This increase in losses from new starts negatively impacted the comparative margins by 67 basis points.

Central support expenses continued to reflect a favorable decline over the prior year. These costs, included as selling, general, and administrative expenses in our Statement of Operations, declined 8.1% over the prior year. This favorable decline is the result of eliminating certain private company expenses discussed in our prior conference call.

Our average length of stay for the quarter was 60.8 days. This compared to the third quarter of 2003 of 54.7 days into the second quarter of 2004 of 59.9 days. Our median medium (sic) length of stay in the quarter was 13 days. The range of our length of stay in our 22 base programs range from a low of 35.2 days to a high of 84.5 days.

During the quarter, routine home care, as a percentage of total revenue at VITAS, increased 69.8% of revenue in the third quarter, which is 130 basis points above the prior-year quarter and 150 basis points above the second quarter of 2004. Although high for VITAS, it is still within reasonable fluctuation patterns. The shift in mix did reduce our revenues per patient day from $166.78 [$ph] per day in the second quarter to $164.10 in the third quarter of 2004.

This shift negatively impacted revenue by approximately $1.9m in gross profit and EBITDA by $276,000. These revenue mix fluctuations are derived strictly from the needs of our patients at any given time. A significant portion of our days of care for inpatient in continuous care are from patients transferred out of routine home care. Our experience is that a typical level of care episode for continuous or inpatient care would average between 3 and 5 three and five days.

Our day sales outstanding, or DSO’s, at the end of September 2004, were very favorable at 35.9 days. Over the past 12 months, our DSO’s (are running) [ph] from 34.2 days to 37.4 days.

Our consolidated balance sheet is solid. As of September 30, 2004, cash and cash equivalents were over $51m. The timing of month-end/quarter-end didn’t pick up cash on hand. We receive our Medicare payments every other Friday. September 30th was on a Thursday, one day prior to receiving these funds. As a result, accounts receivable increased from $59m at the end of Q2, 2004, to $71m as of September 30, 2004. We have available an additional $72m through our unused lines of credit. We also anticipate receiving in the fourth quarter of 2004, $15m in tax refunds from the deductibility of stock option buyouts at the VITAS level.

We recently had an outside tax firm complete a state and local tax strategy study, which began in the second quarter. As a result of this study, we were able to lower our consolidated effective tax rate to 40.8%.

Looking ahead into the fourth quarter of 2004, we anticipate sequential consolidated revenues revenue to be materially above the third quarter due to seasonality factors within Roto-Rooter. Roto-Rooter is estimated to generate a 5% to 7% sequential revenue growth in the fourth quarter over the third quarter of 2004, which is consistent with historical seasonality factors.

VITAS continues to show consistent ADC growth. The past six quarters have averaged a sequential quarterly increase in ADC of 345. If this trendline continues, ADC would approximate 9,300 in the fourth quarter. We are optimistic as to the long-term sustainable trendline improvements in ADC, revenue, EBITDA margins and earnings per share. However, we should keep in perspective, VITAS will experience fluctuations in growth patterns and revenue mix quarter- to- quarter. We anticipate fluctuations in margins quarter- to- quarter as capacity and central support resources are grown at a more predictable and methodical rate than our actual ADC.

Based upon these factors and a diluted share count of 12.7 million, our expectation is that earnings per diluted share for the fourth quarter will be in the range of 0.73 cents to 0.77 cents per share. We anticipate providing full-year 2005 guidance when we release our 2004 final operating results.

With that, I would like to turn this call over to Tim O’Toole, our Chief Executive Officer of VITAS.

Thanks, David. As Kevin mentioned earlier, VITAS had an excellent quarter. Driving these results was our ADC growth in the second quarter that was 17% above the prior year. Even more important, our smaller programs are contributing a greater percentage of this organic census growth. We now have six large programs in excess of 450 patients. The census growth in these markets was 14% this last quarter. Our 14 small programs, ADC less than 200, and our 12 medium programs, ADC between 200 and 450, had a combined census growth rate of 21.6%.

Sequentially, large programs grew 2.2%, and the small and medium programs grew at a combined sequential rate of 6.5%. What this means is that our small and medium programs continue to grow at a faster rate than large programs. We believe this is indicative of long-term sustainable growth.

Continuation of our startup programs is critical to ensure the insure this steady development of new markets and organic growth. We currently have 9 nine startups, 7 seven of which are licensed, and 4 four are Medicare certified. These startups served an ADC of 188 patients, with revenues of $2.3m and operating losses of $1.4m in the quarter. In the prior-year quarter, startups had an ADC of 80 with revenues of $1m and operating losses of $500,000. The Q2 2004 quarter had a census of 133 and losses of about $1m.

We recently entered our eleventh state with the purchase of a hospice in Atlanta, Georgia. This was a small acquisition with a census of approximately 25. This is viewed more as an accelerated startup, in which we have a small, established hospice with licensure, strong culture, and a starting base of referral sources.

Small census acquisitions provide us the opportunity to enter a market and grow ADC at an accelerated rate when compared to a new start. We anticipate small census acquisitions playing a key role in our business expansion model over the next several years. We still continue to analyze large step-out acquisitions. These step-outs will establish a platform for VITAS to build off of in terms of organic growth and contiguous startups.

On a per census, as well as on a total cost basis, the acquisition targets we have reviewed today are pricey. We remain disciplined in our approached evaluations. However, when we do close on a large acquisition, it will be our subsequent execution of organic growth within that acquired program, as well as contiguous development of new starts in the surrounding counties that will determine our final return on investment.

As of September 30th, we have 151 sales representatives and 97 admissions coordinators in place. This is up from 142 sales reps and 93 coordinators in the second quarter of this year. We anticipate building this group on a steady and methodical basis over the next several years.

We monitor our compliance environment carefully. VITAS compliance activity is supported by its Chief Compliance Office, a Compliance Committee, and the Clinical Research Audit and Analysis Department. We also remain very active in the development of Standards of Care for the industry. We participate in the NHPCO’s regulatory subcommittee that defines best practices and assists in the development of educational materials for the industry. We believe this type of proactive action will be very helpful to CMS and other regulatory bodies in the shaping of future regulatory or legislative agendas.

At VITAS, we are committed to providing the highest level of care to the terminally ill patients and their families that equal or exceed expectations from all of our stakeholders.

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

And we stand ready to answer any questions.

(Caller Instructions). We’ll pause for a moment to compile the q-and-a roster. Your first question comes from the line of Eric Gommel with Legg Mason.

Yes, thank you. Good morning. One of your competitors has identified increasing competition from nursing home val tacks (ph) and outpacks[ph] in home care as an issue. What kind of experience are you guys having in your key markets, and, I guess, what makes you feel comfortable that you can drive growth broke[ph] in the face of potential new competitive pressures?

Well, this This is Kevin McNamara. I’ll turn this over to Tim, with just a starting comment to say that there is a lot of competition out there. I don’t think that there is any as far as our -- not necessarily new sources of significant competition that are affecting our operations. We always feel that well-run, not-for-profit institutions are some of our toughest competition just because they don’t pay taxes. I mean, it makes for a tough competitor. But, Tim, anything specific that you would like to say in response to that comment that was in one of our competitors’--?

No, I think -- I mean, Eric, the point of nursing home or long-term care companies being competitors, it’s really nothing new. That’s been the situation for quite some time. I think in the face of competition coming from many sources, I mean, the important news is for us that we’ve made good progress in the long-term care setting with our census up nicely; our assisted-living census is up, for example, 25% year-to-date, so we’re seeing very good opportunities there.

Sometimes when you are a national competitor or long-term care company. for example,, in fact, it limits you because certain other nursing homes don’t want to do business with a competitor. So there is always give-and-take in that area, but what we see out there is plenty of opportunity, and we’re very much focused on the long-term care market and the assisted-living markets because they, you know, very much need our services,; and we’re working well with big national chains and, certainly, some of them are making statements about getting into the business a little more and that’s been there for quite some time. So --

Eric, this is Dave Williams. I would also add like CMS has only released data really over the past 7 seven years. The market, if you define the market as CMS reimbursement into hospice, has grown well in excess of 15% per year, closer to 20% per year compounded. So, the market still is expanding rapidly.

Right. And then I guess on your new startups, are you developing inpatient units in those new startups, as well as growing routine home care?

Generally speaking, we don’t start out with an inpatient unit in a new start. That would be something that, over time, you would develop with relationships as you really have a bigger base of a home care business, settings of care, and as I mentioned before, both the person’s home as well as long-term care settings and assisted-living. Generally speaking, when you get your census up a little bit, you would actually have the volume and the area that it makes sense to have an inpatient unit. We do have inpatient units in certain of our new starts and we do have contract beds, which can be a bridge to an inpatient unit in certain situations.

But, we’re really just trying to build the base of business throughout the community for opportunity starting from a the small program, which doesn’t work well to have an inpatient unit. Most inpatient units need to be about a 15-bed size for them to make any sense for the provider, the hospital, or the care center you’re working with, and that’s not efficient for us on day one of a startup. But, over time, we hope to have them in numerous of those locations, yes.. Yes.

And then Then just one last question and I’ll get out. On the tax rate, how should we look at that going forward now that you had a lower tax rate this quarter?

Right now, I’d use the 40.8%, as . As -- there’s There’s a sidebar. We’re still exploring some other opportunities that might get that closer to 40%, but at this point, we’re making the assumption of 40.8%.

Great. Thanks.

Your next question comes from the line of Jim Barrett with C.L. King and Associates.

Good morning, everyone.

Dave Williams Unidentified Company Representative: Hey, Jim.

Tim, could you talk about the competition as it applies to Certificate of Needs when you’re going through that process? What are the key competitive issues? Are they the key issues that determine the winners winner versus the losers loser?

Well, I think, just to get into the basics of it, Florida is a state with Certificate of Need process and that limits the ability for new players to come into the state. Recently in the last 6 six months, for example, the state of Florida identified 4 four new territories where recently there have been some licensure opportunities become available. In our situation, we’re very pleased because that’s allowed us to enter into the Daytona market, and that’s just recent news in the last month or so. So, we’re very happy that that process at least allowed us to expand into a new market. That will be a great opportunity for us. We think we’ll be up and running by the end of the year.

This will happen from time to time, every 6 or 9 six or nine months, the state will identify certain regions in the state where they see the need is not being met. Many of the places, for example, in Florida where we’re not, there are big non-for-profits that have a very nice business, do a great job, but the question is, should there be more competition into those markets? And I think that is starting to happen and that should open up other areas of the state for us.

Just one -- this This is Kevin McNamara. I would like to add also that with regard to Daytona, we are in there on a for-profit basis. Again, you may have heard I know, Jim, that there are other for-profit hospice companies that are certainly attempting to develop a Florida business. They have to and can do so on some basis on a not-for-profit basis with service contracts and what- have- you. But, the only significant development in Florida that we would note that really relates to us is positive. And that is, in short order, we’re going to be up and running in Daytona Beach.

I would add, keep in mind that only approximately 35% of our census is based in the state of Florida,; and, of course, that puts -- 65% (ph) is outside of that CON market.

I see. And Tim or Dave, the Medicare reimbursement increase that I take it ensued and occurred in October, how did that impact your Q4 P&L?

Based on the current census we have on our markets, we have to adjust the national increase of 3.3% based on the individual markets we operate and on the reimbursement. On a look-back basis, that came to a weighted 3.4% for the year when we factored in 3.4% increase in our revenue for the fourth quarter.

Does that cause -- call all else being equal and all or else may not be equal. ? Does that cause your margins to improve in Q4 seasonally?

Dave Williams Unidentified Company Representative: Yes, it does.

Is Q4 a seasonal, somewhat soft period to the extent people decide not to go into hospice prior to the holidays?

We really don’t see it as a soft period. Certainly, it’s historically a strong admissions quarter for us. In the early part of the quarter as we move into the holiday season near the end of the month, and beginning in of the early part of January, we do usually see a little bit of a slowdown on admissions because many of the referral sources are not open for business, so to speak. And, so we do see a little bit of softness during the end of the quarter, but not throughout the quarter.

And, as you know, we move into the first quarter of next year with some impacts to our margin, mainly by the payroll taxes that we expense in the first part of the year, and we historically have seen our census drop back a little bit in January because we know there’s this phenomena of people deferring the admissions and then after the holidays, there do appear to be a high number of deaths compared to history, and that causes the admissions slowdown along with the trend- down in the ADC, but then we pick it back up in February and March has been our history. So, you know, that’s kind of what we see over the next 4 to 5 four or five months, Jim.

That’s helpful. And then finally, Tim, with two of your publicly-traded competitors facing challenges, how has that changed, if at all, the competitive landscape for the larger (indiscssernible) [and fan-out] of a smaller acquisition?

I think the acquisition program that we’re focused on hasn’t changed. We began in the spring of this year to seed feed the marketplace with a lot of activity. We have a very strong group of people that are in all communication, we believe, of any important deals out there. I think we’re clearly a company that people want to talk to. And, as I say, we’re having great success in our discussions.

What we mentioned earlier in the comments, we still think the valuations evaluations in the private market are maybe a little higher than we would see them moving into the future. So we’re being very prudent. We’re financial buyers, as you know. On the other hand, we think our acquisition program will roll out very well into the future. So, we wouldn’t comment specifically because there’s there are always multiple players. So whether it’s one party or the other, you know, this is an attractive industry. There are multiple players bidding for acquisition. The good news for us is that I think we are a player at the table at all important deals. And we, I believe, are the buyer of choice at this point.

Thank you.

We will remain disciplined in all deals we look at.

Thanks again.

Once again, if you would like to ask a question, please press star/one at this time. Your next question comes from the line of Eugene Fox with Cardinal Capital Management.

Hello, gentlemen. A couple of questions. -- Can you talk about the hurricane and what, if any, impact -- or hurricanes, I should say -- had? Do you all have the number for the cost of the Atlanta acquisition? Those are the primary questions.

I’ll answer the Atlanta issue and turn hand it over to Tim. This is Dave Williams. We’re not going to release publicly what we paid for the acquisitions. I’ll just say, we take a hard look at it and we make sure it makes sense, but we’re not going to be releasing that type of metrics.

Does it just get buried, Dave, in the your acquisition line on your Cash Flow Statements?

The small ones, yes.

Okay.

Yes, Gene. As far as the hurricanes, I think you cannot help but start off with discussing the hurricanes with thanking all of our employees at VITAS in Florida, and even one hit Atlanta a few days after we closed, but, you know, thanking all of the employees for all of the incredible work they did to meet the needs of the patients. There was a lot of activity. There were at least four hurricanes that came through the state. It seemed like they all centered right on Orlando when they crossed. But, we were fortunate to the extent they did not come through the very southern tip of Florida into our bigger programs. We did have to prepare as if they might have, and what that generally means is identifying where our patients are, providing them with the necessary pharmacy and medical supplies that they might need for an extended period of time. So, we did have a lot of activity. We were very fortunate. There clearly was an impact over the days and weeks around that activity holding back some of our admissions activity.

We think we would have probably had a better level of admissions,; but, certainly, the good news is it only impacted a few days. Continuous care, -- ability to serve continuous care programs was impacted because we couldn’t get staff out during those limited period of days. So, there was a modest impact on the financial side, probably held us a little bit back on admissions, but really no severe impact of the hurricanes. So, I guess it’s interesting. It’s certainly an issue we always worried about. Now to the extent that we’ve seen a horrific hurricane season and we’ve survived it, done quite well, it probably gives us some comfort. But, I guess my take- away from it is the employees did a great job and we survived a tough couple of weeks there.

Thanks, Tim. Last question. With -- with respect to your CapEx CAFEX [ph] plans for this year and next year, if you’re willing to talk, I would appreciate knowing that. Also, what do you plan on doing with your cash flow? Do you have any specific goals with respect to reducing your debt?

Eugene, this is Dave Williams. Relative to the CapEx, CAFEX, I would target in the probably roughly $18m this year, and out of target, approximately $20m next year. We’re still finalizing those plans. We’ll spend more if there’s a good return on investment as prudent, less if we don’t have to. In terms of cash, we are obviously building cash onto on to our balance sheet. At this point in time, we don’t have enough clarity on capital needs relative to acquisitions to make any determination relative to pay down debt or set up a different financing structure. So at this point, we’ll continue to accumulate cash on the balance sheet until we have we’ve got clarity on capital needed for acquisitions.

Thanks.

Once again, if you would like to ask a question, please press star/one at this time. At this time, there are no further questions. Gentlemen, are there any closing remarks?

None for the Company other than to say that we had an excellent quarter and do a lot of hard work of people at both of our subsidiaries. We --, as you’ve you heard from Dave’s, guidance, we -- We are expecting certainly on a sequential basis, or even a comparative basis to last year, an excellent fourth quarter. And, we’ll just see what we can do to bring it in. But with [Indiscernible] to that, I will terminate the call and we’ll probably meet to talk with -- talk with much of the same group in 3 three months.

This concludes today’s Chemed Corporation’s conference call. You may now disconnect.

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