Chemed Corp (CHE) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Chemed Corporation's third quarter 2009 conference call. My name is Janeta, 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 speaker's remarks, there will be a question and answer period.

I would now like to turn the call over to Sherri Warner with Chemed Investor Relations.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2009 ended September 30, 2009. Before we begin, let me remind you that the Safe Harbor provisions of the Private Security 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 press release of October 27th 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 27th which is available on the Company's Web site at www.Chemed.com. I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation, Dave Williams, Executive Vice President and Chief Financial Officer of Chemed, and Tim O'Toole, Chief Executive Officer of Chemed's VITAS HealthCare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning, everyone. Welcome to Chemed Corporation's third quarter 2009 conference call. Chemed consolidated revenue in the quarter totaled $296.8 million, and net income was $19.2 million. This equated to diluted earnings per share of $0.84, an increase of 13.3% over the comparable prior year period. If you adjust for non-cash items, or items that are not indicative of ongoing operations, adjusted earnings per diluted share were $0.96 in the quarter. An increase of 6.7% when compared to adjusted earnings per diluted share in the third quarter of 2008. In the third quarter of 2009, our Hospice business segment generated revenue of $217.1 million, an increase of 5.9% over the comparable prior year period. An adjusted EBITDA of $32.9 million, an increase in our adjusted EBITDA of 5.8%. This equated to an adjusted EBITDA margin of 15.1%.

In the third quarter of 2009, our admissions totaled 13,735. An increase of 3.1% over the prior year quarter. Our admissions growth has been very difficult over the past several quarters. However through a combination of increased resources and significant effort by our field-based personnel, we have begun to positively impact our admissions trends. Tim O'Toole will provide you with additional detail later in the presentation.

During the third quarter, VITAS recorded $43,000 of Medicare cap liability which related to the 2006 Medicare cap year. Of VITAS' 34 unique Medicare provider numbers, 31 provider numbers, or 91%, have a Medicare cap cushion greater than 10% for the 2009 Medicare cap period. And two provider numbers have cushion of less than 5%. VITAS generated an aggregate cap cushion of $174 million, or 25%, during the 2009 Medicare cap period.

Now let's turn to our Roto-Rooter business segment. Adjusted EBITDA for Roto-Rooter increased 1.2% in the quarter. We generated this growth in earnings despite a very difficult demand environment. Total job count declined 8.3% when compared to the third quarter of 2008. However, our revenue declined a modest 4.4%, and we expanded our adjusted EBITDA margin to 17.3% in the quarter. We continue to substantially offset the revenue impact of this decline in job count volume through a combination of strategic price increases and favorable job mix to shift to higher price jobs. With that, I would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks Kevin. Net revenue for VITAS was $217.1 million in the third quarter of 2009, which is an increase of 5.9% over the prior year period. This revenue growth was the result of increased admissions of 3.1%, a Medicare price increase of approximately 3.5%, partially offset by an increase in discharge patients of 1.2%. The remaining difference is attributed to the timing within the quarter of admissions and discharges, as well as revenue and patient geographic mix. Our average revenue per patient per day in the quarter was $194.76, which is 5.2% above the prior year period. Our routine home care reimbursement and high acuity care averaged $153.11 and $675.70, respectively, per patient per day in the third quarter of 2009. During the quarter, our high acuity days of care were 8.0% of total days of care. This is a 30 basis point improvement over the third quarter of 2008.

The third quarter 2009 gross margin for VITAS was 23.4%, which is essentially flat with the prior year quarter. Our home care direct gross margin was 51.7% in the quarter. A decline of 70 basis points when compared to the third quarter of 2008. The third quarter of 2008 was actually an extremely strong margin, unusually so in the prior year. Our direct inpatient margins in the quarter were 12.8%, which compared to 16.6% in the prior year. Occupancy of our inpatient units averaged 74.6% in the quarter, in comparison to 76.9% occupancy in the second quarter of 2009.

Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.6%, an increase of 260 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care averaged 18.8 in the quarter. Selling, general, and administrative expense was $18.2 million in the third quarter of 2009, which is an increase of 6.6% when compared to the prior year. Adjusted EBITDA totaled $32.9 million, an increase of 5.8% over the comparable prior year period. The adjusted EBITDA margin was 15.1% in the quarter, essentially flat with the prior year.

Now, let's turn to Roto-Rooter. Recessionary pressure continues to impact demand for Roto-Rooter in discretionary plumbing and drain cleaning services. This is evidenced by a 14.2% decline in call volume in Roto-Rooter centralized call centers. The revenue impact of this decline has been substantially offset by selective price increases, favorable job mix shift to higher price jobs, and increased conversion rates of calls to pay jobs. Job count in the third quarter of 2009 declined 8.3% when compared to the prior year period. Our total residential jobs declined 6.1% as residential plumbing jobs decreased 6.8%, and residential drain cleaning jobs declined 5.6% when compared to the third quarter of 2008. Residential jobs represented 71% of total job count in the quarter. Total commercial jobs declined 13.3% with commercial plumbing job count declining 17.1%, and commercial drain cleaning decreasing 13.1% when compared to the prior year. These declines were partially offset by a 21.3% of jobs in our 'other' category.

Now let's review our consolidated balance sheet. Chemed had total debt of $150.5 million at September 30, 2009. This debt is net of the discount taken as a result of the new accounting standard. Excluding this discount, aggregate debt is $187.0 million and is due in May, 2014. During the third quarter 2009, the Company prepaid our remaining $5.0 million of bank term loan, utilizing our cash on hand. Chemed's total debt equates to less than one times trailing adjusted EBITDA. Chemed's $175 million revolving credit facility expires in May, 2012. At September 30, 2009, this credit facility had approximately $147.1 million of undrawn borrowing capacity after deducting $27.9 million for letters of credit issued under this facility to secure the Company's workers compensation insurance.

Our total cash and cash equivalents as of September 30, 2009 was $42 million and represents 23.1% of total current assets. Net cash provided from operations in the first nine months of 2009 aggregated $80.5 million. Capital expenditures for the first nine months of 2009 aggregated $14.5 million and compares favorably to our depreciation and amortization in the first nine months of the year of $20.8 million.

Our 2009 full year guidance is as follows. VITAS expects to achieve full year 2009 revenue growth prior to Medicare cap of 5.7% to 6.2%. Admissions in 2009 are estimated to be in the range of 98% to a 100% of our total 2008 admissions, and full year adjusted EBITDA margin prior to Medicare cap is estimated to be between 15.2 % and 15.5%. Effective October 1, 2009, Medicare increased our average hospice reimbursement rate by approximately 1.4%. This guidance includes $1.25 million of estimated Medicare contractual billing limitations for the fourth quarter of 2009. Roto-Rooter expects to achieve full year 2009 revenue to range from 98% to 101% of our 2008 full year sales. The revenue estimate is a result of increased pricing of 5.0% of favorable mix shift to higher revenue jobs, offset by a job count decline estimated at 7% to 8%. Adjusted EBITDA margin for 2009 for Roto-Rooter is estimated in the range of 17.9% to 18.2%.

Chemed's effective tax rate for the full year 2009 is estimated at 39%. Based upon these factors, a full year average diluted share count of 22.7 million shares, management estimates 2009 earnings per diluted share from continuing operations excluding non-cash expenses for stock options, the non-cash increase in interest expense related to the accounting change for convertible debt interest expense and other items not indicative of ongoing operations, will be in the range of $3.85 to $3.95. I will now turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS.

Thank you, David. Over the past year, we have placed significant emphasis on two key areas -- efficiently managing field-based labor and increasing admissions. The focus on improved labor management has materially increased our operating results, expanding our year-to-date adjusted EBITDA margins 155 basis points when compared to the first nine months of 2008. All of this was accomplished as we continued to provide a high level of care, averaging over 5.5 visits per patient per week, which is well above the industry average.

In terms of increasing admissions, we have begun to see a return from these efforts, with admissions totaling 13,735 in the quarter, an increase of 3.1%. Our largest market, Florida, increased admissions 3.6% in the quarter. And our second largest market, California expanded admissions 8.9%. Our most difficult markets in 2009 have been Illinois and Texas. Illinois did generate 4.2% admissions growth in the third quarter. Texas remains difficult with a quarterly decline in admissions of 10.6%. However, this trend is beginning to reverse. Our Texas programs did generate a modest increase in admissions in the month of September of 2009, when compared to the prior year.

We have significantly increased our overall investment in the admissions arena. Today, we have 293 sales representatives, 117 admissions coordinators, and 302 admission nurses. This represents a 7.2% increase in these categories when compared to the third quarter of 2008. Increased spending in the sales and admissions areas resulted in an increase in our total admission cost of $1.3 million, or 8.7%, when compared to the prior year quarter. Admissions have increased in three of our four top referral categories. During the quarter, home-based admissions increased 5.4%, assisted care living facilities increased 11%, and hospital referred admissions increased 5%. Nursing home referrals declined 7.4% in the quarter.

VITAS' average length of stay in the quarter was 78 days, which compares to 74.1 days in the prior year quarter and 73.4 in the second quarter of 2009. Average length of stay is calculated using total discharges during the quarter. The 78 average length of stay -- 78 day average length of stay in the quarter is unusual. And we anticipate this will return to the low to mid-70s in the future quarters. Median length of stay remains stable at 14 days. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,114,774 days in the quarter, an increase of 0.7% over the comparable prior year period. Non-nursing home routine home care days increased 4% in the quarter. However, this increase was substantially offset by a decline of 7% in the nursing home days of care. Continuous care days increased 8.2%, and inpatient days of care declined 1.6% when compared to the third quarter of 2008.

We opened a 15-bed inpatient unit in San Antonio and a 10-bed inpatient unit in Naples, Florida serving Collier County late in the third quarter of 2009. The costs associated with this expansion in capacity did put some stress on our inpatient margins during the quarter. However, this increase in our high acuity capacity should have a very positive impact on our admissions in these two markets on a go-forward basis.

As of September 30, 2009, we had one program classified as a startup. This program is licensed and is Medicare certified. With that, I'd like to turn the call back over to Kevin McNamara.

Thank you Tim. I will now open this teleconference to questions.

Thank you. (Operator Instructions) Your first question comes from the line of Brandon Strong with Barclays Capital. Please proceed.

Hello, good morning. Thanks for taking the questions here. It was great to see admissions growing again. I'm curious if you could give any color about how admissions trended during the quarter? And whether or not we might see some acceleration in patient days into the fourth quarter as a result?

Tim?

Well, you know the quarter progressed well, and I do think we had a strong finish to the quarter. So again, as far as predicting the future, we have put our guidance out there, and we're comfortable with that. But no, we do think we have seen a change in the direction to more of a positive trend because of the efforts and the marketplace we work in. We have expanded our admissions support. We have expanded our sales effort. We have refocused managers in locations that weren't performing well, and we have focused corporate support to add resources to the locations that haven't been doing well. We have shown we can make an impact. We are also encouraged by the opportunities we have had to open inpatient units. I think we're nearing possibly 30 -- 29 to 30 now, and that's up three or four from the prior year. And that helps build your business and certainly helps build admissions in those locations. I'm encouraged. We think we have made a change of direction. But we're within our guidance that we have put out there.

Okay. And then I know it's been at least a few quarters here where the referral to nursing homes have been down. If you could remind me when that first annualized?

I think we're getting there. I think it started late last year. So, we began to see it more in the last six to nine months. But, it started really when the economy was very difficult about a year ago.

Probably tied to occupancy.

Occupancy. We have talked about some of the issues. There's a lot of pressure on the nursing home market because of weak Medicaid reimbursement, Medicare is also putting pressure there -- the individuals, because of the economy, not having the ability to pay to move into them. So census is not up. A lot of captive hospices working with some nursing facilities. But we don't see that worsening at all. And again, we're making progress by focusing on our efforts to work with the nursing homes to show how we can be a great partner for them and help them, you in the ability for them to provide high quality care. I think it will improve. So, we're lapping ourselves, as you say, soon, and we do not see that situation deteriorating. Like anything, as we have had time to adjust our thinking and our resources and our efforts, I think we will make a better effort to do better in that arena in the future.

Okay. Then Tim, maybe one last question here. Just in on the cost management side. Just curious, as you think about over the next year here you need to basically manage all your costs down to 1.4% growth for the year. How comfortable are you with that? And to the extent you start to see an uptick in the economy at some point here, is that actually going to represent a challenge for you?

This is Kevin McNamara. I'll turn it back over to Tim. But something we have been following very closely. When you're talking about a service business like VITAS, you are talking about expense. You're talking about labor.

Yes.

This year, we have done a great job in managing -- when we say, we -- the people at VITAS have done a great job in managing labor. And more to your point, if you want to manage labor, and you want to provide the same good service you can't give everybody a pay increase that is in excess of the increase in reimbursement. The only thing I will say is that we exceeded my expectations with regard to salary and wage management over the last couple months in order to put us in a great position on that. Tim, as far as any other?

No, I would echo those comments. We were proactive three or four months ago, seeing the situation coming. And as you all know, we actually received some relief in the last two or three months when they spread the BNAF issue over a period of years. So looking at about a 1.5% price increase next year, I'm very comfortable we will be able to keep our expenditures in line with that increase. As Kevin mentioned, our compensation -- we have a very good handle on it. We have been able to bring the year-over-year increases down to the range in the last few months, and that will be an ongoing issue. We have had good success, I think, in the areas that are important. And labor side, the benefit areas able to keep our expenditures on a go-forward basis, we think, in line with a very small increase next year. Obviously, we focused as well on the ancillary later costs that we have in the business -- the pharmacy, the medical equipment, the medical supplies. I feel very comfortable we will be able to keep those areas at a very low growth rate to keep in line with that revenue. Corporate, we have in very good control. And the magic bullet we're also working on is try to squeeze out some more productivity out of the methodologies that we use to schedule our labor to make sure that we're matching the right labor to the right number of visits to the care plan and using technology efficiently to shift schedules because of drive time or the right person at the right job. So, we have been working on that for six or nine months, and I think in the next several quarters, we will have some other internal products we can use to help lower our costs vis-a-vis productivity and keep the same high level of care at the bedside. So again, net-net, I'm very comfortable we will keep our expenses in line with this low price increase we have.

The one thing to add on that, it's not surprising. Even though we have been very tough on compensation given the environment we're in, we have benefited from the fact that there's no place for the people to go. Our retention levels are at record levels.

Yes, our turnover is way down, and that is helping. Our challenge will be to, as you say, if the economy picks up to keep it down and keep these things under control. I feel we're in a good position to do that. I feel we're the employer of choice in the industry and have a good home for our people and have a lot of good benefits. And we're in the right spot there.

Okay, thanks very much.

Your next question comes from Darren Lehrich with Deutsche Bank. Please proceed.

Thanks, good morning everyone. A few things here. I guess I just wanted to start with capital deployment. I know you have mentioned this and talk about it in many of your conference calls, but you are generating a lot of excess capital. We haven't seen a lot of M&A activity thus far. You brought your dividend up a little bit. But can you just help us think about how we should think about capital? From our position, you're underlevered. You're generating a lot of excess capital, and you've got wonder if there's better places to be deploying it going forward.

Darren, let me start by saying that you're right, our dividend is relatively modest, but we did double it. And not as significant percentage -- not necessarily yield, but as far as our total cash we generate. But one thing as you mentioned. Over the last several conference calls and meetings what we say is we're very aggressively seeking the repurchase of Roto-Rooter businesses. We think this is a good time for it. Our franchise holders are almost, without exception, second generation holders nearing retirement. We have been very active in reaching out to these people and indicating that now is an excellent time from a financial standpoint for them to sell if they're considering at all. Oftentimes, it's not an economic decision for them. It only works if they have some motivation as a seller. But we are redoubling our efforts in that regard. On the hospice side, I can assure you we look at every hospice that is for sale. And at this point, there aren't many for-profit hospices out there that aren't for sale. We're looking at them. We're a disciplined buyer. There isn't a quarter that goes by that we don't make some indication of interest in financial terms for some -- for one hospice or another. But again, that disciplined element of our buying has kept us from announcing anything of any great significance in that regard. But, it's our constant push. We're obviously well known in the hospice field, and anybody who's looking to sell a hospice of any size wants to know what we think, as far as going forward. As I have indicated -- I don't want to spend too much time. Most of the for-profit hospice programs that are for sale now have a lot of small programs in rural areas that on a long-term basis given the current reimbursement model, we're not that interested in. They're looking to be paid for those programs. And if anything, those are negatives for us. That's often a disconnect, but it's not from a lack of trying. Dave, anything else as far as capital utilization?

Darren, what I would add as what you refer to as underlevered balance sheet, I would say is competitive advantage of a capital structure. And it's not a question of if, it's a question of when consolidation happens in the hospice space. It will happen. We can debate what that trigger is going to be in terms of change in reimbursement, change in conditions of participation that raises the bar in terms of the system and structure you need to have in place. But consolidation will happen in the hospice space, and that's going to -- you're talking about deploying several, couple hundred million dollars plus we would envision in capital for acquisitions at reasonable multiples. Roto-Rooter, again, it is a question of timing. But without a doubt, we see easily $150 million to $200 million of capital to be deployed over the next five years plus. Five to ten years. Ten at the outside. So our attitude is we have a very, very strong balance sheet that's going to reduce our cost of capital when we do have to apply leverage. And it's going to put us in a much better position than a lot of our competition as we chase these deals. So we intend to accumulate cash. Pay out a dividend, which relative to a healthcare company, is actually relatively high. And we will be opportunistic as the acquisitions present themselves.

And also continue to buy in our stock.

Yes. And just out of curiosity, I know that every deal with a franchisee is discrete and unique. But do you think there's an opportunity to do a group buy in a given quarter or two? And is there anything to say about year-end-type sales around tax planning? Is there anything that we should expect over the short run along these lines?

Darren, I would say -- hard to say -- expect it. But just to give you an idea of what we have done. We have identified what we really think are our ten best prospects for repurchase. We have sharpened our pencil, and basically added about 15% to what we would have normally been willing to offer. We have contacted all ten of those. Some have said they have no interest at this point. A couple have said they have some level of interest. But we're doing everything we can. I would say the net effect of that still is that we can't push a string. These are decisions to sell the Roto-Rooter franchises -- they just don't -- they're not driven by economic principles. They're family businesses. It's a great business in that they have a great service mark for an incredibly low franchise fee that's written in stone under Iowa law. Iowa franchise law. So some of the issues about end of the year tax planning, those are arrows in our quiver. And this particular year when I say redoubling our efforts I'm just putting a number on it for you. We're basically offering about 15% more than we would normally just to see if we can't get some things done. But to answer your question, no. It would be, I think, unwise to expect something like that to happen. We will just keep pushing, and I wouldn't be surprised if one or two is done in the next six months or so. But, your point would be well, if they do it in the next six months, why not do it before the year end? Who knows what the tax situation is going to be next year.

And just a question as it relates to admission trends. You mentioned Texas. It has obviously been a really competitive state. Anything more to say there beyond just the obvious competitive dynamics?

Well, the only thing I would say -- and Tim, you can turn it over -- I would just say like in one of our programs -- and I've said this in the past and in various conferences. We had a program that grew very quickly. Probably to an unsustainable level as far as census. We had some management turnover in that program. The program generally has retreated to a census level to about what -- where it started before the managers involved -- got involved. And, when you look at admits and census, having that differing by 150 to 200 census over a year and a half period going up and then down. It just has the effect on the census, the admit numbers. As Tim indicated, that's getting back into an equipoise -- a normal situation. I can't really say it was just pure normal competition in the Texas market. Texas market is always tough, always competitive, but VITAS has done pretty well over time in the Texas market. And we expect that to continue.

Okay, great.

Anomaly. I guess what I'm really trying to say is, we're still a pretty small Company. We're talking about relatively small numbers. We're talking about numbers that can be rocked by things like one or two managers leaving and going to a competitor and taking a couple of their best contacts with them.

Yes. As far as the update goes, we know about how the budget neutrality adjustment factor has been dealt with now. But I guess just a nuance question about whether any wage classifications or any technical components to your rates influenced by the markets you're in would impact that rate over the 1.4%. Is there anything that you could quantify there?

This is Tim. Those factors that you mentioned have been all worked into the black box, and output is the 1.4%. So yes, there are certain states -- like California's, probably the highest from the wage perspective. Since we're growing well there. Florida is not. A few others aren't, but that's all in the analysis we have done already. And we do not expect any new information to come out. That's all locked in stone, so to speak. So our number contemplates all of those issues.

Great, thanks a lot.

Your next question comes from the line of Jim Barrett with CL King and Associates. Please proceed.

Good morning, everyone.

Morning, Jim.

Kevin or Tim, could you talk about the -- in your search to acquire other hospices, any sense as to how much competition you have? Whether it's strategic acquirers or other types of acquirers?

I'll say this. That there is still -- it surprises me. But there are still apparently financial buyers out there. I won't give any names, but, we relatively recently had the opportunity to make a bid on a substantial for-profit hospice out there. And again, I thought we made a very aggressive bid. We were told that we weren't in the ballpark. That a financial buyer was offering substantially more for it. I guess to buy the platform. I'll just say that that was three months ago, and there's been no announced deal. But to answer your question Jim, the most significant element to me is that there's still some financial buyers out there. There's still some people flailing about looking to buy a platform, and they are, by definition, willing to pay a little bit more than -- .

Right

-- a strategic buyer -- it's not -- that likes the strategy behind it but isn't willing to pay for the platform.

Okay, that's helpful. Thank you very much.

At this time, there are no further questions. I would now like to turn the call back over to Kevin McNamara for any closing remarks.

Dave, before we close, you have something that you would like to add?

Yes. A couple questions I had last night -- didn't come up in the conference call. But to save a lot more phone calls coming in. We did see an increase in our receivable balance. It was $88 million at the end of September of 2008, and it was $106.7 million at September 30, 2009. Basically, we saw the receivables for Roto-Rooter drop about $1.3 million over the prior year quarter. But VITAS was up almost $20 million. $11 million of that increase was actually due to -- for a very unique reason, we received a portion of our PIP payment in September, late September. Actually came in the form of a check that we received in early October for $11 million. As well as we have about $4 million tied up in California related to consolidation of provider numbers that we're working our way down through sequential billing. So basically, we saw an unusual pop in our receivables that basically is corrected as of today. For example at the end of September, we had $42 million of cash on hand. And today, we have almost $63 million on hand. So most of that has been monetized. But it was an unusual jump in our receivables for the quarter. With that, Kevin, really no other comments.

Okay. Well, with that we will end the call, and we will see you at the end of the fourth quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.