Chemed Corp (CHE) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Chemed Corporation's third quarter 2010 conference call. My name is Lanita, and I will be your conference facilitator for today. Please note that today's conference is being recorded. (Operator instructions.)

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

Good morning. Our conference call this morning will review the financial results for the third quarter of 2010 ended September 30th, 2010.

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 a portion 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 the result of a variety of factors, including those identified in the Company's news release of October 25th and 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 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 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 2010 conference call.

Given the current state of our economy I was pleased with our operating results in the quarter. Revenue in the quarter totaled $320 million and net income was $21 million if you adjust for certain noncash items and items that are not indicative of ongoing operations. Adjusted net income totaled $24 million and equated to adjusted earnings per diluted share of $1.03, an increase of 7.3% when compared to adjusted earnings per diluted share in the prior year.

In the third quarter of 2010 our hospice business segment generated revenue of $234 million, an increase of 7.8% over the comparable prior year period. VITAS provided an adjusted EBITDA of $35.6 million, an increase of 8.3% compared with the third quarter of 2009. This equated to an adjusted EBITDA margin of 15.2%.

Our admissions expanded 5.4% in the quarter and have increased 4.8% on a year-to-date basis. This compares to a 1.7% decline in admissions in the first nine months of 2009. This improvement in admissions trends is attributable to several factors, the most significant has been the expansion of our inpatient units, or IPUs, over the past year.

As of September 30th, 2010, VITAS has 31 dedicated IPUs with a total daily capacity of 414 beds. This is a 7% increase in IPU locations and a 6% increase in patient beds. New IPUs provide increased visibility to the referral sources in the community, as well as increased capacity to provide hospice care to our high acuity patients.

We've also made significant investments in our field personnel in terms of staffing, training, and support. These investments are now providing a noticeable improvement in our overall admissions trends.

In the third quarter of 2010 VITAS recorded a Medicare Cap billing limitation of $117,000 for one program with an average daily census of 126. This equates to a shortfall of roughly five admits. Of VITAS' 33 unique Medicare provider numbers, 30 provider numbers, or 91%, have a Medicare Cap cushion greater than 10% for the most recent 12-month period. Three provider numbers, including a small program with a modest Medicare Cap liability, have Medicare Cap cushion below 5%. VITAS generated an aggregate Medicare Cap cushion of $199 million, or 24.1%, during the trailing 12-month period.

Roto-Rooter's demand trend has continued to show modest improvement over the past three quarters. This trend has continued as we enter the fourth quarter of the year.

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

Thanks, Kevin.

As Kevin noted, the net revenue for VITAS was $234 million in the third quarter of 2010, which is an increase of 7.8% over the prior year period. This revenue growth was a result of increased ADC of 6.1%, driven by an increase of admissions of 5.4%, increased discharges of 4.7%, combined with Medicare price increases of approximately 1.3%. The remaining difference was driven by geographic mix shift of the patient base. Our average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $197.90, which is 1.6% above the prior year period.

Routine homecare reimbursement and high acuity care averaged $155.49 and $689.30, respectively, per patient per day in the third quarter of 2010. During the quarter high acuity days of care were 7.9% of total days of care. This is essentially equal to the prior year quarter.

The third quarter of 2010 gross margin excluding the impact of Medicare Cap was 23.1%, this is 36 basis points lower than third quarter of 2009. Increased expenses related to field based admissions, expansion of inpatient units, and increased documentation requirements and Medicare certifications all contributed to this margin decline.

Our homecare direct gross margins were 52.7% in the quarter, an increase of 100 basis points when compared to the third quarter of 2009. Direct inpatient margins in the quarter were 12.3%, which compares to 12.8% in the prior year. Occupancy of our inpatient units averaged 77.4% in the quarter and compares to 74.6% occupancy in the third quarter of 2009.

Our inpatient results were impacted by the expansion of our inpatient capacity. Tim O'Toole will provide additional metrics related to our inpatient strategy.

Continuous care, the least predictable of all levels of care, had a direct gross margin of 21.1%, a 50 basis point improvement over the prior year quarter. Average hours billed for a day of continuous care averaged 18.9 in the quarter, a 0.3% increase over the prior year's average.

Selling, general and administrative expense was $18.4 million in the third quarter of 2010, which is an increase of 0.8% when compared to the prior year quarter.

VITAS adjusted EBITDA totaled $35.6 million in the quarter, an increase of 8.3% over the prior year period. Adjusted EBITDA margin excluding the impact from Medicare Cap was 15.3% in the quarter, which was slightly above the prior year quarter.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $86.5 million for the third quarter of 2010, an increase of 8.5% over the prior year quarter. Roto-Rooter's gross margin was 44.6% in the quarter, 184 basis point decline when compared to the third quarter of 2009. This decline in our gross margin is primarily the result of increased plumbing and excavation jobs which contribute a lower gross margin than sewer and drain.

Job count in the third quarter of 2010 declined a modest 0.4% when compared to the prior year period. During the third quarter of 2010 total residential jobs declined 1.5%, as the residential plumbing jobs increased 2.3%, and residential drain cleaning jobs declined 3.6% when compared to the third quarter of 2009. Residential jobs represented 71% of total job count in the quarter. Total commercial jobs increased 2.3%, with commercial plumbing excavation job count increasing 5.9% and commercial drain cleaning increasing 0.8% when compared to the prior year quarter.

Roto-Rooter adjusted EBITDA in the third quarter of 2010 totaled $13.7 million, a decline of 0.5%, and the adjusted EBITDA margin was 15.9% in the quarter, a decline of 144 basis points when compared to the prior year. This decline is a direct result of job mix shift due to more plumbing and excavation jobs.

Now let's turn to our consolidated balance sheet. Chemed had total debt of $157.4 million as of September 30th, 2010. This debt is net of the discount taken as a result of convertible debt accounting requirements. Excluding this discount aggregate debt is $187 million and is due in May 2014. Chemed's total debt equates to less than one times trailing 12-months' adjusted EBITDA.

Chemed's $175 million revolving credit facility expires in May 2012. At September 30th, 2010 this credit facility had approximately $146.8 million of undrawn borrowing capacity after deducting $28.2 million for letters of credit issued under this facility to secure our workers compensation insurance.

Capital expenditures for the third quarter of 2010 aggregated $7.2 million, and compares favorably to depreciation and amortization during the same period of $7.6 million.

Total cash and cash equivalents as of September 30th, 2010 was $137 million. Net cash provided from operations in the third quarter of 2010 aggregated $38 million.

Our 2010 full year guidance is as follows. VITAS expects to achieve full year 2010 revenue growth prior to Medicare Cap and the budget neutrality adjustment factor of 7.5% to 8.2%. Admissions in 2010 are now estimated to increase 4% to 5%, and full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.3% to 15.6%.

Effective this October 1st, 2010 our Medicare increased average hospice reimbursement for VITAS by approximately 2.1%. our 2010 full year guidance includes $1.25 million of estimated Medicare contractual billing limitations for the fourth quarter of 2010.

Roto-Rooter expects to achieve full year 2010 revenue growth of 4.5% to 5.5%. The revenue estimate is a result of increased pricing of approximately 3%, a favorable mix shift to higher revenue jobs offset by a job count decline estimated at 2% to 3%. Adjusted EBITDA margin for 2010 is estimated to be in the range of 17.5% to 18.5%.

Based upon these factors, an effective tax rate of 39%, and a full year average diluted share count of 23 million shares Management estimates 2010 earnings per diluted share from continuing operations excluding noncash expenses for stock options, the noncash increase in interest expense related to the accounting change for convertible debt, and other items not indicative of ongoing operations will be in the range of $4.10 to $4.20.

I'll now turn this call over to Tim O'Toole, Chief Executive Officer of VITAS.

Thank you, David.

VITAS is continually monitoring and adjusting its local field efforts in terms of generating awareness of the hospice benefit for Medicare. Through the hard work of all of our employees we have generated some extremely positive improvements in our overall admission trends. This has resulted in VITAS admitting 14,483 patients in the quarter, which is 5.4% higher than the prior year.

During the quarter our largest State, Florida, increased admissions 9.3%, and our second largest State presence, California, expanded admissions 4.1%. We were able to expand admissions in 11 of the 15 States plus the District of Columbia, in which VITAS operates.

Our most difficult States in 2009 had been Illinois and Texas. Both of these States have stabilized, and in the first nine months of 2010 Illinois' admissions have increased 1% and Texas had a modest decline of 1.7% on a year-to-date basis. This is a significant improvement over the prior year period.

Admissions have increased in three of our four top referral categories. During the third quarter home based admissions increased 8.5%, assisted care living facilities admissions increased 5.6%, and hospital referred admissions increased 5.9%. Nursing home referrals declined 2.4% in the quarter. This growth in admissions is in part due to our strategy of expanding inpatient capacity. This strategy raises VITAS' visibility with our referral sources in key markets. In addition, increased care to high acuity patients has a positive impact on our billing potential under the Medicare Cap formula.

We have been methodically changing our inpatient positioning over the past year. In the third quarter of 2009 we opened a 15-bed inpatient unit in San Antonio, Texas, and a 10-bed inpatient unit in Collier County, Florida. In the fourth quarter of 2009 we opened up a 10-bed unit at Columbia Hospital in Palm Beach, Florida. In the first quarter of 2010 we began accepting patients into our Courtney Springs inpatient unit in Brevard County, Florida, and the University of Miami Hospital inpatient unit opened in April of this year.

In 2010 we opened an inpatient unit at Jefferson Methodist Hospital in Philadelphia. In addition to this dedicated inpatient bed capacity VITAS has a significant number of short-term contract beds available in the vast majority of our programs to accommodate any unusual spikes in high acuity patient needs.

The costs associated with the inpatient capacity did put some stress on our inpatient margins during the quarter. Excluding the startup cost of these IPUs, VITAS had an inpatient margin of 15.4% in the quarter.

We also continued to increase our investment in the admissions arena. Today we have 297 sales representatives, 118 admissions coordinators, 341 admission nurses, 86 community liaisons, and 19 long-term care liaisons. VITAS has increased total admissions staffing personnel 6.2% when compared to the third quarter of 2009. These investments in the sales and admissions areas resulted in an increase in our total admissions costs of $2.5 million or 15.6% when compared to the prior year period.

VITAS' average length of stay in the quarter was 78.2 days, which compares to 78 days in the prior year quarter and 77.4 in the second quarter of 2010. Average length of stay is calculated using total discharges during the quarter.

Medium length of stay increased one day to 15 days in the quarter. Medium length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,182,833 days in the quarter, an increase of 6.1% over the comparable prior year period.

Non-nursing home routine homecare days increased 9.6% in the quarter. This increase was partially offset by a 2% decline in nursing home days of care. Continuous care days increased 6.1%, and inpatient days of care increased 5.4% when compared to the third quarter of 2009.

At September 30th, 2010 we had one program classified as a startup. In addition, we have been awarded a certificate of need by the State of Florida in the Jacksonville community.

With that, I'll turn the call back over to Kevin McNamara.

Thank you, Tim.

I will now open this teleconference to questions.

(Operator instructions.)

And your first question comes from the line of Brendan Strong from Barclays. Please proceed.

Hey, good morning. I guess the biggest area of focus for me is on the revenue side, and it's specifically for Tim. I mean you guys have done really a great job ramping admissions back up over the past year here. And I'm curious how much more do you think you have to go from these initiatives you already put in place, and maybe just refresh my memory on when you're going to annualize some of that impact?

Very good. Well, I mean I think we've begun to see about, you know, a couple of quarters ago we began to see improvement from the investments we made, and I think some general areas. I mean we do think the economy is helping a little bit this year compared to the prior year, but we'll continue to see good results I expect and we've seen them now for two or three quarters. The initiatives that we've put in place, whether it be personnel or the strategy as we've talked about with the inpatient unit expansion, we certainly expect that to continue. So we're very optimistic.

Okay, and then just as you think about the growth here, and you mentioned the economy, how much of this growth would you attribute to your initiatives versus -- and actually taking market share versus just maybe some -- the growth in the hospice industry overall?

Well, I'd like to attribute most of the impact from initiatives that we took, you know, the economy is a minor issue, I don't want to overstate it. So those are issues. We continue to have a lot of resources coming to the table. We're getting to the referrals sooner. We're providing great care, and the inpatient unit activity, the continuous care program, all of our marketing, we're -- we have big market presence in many of our locations.

As you know, our strategy is to go into large markets, which gives us continual opportunity to expand. One of the ways we expand is by opening satellite offices, and we've done numerous of those during the year. They're not considered new starts. So, again, all those initiatives I expect to continue, and as I say we're optimistic.

I would add that when you look at how important Florida is to VITAS the improvement in the Florida economy, that is the freefall stopping, that's helped from an economy related issue that's helped.

The other comment I would make California has been strong for us but that's probably driven by kind of disarray in the communities and the economy of California. So many of our competitors are not-for-profits that you can imagine if you have a not-for-profit that's barely hanging on, it's dependent on charitable contributions and some other volunteer activities. And then if you look at what's going on in some of those communities that's helpful to a professionally run organization, like VITAS that's not dependent on those things.

Thanks, great. Thanks.

and your next question comes from the line of Darren Lehrich from Deutsche Bank. Please proceed.

Good morning. This is [Raj Mahalle] calling in for Darren Lehrich at Deutsche Bank. I was just wondering can you discuss how you're preparing for the face-to-face visit requirement and what that means in terms of cost for VITAS?

Well, we're preparing like everyone else. And, again, it's -- it will become effective next year early in the year. We're going to need to be hiring more doctors. We're going to need to be putting in processes. We're still getting guidance form the regulatory individuals about exactly what needs to happen.

Again, I don't see it as a major issue. The regulations have been adding up over the last several years, whether it be the conditions of participation that were revised a year-and-a-half ago or the narrative upon admission that we dealt with this year, a lot of the extra review by regulatory bodies of FMR and various audits. So, again, this is a strength of VITAS, and I don't expect this will be a big burden. It will be an extra cost, and we have not put a separate figure on that yet but we'll have that handled.

And just to give you an idea that during the course of this year one of the issues we've had when you look at our administrative costs, that's almost 100% of that is net based, is driven by an increase in physician hours. We have right now about 100 physicians more, part-time physicians on the payroll than last year, and average pay between $60,000 and $70,000, which have increased our capacity we think significantly in both -- to answer, you know, an issue or two, that talk about the physician narrative that's applicable now but also looking forward to the future for the face-to-face visit. But we think we've -- we're hitting the ground running in that regard to, again, increase our capacity in advance so we're not flatfooted when the new conditions apply.

Okay, great. And then on your inpatient margins, they've been under a bit more pressure in the last few quarters. Can you kind of discuss how much additional startup activity is expected and what was incurred in Q3, and I guess what I'm driving to is what do you think a more normalized inpatient gross margin would be going forward?

I wouldn't expect our margins to change dramatically in that area, both on an adjusted basis and on an investment basis. We'll probably be adding maybe one new one a quarter as we look out and refurbishing maybe some that we have. At the same time we would hope that some of the inpatient units that we began to develop six and nine and 12 months ago would begin to mature.

So it's like a 15% to 18% margin over the next 12 --

Yes, well, right now we did 15% in this quarter on an adjusted basis, and I would not see that necessarily changing. But as far as, you know, you have to take your opportunities as they come, so if there is a larger investment than one a quarter it could impact it, but it just builds the homecare program, it builds our admissions, and it sets the stage for future growth and maturation when we get the occupancy up. So I don't think any of that is concerning.

That 15% plus margin is taking that adjustment or call it the sales and marketing aspect of the inpatient units and applying it to the sales and marketing side, although we make that adjustment, but that number is an adjusted figure.

Right. I'd say, again, we've burdened the quarter with about an extra -- a little over a half a million dollars of expenses. The prior year we had about a quarter of a million dollars of excess expenses related to startup. But we're getting such a great response from these results, quite frankly, we're not all that concerned about the last couple hundred basis point profitability of our inpatient units. It's high acuity care that our patient needs, and it is a great point of visibility for the quality of care we provide all our patients.

So we really see this as an ongoing program, so we certainly expect inpatient care, high acuity care to be profitable. But whether it's 12% or 15%, quite frankly, we don't care as long as it's very effective in providing good care and it provides good visibility to what VITAS does in our individual markets.

And to the extent we've been able to make this investment in that segment and our overall margins have remained solid and modestly improving, that's encouraging.

Great. Thank you.

And your next question comes from the line of Frank Morgan from RBC Capital Markets. Please proceed.

Good morning. A couple questions here. First, it looks like Texas is close to finally making a turn. I was wondering if you could give us any commentary on the larger competitive landscape in Texas? Have you seen a slow-down in the growth of new programs in the market? Do you think this is more macro driven with Texas market dynamics or is it something specific to you all with the investments you've made?

Well, I think the Texas market is very solid. I think, frankly, a couple of years ago we ran into some problems, in some cases were self-inflicted. And so we've firmed up the Management there and put in some new strategies, some new inpatient units, and we're moving ahead. I don't think there's any seachange in the competitive environment, at all, in Texas compared to elsewhere. So we're making progress there. Some of the competition is struggling, both in Texas and elsewhere, but it's nothing radical.

With that competitive backdrop with some of your competitors struggling, do you really see any change in the acquisition environment on the hospice side of the business in Texas or any other State for that matter?

Well, as we've said, from really the first quarter we've seen a significant change in the acquisition environment. Go back a couple of years there were a lot of hospice programs that were for sale but they didn't fit our profile. They were largely put together by financial players, kind of a concatenation of small programs in far-flung locations. What we're seeing this year is a lot more hospice programs that really fit our profile.

As we've indicated, previously there were a couple going back six or nine months that fit our profile. We got actively involved. We made bids, and we were frankly outbid by people who were really looking to -- for a platform acquisition and could offer platform pricing. I think we're through that, and I think, as I've indicated, that there is a good environment for acquisitions that fit our profile, and I think I said on the first quarter call I'd be surprised if we didn't complete one before the end of the year. I'm still looking at that type of observation from the type of environment we're looking at.

Got you. One final question, obviously, with the investments that you've made on the -- adding staff at field level, for marketing, for increased documentation, is there some leverage that you can expect to get at the operating level having made those investments or will those continue to occur as your volume growth occurs? I'm just trying to get at what do you see as the near-term opportunity for further margin expansion at the facility level? Thanks.

Tim, I'll let you jump-in there. I'll just say, obviously, if we're spending $7 million more this year for that category, between $6 million and $7 million on a run rate, you'd expect leverage from that excess capacity. Given the fact that we're, you know, there's going to be a significant change January 1st in dealing with recertification, that is the face-to-face meeting, so it's a bit of an unknown.

I'll just say that as of this moment it's our expectation that there is some leverage there. I'll leave it to Tim here to jump-in and put his deck on the line as far as how much there is, but.

Well, I would expect there'd be some, and I agree with Kevin that we had a major increase in the administrative area around the compliance effort in the last 12 to 18 months. And, yes, if it wasn't for the new requirement for the face-to-face we'd maybe be a little more optimistic that it would come under control. So I think it'll continue to grow at an incremental basis but not anything like we've seen. It's always healthy to invest in the compliance area, it gives you tremendous advantages.

The areas of sales and marketing those are areas that we make decisions our self, they're not imputed on us. So my view would always be to continue to press the sales and marketing effort as long as it's producing good top line results, and it is. So it's helping us move forward, but that's an area we can dial-in those increases. And, of course, we'll manage that. But we're in good shape in both those areas.

Okay. Thank you.

and your next question comes from the line of Jim Barrett from C.L. King & Associates. Please proceed.

Good morning, everyone. Kevin, you mentioned potential hospice acquisitions. The press release mentioned prospective plumbing acquisitions. As you seek to do deals is there a certain level of leverage the Company is comfortable with? And on a related note could you envision using stock, as well, to purchase acquisitions on either side on either business?

I don't think the stock acquisition is likely. We've got plenty of cash and debt capacity, we could expand our leverage a lot. It's just not going to be a limitation. You have to -- I mean the one issue that you can conclude with virtually no chance of being wrong is the type of acquisitions we're making, that is hospice and storm drains and plumbing, that is Roto-Rooter and hospice, both businesses have excellent cash flow characteristics.

So any acquisition, I mean in the development of Roto-Rooter since 1980 we've grown from zero Company operations to our -- to basically owning about 118 counties, over 50% of the U.S. population where the population resides. That's all been self-funding from the cash flow of the acquired companies.

So I guess what -- the only thing I could say is we have a lot of debt capacity and if it's used for acquisitions they're almost self funding, so it's just not a limiting factor.

Jim, if you look at our balance sheet we almost have zero net debt when you look at the GAAP debt compared to the cash on the balance sheet. Given the fact that we have extremely low capital, CapEx in the low to mid $20 million annually, and that's mostly replacement, the fact is we could comfortably have four times EBITDA in terms of a debt load. And then keeping in mind any acquisition we do will immediately provide cash flow, so we really view as we have significant opportunity to provide leverage if we can effectively deploy that cash flow for a return.

And when you look at the number and size of the acquisition pipeline, you spent over $300 million to acquire VITAS, it sounds like you could borrow well north of that number in this current round of consolidation, is that a reasonable outlook when I look out a year to two years?

Yes.

Okay. Okay, well, thank you, both.

Very well. Well, I think that's the last of our questions. I want to thank everyone for your attention, and we'll hope to have a pleasant conversation following our fourth quarter and end of 2010.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.