Chemed Corp (CHE) 2011 Q2 法說會逐字稿

Good morning. Ladies and gentlemen. And welcome to the Chemed Corporation second quarter 2011 conference call. My name is Keisha and I will be your conference facilitator today. (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 second quarter of 2011, ended June 30th 2011. 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 26th 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 26th 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 second quarter 2011 conference call.

Chemed consolidated revenue in the quarter totaled $333 million and net income was $20.3 million. If you adjust for certain non-cash items and items that are not indicative of ongoing operations adjusted net income totalled $23.5 million and equated to adjusted earnings per diluted share of $1.09, an increase of 11.2% when compared to adjusted earnings per diluted share in the second quarter of 2010.

During the quarter our hospice business segment generated revenue of $243 million, an increase of 7.3% over the comparable prior year period and adjusted EBITDA of $33.9 million, an increase of 2.5%. This equated to an adjusted EBITDA margin prior to Medicare cap of 14.1%.

In the second quarter of 2011, our admissions totalled 15,294, an increase of 6.0% over the prior year quarter. Our success in achieving excellent admissions growth is attributed to several factors. We continue to expand our presence in local communities with new or refurbished in-patient units. This provides VITAS with increased visibility to our referral sources as well as increased capacity to provide hospice care to our high acuity patients.

As of June 30, 2011, VITAS had 34 dedicated IPUs with a total daily capacity of 450 beds. This is an increase of 9.7% over the prior year quarter. I anticipate using in-patient units to maximize our visibility within the community to be a permanent part of our admission strategy.

We've also continued to expand our marketing and community liaison structure in terms of staffing, training and support. These investments in personnel, coupled with our in-patient units have resulted in a significant improvement in over all admissions trends.

We continue to successfully manage within the Medicare cap billing limitation. During the quarter we had one small program requiring us to accrue for a Medicare cap billing limitation of $368,000. This compares to a $35,000 reversal of billing limitations in the second quarter of 2010.

Of VITAS' 36 unique Medicare provider numbers, 33 have a Medicare cap cushion of 10% or greater during the trailing 12-month period. Two provider numbers have a Medicare cap cushion of less than 10%, and one small program has, as I mentioned earlier, a modest Medicare cap liability. VITAS generated an aggregate Medicare cap cushion of $222 million or 25% during the trailing 12-month period.

Now let's turn to our Roto-Rooter business segment. During the second quarter of 2011, Roto-Rooter increased revenue 2.2%. This revenue growth is a combination of revenue and job count growth in our commercial sector, partially offset by a slight decline in job count in our residential business.

I continue to see signs of modest strengthening in the overall Roto-Rooter business that I anticipate will continue for the remainder of the year. With that I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. As Kevin mentioned, net revenue for VITAS was $243 million in the second quarter of 2011, which is an increase of 7.3% over the prior year period. Excluding the impact of Medicare cap, our revenue increased 7.4%.

This revenue growth was a result of increased ADC of 5.8%, driven by an increase in admissions of 6%, combined with Medicare price increases of approximately 2.1%. This was partially offset by acuity and geographic mix shifts within our patient base.

Our average revenue per patient her day in the quarter, excluding the impact of Medicare cap was $200.99, which is 1.6% above the prior year period. Routine home care and high acuity care reimbursement averaged $158.67 and $696.00 respectively per patient, per day for the second quarter of 2011.

During the quarter, high acuity days of care were 7.9% of total days of care, 20 basis point lower than the prior year quarter.

The second year -- the second quarter of 2011 gross margin, excluding the impact of Medicare cap was 22.0%, which is a decline of 68 basis point from the second quarter of 2010. This decline in margin is a result of increased costs related to newly mandated physician visits for recertification, expansion of our community liaison program as well as costs associated with our continued expansion of in-patient units.

Our home care direct gross margin was 52.4% in the quarter an increase of 30 basis points when compared to the second quarter of 2010. Direct inpatient margins in the quarter were 13.3% which compares to 12.3% in the prior year.

Occupancy of our inpatient units averaged 74.2% in the quarter, in comparison to 78.4% occupancy the second quarter of 2010. Continuous care, the least predictable of all levels of care, had a direct gross margin of 20.2% a decline of roughly 100 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care averaged 18.8 in the quarter, essentially equal to the prior year's average.

Selling, general, and administrative expense was $19.7 million in the second quarter of 2011 which is an increase of 7.2% when compared to the prior year. Adjusted EBITDA margin, excluding the impact from Medicare cap was 14.1% in the quarter, which was 51 basis points below the prior year quarter.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain-cleaning business generated sales of $90.3 million for the second quarter of 2011, an increase of 2.2% over the prior year quarter. Roto-Rooter's gross margin was 45.0% in the quarter, an 18 basis point decline when compared to the second quarter of 2010.

Adjusted EBITDA in the second quarter of 2011 totaled $15.8 million, an increase of 4.4% and the adjusted EBITDA margin was 17.5%, an increase of 37 basis points compared to the prior year quarter.

Job count in the second quarter of 2011 did have a modest decline of 1.6% when compared to the prior year period. Job count is adjusted to exclude acquisitions as well as any location that was converted from or to a contracted location. So basically same story, unit per unit.

During the second quarter of 2011, total residential jobs decreased 3.4% as residential plumbing jobs decreased 1.3% and residential drain cleaning jobs decreased 4.5%. Residential jobs represented 71% of our total job count in the quarter.

Total commercial jobs increased 3.1% with commercial plumbing excavation job count increasing 3.6% and commercial drain cleaning increasing 3.5% when compared to the prior year. The all other residential and commercial job category which makes up less than 2% of total job count declined 8.8%.

Now let's review Chemed's consolidated balance sheet. Chemed had total debt of $163 million at June 30, 2011. This debt is net of a discount taken as a result of the convertible debt accounting requirements. If we exclude this discount, aggregate debt is $187 million and is due May of 2014.

Our total debt equates to less than one times trailing 12-month adjusted EBITDA. In March 2011, Chemed replaced its existing credit facility with a new credit agreement. Terms of this agreement consist of a 5-year, $350 million revolving credit facility. The interest rate on this credit agreement has a floating rate that is currently LIBOR plus 175 basis points. This credit agreement provides Chemed with increased flexibility, in terms of acquisitions, share repurchases, dividends and other corporate needs.

In addition, an expansion feature is included in this credit agreement that provides Chemed the opportunity to increase its revolver or enter into term loans for an additional $150 million. At June 30, 2011, this facility had approximately $321 million of undrawn borrowing capacity after deducting $29 million for letters of credit issued to secure our workers compensation insurance.

Capital expenditures for the first six months of 2011 aggregated $15 million and compares to the depreciation and amortization during the same period of $14.8 million. We increased our quarterly dividend from $0.12 to $0.14 per share in the third quarter of 2010. In addition, the Company has purchased $21.8 million or 341,513 shares of Chemed stock in the first six months of 2011.

We have approximately $97.4 million remaining under our previously announced share repurchase program. Management will continually evaluate capitalization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of capital resources.

Our 2011 full year guidance is as follows. VITAS expects to achieve full year 2011 revenue growth prior to Medicare cap of 7.5% to 8.5%. Admissions in 2011 are estimated to increase approximately 6.5% to 7% and full year adjusted EBITDA margin prior to Medicare cap is estimated to be 15.3% to 15.8%.

Effective October 1, 2010, Medicare increased the average hospice reimbursement rate by approximately 2.1%. Consistent with prior years, our guidance assumes VITAS will incur an additional $2.5 million of estimated Medicare contractual billing limitations for the remainder of 2011.

Roto-Rooter expects to achieve full year 2011 revenue growth of 6.5% to 8.5%. The revenue estimate is a result of increased pricing of approximately 3%, a favorable mix shift to higher revenue jobs with job count growth estimated at 0% to 2%. Adjusted EBITDA margin for 2011 for Roto-Rooter is estimated in the range of 17% to 18%.

Based upon the above, management estimates 2011 earnings per diluted share, excluding non-cash expense for stock options, non-cash interest expense related to the accounting for convertible debt and other items not indicative of ongoing operations will be in the range of $4.70 to $4.80 per share. This compares to Chemed's 2010 adjusted diluted earnings per share of $4.17. I will now turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS.

Thank you, David. As most of you are aware, we continue to put significant efforts into our admission focus and initiatives. One of the most important aspects to increased admissions is appropriately focused field-based sales and marketing personnel. As of June 30, 2011, we have 305 sales representatives, 143 admissions coordinators, 342 admission nurses, 111 community liaisons and 23 long-term care liaisons. Sales representatives and admissions personnel have expanded 6.8% compared to the second quarter of 2010.

This focus has resulted in VITAS generating 15,294 admissions in the quarter, an increase of 6% over the second quarter of 2010. At this rate, VITAS is on track to provide end-of-life care to more than 76,000 patients in 2011.

During the quarter, our largest state, Florida, increased admissions 8.4% and our second largest state presence, California, expanded admissions 2.7%. We were able to expand admissions in 13 of the 16 states plus the District of Columbia in which VITAS operates.

Admissions have increased in three of our four largest referral categories. During the second quarter of 2011, home-based admissions increased 7.6%, assisted care living facilities increased 12.5% and hospital referred admissions increased 5.2%. Nursing home admissions decreased by 5.2%.

VITAS' average length of stay in the quarter was 77.1 days which compares to 77.4 days in the prior year quarter and 78.9 in the first quarter of 2011. Average length of stay is calculated using total discharges during the quarter.

Median length of stay was 14 days in the quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,211,325 days in the quarter, an increase of 5.8% over the comparable prior year quarter-- period, excuse me. Non-nursing home, routine home care days increased 10.6% in the quarter. This increase was partially offset by a 5.9% decline in nursing home days of care.

Continuous care days increased 3.1% and in-patient days of care increased 3.2% when compared to the second quarter of 2010.

At June 30, 2011 we had five programs classified as start-ups. We currently have three state applications that are in process and should allow us to begin caring for patients during the third quarter of 2011. Total operating losses for these start-ups totaled $430,000 in the quarter and compares to losses of $6,000 for locations classified as start-ups in the prior year period. With that I would like to turn the call back to Kevin McNamara.

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

Thank you. (Operator Instructions). The first question comes from the line of Darren Lehrich from Deutsche Bank. Please proceed.

Hi. Thanks and good morning. This is Brian Zimmerman in for Darren. Last week the Office of Inspector General came out with a report focusing on Medicare hospices that focus on nursing facility residents. Do you see the government's interest in this area as a potential risk? And the second part of that question is, we've noticed a decline year-over-year in average daily census in nursing facilities. has that changed from competition, from skilled nursing facilities or are you de-emphasizing growth in that setting?

I'm going to turn this over to Tim who lives this on a daily basis. But, no, it's very consistent what we have seen over the last five years. You know increasingly over this period. VITAS has become less and less dependent, using maybe an inappropriate word, on patients in nursing homes, because the nature of the fact that a lot of nursing homes have started their own captive hospice programs.

And there's something that we think has given our lack of dependence on this sector, we see as positive, because as you suggest, the government has this thought -- several elements within the government, that there's some type of double dipping going on when you have hospice in nursing homes. They can't put their finger on it. They don't like self-referral. They just have this sense that there's some double dipping going on there. Again, we still don't think it's a huge risk, even for those nursing home providers. But in our case, from our perspective, whether we like it or not, we have become less dependent on this sector. Tim, anything to add to that?

Yes, just a couple of things. As Kevin highlights, the trend in the nursing homes census for us have been mirroring the reduction and overall nursing home facility beds in the country. There are more ALF beds being built and that's really -- we are just following the industry. Our percentage of nursing home patients, very similar to what it's been in the past, around 30% and we are very pleased with that and think our future there is very good. Briefly speaking about the OIG report, as Kevin mentioned. They sensed some issues there.

I think what we would say is hospices are very, very important service that's provided to nursing home patients and just because someone happens to have their residence in a nursing home should not mean they are not entitled to their hospice benefit. We feel very strongly about that. They raised some concerns about captives, where some companies have maybe two-thirds or more of their census from nursing home patients that they own the nursing home. That may be something they need to look at.

VITAS is independent. We don't have that issue at all. We are very comfortable with where we sit. Also keep in mind, hospice is additional services. The OIG report indicates some comments about there's care givers already there. Those care givers are not allowed to do hospice services and hospice provides additional services and keep in mind that because hospice is provided for nursing home patients, those patients can stay in the nursing home and aren't shifted aggressively to a higher acuity facility, aka a hospital, where their cost structure would be much higher.

So there's parts of the OIG report I disagree with. Some of the comments are not new. They've been focused on it for a long time. CMS has already responded to the OIG report and they said they will call the issue to the attention of the auditors and so forth about the self-referrals. And as far as the change in the payment system, the OIG highlights that they are already looking at changing the system for a U-shaped curve. They are gathering a lot of data. This is one period they will look at but I will not see any changes there soon.

Brian, this is Dave Williams. We've had multiple meetings over the years with CMS on this very issue of nursing homes doing self referral. We've also had meetings directly with Senate Finance discussing this issue and of course it's come up in MedPAC multiple times. We're a firm believer in checks and balances. Said differently, there is strong anecdotal evidence that when it's an independent hospice agency going into the nursing home and providing hospice care for that nursing home resident, the quality of care improves significantly during end-of-life, one because we are providing that care, and two, this outside health care professional's now reviewing that quality of care that the nursing home is providing. And because of that scrutiny we have seen significant improvement in the quality of care of these nursing home residents. So we think this check and balance approach of an outside independent hospice provider coming into the nursing home significantly improves care for that patient.

Thanks for that. That was very helpful. My other question is on the Roto-Rooter side. We saw a decrease in job counts this quarter. As you highlighted most of that was coming from the residential side. Can you elaborate and give us a little more on what you saw? Is this a sign of maybe a slowing economy or is there another dynamic going on here?

I believe that it's a bit of a sign of a slowing of the economy. Halfway through the third quarter of last year we almost saw a light switch going on with regard to demand. Residential demand as well. Very strong call counts and as the economy slowed down. You know for the first month or so of this calendar year, we saw that effect on the residential call counts. As I say we are still happy -- on the commercial side we saw continued strengthening overall relatively low based. But that's what we are observing just what you suggested in the Roto-Rooter business.

Fact that the slight commercial job count also continued to show some nice increase, we feel there's a very, very solid foundation of our existing job count. But because there is such a low delta in terms of slight increase or slight decline in job count. You can go slightly positive or slightly negative, but we took a lot of assurance from the fact that commercial job count held up quite nicely during the quarter.

My final question is regarding your Roto-Rooter EBITDA margin guidance. I think you were guiding to 17% to 18%, and if we saw SG&A down this quarter -- it's usually lower in the second quarter, I'm trying to walk to an adjusted EBITDA margin based on job count growth being maybe a little lower than you were expecting. How should we think about that? What makes you feel comfortable that you will get to your numbers or your guidance for 2011?

Well, to start, remember Roto-Rooter actually has a second half of the year seasonality-wise always has shown significant increase in overall EBITDA margin, with the exception of last year. Last year we had several million dollars of unusual high insurance expenses that were factored in. If it wasn't for those expenses, in the prior year, second half of 2010, we would have shown the typical increase in our overall EBITDA margin. And that is really driven by two factors.

One, incremental volume that doesn't carry with it some fixed costs. The incremental volume primarily comes in the fourth quarter of the year around the holiday season, where we see anywhere from a 3% to 7% increase in volume from Q3 and Q4. As well as the second half of the year, for both VITAS and Roto-Rooter, isn't saddled with the unemployment taxes because most of the employees have capped out on the required withholding up to the first X number of dollars of their wages. So those factors typically have a nice increase in EBITDA margin for Roto-Rooter and that's true for as well as VITAS, you could see up to a 300 point margin increase EBITDA in the second half of the year versus the first. So if you look at over the past several years the seasonality patterns of those margins, we're basically just predicting to be in line with those patterns.

Okay. Thanks. That's very helpful.

Our next question comes from the line of Frank Morgan, representing RBC Capital Markets. Please proceed.

Good morning. I was hoping you can talk a little bit about external growth opportunities, either for the acquisition market for hospices or maybe on the development side. We haven't heard much talk about that lately but hoping you can give us a little color there and maybe a little bit of anything you hearing out of DC these days about this new U-curved reimbursement per diems. Any updates there would be appreciated. Thank you.

Tim, you're dealing with them on a daily basis.

Absolutely. The acquisitions. We have talked about a lot before. We are working on numerous contacts and we are optimistic we will bring some acquisitions to the table in the near term so I think that opportunity is good. We are trying to be disciplined in our pricing and will remain such but there are opportunities and we're in the loop and working on them. We do see a good opportunity on the development side in beginning to open some new locations, which we have begun to open about 4 or 5 of them in the last couple of quarters, as we mentioned so we invested about $400,000 of expense this quarter in those startups. A couple of years ago, that activity almost was very, very difficult just because of the nature of some changing tides and how you get your license, who the bodies are that give their approvals and the states were slowing that down and now third parties are stepping in, the JCHAO and CHAP.

So anyway. We are starting four or five new locations. It's been very good for us in the past. It's economical. We know we are building a business on a strong platform from regulatory and quality perspective. So we are optimistic that these will do well for us and we will accelerate that effort but we will bring some acquisitions to the table.

As far as the U-shaped curve, I would say there's not much news on that. That's expected to be put into place sometime late in 2013. There's a panel that has been put together to help study it with CMS. No new news on that. We'd expect that to move forward on the basis of the MedPAC report which we are not discouraged about at all.

I would say two things with regard to the U-shaped curve. First of all, again, if it's revenue neutral as it's been described, it should benefit a company like VITAS that has more short-stay patients than the average hospice program. With regard to acquisitions, to be perfectly candid, the Beacon acquisition was a bit jarring to some of our ongoing discussions on the acquisition front. It was frankly done at a price that we would not have paid. And we wouldn't pay for -- you know for the programs we were talking in active negotiations with, some of the hospice programs. So obviously with the platform pricing -- deal, that we don't need to buy another platform. But it was a bit of a jarring effect on some of our discussions.

But overall we are still very interested and active in that regard.

One nuance on the U-shaped curve. We had a meeting with some senior CMS officials responsible for hospice a couple of months ago and in passing, noted as part of the healthcare reform, the mandate on -- a new reimbursement program proposed, starting fiscal 2014. And they stopped and corrected us and said, no, the way it's written is no earlier, no earlier than fiscal 2014 to come up with a proposal. Which led us to believe they have a lot on their plate and it may not come on the earliest date that the health care reform mandated.

Thank you. That's very interesting. Maybe just one followup. Given what you are seeing, all of these home health care companies going after hospice acquisitions, is it -- is that when it's the more development side picking up? Tell me exactly what happened, why from a regulatory standpoint it's getting easier to start a new hospice?

Well as I said before, about three years ago when the financial crisis and economic crisis hit, the states pulled back on their survey teams. So when you start a new license you file your paperwork, you wait for the state to come to look at your setup and say, yes are you can move forward either to take patients or move forward to seek your Medicare billing. So about 3 years ago -- well 4 or 5 years ago when we were doing a lot of them, we saw the process from start, to getting our Medicare billing license. You know, maybe a nine-month process. That process moved to a 2 or 3 year process. When everything slowed down and you had to absorb losses when you're carrying patients for three years before you get your Medicare license. We said that's not good. We pulled back. That situation has changed.

Because the states have now -- most of them turned over the ability to get a license or survey to third party companies like Joint Commission and CHAP. We can work with them quicker and most states also are allowing them to do the survey for your Medicare billing number as well. So that's allowing us to move quicker and we're not seeing as many new entrants in the marketplace today which is allowing us to, we think, gain a foothold and gain some market share pretty quickly. So the situation has changed. It's not easy but it's better than it was 2 or 3 years ago when we pulled back and there's a good handful of cities there is with large opportunities that we will be moving into.

Okay. Thanks.

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

Good morning, everyone. Kevin, could you talk a bit about Roto-Rooter. Historically the business has had very good pricing power. I notice it was not a key driver in the quarter and wanted to know whether given the softness you're seeing in residential, whether you're leery of implementing the types of pricing increases you've done in the past.

Well, it was up 3%, if I remember correctly, for the quarter. And again, in excess of general inflation during the period. But we do that on -- we don't put an overall price increase. We look at it on a market-by-market basis. Service line-by-service line basis. We respond to the market but we have pricing power but it's not absolute, I would say. If you asked me -- based on current trends and whatnot.

If you asked me if I was going to make a prediction for next year -- and let's say we assume that the economy didn't get dramatically better, so we continue to see maybe a little slackening demand on the residential side, I would still say we would be looking at something in the 3% to 5% range but if inflation stayed very low -- that is in the sub-2% range, I think it would be at the lower end of that range. If not, the higher end of that range. But I don't see any big change in "pricing power" of Roto-Rooter. Except when times are tough, we do see potential residential customers who might get two quotes instead of taking the first one that comes and might have a little effect by a percentage point or two on closed rate.

Your ability to recruit plumbers in this environment, is that changing at all over the last several quarters?

It's been overall pretty good. There's always a situation where there's a couple of markets where we are told we need more plumbers in this market or that market. But generally speaking, we are still at historically wonderful rates of retention, for instance, with regard to overall personnel, including plumbers. And, again, the fact that there's still very little new construction going on out there, plumbers are generally available and it's not necessarily a good time to go out and start -- hang out your shingle and start your own business.

Understood. Good, well thank you very much.

With no further questions in the queue I would now like to turn the call over to Kevin McNamara for closing remarks. Please proceed.

No other remarks other than thanking everyone for their attention and we will look forward to having a conversation like this in another three months.

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