Chemed Corp (CHE) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Chemed Corporation's fourth-quarter 2011 conference call. My name is Jennifer 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.

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 fourth quarter of 2011 ended December 31, 2011. Before we begin let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 applies 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 February 14 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 February 14, 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. Welcome to Chemed Corporation's fourth-quarter 2011 conference call. I will begin with some of the highlights for the quarter and David and Tim will follow with some additional operating detail. I will then open up the call for questions.

Chemed consolidated revenue in the quarter totaled $350 million and net income was $25.7 million. If you adjust for certain non-cash items and items that are not indicative of ongoing operations, adjusted net income for the quarter totaled $28.3 million, and equated to adjusted earnings per diluted share of $1.45. This is an increase of 19.8% when compared to adjusted earnings per diluted share in the fourth quarter of 2010.

During the quarter our hospice business segment generated revenue of $255 million, an increase of 5.1% over the comparable prior-year period and provided adjusted EBITDA of $40 million. This equated to an adjusted EBITDA margin prior to Medicare Cap of 16.6%.

Our adjusted EBITDA margin did decline 122 basis points in the fourth quarter of 2011. This is primarily the result of increased cost related to the doctor face-to-face requirement on recertification and our new stock program which negatively impacted our margins an estimated 75 to 100 basis points.

In the fourth quarter of 2011 our admissions totaled 15,191, an increase of 2.8% over the prior-year quarter. On a full-year basis admissions have increased 2.8%.

Our 2011 admissions growth is attributable to several factors. We expanded our presence in local communities with new or refurbished inpatient units. This provided VITAS with increased visibility to our referral sources as well as increased capacity to provide hospice care to our high acuity patients.

As of December 31, 2011 VITAS has 34 dedicated IPUs with total daily capacity of 458 beds. This is an increase of 7.3% over the prior-year quarter. I anticipate the use of inpatient units to maximize our visibility within the community will be a permanent part of our admissions growth strategy.

We continue to expand our marketing and community liaison structure in terms of staffing, training and support. The headcount for this group has increased 13.5% when compared with the prior year. These investments in personnel, coupled with our inpatient units, have resulted in sustainable momentum in our aggregate admissions trends.

During the quarter VITAS recorded a Medicare Cap liability of $2.6 million relating to three provider numbers. This compares to $1.1 million of Medicare Cap recorded in the fourth quarter of 2010.

The government's Medicare Cap fiscal year begins on September 29. The first quarter of a Medicare Cap year has a potential to be volatile if a program experiences any unusual admission or discharge patterns. It is also attributable to a seasonality pattern in which admissions and discharges tend to sequentially decline in November/December and then subsequently spike in January/February. As the year progresses individual program Medicare Cap calculations become significantly less volatile and more predictable on a year-to-date basis.

Actual January 2012 admissions and discharges in these three programs did increase sequentially, and consistent with prior years we anticipate reversing all or a significant portion of this Medicare liability in the first quarter of 2012.

VITAS currently has 37 unique Medicare provider numbers. On a trailing 12-month period 32 provider numbers have a Medicare Cap cushion of 10% or greater, two provider numbers have a Medicare Cap cushion between 5% and 10%, and three provider numbers have a Cap cushion between 0% and 5%.

VITAS generated an aggregate Cap cushion of approximately $218 million during the trailing 12-month period.

Now let's turn to our Roto-Rooter business segment. During the fourth quarter of 2011 Roto-Rooter's plumbing and drain cleaning business generated sales of $95.7 million, an increase of 1.8% over the prior-year quarter. This revenue growth was the result of a combination of selective price increases and favorable mix shift, partially offset by a slight decline in aggregate job count.

Roto-Rooter continues to show excellent stability in the difficult economic environment. In 2011 Roto-Rooter produced $64.2 million in adjusted EBITDA on $370 million of revenue. This makes 2011 Roto-Rooter's second most profitable year ever in terms of revenue and aggregate EBITDA.

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

Thank you, Kevin. Net revenue for VITAS was $255 million in the fourth quarter of 2011, which is an increase of 5.1% over the prior-year period. Excluding the impact of Medicare Cap, revenue actually increased 5.7%.

This revenue growth was the result of increased ADC of 4.9% and increased Medicare reimbursement of 2.5%. ADC growth was driven primarily by an increase in admissions of 2.8% and discharges increasing at the lesser rate of 1.7%.

The revenue growth was marginally impacted by a 27 basis point decline in our high acuity care mix, as well as geographic mix shift within the patient base. Average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $203.68, which is 0.7% above the prior-year period.

Routine home care reimbursement and high acuity care averaged $161.90 and $707.89 respectively per patient per day in the fourth quarter of 2011. During the quarter high acuity days of care were 7.65% of total days of care. Again, as I mentioned, 27 basis points lower than the prior-year quarter.

The fourth quarter of 2011 gross margin, excluding the impact of Medicare Cap, was 23.8%, which is a decline of 155 basis points from the fourth quarter of 2010. This decline in margin is primarily the result of increased cost related to the 2011 mandated physician visit for recertification, expansion of our community liaison program, expansion of losses in startup location, as well as increased costs associated with the expansion of the inpatient units.

Our home care direct gross margin was 53.2% in the quarter, a decline of 80 basis points when compared to the fourth quarter of 2010. Direct inpatient margins in the quarter were 13.1%, which compares to 14.4% in the prior year. Occupancy of our inpatient units averaged 72.5% in the quarter and compares to 76.9% occupancy in the fourth quarter of 2010.

Continuous care had a direct gross margin of 19.9%, a decline of 270 basis points when compared to the prior-year quarter. Average hours billed for a day of continuous care averaged 18.6 in the quarter, a 4.5% decline over the average hours billed in the fourth quarter of 2010.

Selling, general and administrative expense was $18.3 million in the fourth quarter of 2011, which is a favorable decline of 2.8% when compared to the prior-year quarter.

Our adjusted EBITDA for VITAS totaled $40 million in the quarter, a decrease of 5.2% over the prior-year period. And adjusted EBITDA margin, excluding the impact from Medicare Cap, was 16.6% in the quarter, 122 basis points below the prior year.

On the Roto-Rooter segment, Roto-Rooter's plumbing and drain cleaning business generated sales of $95.7 million for the fourth quarter of 2011, an increase of 1.8% over the prior-year quarter. Roto-Rooter's gross margin was 45.4% in the quarter, a 228 basis point increase when compared to the fourth quarter of 2010.

Adjusted EBITDA in the fourth quarter of 2011 totaled $17.8 million, an increase of 12.0%. And the adjusted EBITDA margin was 18.7% in the quarter, an increase of 169 basis points when compared to the prior-year quarter.

Unit-for-unit job count for Roto-Rooter in the fourth quarter of 2011 declined 0.2% when compared to the prior year. In the fourth quarter total residential jobs decreased 2.6% as residential plumbing jobs increased 5.6% and the residential drain cleaning jobs decreased 6.6% compared to the prior-year quarter. Residential jobs continue to represent approximately 70% of total job count in the quarter.

Total commercial jobs increased 5.7%, with commercial plumbing and excavation job count increasing 10.8% and commercial drain cleaning increasing 4.3% when compared to the prior year. The all other residential and commercial job category, which represents less than 2% of aggregate job counts, decreased 6.1%.

Now let's look at our consolidated balance sheet. Chemed had total debt of $167 million at December 31, 2011. 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 of 2014.

Chemed's total debt equates to less than 1 times trailing 12 months of adjusted EBITDA. At December 31, 2011, Chemed's $350 million credit 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 in 2011 aggregated $29.6 million in comparison to depreciation and amortization during the same period of $29.5 million.

The Company has purchased $144 million or 2,602,513 shares of Chemed stock in 2011. As of December 31, 2011 $75.3 million is remaining under Chemed's previously announced share repurchase program.

Management will continue to evaluate cash utilization alternatives, including share repurchase, debt repurchase, acquisitions and increased dividends to determine the most beneficial use of our capital resources.

Our 2012 full-year guidance is as follows. VITAS expects to achieve full-year 2012 revenue growth prior to Medicare Cap of 5% to 8%. Admissions in 2012 are estimated to increase approximately 2.5% to 4%. And full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.0% to 15.5%.

Effective October 1, 2011, Medicare increased the average hospice reimbursement rate by approximately 2.5%. Our guidance assumes VITAS will incur $5 million of estimated Medicare Cap contractual billing limitations for calendar year 2012.

Roto-Rooter expects to achieve full-year 2012 revenue growth of 4% to 5%. The revenue estimate is a result of increased pricings of approximately 2%, a favorable mix shift to higher revenue jobs, with job count growth estimated at 0% to 1.5%. Adjusted EBITDA margin for 2012 is estimated in the range of 17% to 18%.

Based upon the above, management estimates 2012 earnings per diluted share, excluding non-cash expense for stock options, the 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 $5.35 to $5.55 per share. This compares to Chemed's 2011 adjusted earnings per diluted share of $4.78.

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

Thank you, David. We continue to invest significant resources into our marketing and admission focus. One of the most important aspects to increased admissions is appropriately focused field-based sales and marketing personnel. As of December 31, 2011, we have 329 sales representatives, 163 admissions coordinators, 359 admission nurses, 109 community liaisons and 29 long-term care liaisons.

Staffing in these areas has expanded 13.5% compared to the fourth quarter of 2010. This focus has resulted in VITAS generating 15,191 admissions in the fourth quarter of 2011, an increase of 2.8% over the prior-year period.

Admissions have increased in three of our four largest referral categories. During the fourth quarter of 2011 home-based admissions increased 7%, assisted care living facilities increased 2.8%, and hospital referred admissions increased 1.9%. Nursing home admissions declined 2% in the quarter.

VITAS' average length of stay in the quarter was 79 days, which compares to 80.8 days in the prior-year quarter and 80.1 in the third 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 1,262,643 days in the quarter, an increase of 4.9% over the comparable prior-year period.

Non-nursing home routine home care days increased 8.3% in the quarter, and nursing home routine home care declined 3.2%. Nursing home days of care currently represents 22.5% of our total days of care.

Continuous care days increased 1.2% and inpatient days of care increased 1.7% when compared to the fourth quarter of 2010. At December 31, 2011, we had five programs classified as startups. One has passed its CHAP survey and will be receiving its Medicare license in the first quarter. Two of the new starts are currently billing Medicare and the remaining two programs have received their provisional state licenses, have met the patient admission requirements and are awaiting their on-site survey.

Total operating losses for these startups totaled $1.1 million in the quarter and compared to losses of $100,000 for locations classified as startups in the prior-year period. With that I will turn the call back to Kevin.

It is now time to consider any questions for the teleconference.

(Operator Instructions). Brendan Strong, Barclays Capital.

Maybe first just on the Medicare rate per day only being up 0.7%, I guess that is a mix issue. Could you just give us a little bit more about that?

Yes, it is exactly a mix issue. So we basically declined 27 basis points in our high acuity, and we average about 160 for routine home care, but it was -- what was it -- $700 and change for high acuity. So that has a pretty big impact on the overall average rate.

As I look at it, it is interesting because despite all the investments you guys have made in inpatient, inpatient looks like it is a lower percentage of revenue in 2011 than it was in 2010. So is that -- do you expect that business maybe to grow faster at some point or is that more just about referral sources really?

Remember, the inpatient unit when we are making investment is for increased visibility in the marketplace -- that cost. It is not because all of a sudden there has been a spike in the demand for the high acuity care. It is increasing basically better real estate, better locations.

All I can say there has been no material change and I wouldn't expect any. You know, very minor differences you're speaking about.

Great. Then just thinking about free cash flow this year, you generated, I guess, around $150 million last year. Do you think you're looking at a similar amount this year? And then is the backup plan just to do more share buybacks unless there is some good M&A opportunities you come across?

Well, you have to be careful on that. The cash flow we generated this year, if you pro forma out -- for example, December 31 of 2011 was on a Friday of a [PIK] payment day. That will exaggerate the cash flow in 2011.

In fact, you look back at 2010, we had the exact opposite occur. So on a raw 12-month basis the free cash flow looked like it was abnormally low. Go back to 2009 it was abnormally high. So you smooth that out, you're talking about in the low -- about $100 million of free cash flow that is sustainable. This basically works out to be the free cash flow per share equals our adjusted GAAP EPS.

With that said, certainly acquisitions, because if we don't like the multiple of acquisitions, dividends and share repurchase will continue.

Great, thanks a lot.

Darren Lehrich, Deutsche Bank.

This is Dana Vartabedian in for Darren Lehrich. My first question is on margins. VTAS looked a bit light in the quarter, but Roto-Rooter seemed to hold up pretty well. Can you give us a little bit more color on margins, and I guess how we should think about them going forward?

I think we noted in the comments some investments in the quarter. Obviously, the face-to-face has required pretty big investment in the new start area, and an incremental $1 million this current period. So all I would say is I think our margins are stable and the guidance we provided for next year I am comfortable with.

I would just say one additional to what Tim said that there is some noise in those numbers. The number that is imperative to keep a good handle on is labor. And I would join Tim in saying that I think VITAS has done a great job in managing that number.

So if we have labor issues I would be concerned with regard to some of the components of the margin calculation, but really I think that you have done a great job on the labor control.

And the only thing, on the Roto-Rooter margins, they spiked up nicely, but that is primarily because last year the fourth quarter of 2010 we had some abnormally high health care claims come through. So really we are seeing Roto-Rooter return more to the norm.

Then on your 2012 guidance, I guess going back to buybacks, we assume there is no buyback numbers -- buybacks baked into your numbers, but you guys seem to be a pretty consistent repurchaser of stock, so I guess how should we think about buyback going into 2012?

There are no -- we make the assumption of no additional buybacks. Our share count on a diluted basis is about 19.3 million shares.

All right, thank you.

Frank Morgan, RBC Capital Markets.

I wanted to ask a question on the nursing home side. I think you heard I heard you say that the amount of admits coming from nursing home sources was done a little bit in the quarter. And I know that particular area has got a lot of heightened attention in some of the MedPAC findings. But is anything you are seeing going on there? I know it is a smaller part of your business than other players, but any commentary you have on why that is down? And then how you see the world playing out with nursing home-based hospice down the road?

I think the comment would be similar to what we have commented in the past that the total nursing home beds are not growing, and so our performance is mirroring the industry there. I expect our future performance in the nursing home segment to be good. We work very closely with them. We are an important partner, and hospice is critical to the success of good quality services in the nursing home arena. So I don't see any changes and the results are just mirroring the opportunity in the marketplace.

And, Frank, the only thing I would add as well, obviously I would agree with that 100%. It seems that the various government authorities, they have hospice -- the hospice service in the nursing home environment is under a microscope. There are some things -- they don't like self referral. They suggest it leads to gaming of the system and there're questions of a captive hospice margin.

It doesn't -- we don't have a significantly higher margin with regard to our nursing home patients. But you can imagine that -- it is hard to pull the numbers, but it is probably likely that a captive nursing home hospice program would. And I agree with you that is going to be something that the whole industry is going to watch pretty closely because it has been getting a lot of attention.

But, again, with us, as you started -- you were first saying, it is not as big a component of our business as it is a lot of the hospice businesses. It is not insignificant, but it is one that for some time we haven't put our reliance on as far as looking for growth for our Company.

Okay, thanks.

Jim Barrett, CL King & Associates.

Kevin, could you talk about 2012 in terms of when you listen to what the Democrats and the Republicans are saying about Medicare and hospice, are you fairly agnostic as to who wins in November or do you have a preference?

Well, let me put it this way. I am fairly agnostic. I would say that hospice has support on both sides of the aisle. I would say, again, and this is clearly up ahead, I think Democrats are a little better for hospice than Republicans, but it is a complicated issue.

But it has general support. You got to remember the biggest rationale for comfort as a provider is that hospice is a money saver for the federal government, and both Democrats and Republicans are looking to control health care spending. And it is clearly a form of rationing of care, which both sides know that eventually there is going to be rationing of care, just the hospice is a voluntary rationing of care.

From a political standpoint, without -- I mean, yes, I would like my personal income tax rates as low as possible, but obviously, for the industry Democrats aren't all bad for hospice generally speaking.

I don't know what else -- it really goes to the heart of one of your target question is this. Regardless of what the law is or the reimbursement, hospice will succeed or fail -- a hospice company, if they control their labor costs. To the extent that wherever the rate is set, as long as the hospice company is fairly nimble and can respond with the right amount of labor within that reimbursement nexus, it will do fine.

And I think that is one thing we are working on internally on a daily basis is to increase our nimbleness in responding on a program by program basis to having the right amount of staffing.

Right now with a given reimbursement environment for our census, and to the extent that reimbursement is going to change or could possibly change, it will just be another part of the calculus. But ultimately, again, I don't want to simplify it too much other than saying hospice is a function of having the right amount of labor for the census and the reimbursement environment.

And given your visits per patient are at the high end of the industry right now, given the pressure on reimbursement, do you envision ratcheting down those visits per week as we look out two to three years?

I will put it this way. If you asked me to prognosticate if reimbursement -- if there is sequestration of 2% or if there is -- if there is a change -- if reimbursement continues to not keep pace with inflation within the industry, I think that to the extent that the hospice programs at the breakeven level, they won't have a choice. They will reduce expenses rather than go out of business. The biggest expense is, as I said, is labor, so they will reduce labor.

If they have the same census and fewer nurses and health care aides they will make fewer visits per patient per week. That will happen, and to the extent that I see the other -- the more efficient hospice companies drafting upon their behavior, that may well happen.

But the important thing for us is to continue with the level and quality of service that makes referral sources say, I have a number of choices, but the most professional, efficient, reliable hospice company I can refer my patients to is VITAS.

So to the extent that all things in life are relative, but to the extent that we always maintain, call it, that advantage in visits per patient per week, I think we will be well served.

Okay, it makes sense. Then on a separate subject, you have been consistently disciplined in avoiding making acquisitions at high multiples. So for that matter have you found at the margin are multiples for hospices starting to rationalize at all, and ditto for some of your franchisees who in employer friendly states?

I would say this. First of all, with regard to hospice acquisitions, the situation has not gotten better. If you have listened to these calls, for about a year and half period I said I would be personally surprised if we didn't make a significant acquisition by the end of the year. And the reason I said that were a number of hospice programs that were for sale that we were aggressive in our pursuit of them. Our stature in the industry was such that if there was one for sale they talked to VITAS before they made their final decision.

But things have changed -- things have changed a little bit as a result of a couple of acquisitions -- the Odyssey pricing, the Beacon Hospice pricing -- such that it is just -- when we compare it we have a pretty high hurdle. We are buying our own stock. We are buying hospice when we buy our own stock at about 6 times EBITDA.

The question is do you want to take a chance and the fear of the unknown of buying a hospice at 10 to 12 times EBITDA just in order to build census? And the answer is -- and given the fact -- you've got to remember of all the types of acquisitions that I have seen hospice is fraught with worry. You don't get much when you buy a hospice. The patients die by in short order almost by definition. There is no bricks and mortar. And referral source -- I would characterize those relationships as ephemeral.

So you don't get much. And to the extent that the idea that paying a princely sum for them is, again, to a conservative acquirer is -- it just doesn't fit.

So to answer your question, with regard to hospice, no, I see pricing continue to be high. I don't see us being real active in that front. On Roto-Rooter side we are always very active. The problem is we are down to now Roto-Rooter franchises that have been within the same family's hands for two generations, and they have a great deal. They pay a very low franchise fee for a great service mark. And, again, when they are willing to contemplate selling, we buy it. And before that they are just really not on the market.

But we are always -- we would drop anything to make a Roto-Rooter acquisition because our experience in our acquisition has been everyone has been a winner. So having said that, no, I don't anticipate great growth in 2012 by acquisition. That is why we have expanded our new starts in VITAS. And, again, we're sticking to our knitting in Roto-Rooter and kind of grinding it out.

It makes sense. Well, thank you very much.

There are no further questions at this time. I will now turn the call back over to Kevin McNamara for closing remarks.

Well, I have talked plenty. So I'll just use this opportunity to conclude our fourth-quarter 2011 conference call. Thank you.

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