Chemed Corp (CHE) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Chemed Corporation third quarter 2012 conference call. My name is Emily, and I will be your conference call facilitator today. Please note that today's call is being recorded, and 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.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2012 ended September 30, 2012.

Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call the Company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements, as a result of a variety of factors including those identified in the Company's news release of October 29th, 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 29th, 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 third quarter 2012 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 $354 million, and net income was $20.8 million. If you adjust for certain noncash items and items that are not indicative of ongoing operations, adjusted net income for the quarter totaled $24.7 million, and equated to an adjusted earnings per diluted share of $1.28. This is an increase of 6.7% when compared to adjusted earnings per diluted share in the third quarter of 2011.

During the quarter our Hospice business segment generated revenue of $268 million, an increase of 5.9% over the comparable prior year period, and provided adjusted EBITDA of $39.8 million. This equated to an adjusted EBITDA margin of 14.8%. Admissions in the quarter totaled 15,539,an increase of 4.4% over the prior year. We have three new start initiatives in process that reported aggregate losses of slightly under $1 million. These losses negatively impacted the quarterly margin by 37 basis points.

VITAS did not incur any Medicare cap billing limitations in the third quarter of 2012. The Medicare cap 2012 fiscal year is based upon Medicare admissions from September 29, 2011 through September 28, 2012, and is compared to Medicare hospice billings from November 1, 2011 to October 31, 2012. Based on admissions during this period, VITAS estimates that there will not be any limitations for the 2012 Medicare cap fiscal year. Of VITAS' 35 unique Medicare provider numbers, 29 provider numbers have a Medicare cap cushion of 10% or greater during the 2012 Medicare cap year. Two provider numbers have a Medicare cap cushion of between 5% and 10%, and four provider numbers have a cap cushion between 0% and 5%. VITAS generated an aggregate cap cushion of $217 million during the 2012 Medicare cap fiscal year, and this is about equal to the overall Medicare cap cushion of last year.

Now let's turn to our Roto-Rooter business segment. I am disappointed with Roto-Rooter's operating performance. In 2011, Roto-Rooter had its second best year ever in terms of profitability. Our 2012 business plan had initially anticipated 2012 exceeding that operating performance. Now however, I anticipate 2012 generating an adjusted EBITDA of approximately $58 million, essentially equal to our 2010 operating results. Soft demand primarily in the residential sector combined with an unusually high healthcare claim situation, are putting pressure on our operating performance.

We continue to achieve solid growth in the commercial sector expanding commercial jobs 1.1% in the quarter, and 3.1% on a year-to-date basis. However, this growth in the commercial sector was offset by weak residential sewer and drain demand which declined 4.8% in the quarter, and 6.1% on a year-to-date basis. With that, I would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. As Kevin mentioned, VITAS' 5.9% revenue growth was the result of increased ADC of 4.5%, driven by an increase in admissions of 4.4%, increased discharges of 4.5%, and Medicare price increases of approximately 2.5%. Revenue growth was partially offset by mix shift between routine home care and our high acuity care. Average revenue per patient per day in the quarter excluding the impact of any Medicare cap was $204.03, which is 1.5% above the prior year period. Routine home care reimbursement in high acuity care averaged $162.90 and $706.19 respectively per patient per day in the third quarter of 2012. During the quarter our high acuity days of care were 7.57% of total days of care, 15 basis points lower than the prior year quarter. The third quarter of 2012 gross margin was 22.2%, which is equal to the gross margin in the third quarter of 2011 when you exclude the impact of the Medicare cap in the prior year quarter.

Our home care direct gross margin was 52.5% in the quarter, 10 basis points above the third quarter of 2011. Direct inpatient margins in the quarter 9.2%, which compares to 12.4% in the prior year. Occupancy of our inpatient units averaged 73.4% in the quarter, and compares to 74.3% occupancy in the third quarter of 2011. There are currently three in patient units classified as startup in the quarter. These startups negatively impacted our inpatient margins by approximately 140 basis points.

Continuous care had a direct gross margin of 19.0%, a decline of 170 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care averaged 18.9% in the quarter, at 3.6% decline over the average hours billed in the third quarter of 2011. Our selling, general and administrative expense was $20.1 million in the third quarter of 2012, which is an increase of 6.3% compared to the prior year quarter.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $86.4 million for the third quarter of 2012, which was a decrease of $2.1 million, or 2.4% over the prior year quarter. Approximately $1.0 million, or 130 basis points of this decline is attributed to Roto-Rooter eliminating a small HVAC operation in an East Coast market. In the third quarter of 2012 Roto-Rooter merged one of our local brand plumbing operations into a Roto-Rooter branch and eliminated the local brand's HVAC business. This resulted in effectively zero HVAC revenue in the third quarter of 2012. Adjusted EBITDA for Roto-Rooter in the third quarter of 2012 totaled $12.7 million, a decline of 15.3%, and the adjusted EBITDA margin was 14.7% in the quarter, a decline of 223 basis points.

Our unit per unit job count in the third quarter of 2012 declined 3.0% when compared to the prior year period. During the third quarter of 2012 total residential jobs decreased 4.8%, as our residential plumbing jobs declined 4.6%, and our residential drain cleaning jobs decreased 4.9% when compared to the prior year quarter. Residential jobs continue to represent about 69% of our total job count. Total commercial jobs did increase 1.1% with commercial plumbing excavation job count increasing 5.6%. And commercial drain cleaning declining a modest 0.4% when compared to the prior year. The all other residential and commercial job category, which represents 1.6% of aggregate job count, declined 8.6%.

Now let's take a look at our consolidated balance sheet. Chemed had total debt of $173 million at September 30, 2012. 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 adjusted EBITDA.

In March of 2011 Chemed entered into a five year credit agreement that consists of a $350 million revolving credit facility. The interest rate on this credit agreement has a floating rate that is currently LIBOR plus 175 basis points. In addition an expansion feature is included in the credit agreement that provides Chemed the opportunity to increase its revolver and/or enter into term loans for an additional $150 million. As September 30, 2012 this facility had approximately $321 million of undrawn borrowing capacity, after deducting $29 million for letters of credit issued to secure the Company's worker's compensation insurance. Capital expenditures through September 30, 2012 aggregated $26.5 million, and compares to depreciation and amortization during the same period of $22.6 million.

During the quarter the Company purchased 9,334 shares of Chemed stock at an aggregate cost of $586,000. The Company has $63.5 million remaining under our previously announced share repurchase program. Our 2012 full year guidance is as follows. VITAS expects to achieve full year 2012 revenue growth prior to any Medicare cap of 7.5% to 8.0%. Admissions in 2012 are estimated to increase approximately 4.0% to 4.5%, and VITAS' full year adjusted EBITDA margin prior to Medicare cap is estimated to be 14.5% to 15.0%. Effective October 1, 2012 Medicare increased the average hospice reimbursement rates by approximately 0.9%.

Our guidance assumes VITAS will incur $1.25 million of estimated Medicare contractual billing limitations for the remainder of calendar year 2012. Roto-Rooter expects to achieve full year 2012 revenues 2.0% below the prior year. The revenue estimate is the result of increased pricing of approximately 1.5%, a favorable mix shift to higher revenue jobs, with job counts estimated to decrease 3% to 4%. Adjusted EBITDA margin for 2012 is estimated in the range of 15.8% to 16.3%. Based upon the above, management estimates 2012 earnings per diluted share excluding non-cash expense for stock options, the noncash interest expense related to the accounting for convertible debt, and other items not indicative of ongoing operations will be in the range of $5.20 to $5.30. This compares to Chemed's 2011 reported adjusted earnings per diluted share of $4.78.

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

Thank you David. We continue to make investments in our sales and marketing efforts, including training, education, and recruitment of additional staff. Admissions at VITAS continue to increase at a healthy level. In the third quarter we generated 15,539 admissions, an increase of 4.4% over the prior year. On a year-to-date basis admissions increased 3.9%. As of September 30, 2012, we have 345 field sales and marketing personnel, 168 admissions coordinators, 375 admission nurses, 44 admission liaisons, 77 community liaisons, and 23 long-term care liaisons.

Admissions increased in three of our four largest referral categories. During the third quarter home based admissions increased 9.4%, and our hospital referred admissions increased 4.3%. Assisted living facilities increased 18.7% in the quarter, and nursing home admissions declined 1.3%. VITAS' average length of stay in the quarter was 78.5 days, which compares to 80.1 days in the prior year quarter, and 74 days in the second quarter of 2012. Average length of stay is calculated using total discharges during the quarter. Median length of stay was 15 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 1,313,472 days in the quarter, an increase of 4.5% over the comparable prior year period.

Non-nursing home routine home care days increased 6.7% in the quarter, and nursing home routine home care declined 1.4%. Nursing home days of care currently represents 21.5% of our total days of care. On any given day, approximately 22% of our average daily census, or about 3,000 of our patients, reside in a skilled nursing facility. Continuous care days of care increased 3.7%, and inpatient days of care increased 0.8% when compared to the third quarter of 2011.

At September 30, 2012, we had three programs classified as startups. Total operating losses for these startups totaled $1 million in the quarter, and compares to losses of $625,000 for locations classified as startups in the prior year period. We also had three inpatient units classified as startups at September 30, 2012, located in Florida, Georgia, and Kansas. VITAS expects to continue making significant investments in inpatient units, which are important to providing quality patient care. With that I will turn the call back over to Kevin.

Thank you, Tim. At this point it is appropriate to receive questions.

Thank you. (Operator Instructions). Please stand by for your first question. Your first question comes from the line of Jim Barrett, of CL King and Associates. Please go ahead. You are live on the call.

Thank you. Good morning everyone. Tim, I think this is a question for you. With your average reimbursement rate in the current Medicare fiscal year being 90 basis points, what do you estimate your going in inflation rate is in running that business, and how do you plan to address it if it is more than 90 basis points?

Very good. Well, Jim, we have been understanding this as coming to us here for several years now, and so our planning is to be as productive as we can on all of our expense lines especially the labor line, and match the rate increase. And again our strategy will remain the same. We are looking to protect margins with our corporate expense area growing at a slower rate than field, and I think we will certainly need volume increases. So our goal is to have volume increases in the market place, and grow share where we are at, and improve underperforming units. Again, yes, you are right that is a challenge.

Again, we look at the benefits area. Obviously fringe benefit compensation, all of the areas for example in the labor line, and as well as ancillary services like our medical equipment, our medical supplies, our pharmacy. And all I would tell you is yes, it is our goal to keep all of those in line with our growth rate on the top line, and we feel pretty good about being able to do that in the near term.

And Jim, also, additionally keep in mind that what you are describing generally, is something we already have had for the last couple of years. The budget neutrality factor has been a cut in reimbursement that really is traceable to what is called the industry inflation, that is hospital wage index and CPI combination to give us a quote increase in reimbursement, reduced by budget neutrality factor. We have been dealing with those forces now for a couple of years.

The last couple of years in addition to the cut the budget neutrality factor, from a regulatory standpoint there is a bit more labor hours demanded in the most expensive labor hours for us, doctor physician hours for physician narrative and face to face. So what you are describing is yes, I mean to the extent that we see real inflation in the industry being up 3%, we are only getting 90 basis points increase, it is not like it is a 10% cut. It is I think doable, but requires everybody to roll up their sleeves, in fact, we are having a meeting right after this call on some detail to address those issues. You put your finger on what will be crucial for VITAS, and any hospice company over the next couple of years.

And would you expect the industry and possibly VITAS to reduce at least incrementally to reduce the number of visits per week per patient?

This is how I start that discussion with let's say our operating people in the field. I say if the government reduced reimbursement from $170 a day to $100 a day, would there be more visits, fewer visits, or the same number of visits. And I guess people usually say fewer visits. Well, if the government reduces reimbursement 3%, would there be more visits, the same number of visits or fewer visits. I think that ultimately whether they decide, whether the industry decides that this year or the next year or the following year, it will reduce it slightly, hopefully imperceptively fewer visits. One thing to talk about what VITAS is planning on doing, or however that is achieved. I think what we will observe in the industry is with so many hospice companies at the breakeven level or ,below what are they going to do when reimbursement continues to, not equal their inflation. They are going to have fewer visits per patient per week I believe.

I believe that will be an observed event. It is very difficult to engineer. Our visits are driven by plans of care, by labor available, I think that over time, as you know Jim, we have about 0.9 of a visit per patient per week more than the industry average. So we have an advantage there as we are managing that. And we also have an advantage in being more profitable. We are not metal against metal. Yes, I think that will be something that this capital isn't being what it is, I think that is something that will be an observed event rather than planned.

Okay. And Kevin either for you or Dave. There has been a dramatic slowdown in your share repurchase this year. Is that a strategic intent? Are you looking to do more acquisitions? Can you comment as to why that has come about?

I will turn it over to Dave, but the answer is we try to be opportunistic. Dave, do you want to put more color to that?

Our attitude is still the best use of our cash right now absent some attractively priced acquisitions is in share repurchase. Nothing has changed in that regard, but as Kevin mentioned we will be opportunistic and take advantage of any strange pricing that seems to periodically happen within our stock.

And Jim let me just say that in talking to shareholders over the years, I would say that it is pretty hard to argue with a good stock repurchase program, and they always say, my only problem with it is companies all buy at the high and they end up with too high of an average price. All you can do by that is say, yes, that has a way of happening if you are not pretty disciplined on the opportunistic side of things.

True. And last and least, Kevin, will this hurricane activity give Roto-Rooter at least a temporary burst up and down the east coast based on your experience?

I will tell you this, based on my experience if you can get around and there is power, that is good. That is very good. Until such time, it tends to be a total loss.

So the short-term negative is that we don't have trucks on the road, but once they can get on the road then they will have more business than they could possibly handle for a period of time.

Well, thank you, everyone.

Thank you for your question, Jim. Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please go ahead, you are live on the call.

Good morning everybody. I few things I wanted to key, in the last part of the question as it relates to capital deployment. I am just curious as it relates to the Roto-Rooter initiative to buy in franchisees over time, just given the anticipated changes in tax law and we are coming into the year end. Anything short run that we should be expecting around that activity?

I would say no. It is something that if you look at, I mean I just give you automatically, we just recently prepared something for our Board of Directors talking about our last three Roto-Rooter acquisitions, and how they have done basically, and they are all off the chart. I mean we would love to do more, but they just are not generally available until there is some kind of event like a death in the family. I will say that, again, I don't want to, we don't report on acquisitions until they occur, but I would say yes, we do and are engaging in discussions, but given the fact that we are what I hope is in retrospect viewed as a disciplined buyer rather than an overly conservative buyer, I think that there is still a lot of work to be done in that regard. The upside is so good for Roto-Rooter, it is something that gets a lot of attention for us.

And Darren you are absolutely right given the uncertainty on tax rates this year would be a better time from the tax standpoint to solve the next year. For the franchisee first and foremost it is an emotional decision, and they have to cross that emotional bridge before they even consider the financial aspects, so again it is not as rational as you would like.

Okay. And then I guess just maybe a few other questions on Roto-Rooter, and I wanted to focus a bit on VITAS. Kevin, you expressed disappointment obviously in the flattish EBITDA outlook for this year, It seems to be a bit of a disappointment on the margin side, and you mentioned health expense, some of that you can't control, of course. But can you just talk in general terms about margin, productivity, and what do you think might be missing this year relative to your original plan?

Darren, good question. As we have said, tough first part of the year for a couple of reasons. We hesitate to say it, but we said a lot of weather-related issues, and we certainly saw, maybe everyone else saw kind of a stabilizing in some of the elements of demand in the business. Which I mean it did, I mean there was some stabilization. Not as much as I thought, but just on the issue of margin and it is a complicated issue. My understanding our margin at Roto-Rooter was down 223 basis points compared to the previous year's quarter. 200 points of that was healthcare expense. So the question is, and you might say to a company like Roto-Rooter what is healthcare expense.

We are self-insured. It is not the $300 or the $2,000 or $3,000 claims. It is the big claims. We have had more big claims than we have ever had before, and the big claims are more expensive than previously. We have made significant changes in the stop losses and what not for next year. We are making some tough choices in that regard, but when you talk about a quarter that is already kind of a tough one with unemployment still very high, consumer demand still just one good week out of four, which is up from no good weeks out of four, it is tough to have a situation where you have a negative comparison of 200 basis points in margin.

And Darren, just to put that in perspective. Last year we had about $19 million in healthcare costs for Roto-Rooter, and this year it is going to be $23 million. And as Kevin said, driven really by large claims. We have to go back two or three years before we saw something like that before. We are actually for next year going to forecast somewhere in between the 2011 and 2012 years.

But so really in 2012 it is a combination of soft demand on the top line, coupled with just bad timing when we have these large unpredictable claims. That really took instead of 2012 being the second best year ever, it is basically putting us flat with 2010. But that really points out what Kevin and I have been saying for quite a while now. Roto-Rooter absent of any inflation in the business models, so in real dollars we kind of operate in this corridor between $58 million and $59 million of EBITDA, and about $65 million of EBITDA, and then kind with depreciation and amortization equaling about our CapEx. So absence of any acquisition that is kind of the range I think you expect in the cash flow we expect to generate out of the Roto-Rooter business model. We certainly want it on the higher end, but it is unpredictable. But within our business model, of course, we have a commission labor force. If the labor doesn't happen, or the revenue doesn't happen the labor doesn't happen, but there are other expenses within the business model that are unpredictable like healthcare. We have worked, there is a lot of activity happening below the surface, and trying to offset some of those expenses in other categories, but it is too big of a nut for us to overcome completely, and that is just the nature unfortunately of Roto-Rooter.

Makes sense. Thanks. Thanks for the color on the health expense claims. That puts it in perspective. The other questions I had just around the hospice business, and I guess, you commented a little bit about how you are trying to manage expense growth, with sequestration a possibility, I guess I want to just hear a little bit more about how you would expect to manage through that? We had $1 million of startup expense in the quarter. Are there things like that you can, I guess put off for next year that maybe just help us think about how you are going to maneuver through potentially an even deeper cut in your Medicare rates?

I will turn this over to Tim. From my perspective, it is two things. Tim already mentioned one we want central support costs to grow at a rate lower than the top line for each of the previous years. That growth has been less than half of the top line growth. That gives some cover and some margin protection on it. But my second point would be controlling labor, and there are two ways to control labor. By the hourly rate that you are paying to the person providing the service. That is, you pay less to lower echelon nurses than higher echelon nurses. You try and be more productive. If you have fewer labor dollars sometimes, as I said earlier, that may result in the industry in slightly fewer visits per patient per week. Two things I would say, and Tim, feel free to disagree with me, but I would say really from my perspective from the headquarter perspective, we are focusing on making sure we get that leverage from the SG&A growing slowly, and controlling labor costs on a daily, weekly, monthly, by program basis. Tim?

I mean I echo that. Basically as Kevin said all costs are being focused on for control. In the corporate area you can dial those numbers back, and certainly have some choices there. In the field, as you said we have had a lot of startup activity in the last year, year and a half or so. We picked up that activity about a year and a half ago because we saw the market give us that opportunity with a better chance for a timely survey, from both the state and the Medicare billing survey, which seems to be a little better but not much better.

So again what I would say is yes, we will probably have less startup activity next year. All of the markets are saturated. Doesn't seem like any great opportunities. We will mature the ones we have. There still are several big markets that we are looking at that we would move into at the right time. Yes, we will probably have less startup next year, but that, the long-term issues are controlling your labor costs and all of your attendant costs in your corporate area, and again your costs seem to come in line when your volume is growing nicely. Our challenge will be to grow our volume nicely. One of the other opportunities we have which is good is we are in large markets. It is one of our strategies to mainly be in large markets. When you are in large markets you have better opportunity for volume gains and productivity and you have good opportunity there. Again, we are watching everything. We understand the pressure on the top line, if sequestration would kick in across-the-board, which we don't know, that would put more pressure and we would take more action. We will be monitoring everything monthly and weekly.

Last question I had on VITAS. Any updates on the investigations? I know in the 10-Qs we have been getting some fairly regular disclosure, but anything to say about any of the ongoing stuff, and has anything been wrapped up or close to being wrapped up?

I would say that there are no significant developments. You can see, I mean the comment you are going hear are from me now, hopefully from me next year the following year, what not, is going to be VITAS is in the business of providing services that the federal government pays for. There is a whistle blower, has a bounty on us basically. There is always going to be that pressure. Hospice has another unusual element, and that is that this is hospice industry-wide, 11% of patients who are given a terminal diagnosis by their own doctor, and will come to hospice end up, being in the program for longer than six months. The question is who knows, don't really know who the 11% are initially, but they exist. And it leads to a situation where laymen can say look, there is a patient who has been in hospice for two years, that is obviously fraud, the government paid for that, I am suing.

That situation is not the going to go away as long as is there is hospice, so we are going to continue to be talking about this, and we will continue to, we just think we have good systems. We are going to just continue to fight the issue. We are thought going to settle a case like that, because that is hospice. To answer your question specifically, no significant developments. The one, the case that has gotten the most publicity, the San Antonio case has not been served on us. The government has not joined in the action. There is the only thing that has happened in that case is that the other defendants is have been dropped from the case. So to answer really your question from a public disclosure standpoint, no, certainly no significant developments, and I would just kind of add to that by saying, we are in one of these developments that were a close case to whether they were disclosed for or not either.

I appreciate all of the responses here. Thanks.

Thank you for your question, Darren. I would now like to turn the call over to Kevin McNamara for closing remarks.

Closing remarks are simple. We are looking forward to our fourth quarter, which is usually our most profitable quarter. I can see from the range that Dave gave, as far as our expectations is a fairly broad range, but that is largely because it is our most profitable quarter, and there is a little more volatility in our fourth quarter, but it is one where again I think that we are well-positioned and energized. So thank you for your attention, and we will reschedule one of these in about four months. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.