Chemed Corp (CHE) 2013 Q1 法說會逐字稿

A very good morning, ladies and gentlemen. Thank you all for joining. Welcome to the first-quarter 2013 Chemed Corporation's earnings kerning conference call. My name is Lisa and I will be your coordinator for today. At this time all participants are in listen-only mode. Following this presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would also like to remind you this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Sherri Warner of Chemed Investor Relations. Please proceed. Thank you.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2013, ended March 31, 2013. 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 April 18 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 April 18, 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 first-quarter 2013 conference call. I will begin with some of the highlights for the quarter, and David and Tim will follow with additional operating detail. I will then open up the call for questions.

As you are aware, sequestration mandated that CMS reduce our Medicare hospice reimbursement rates 200 basis points effective April 1, 2013. Ordinarily, such a drastic reduction in reimbursement would have a negative impact on our forecasted earnings. However, I'm very pleased to be able to maintain our full-year 2013 earnings guidance in spite of these lower reimbursement rates.

This has been accomplished through excellent earnings growth in the first quarter of 2013, continued benefits from operational efficiencies within VITAS, reduced risk of Medicare Cap billing limitations, and continued margin improvement in the Roto-Rooter segment.

Now let's turn to our operating results. In the first quarter of 2013, Chemed consolidated revenue totaled $367 million, and net income was $22.3 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 $26.1 million and equated to adjusted earnings per diluted share of $1.38. This is an increase of 14% when compared with our adjusted earnings per diluted share in the first quarter of 2012.

During the quarter our hospice business segment generated revenue of $271 million, an increase of 4% over the comparable prior-year period. Revenue growth aggregated 5.9%, excluding the impact of 2012 being a leap year and the impact of revenue recognition related to the reversal of prior years' Medicare Cap accruals.

We generated at $37.6 million of adjusted EBITDA in the quarter, which equated to an adjusted EBITDA margin prior to Medicare Cap of 13.6%, an increase of 83 basis points. The 83 basis-point increase in our adjusted EBITDA margin, excluding Medicare Cap, was driven by increased efficiencies at the field operating level. With the threat of sequestration now a reality, it is imperative that we continue to reduce the growth rate of all our costs while at the same time maintaining the highest level of care possible under these reduced reimbursement rates. Tim will provide you with more detail on these expense reduction initiatives later in the call.

In the first quarter of 2013, VITAS recorded a positive revenue adjustment of $900,000 relating to eliminating the Medicare Cap billing limitation recorded in the fourth quarter of 2012. This compares with $2.6 million of additional revenue recorded in the first quarter of 2012. Of VITAS's 36 unique Medicare provider numbers, 31 provider numbers have a Medicare Cap cushion of 10% or greater during the first six months of the 2013 Medicare Cap year. Two provider numbers have a Medicare Cap cushion between 5% to 10%, and three provider numbers have a Cap cushion between 0% and 5%. VITAS generated an aggregate Cap cushion of $233 million during the trailing 12-month period.

Now let's turn to our Roto-Rooter business segment. During the first quarter of 2013, Roto-Rooter's plumbing and drain cleaning business generated sales of $95.3 million, an increase of 3.5% over the prior-year quarter. More importantly, this revenue translated into $17.4 million of adjusted EBITDA, an increase of over 24%.

As most of you probably recall, the unusual weather patterns in the first half of 2012 had a negative impact on our residential demand. Fortunately, in 2013, we appear to be experiencing more traditional seasonal patterns that should result in Roto-Rooter having an excellent year, both for revenue and profitability growth.

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

Thank you, Kevin. Net revenue for VITAS was $271 million in the first quarter of 2013, which is an increase of 4% over the prior-year period. This revenue growth was accomplished from an increased ADC of 5.3%, driven by an increase in admissions of 5%, increased discharges of 4%, and Medicare price increases of approximately 0.9%.

As Kevin previously noted, if you exclude the impact of leap year and Medicare Cap reversals, our revenue expanded 5.9% in the quarter. Our average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $208.23, which is 0.5% above the prior-year period. Our routine home care reimbursement and high acuity care averaged $164.51 and $713.65 respectively, per patient per day in the first quarter of 2013. During the quarter, our high acuity days of care were 8.0% of total days of care, 10 basis points below the prior-year quarter.

The first-quarter 2013 gross margin, excluding the impact of Medicare Cap, was 21.2%, which is an 80 basis-point improvement when compared to the first quarter of 2012. Our home care direct gross margin was 51.9% in the quarter, an increase of 150 basis points when compared to the first quarter of 2012.

Direct inpatient margins in the quarter were 10.9%, which compared to 14.1% in the prior year. The occupancy of our inpatient units averaged 74.7% in the quarter, and compares to 78.3% occupancy in the first quarter of 2012.

Continuous care had a direct gross margin of 17.7%, a decline of 220 basis points when compared to the prior-year quarter. Our average hours billed for a day of continuous care averaged 18.7% in the quarter, a 1.1% decline over the average hours billed in the first quarter of 2012.

On Roto-Rooter, the plumbing and drain cleaning business generated sales of $95.3 million for the first-quarter 2013, which is 3.5% higher than the prior year. Roto-Rooter's gross margin in the quarter was 46.3%, a 261 basis-point expansion when compared to the first quarter of 2012.

Adjusted EBITDA in the first quarter of 2013 totaled $17.4 million, an increase of 24.1%, and the adjusted EBITDA margin was 18.3% in the quarter, an increase of 304 basis points.

Total residential and commercial unit-for-unit job count increased 0.1% in the first quarter of 2013. This consisted of a residential plumbing job -- a residential plumbing job count decline of 4.9%, and residential drain cleaning job increase of 5.4% when compared to the first quarter of 2012. Residential jobs represent over 70% of total job count in the quarter. Commercial plumbing excavation job count declined 2.6%, and commercial drain cleaning decreased 2.4% when compared to the prior-year quarter.

Now let's look at our consolidated balance sheet. Chemed had total cash and cash equivalents of $73 million and debt of $177 million at March 31, 2013. This $177 million of 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 adjusted EBITDA.

During the quarter, the board of directors authorized an additional $100 million for total share repurchase. Chemed currently has $114.7 million of authorization remaining under this share repurchase plan. The Company did not repurchase any shares during the quarter.

As Kevin noted, effective April 1, 2013, Medicare reduced hospice reimbursement rates for Medicare beneficiaries 2%. This reduction impacts approximately 91.2% of VITAS's revenue base and is factored into the guidance. With that, VITAS estimates its full-year 2013 revenue growth prior to Medicare Cap will be in the range of 4.5% to 5.5%. Admissions in 2013 are estimated to increase approximately 5.0% to 6.0%, and full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 13.8% to 14.2%.

Effective October 1 of 2012, Medicare increased the average hospice reimbursement rates approximately 0.9%. Then as we mentioned on April 1 of 2013, this 0.9% increase was reduced to a 1.1% decline in reimbursement rates when compared to the prior year.

Our guidance assumes VITAS will incur an aggregate of $750,000 in Medicare contractual billing limitations over the three remaining quarters in calendar year 2013. The risk of incurring Medicare Cap billing limitations is reduced due to the April 2013 reduction in reimbursement rates.

Roto-Rooter estimates it will achieve full-year 2013 revenue growth of 2.5% to 4.0%. This revenue estimate is a result of increased job pricing of approximately 1.5%, a favorable mix shift to higher revenue jobs, and job count increasing 0.1% to 0.5%. Roto-Rooter's adjusted EBITDA margin for 2013 is estimated in the range of 18.0% to 19.5%.

Based upon the above, management estimates 2013 earnings per diluted share, excluding non-cash expense for stock options, non-cash interest expense related to accounting for convertible debt, and other items not indicative of ongoing operations, will be in the range of $5.65 to $5.80. This compares to Chemed's 2012 reported adjusted earnings per diluted share of $5.29.

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

Thank you, David. As all of you are aware, the threat of sequestration became a reality for VITAS when CMS reduced our reimbursement by a full 200 basis points on April 1. While there is also the possibility Washington will reduce or eliminate this reduction in hospice reimbursement, we are operating under the assumption that the Federal government will be putting reimbursement pressure on all Medicare providers, including VITAS, for the foreseeable future.

This makes it imperative that we continually increase our efficiency while continuing to deliver quality hospice care to our patients. This approach has already produced results with our first-quarter adjusted EBITDA margins, excluding Medicare Cap, increasing 83 basis points.

We have reduced the daily cost for pharmacy, medical supplies and medical equipment through effective negotiations with our vendors and by improving our internal systems. Also, we have provided additional tools which strengthen our ability to monitor and measure field productivity. This provides our managers with more information to maintain appropriate staffing levels and meet the needs of our patients without incurring unnecessary headcount and related payroll expense.

As of March 31, 2013, VITAS employs approximately 1172 admissions personnel as compared to 1083 in the prior-year quarter. This consisted of 356 sales representatives, 160 admissions coordinators, 398 admission nurses, 88 community liaisons, and 20 long-term care liaisons and 61 admission liaisons. VITAS generated 17,137 admissions in the first quarter of 2013, an increase of 5% over the prior-year period.

Admissions increased in all four of our largest referral categories. During the first quarter of 2013, home-based admissions increased 1.9%, hospital referred admissions increased 6.9%, assisted living facilities increased 7.4%, and nursing home admissions increased 4.9%. VITAS's average length of stay in the quarter was 77.4 days, which compares to 82.4 days in the prior-year quarter and 80.3 in the fourth quarter of 2012. Average length of stay is calculated using total discharges during the quarter. Medium length of stay was 13 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 1,298,838 days in the quarter, an increase of 4.2% over the comparable prior-year period. At March 31, 2013, we had three programs classified as startups. Total operating losses for these three startups totaled $563,000 in the quarter, and compares to losses of $1.4 million for locations classified as startup in the prior-year period.

With that, I will turn to call back to Kevin.

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

(Operator Instructions) Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. A few things here I wanted to cover. Just first of all as it relates to guidance, and first I will start with the Roto-Rooter side of things. Obviously, the margins are going to be very strong based on what you are seeing. And as I look back over just the last three years or so, it works out to be about 200 basis points above where you have been.

So just given how moderate the revenue growth is still, I'm wondering if you can just give us a little bit more confidence in how you plan to get there. And if beyond the health benefit large claims that you had last year, is there anything else that we should be considering?

Hi, Darren, this is Dave. Yes, there is a few things going on within Roto-Rooter, and as it turns out, all very, very positive. Of course, we talked about the first half of 2012, the first quarter of 2012, that was a very warm winter. So we weren't getting the business that were related or won off from frozen pipes. Then, of course, then the second half -- the second quarter was a very dry spring. We didn't get as much rain, which also is very good for our businesses. So we are lapping that, which is all very positive.

And then as you pointed out, we had a lot of claims, primarily large health claims, throughout really 2012. So when we did our business plan going into 2013, some of the assumptions we initially started with is let's just assume we have a continuation of difficult trends. And the Roto-Rooter operations basically took a hard look at every one of the branch programs, and we had what we will call a mini reduction in force, as well as streamlining of personnel.

So expense reductions happened in really, primarily in December of 2012. So we had already reduced our indirect workforce headcount as we went into January of 2013. So we lowered our operating expenses. And the increase in revenue happened on the residential side, which is a key part of that 70% of our job count. The healthcare claims aren't coming. As a matter of fact, they are coming in abnormally low and there is very short lead time. Usually there is only about -- less than a 30-day incurred but not reported. So we are mostly on real billing time.

So higher revenue, reduced operating expenses, reduced insurance claims, all kind of leads into a strong first quarter, and we can already see the visibility in April and that is continuing. So all of that is actually pointing towards Roto-Rooter has a very good chance of this being the best year ever relative to EBITDA, one of the highest EBITDA margins we have had over the past -- actually ever.

And to summarize, Darren, you make a good point. I mean, yes, there is a number of factors contributing, but the real issue is preloading of reducing expenses on, call it the -- in the field but not at the technician level. So made a lot of tough calls in the fourth quarter, the Roto-Rooter business did, and they are just -- everything else is going just good enough for them to kind of operate at peak levels of efficiency.

Yes. No, that certainly makes sense. The other question just around guidance. I know you don't explicitly call it out, but just curious how buyback is contemplated in guidance. Just given the pattern of capital deployment, we certainly have assumed some in our modeling, but I'm just not sure if that is in your share count assumptions for guidance. Maybe just some color there.

Yes, we did not put any share reduction beyond what has currently happened, so there is no forward-looking share reduction in our guidance.

And if I would just give you an order of magnitude, I mean obviously what we have said when you look at the cash flow that we will almost undoubtedly generate, we've indicated that under current situations a substantial portion of that would be used for opportunistic share repurchases.

I would just -- if you just want an order of magnitude, you can do the math. But I mean I could see that to the extent that you ratably buy $70 million worth of Chemed stock at some reasonably assumed purchase price between now and the end of the year, that would add a couple percentage points to our growth for the year, but it is not a game changer.

Yes.

One of the reasons is because we bought none in the first quarter.

Right. Okay, and then just two other things here. One is just maybe for Tim, just length of stay in the first quarter, I know that's your discharged length of stay, but the median certainly dropped a lot. And I'm just wondering if you think that is sort of what the current mix of business looks like or not?

Well, I don't think there is anything meaningful. We bounce from 14 days to 15 or 13 on our median, it seems like. And it just would probably indicate we are doing a very good job of having access to the patients that need our services for only a short period of time -- weekends, good relationships with hospitals discharging into inpatient units, situations like that.

So again, I don't see any of it as unusual. But it's favorable, I think, to not have an increasing longer length of stay, and we basically make sure we are on top of that. So all of those trends look pretty good from where we sit.

Just last thing here. MedPAC obviously laid out their U-shaped payment model in their last meeting cycle. Any reaction to that, given your distribution of patient days and your patient mix? Just curious how we ought to be thinking about that for you guys.

Well, let me just say that as we've said all along, again, when you look at our median length of stay being seven to eight days shorter than the national average under a U-shaped curve situation on reimbursement, you would think we would be a big winner. And as we do the math -- I mean first of all, there is a lot to be done between now and implementation. But yes, it would help us significantly. I mean you can think of it, but in this order of magnitude, 2% to 3% more revenue with the same costs.

Yes. And I think it's probably too early to know for sure where CMS is going to land, but just in terms of the industry expectation do you think that there is enough here given what MedPAC has done for CMS to move on a rulemaking for next year, or do you think we are still two to three years out?

I personally think we are two to three years out. I wish it was next year.

Derrin, this is Dave. One of the issues we really have is it not so much as the -- it is actually a very thoughtful discussion in terms of having reimbursement have that strong correlation to the cost of appropriate care. So we are -- obviously, VITAS is completely in favor of that.

But we are really more concerned about the rules that get wrapped around this strategy in reimbursement. For example, what do you do about these hospices that have usually high live discharges? What do you do when you take those patients back in, because the cost of developing a plan of care from someone else's live discharge from earlier, maybe months earlier, we have to have those setup costs.

So there is a lot of unknowns on the rules they wrap around the reimbursement that we think are critical to make sure you have an appropriate reimbursement program in place. So the National Hospice and Palliative Care Organization has been pushing hard for once CMS develops that thought process on reimbursement to actually then test it, do a bit of a demonstration project to make sure there aren't unintended consequences. So from that standpoint, it is a big unknown on when this will be put in place.

Okay, that's helpful. Thanks very much, guys.

Frank Morgan, RBC Capital Markets.

You provided a lot of good detail about the sources of admission growth, which was quite impressive. But just taking that from a different tack, do you think recent de novos that have rolled into your same-store count are also a strong driver there on the admission growth?

I don't think so. Dave, what do you --?

I would defer to Tim on that.

It is not meaningful. The growth is consistent across our large operations as well with what we have been seeing. So there is improvement in our smaller locations as they grow. They can usually grow faster because they have small market share and good opportunities. But it has not been meaningful as far as any movement in margins.

A program almost has to be in existence three or four years before they start being a blip on the radar screen.

I got you. So you attribute this growth -- I mean, obviously you have got a lot of sales -- invested a lot in sales infrastructure. But this is just basically a lot of you are taking market share away from other competitors in the markets; is that fair?

Well, I don't think it's meaningful. I mean, the growth rates that we've seen in the last quarter are not unusual for us. So we think we are -- as we have discussed, we think we are better prepared than pretty much everyone out there, our competition to move forward in a difficult environment, and we are seeing some advantage from that. It's always very hard to tell.

So, again, I would say this is our normal operations, should be ongoing. And as we have told you, yes, we have more resources; we are moving forward in marketplaces with new products, new services, inpatient units, all of the things that we have talked about. And that seems to be a little different than most. And I would suggest that is benefiting us modestly, but not dramatically.

In fact, one way to look at it is -- I mean, the way we look at it is we are, quote, maybe taking a little market share, but you can imagine that every hospice that was looking at a sequestration cut of 2%, and a lot of our biggest competitors are not for profits. What do they look at cutting? Sales and marketing.

And what's the effect of that? And that is kind of drift to some of the competitors that are maintaining and/or stepping up those sales and marketing efforts. And we think that is a little bit what we are seeing. We hope that accelerates.

I got you. How many additional de novos do you think you will be opening this year?

We are going to minimize that for the balance of the year. We have three as we have discussed earlier right now. I would say we might do one more at some point in the year. But we are going to slow those down and let them mature, and there is less opportunities for the new starts.

And one of the things we also are seeing with the many companies out there under pressure, frankly, we are probably seeing better acquisition opportunities. And we did a small one, which we've announced early in April, of about 65, 70 census in Texas. And so, you know, we have always balanced the de novo startups to the acquisitions, and it is great that we have had the de novos. It was a very smart policy over the last five or six years to not buy and to build, and we will see what the future brings. The good news is we are prepared to go either way in the markets we are at.

Okay, one final question. I will ask this one for Dave. Just in terms of, given the magnitude of the beat in the first quarter and the way you are laying out the rest of the year, any advice you want to give us in terms of sort of the sequential layout or directional layout over the balance of the year? When we get back to this annual guidance you have given us, is there anything we should be aware of, like in the second quarter as it relates to first quarter?

No. Just look at typical seasonality patterns for Roto-Rooter as well as for VITAS, and that should get you to the full year. Fourth quarter will be the strongest quarter for both of the operating segments.

Okay, thanks.

Jim Barrett, CL King & Associates.

Good morning, everyone. The only question I have left is for Dave, and it relates to the convertible notes. Dave, they mature in 12, 13 months. What are your thoughts on how the Company would finance retiring those notes, assuming they are not converted into stock? And I am aware that you hedged your position back in May of 2007.

Yes. So there is the face value of the notes are $187 million, and they come due in May of 2014. We have structured a bank credit facility, which was renegotiated this January of 2013, 5 years, so it straddles that period very nicely. And all we are really doing is looking at a lot of various options. First and foremost, as you pointed out, it will not be dilutive unless our stock price goes over $100 a share, I think around $105.

So from that standpoint, we are not worried about dilution, and we can get cash flow back if it's in the money when it comes to maturity. Right now, the convert market is actually not -- on a comparable basis the convert market is rather weak because of interest rates are so low. I would argue the real rate of interest right now is zero or maybe even negative.

So we probably at this point we could do it with, depending on what our share repurchase with the combination of cash on hand and drawing on our credit facility and probably fixing that rate which would be around 2.5% all in, maybe even a hair better. So with that said, we have options of using cash on hand, drawing against our bank credit facility. But at this point, I don't even think it would be necessary to do another convert, but we have a lot of options available to us.

And I recognize your low leverage, but the fact you didn't buy back any stock in the quarter, does that relate tactically to anticipating retiring that debt in May of 2014?

Absolutely not, that doesn't impact the decision at all. Our share repurchase, one, it is very accretive to the shareholders. And we also -- we want to be opportunistic. It seems inevitably some concerns out of Washington or some negative article on hospice gets written that takes our stock price to an unusually low level. And we are opportunistic to take advantage of that, so that is really why our share repurchase tends to come in chunky over any 12-month period.

In other words, just -- and Jim, just to the extent that there were just several periods where the stock -- Chemed stock price during the first quarter was going up very substantially; just that's not necessarily the right time to be making significant stock repurchases, for a couple reasons.

Agreed. Okay. Well, thank you both.

We have more than adequate resources to do share repurchase and take out the debt next year.

Perfect. Okay, thanks again.

Thank you for your questions. There are no further questions for you. So, ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the conference back to Mr. McNamara for closing remarks.

As usual, I think we said it all; no closing remarks. So I just want to thank everyone for their attention and look forward to having a similar call in about three months.

Thank you very much, ladies and gentlemen. That concludes today's conference call. You may now disconnect your lines. Have a good day. Thank you.