Chemed Corp (CHE) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Chemed Corporation earnings conference call. My name is Crystal, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question and-answer session towards the end of the presentation.

(Operator Instructions)

I would now like to turn the presentation over to your host for today, Ms. Sherri Warner, Chemed Investor Relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2013 ended June 30, 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 July 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 July 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 second-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 this call for questions. As most of you our aware, the government recently filed a False Claim Act complaint against the Company, and certain of our hospice-related subsidiaries. It is our intention to work closely with the government, and attempt to resolve these issues in an efficient and timely manner. With that said, we will vigorously defend our approach to quality end-of-life care, as well as ensure VITAS patients have access to the entire range of hospice services that are mandated by the Medicare hospice benefit.

One of the specific concerns the government highlighted in the complaint is our utilization of high acuity care. It is important to note that VITAS medical decisions including levels of care are determined by our field level-based physicians, and these decisions are tailored to the specific needs of our patients. As expected, a result of this litigation is that high acuity care as a percentage of total days of care declined 0.9 percentage point, or $6.4 million in the quarter. A doctor delaying a decision for a patient to enter high acuity care by a single day has a noticeable impact on revenue. We estimate this mix shift in high acuity days of care negatively impacted contribution margins by approximately $2 million. The majority of this impact or $1.9 million, is due to lower margins within the high acuity segment. Our inability to forecast prescribed high acuity days of care has resulted in excess costs and inefficiencies within the care segments. This should be mitigated in future quarters, as we better anticipate prescribed days of care, and balance inpatient occupancy rates between short-term and long-term contract beds.

VITAS incurred an $855,000 Medicare Cap billing adjustment in the quarter related to one provider number. This is a large program on the West Coast that currently has a gross profit margin, including this Medicare Cap limitation in excess of 30%. Of VITAS' 36 unique Medicare provider numbers, 32 provider numbers have a Medicare Cap cushion greater than 10% in the first nine months of the 2013 Medicare Cap year. Two provider numbers have a Medicare Cap cushion between 5% and 10%, and one provider number has a Cap patient 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. In June 2013, we reached a tentative agreement subject to court approval to settle certain class-action litigation claims for alleged violation of the Fair Labor Standards Act, and alleged claims for violation of the labor laws in various states. As a result of the tentative settlement, Roto-Rooter recorded after-tax expense of $9 million. This class-action litigation involved a variety of wage/hour claims, arising under the Company's former compensation program based on the laws of approximately 30 different states. To reduce the risk of future litigation, Roto-Rooter revised its compensation program to clearly delineate wages from vehicle and other expense reimbursement. All Roto-Rooter commission service technicians now receive a vehicle expense reimbursement under a standard mileage rate within IRS guidelines. Utilizing the standard mileage rate significantly reduces both employer and employee documentation requirements, and provides a much greater Safe Harbor in terms of establishing that reimbursed vehicle costs are excluded from compensation when determining employees' hourly rate, minimum wage and overtime considerations.

On an operational basis, Roto-Rooter is having an excellent year. During the second quarter of 2013, Roto-Rooter's plumbing and drain cleaning business generated sales of $93.6 million, an increase of 5.3% over the prior year. More importantly, this revenue translated into an $18.9 million of adjusted EBITDA, an increase of over 31.1%, and equates to an adjusted EBITDA margin of 20.2%. As most of you probably recall, the unusual weather patterns in the first half of 2012 had a negative impact on our residential demand. In addition in 2012, we experienced a significant number of large medical claims, that is claims that exceeded $20,000.

As we prepared for our 2013 business plan, we made the conservative assumption that these unusual weather patterns would continue to pressure consumer demand. In addition, we assumed this run rate of large medical payments would remain elevated into 2013. To offset these revenue expense pressures, we re-engineered the field structure, and significantly reduced field operating expenses. Fortunately in 2013, we are experiencing more traditional weather patterns. In addition, our large medical claims have declined 30% and are now at more historical trends. As a result, 2013 has the potential to be a record year for Roto-Rooter, in terms of revenue and operational profitability.

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 $264 million in the first quarter of 2013, which is a decrease of 0.6% over the prior year period. As Kevin noted, during the quarter our revenue growth was significantly constrained by a mix shift from continuous and inpatient care, which we refer to as high acuity care into routine homecare. Historically, VITAS has averaged between 7.5% to 8% of total days of care being high acuity. This high acuity care declined 89 basis points to 6.9% in the quarter. Since routine homecare per diem averages $161.08 and high acuity care averages $693.20, this mix shift negatively impacted revenue by approximately $6.4 million. The second quarter 2013 gross margin, excluding the impact of Medicare Cap, was 22.2% which is a 54 basis point improvement when compared to the second quarter of 2012.

Now let's return to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $93.6 million for the second quarter of 2013, an increase of 5.3% over the prior year quarter. Roto-Rooter's gross margin in the quarter was 47.1%, a 273 basis point increase when compared to the second quarter of 2012. Adjusted EBITDA in the second quarter of 2013 totaled $18.9 million, an increase of 31.1%. And the adjusted EBITDA margin was 20.2% in the quarter, an increase of 398 basis points. Total unit per unit job count increased 1% in the second quarter of 2013, when compared to the prior year period. This consisted of residential drain cleaning job count increase of 5.8%, and residential plumbing job count decline of 4.5%. Residential jobs represented 69% of total job count in the quarter. Commercial drain cleaning increased 0.8%, and commercial plumbing and excavation jobs declined 2.2%.

Now let's look at our consolidated balance sheet for the quarter. As of June 30, 2013, Chemed had cash and cash equivalents of $113 million and debt of $179 million. Chemed's total debt equates to less than 1 times trailing 12-month adjusted EBITDA. Our capital expenditures through June 30, 2013 aggregated $12.2 million, and compares to depreciation and amortization during the same period of $16 million. During the quarter, we repurchased $18.4 million of Chemed stock. This equated to 280,701 of Chemed shares repurchased at an average cost of $65.72. Chemed currently has $96.3 million of authorization remaining under our share repurchase program.

Our 2013 full-year guidance is as follows. Effective October 1, 2012, Medicare increased the average hospice reimbursement rates by approximately 0.9%. Medicare then reduced hospice reimbursement rate 2% through sequestration effective April 1, 2013. As a result, effective April 1, 2013, Medicare hospice reimbursement rates were reduced 1.1% when compared to the prior year. The impact of the 2% sequestration cuts impacts approximately 91.2% of VITAS' revenue base, and is factored into our 2013 guidance which I am about to discuss. VITAS estimates its full year 2013 revenue growth will be constrained in the second half of 2013, as a result of mix shift from high acuity care to routine homecare.

The mix shift is anticipated to have a modest impact on our overall profitability, given the relatively low direct contribution margins of high acuity care. Full-year 2013 revenue growth, prior to Medicare Cap is estimated to be in the range of 0.5% to 2%. Admissions in 2013 are estimated to increase approximately 2% to 4%, and full-year adjusted EBITDA margin prior to Medicare Cap, is estimated to be in the range of 14% to 14.5%. Roto-Rooter is forecasted to achieve full year 2013 revenue growth of 4% to 5%. This revenue estimate is based upon increased job pricing of approximately 3.5%, and job count increasing approximately 0.5% to 1%. Adjusted EBITDA margin for 2013 is estimated in the range of 19% to 19.5%.

We reaffirm our previous guidance that full-year 2013 earnings per diluted share excluding non-cash expense for stock options, non-cash interest expense related to the accounting for convertible debt, litigation 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.

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

Thank you, David. As we noted earlier, sequestration reduced our Medicare hospice reimbursement rates a full 200 basis points on April 1. Although difficult, we still managed to generate an increase in our adjusted EBITDA and adjusted EBITDA margin. Admissions did struggle during the quarter, aggregating 15,721, which is 1.2% below the prior year quarter. On a year-to-date basis, our admissions aggregated 32,858 which is an increase of 1.9%. As of June 30, 2013, VITAS employs approximately 1,140 admissions personnel, as compared to 1,090 in the prior year quarter. This consists of 351 sales reps, 162 admissions coordinators, 387 admissions nurses, 79 community liaisons, and 14 liaisons in the long-term care area, and 70 admissions liaisons.

During the second quarter of 2013, admissions in assisted-living facilities increased 3.6%, and home-based admissions increased 1.1%. Hospital-referred admissions decreased 1.8%, and nursing home admissions decreased 2.5%. Our per diem pharmaceutical costs averaged $7.55 in the quarter, and are 9.1% favorable to the prior year. Our medical equipment per diem costs totaled $6.56 in the quarter, which is 3.4% below the prior year period. This was accomplished through the expansion of our in-house medical equipment program, which provides us the dual benefit of lower costs and improved service levels.

VITAS' average length of stay in the quarter was 84.8 days, which compares to 74 days in the prior year quarter, and 77.4 days in the first quarter of 2013. Average length of stay is calculated using total discharges during the quarter. Median length of stay was 16 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 1,335,834 days in the quarter, an increase of 4% over the comparable prior year period. Non-nursing home routine homecare days increased 7.5% in the quarter, and nursing home routine homecare declined 3.1%. At June 30, 2013, we have three programs classified as start-ups. All of the start-ups are state-licensed, CHAP-accredited, and certified by Medicare. Operating losses for these three start-ups totaled $465,000 in the quarter, and compares to losses of $785,000 for locations classified as start-up in the prior year period.

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

Thank you, Tim. Now it is appropriate to consider questions.

(Operator Instructions)

Your first question comes from the line of Darren Lehrich from Deutsche Bank. Please proceed.

Good morning, everybody. Just several things here. I wanted to start with just the gross margin in the quarter, in the higher acuity settings. Obviously, they fell off year-over-year. And you have talked a little bit about some things that you think you can do to mitigate that. I would be curious to hear how you plan to mitigate that. And then as it relates specifically to continuous care, I think you talked about that cost structure as being fairly variable. So I am just wondering what you saw in the quarter that made it a little less variable?

Okay. I will turn it over to Tim.

But yes, Tim, it is largely variable, there is no question about that. But, there is still, again when you are talking, in terms of kind of the infrastructure to -- that exists to make sure that you can kind of change your scheduling on a dime. I mean, that does exist. As one of the things I always say is, there are reasons tied to quality and largely high acuity care that makes our breakeven on a program at about 150 to120 census, when somebody in the industry eke out a profit on a census of 40. I mean, that is -- some of those costs are the sticky costs. But pretty much, there are some specifics, I think, in response to Darren's questions.

Well, I think the issue is that there was some changes in the mix of our business that occurred over a month or six-week period, a normal situation. And it takes some time to respond to that. So again, in the last period of weeks, we have been analyzing all of the areas of cost structure in all these businesses. And there is ways that we can minimize the administrative manager side of it. And with occupancy a little higher, we are going to have occupancy higher to be successful, the margins should be able to be in the range that they have been historically. So, we have strong plans. We are in the middle of it. We expect it to improve.

I am very encouraged by our overall gross margin, and the ability to maintain an increasing gross margin in the period. Labor is under very strong control. And again, this is fighting a 2% reduction right off the top. So, things are going well. And I think the margins, with good admissions which we are working very hard to increase those a little bit. The referral patterns were modestly impacted in the last couple of months. The wonderful news is the strength in our census is pretty good, 4% year-over-year. Our major account is really, really supportive, and the management team working very hard. So it just seems like we have come through the last couple of months quite well, and I am optimistic. So, as far as your gross margin question, I hope that helped.

Yes. No, thank you, it did. I am really just trying to square really what Dave has talked about at some of the conferences, relative to $13 million. So EBIT exposure to continuous care, with the $2 million shortfall in the quarter relative to a smaller shift in the mix. That is really what --

Yes, Darren. So let's talk about that. So, yes, we lost just on raw revenue. Because we get obviously only about $160 for a day of routine care between -- and as opposed $650 and $750 a day for inpatient or continuous care. So clearly, there is a revenue effect.

But as we have always said, we are basically in front, from a care standpoint we think high acuity care is very critical. From a business standpoint, we are actually indifferent what level of care a patients sits at. As a matter of fact we would make more money, if a patient stayed in routine homecare, versus going into an inpatient unit. But obviously, we provide that very complex and very expensive day of care in an in-patient unit because the patient needs it. So based on that, we basically from a business model standpoint are completely indifferent, from a financial profitability standpoint, whether the patient is in continuous care, in-patient care or routine homecare.

And just the 89 basis point decline we had in high acuity care versus our total care, it only impacted our profitability a little over $100,000. As we have talked about -- as you are referring to, we have lost $1.9 million in contribution margins, because within those silos of level of care, continuous care and in-patient care, they took a several hundred-basis point hit in the margin in the quarter.

And that was primarily because we are going through a bit of a paradigm shift. It is difficult for us to predict what the current demand level is. As our doctors prescribe high acuity care for the needs of the patient, we now have a shift and we have uncertainty, and we weren't able to shift our cost structure quick enough. Once we have enough clarity on what that needs are going to be, we will be able to better manage within those high acuity silos, our overall costs. But as Kevin --

And I wanted -- one point, Dave picked back up. But you have to remember that, let's say with regard to those high acuity and continuous care, say our average is, episode is six days, median is five days. I mean, if a doctor just waits one day to say, I have been under a microscope. This subject decision, subjective decision I have been making is now under a microscope. And I will just watch it one more day, before I decide whether to have the high acuity care. Well, that is a 20% impact on -- in that episode. And that, you can see how that -- basically what we are saying is, that does create some real challenges on the administrative side to have to deal with that.

In that episode I just gave, a 20% reduction in the care. And we are -- that's a fairly -- it is not a far-fetched example. It is just, it is just the type of thing that Tim is dealing with. And I think you will see, a couple things you will see with regard to behavior. You will both see retreating to the mean, and you will see an enhanced efficiency within VITAS.

But, and we also say that when Dave says we are indifferent, kind of what we have been maintaining all along, we would much rather have continuous care patients go in-patient for instance. I mean, when you look at the profit margin it -- if you lose five continuous care patients, and but one of them goes into in-patient, that is a tie for us. I mean, it is a, that is one of the advantages, one of the upsides that we are dealing with. But I just want to make that point. But it is not something we -- and what we manage is the effects of the medical decisions. We don't manage the medical decisions.

But again, did you see the distinction, if you just looked at revenue at the margin, how much dollars do you make per day of patient care. Quite frankly, we make more money if the patient stayed in routine homecare. But that is not how we drive our business. We drive it by, what are the needs of the patient? If they are high acuity, they are high acuity. We, quite frankly, are blind to the costs, and we provide the appropriate plan of care for those needs of the patient.

But if you look at the way the business model works, it is blind to the fact. And we will -- it washes out, whether they stay in high acuity or routine homecare. We just have a learning curve, and we have to be able to now better anticipate what is going to be the new norm for doctors who now are under scrutiny, and may delay putting a patient into continuous care by watching the patient more carefully. And maybe at the end of it, should the patient be in three or four days, if they are under pressure the doctors may be considering, should they pull the patient out earlier, than they traditionally have from high acuity care. But these are the decisions made in the field by the doctors.

No, that is very helpful. And maybe just one more line of questioning, just to help me further in the understanding of continuous care cost structure. Just in terms of your continuous care days, what percent are in the skilled nursing facility setting versus in the patient home? And do they have any different cost structure if you think about those two settings, if you will?

Well, there is no difference in the cost structure. And as far, as we don't break those figures out, and there has been no material change in those mixes though, I could suggest.

And that -- the normal logistical advantage you might anticipate with, what might be several patients under one roof, you wouldn't get in the continuous care because it would be episodic, and you wouldn't have many under the same roof.

Right. Remember basically, about 70% to 80% of all of our patients overall that are in a nursing home, we have three or less patient under that roof. And I think it is close to half, is the only patient in that facility. We also don't make a distinction, Darren. When we talk about, we talk about nursing homes that includes skilled nursing facilities as a combination. So we actually don't even make a distinction, because it doesn't drive our care model. It doesn't matter to us whether they are in a nursing facility or a skilled nursing facility. So we don't follow that metric.

Okay. And then just last thing. So I am clear in terms of the admissions guidance, it is up roughly 2% year-to-date. You have updated your admissions guidance overall, but you clearly had some deterioration over the course of the second quarter. So, Tim, maybe just get some thoughts from you, what is embedded in that assumption, that referral patterns get back to normal by Q4, or any visibility into some stabilization there?

Well, all I can say is we are pressing very hard. We are feeling good about where we are at. And over the last few months, we have been able to get very close and speak to a lot of our partners and referral sources, and it seems to be going well. So this is our view, to have the -- a little modest improvement from our current run rate the last couple of months. And I have every expectation, we are pulling all the strings, We are putting new opportunities out from our people, bringing new people in the Company. So, I would expect that we will moderate up from here a bit. And so I have no reason to think that won't happen.

Yes. And let's face it, I mean, we just finished a quarter where we had bad press which never helps. And also another thing to keep in mind if -- and something just to follow, we would consider it noise, in this regard. But if you are following the issue on the prognosis of failure to thrive or debility, I mean it is -- that is causing some uncertainty in the field. And it causes some delay in admissions, because you might have a patient that comes to us with a terminal diagnosis from their doctor. But no one has -- I mean, it, no one has taken the extra step of saying, oh my gosh, they have got 10 things wrong with them. They have got cascading organ failure, which is going to be the first organ to fail? I mean, the -- there is a move by the payors to say, we want more specificity in that, in the overall catch-all of failure to thrive, or debility is, as a prognosis is something I think is -- provides some noise or upsetting a bit, the admissions statistics.

Got it. Okay. Thanks. Appreciate it.

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

Good morning, everyone.

Good morning.

Tim, just so I clearly understand the admissions issue. So it is more of a Company-specific challenge, as opposed to an industry challenge that physicians are being more hesitant to refer patients?

Well, I think there is --

Not refer patients necessarily.

I think there is -- there are issues on both sides of it, so Company issues, Kevin just mentioned, obviously, a big public event. And then, we have had this issue going on in the industry as well, on the debility.

So, okay.

So, some of it is related to our issues, and some of it is industry uses. And the referral sources are the ones that are also trying to understand this. So as Kevin says, if the referral -- not even our doctors -- are a little more reluctant just to make sure, because there has been all this press around it, that happens. And I think over time that usually moderates, because we educate people, people then understand that debility is not an issue that they don't want patients on hospice. They want you to try and identify the underlying disease. And that is just for information and for quality management, we are very good with it. We are working with the industry and everybody to make sure it is put in place, in a way that does not restrict or limit the appropriate access of patients to their benefits.

So it is not a big deal. But on the edges, has it affected 1% or 2% trend of admissions? I think probably. And the bottom line, I am so encouraged that our major accounts are totally solid. And, of course, the event needs to be talked about, but they see the great care. They understand it. And I am very pleased with sort of where we are at. So that is my view of it.

Okay. And Kevin, my reading of the court documents is that it appears as if the lawsuit with the government is concluded sometime in calendar 2014?

No.

No?

No. These things grind slowly, but exceeding fine. I mean, the government is -- it goes through process of call it motion practice, and amendment.

Yes.

I mean, we haven't answered the complaint yet at this point. I mean, they are still --

Understood. (Multiple Speakers).

Is not in a position to answer. We talk about resolving. Jim, you know how these things go.

Yes.

If all of these are resolved. But if we went to the government right, tomorrow and say look, this is a drag on our stock. We want to resolve this. They would say, okay, give us a gazillion dollars. I mean, you have to let them play out. You have to demonstrate to them what is at stake. And let me just take a minute as a digression, if you read the most recent MedPAC report, I mean talk about mixed signals. MedPAC has gotten on to the fact that so many, 55% of hospices don't have any continuous care.

None.

And 15% don't even have an in-patient unit. And what they are saying is, oh my gosh, we are getting killed with expenses associated with patients who -- they come in a crisis. Their hospice provider doesn't have any high acuity facilities for them. So they have a revocation in going to a hospital, run up a huge bill, and then either die or go right back into hospice upon their release from the hospital. And they said, this is just a huge problem. We have got to come up with a way to keep the people in hospice, and not revoking. Of course, the answer to that is high acuity care.

Yes.

And particularly continuous care. But again, that -- when you say from our -- we would like that to play out before -- so that the government can understand the role of continuous care, and what happens when you don't have continuous care. And basically what happens when you don't encourage continuous care. I want -- one of the things I am going to be following over the next quarter or two is, just to the extent that they are --continuous care is under a microscope. And our patients are marginally less likely to have it or have as much of it -- again, to the extent that revocations increase, that is no skin off our nose. But each one probably costs the -- a revocation with admission to the hospital probably costs on average in excess of $10,000 to the federal government.

Yes.

So that -- we would like those -- one of the reasons we are not anxious to rush to settle at any cost is, I think when they capture all of these, some of these trends, it will give them better understanding of the role of hospice, and the role as a -- in lowering overall costs.

Okay, that's very helpful. Thank you, both.

Okay. Well, I think there is no more questions. So we will just conclude this discussion at this point, and look forward to talking to this group in about three months.

Ladies and gentlemen, thank you your participation in today's conference. This concludes the presentation. You may now disconnect, have a good day.