Chemed Corp (CHE) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2015 Chemed Corporation earnings conference call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Sherri Warner, with Chemed Investor Relations. Please proceed.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2015, ended June 30, 2015. Before we begin, let me remind that 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 23, 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 23, 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 2015 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 the call for questions. Chemed generated $382 million of revenue in the quarter, an increase of 6%. This revenue growth translated into a 10.7% increase in net income. Excluding special items, Chemed's net income increased 11.8%. Our adjusted diluted earnings per share aggregated $1.71 in the quarter, which is an increase of 14% when compared to the second quarter of 2014.

VITAS and Roto-Rooter continue to generate solid operating metrics, which translate into excellent profitability growth in both of these operating segments. VITAS provided almost 1.4 million days of care in the quarter, resulting in $276 million of revenue in the quarter, and equating to a 4.7% increase in revenue when compared to the prior year. Our admissions increased 5.8%, to 16,683 new patients, increasing our average daily census to 15,283 patients in the quarter. On June 30, 2015, we had 15,676 patients under our care which should have a positive impact on our third quarter in terms of days of care and revenue growth.

Roto-Rooter generated sales of $105 million. This is a revenue increase of $9.3 million, or 9.7%, compared to the prior year. This revenue growth is being generated primarily from water restoration services. Water restoration is a remediation service, removing water and excess humidity from a home or business caused by an untoward water incident. These services generated $9.2 million of revenue in the quarter, an increase of $5.8 million when compared to the second quarter of 2014. It is difficult to predict how significant water restoration will become to Roto-Rooter's total service revenue. However, I anticipate water restoration will be a significant contributor to Roto-Rooter's revenue growth in 2015. With that, I would like to turn the teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. As Kevin just noted, the net revenue for VITAS was $276 million in the second quarter of 2015, which is an increase of $12.4 million, or 4.7%, when compared to the prior year period. This revenue increase is comprised of an average Medicare reimbursement rate increase of approximately 1.4%, a 5.1% increase in average daily census, offset by level of care, as well as a geographic mix shift, when compared to the prior year. In the second quarter of 2015, VITAS did not record any adjustments in estimated Medicare Cap billing limitations. This compared to $0.1 million of Medicare Cap billing limitations recorded in the second quarter of 2014. At June 30, 2015, VITAS had 34 Medicare provider numbers, none of which has an estimated 2015 Medicare Cap billing limitation.

Our average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $198.79, which is 0.5% below the prior year period. Routine home care reimbursement and high acuity care averaged $164.07, and $698.96 respectively. During the quarter high acuity days of care were 6.5% of total days of care, 40 basis points less than the prior year quarter. The second quarter of 2015 gross margin, excluding any impact of Medicare Cap, was 21.9%, which is 14 basis points below the second quarter of 2014. Our routine home care direct gross margin was 52.4% in the quarter, a decrease of 100 basis points when compared to the second quarter of 2014.

Direct inpatient margins in the quarter were 6.0%, which compares to 6.9% in the prior year quarter. Occupancy of our 34 dedicated inpatient units averaged 73.9% in the quarter, and compares to 74.7% occupancy in the second quarter of 2014. Approximately 77% of our inpatient days of care are in these dedicated units, with the remaining 23% of our inpatient care utilizing shorter term contract beds. Continuous care had a direct gross margin of 16.7%, a decline of 80 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 18.3 in the quarter, a decline of half an hour when compared to the 18.8 average hours billed for a continuous care day in the prior year.

Selling, general and administrative expenses were $22.2 million in the second quarter of 2015, which is an increase of 5.9% when compared to the prior year quarter. If you exclude costs associated with the Department of Justice litigation, selling, general and administrative expenses increased 1.1% in the quarter and are essentially flat on a year-to-date basis. Adjusted EBITDA, excluding Medicare Cap, totaled $39.8 million in the quarter, an increase of 5.9% over the prior year period. Adjusted EBITDA margin, excluding Medicare Cap, was 14.4% in the quarter, which is 17 basis points favorable to the prior year period.

On the Roto-Rooter side, Roto-Rooter generated sales of $105 million in the second quarter of 2015, an increase of $9.3 million, or 9.7%, over the prior year. Water restoration accounted for the majority of this revenue growth, with water and flood remediation services increasing $5.8 million in the quarter. Commercial drain cleaning revenue increased 3.6%, commercial plumbing and excavation increased 5.6%, and overall commercial revenue increased 7.7%. Residential plumbing and excavation increased 9.5%, although drain cleaning declined 3.7% and water restoration increased 167%, which equates to total water -- which equated to total residential water restoration revenue of $7.7 million in the quarter. Overall, residential sales increased 12.7%.

Now let's look at the consolidated balance sheet. As of June 30, 2015, Chemed had total cash and cash equivalents of $32.7 million and debt of $160 million. Capital expenditures through June 30, 2015, aggregated $18.8 million, compares to depreciation and amortization during the same period of $7.3 million. We repurchased $29.8 million of Chemed stock during the quarter, this equates to 250,000 shares of Chemed stock repurchased at an average cost of $119.05. Chemed currently has $82 million of authorization remaining under the share repurchase program.

We have also increased our full year 2015 earnings outlook as follows. Full year 2015 revenue growth for VITAS, prior to Medicare Cap, is now estimated to be in the range of 4% to 5%; admissions in 2015 are estimated to increase 4% to 5%; and full year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 14% to 15%. Medicare Cap billing limitation for calendar year 2015 are estimated to be $2.8 million.

Roto-Rooter is forecasted to achieve full year 2015 revenue growth of 5% to 6%. This revenue estimate is based upon continued expansion in water restoration services, coupled with a modest increase in job pricing and volume. Adjusted EBITDA margin for 2015 is estimated to be in the range of 19.5% to 20%. Based upon these factors, management estimates that the full year 2015 adjusted earnings per diluted share, which excludes non-cash expense for stock option, costs related to litigation and other discrete items, will be in the range of $6.60 to $6.75. This compares to Chemed 2014 reported adjusted earnings per diluted share of $6.07. I'll now turn this call over to Tim O'Toole, our Chief Executive Officer of VITAS Healthcare.

Thank you, David. I continue to be pleased with our admissions growth over the past several quarters. In this quarter we generated admissions totaling 16,683 new patients, which is an increase of 5.8% over the prior year. This brings our year-to-date growth in admissions to 5.7%. During the quarter, admissions generated from hospital referrals, which typically represent over 50% of total admissions, increased 8.5%; home based referrals expanded 2%; nursing home admissions increased 2%; and assisted living facility admissions increased 3.3%. Our per patient per day pharmaceutical costs averaged $6.94 in the quarter which is 4.4% favorable to the prior year. Medical equipment per patient per day cost in the quarter totaled $6.57, which is a 2.8% reduction in costs when compared to the second quarter of 2014.

VITAS's average length of stay in the quarter was 78.5 days, which compares to 82.4 days in the prior year quarter and 79.0 days in the first quarter of 2015. Average length of stay is calculated using total discharges during the period. Median length of stay was 15 days in the quarter and compares to a median of 16 days in the prior year quarter and 13 days in the first quarter of 2015. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,390,735 days in the quarter, an increase of 5.1%. Non-nursing home routine home care days increased 7% in the quarter, and nursing home routine home care increased 0.6%. At June 30th, 2015, we had one program classified as a start-up and it is admitting patients. The new start is a Medicare certified operation and is billing under an existing provider number. With that, I'll turn the call back over to Kevin.

I will now open this teleconference to questions.

(Operator Instructions)

And our first question comes from the line of Jim Barrett from CL King. Please proceed.

Hi. Good morning, everyone.

Hi, Jim.

Kevin, I heard your comment that you -- it was difficult to quantify the water restoration business, but can you discuss it a little bit further in terms of SERVPRO seems to be the largest player. To what degree is this a good fit with your current service offerings? Are there any competitive advantages that Roto-Rooter has in this space? And could you talk about the margin profile if you could, relative to Roto-Rooter overall.

I'll start and then I'll let Dave jump in --

Thank you.

-- to flush out anything that I left out. Let me start by saying, one of the reasons it's hard to fully predict is it's a new business for us. We're -- there's some trial and error going on. We haven't made all services uniform in all our branches, some branches are doing better than others. If you extrapolate across only our best branches in this regard, it's a -- would be a very significant increase in Roto-Rooter's business, I mean, to the extent that you moderate that view, again, there's a pretty big range there.

In that regard, that aspect of your question, I'll say the thing that remains to be seen is, can we expand the service offering outside of, kind of, referrals from plumbing jobs, drain cleaning jobs that we are doing? Currently, and this is why it's a good fit with our business, we have people who -- plumbers and drain cleaners who are called to a home or business where there's an immediate problem. First thing they may do, maybe, is stop the flow of water. Obviously, job two is to make sure that water is remediated so that it doesn't cause further damage and/or lingering problems like mold, and to the extent that the homeowner says, what do you do now? And the comment is, well, there's a number of companies that provide this service, including our Company. We could have somebody here in 10 minutes.

Obviously, the good branches, where they already know there's a water incident in advance, may already have dispatched somebody knowledgeable as far as estimating and able to handle that aspect of it. But I guess my point is, right now Roto-Rooter is pursuing that business with regard to the home-grown leads as they were. So one question is figure how big it's going to get is to the extent that how we approach the general market, where we don't have the lead; whether that makes sense for us and -- but again, I won't even go into -- it's obviously, right now we're just operating in a small percentage of the overall market.

As you say, there's some big players in the industry and it remains to be seen how we would attack that aspect of the business. With regard to margin, let me say the margin profile is good. I mean, it's similar to -- if I was saying at this point, a little bit lower than -- not higher, but little bit lower than our main, our core business, sewer drain cleaning; but very healthy and, given the fact that the cost of acquisition of a job and that referral or that lead is relatively low, it yields a real nice business for us. But Dave, anything that I've dropped -- I left out there or you want to flush out?

A couple other points, although Kevin's absolutely correct. It has slightly lower margin than our other service offerings because it's drafting behind the infrastructure that already exists for the Roto-Rooter branch, that's really why you're seeing us popping above 20% in the EBITDA margin. Typically if we're having a good year, the fourth quarter might pop above 20%. Now, we've actually done the first two quarters because of the contribution of water restoration. Last quarter was 20% and this quarter's 20.9% for an EBITDA margin.

But, even to back up a little bit, although there are a couple large players in the industry, the fact is there's still, basically the major competition is locally owned and operated. It's first responders, and your ability to immediately remediate the damage, that gives Roto-Rooter the advantage because we're already in the customer's home. So that's really what we're taking advantage of. If you looked at Roto-Rooter 20 years ago, and even 10 years ago, this probably wouldn't have been something we could have done. But there's been an evolution within Roto-Rooter, and it really started with excavation about 10 years ago, where we've developed a core competency to do larger jobs, jobs that are equipment and labor intensive, and jobs where we're not charging a commission or not paying a commission to our technicians, but it's more of a fixed contract.

And as we've developed over the last 10 years core competency in excavation, that actually then had a natural transition to extend that core competency now into the water restoration business, and capturing the business we were either not taking advantage of, or just, quite frankly, referring away to other companies. So we think we're well positioned to be, at a minimum, a niche player taking advantage of business that's available to our existing customers and there may very well be opportunities to branch beyond our existing customers as we develop a platform.

What Kevin and I would caution, though, is we expect to have to develop a more detailed infrastructure within the Roto-Rooter branch because of uniqueness to water restoration, developing a specialized accounts receivable and follow-up for insurance companies, as well as capturing deductibles from customers, getting actually more refined in terms of the equipment we need. So that could increase costs a little bit, but still very profitable, as well as could expand our margins as we become greater experts on individual insurance companies and maximize billing and maximize in the services we can provide within what is allowable by the insurance companies. Which is a long way of saying is, we think this is very, very positive and we're going to be refining our approach to water restoration really over the next couple years.

I do recognize it's a fairly new business for you, but Kevin, would you -- do you envision a day, once the infrastructure's established and relationships with insurance companies are also well established, that you would either consider purchasing one of the large national players or even rolling up some of the larger regional companies?

No, I don't think so. I mean, it's a possibility, but I view it as more of another leg to the Roto-Rooter service offering and rather than a standalone business. I guess what I'm saying is, what makes us successful at this point is the connection to Roto-Rooter, and we're capturing a huge percentage of those jobs because, in this business, speed and getting people there to start remediation before the damage has been done, in many respects, has been so important. It's a different business when you're talking about just appealing to the general public that has these issues and yet, doesn't already have a referral through their plumber or insurance company.

So it's a possibility, Jim, but it's not a high priority to us at this point, because it would be a different undertaking completely. Again, to the extent we would become more expert at it, that would be one thing. I'll tell you, we're a long way from thinking that we're better than everybody else in providing this service and more efficient. We're a long way from that, and we probably wouldn't consider expanding it until we thought we were ahead of that power curve, not behind it.

Thank you both.

Okay. Well, I think I don't see any more questions. So again, not that surprising in that our quarter was, in our minds, pretty much within expectation. Yes, we tweaked our guidance a little bit, but part of that is just to the extent that we're further along in the year, and we're proceeding as expected. So with that, I'll thank you for your attention and see you after one more quarter.

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