Chemed Corp (CHE) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Chemed Corporation first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Sherri Warner with Chemed Investor Relations. You may begin.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2016, ended March 31, 2016. 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 28, 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. Our reconciliation of these non-GAAP results is provided in the Company's press release dated April 28, 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 2016 conference call. I will begin with some of the highlights of the quarter, and David and Tim will follow with some additional operating detail. I will then open up the call for questions.

In the quarter, Chemed generated $390 million of revenue, an increase of 3.6%. Consolidated net income in the quarter, excluding certain discrete items, increased 3.4% to $27.8 million. This equated to adjusted earnings per diluted share of $1.62, an increase of 5.2%.

As most of you are aware, on January 1, 2016, CMS implemented certain changes to the Medicare hospice reimbursement per diem. This rebasing eliminated the single tier per diem for routine health care, and replaced it with a two-tier grade, with a higher rate for the first 60 days of a hospice patient's care and a lower rate for days 61 and thereafter.

In addition, CMS provided for a service intensity add-on payment, which provides for reimbursement of care provided by a registered nurse or social worker for routine home care patients within seven days prior to death. The reimbursement for continuous care, inpatient care and respite care were not impacted by this rebasing.

The two-tiered national per diem rate for routine home care provides for a per diem rate of approximately $187 for the first 60 days a patient is in hospice, and $147 for periods thereafter. These are national per diem rates, when the actual reimbursement is adjusted based on variations in geographic cost of living. Rebasing is revenue-neutral to a hospice if it has 37.6% of total routine home care days of care being provided to patients in their first 60 days of admission, and 62.4% of total routine home care days of care provided to patients after the 60 days, basically a 38% to 62% ratio. Historically, VITAS has had roughly a 29% to 71% routine home care ratio. As a result, this change in reimbursement is anticipated to reduce our revenue and pretax profitability by roughly $16 million when compared to the prior reimbursement methodology.

The rebasing impact on revenue in the current quarter was somewhat higher than anticipated. However, we reviewed the quarterly historical pattern of routine home care under 60 and over 60 days of care ratio, and the first quarter of 2016 was within our historical pattern.

VITAS anticipates a significant portion of the estimated $16 million reduction in revenue growth will be offset by increased efficiencies in 2016 and 2017 in areas of non-bedside field operations and general administration. 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 $278 million in the first quarter of 2016, which is an increase of $7.9 million or 2.9% when compared to the prior-year period. This revenue increase is comprised of several factors that net to the 2.9%. The most significant of these factors are our Medicare reimbursement increase of approximately 0.6%, a 5.6% increase in average daily census, offset by acuity mix shift, which negatively impacted revenue by 1.8%. The last significant factor impacting revenue growth is the change in Medicare hospice reimbursement, which negatively impacted revenue by 2.1%.

VITAS did not have any adjustments to revenue related to the Medicare cap billing limitation in the quarter. This compared to $0.2 million of Medicare cap billing limitations reimbursed in the first quarter of 2015. At March 31, 2016, VITAS had 31 Medicare provider numbers, none of which has an estimated 2016 Medicare cap billing limitation. Of these of 31 unique Medicare provider numbers, 28 of the provider numbers have a Medicare cap cushion of 10% or greater for the 2016 Medicare cap period. Two providers have a cap cushion between 5% and 10%, and one provider number has a cap cushion between zero and 5%. VITAS generated an aggregate cap cushion of $264 million during the trailing 12-month period.

Our average revenue per patient per day in the quarter, excluding the impact of Medicare cap, was $194.84, which is 3.5% below the prior-year period. Routine home care reimbursement and high acuity care averaged $160.92 and $702.52, respectively. During the quarter, high acuity days of care were 6.3% of total days of care, which is 66 basis points less than the prior-year quarter.

The first quarter of 2016 gross margin was 21.0%, which is a 14 basis point decline when compared to the first quarter of 2015. Our routine home care direct gross margin was 52.1% in the quarter, a decrease of 60 basis points compared to the first quarter of 2015.

Direct inpatient margins in the quarter were 5.7%, which compares to 8.4% in the prior-year quarter. Occupancy of our 31 dedicated inpatient units averaged 78.3% of the quarter, which compares to 74.5% occupancy in the first quarter of 2015. Approximately 76% of our inpatient days of care are in these dedicated units, with the remaining 24% of our inpatient care utilizing short-term contract beds.

Continuous care had a direct gross margin of 15.1%, which is a decline of 80 basis points compared to the prior-year quarter. Average hours billed for a day of continuous care was 18.2, which is a slight increase when compared to the 18.0 average hours billed for continuous care in the prior year's quarter. Selling, general and administrative expense, excluding litigation costs, was $22.4 million in the first quarter of 2016, which is an increase of 7.9% compared to the prior year. Adjusted EBITDA, excluding Medicare cap, totaled $35.9 million in the quarter, an increase of 0.3% over the prior-year period. Adjusted EBITDA margin, excluding the impact from Medicare cap, was 12.9% in the quarter, which is 34 basis points below the prior-year period.

Now let's turn to Roto-Rooter. Roto-Rooter generated sales of $113 million in the first quarter of 2016, an increase of $5.8 million or 5.4% over the prior-year. Commercial drain cleaning revenue increased 10.6%, and commercial plumbing and excavation increased 0.9%. Overall, commercial revenue increased 4.9%. Residential plumbing and excavation increased 6.0%. Drain cleaning was essentially flat, and water restoration increased 23.3%, which equated to total residential water restoration revenue of $10.7 million in the quarter. Overall, residential sales increased 6.1%.

Now let's look at our consolidated balance sheet. As of March 31, 2016, Chemed had total cash and cash equivalents of $15 million and debt of $145 million. Capital expenditures through March 31, 2016 aggregated $11.5 million, and compares to depreciation and amortization during the same period of $8.5 million. During the quarter, the Company repurchased 400,000 shares of Chemed stock for $52.5 million, which equates to a cost per share of $131.15. On March 11, 2016, Chemed's Board of Directors authorized an additional $100 million of stock repurchase under Chemed's existing share repurchase program. As of the end of the March 31, 2016 quarter, there is $100 million of remaining share repurchase authorization under this plan. Our guidance for calendar 2016 remains unchanged from the previous guidance provided in February 2016. I'll now turn this call over to Tim O'Toole, Chief Executive Officer of VITAS.

Thank you, David. Total average daily census in the first quarter of 2016 was 15,653 patients, an increase of 5.6% over the prior year. If you exclude the three small programs we closed in the past year, our average daily census on a unit-for-unit basis increased 6.7%.

Our overall admissions are also somewhat distorted by the closing of these small programs. Total admissions in the quarter were 16,868, a decline of 2.3%. On a unit-for-unit basis, admissions declined 0.7%. This slight admissions decline is not spread evenly in the communities we serve.

Florida, our largest state market, had overall admissions growth of 5.7%. However, within the State of Florida, individual communities with established programs had admissions which ranged from a decline of 6.4% to an increase of 10.3%. California, our second largest market by state, had a decline in missions of 4.3%. Within Florida, our established programs had admissions ranging from a decline of 20.1% to an increase of 15.2%. This type of local admission volatility is normal. Admissions are subject to a fair amount of volatility, depending on a number of factors, some of which are within our sphere of control, and some involve factors completely out of our short-term control.

With that said, it is our responsibility to educate the community and referral sources of the Medicare hospice benefit, call on all appropriate referral sources, and intake all appropriate terminally ill patients on a 24-hour, seven-day-a-week basis.

During the quarter, admissions generated from hospital referrals, which typically represent over 50% of our admissions, declined 2.1%. Home-based referrals increased 2.4%. Nursing home admissions declined 12.1%, and assisted living facility admission referrals declined 2.1%.

Our per-patient per-day pharmaceutical cost averaged $5.93, and are 8.8% favorable to the prior-year quarter. Medical equipment per-patient per-day cost in the quarter totaled $6.68, and compares to $6.41 in the first quarter of 2015. VITAS's average length of stay in the quarter was 83.7 days, which compares to 79 days in the prior-year quarter, and 89.8 days in the fourth quarter of 2015.

Median length of stay was 15 days in the quarter, and compares to a median of 13 days in the prior-year 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 1,424,386 days in the quarter, an increase of 6.8%. This days of care growth rate is higher than our average daily census growth rate of 5.6%, from the benefit of one additional care day due to 2016 being a leap year. With that, I will turn the call back over to Kevin.

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

(Operator Instructions)

Jim Barrett, CL King & Associates.

Good morning, everyone.

Good morning, Jim.

Tim, I think this may be a question for you. Could you give us an update in terms of specifically what VITAS is doing in terms of cost reductions, productivity improvements, to offset the impact of rebasing?

Before -- Jim, I'm going to turn it over to Tim, but let me say that when you get behind the numbers there is an important point which is probably the summary of part of the answer to your question, and that is this. The net effect is, yes. You look at our quarter and it was, we thought, very solid. We did an analysis, this was great from a data analysis standpoint.

We did an analysis on historical patterns of what we should expect on January 1 with regard to the split between the over 60-day and the under 60-day. Of course, we can't factor in the effect that the split will have on demand and competition within our sector. And we saw that the fact that if the government is paying more for the under 60-day stays, that it becomes more competitive in that regard. So we saw a deterioration in that comparison, which cost us a little bit more money in the quarter.

The good news is, and this is where I turn it over to tim, which is really where your question is, and that is we have said how do we deal with pressures like that, and the overall issue of the $60 million rebasing cost? And I will just tell you, the net effect is, when you look at the all-in cost of hospice program expenses, they were 9/10 of a percentage point better than our expectations. So I guess what I'm saying is -- so that was enough to give us, I believe, a very solid quarter, which leads me to the intro to Tim's question is Tim, how did you achieve the 0.9% improvement over the expected hospice program expenses?

Well, as you say Kevin, I mean the good news is, again, we look in the first quarter, being able to increase our EBITDA was somewhere in $5 million to $6 million of less revenue on the same expense load. So we were able to be effective and efficient in the quarter, already. Of course, we were preparing for this, as we worked all of last year for it.

So mainly the ability to have our cost structure be reduced from productivity, it is a lot around being able to capture real-time data. When you have a real-time data, you can schedule more effectively, and make sure that you're completely efficient in the process. So for example, when we have referrals come in now, that are coming into digital servers, where humans don't intervene, and they are tracked to make the right thing happen on a timed basis workflow system. So again trying to reduce the time for when we have the opportunity to when we can actually visit with the patient and family, and referral sources, and meet their needs. So that capture is very important, so we can manage the data, and we've been working from that for years.

Of course 70% of our cost is around labor, and having the data around your labor to schedule efficiently allows us to reign these costs down. The other areas have to be very cautious and keep our eye on, of course, are the ancillary costs. And those would be in the categories of pharmacy and medical equipment. And supplies, which of course we have a per diem rate, and if those costs go up, we have margin problems. So as we noted in the talk here earlier, all of those costs went down at year-over-year, just through really great work of the team, and reaching out in the marketplace and using our strength and our size to have better negotiating power.

So again, our goal of the future is to be more effective, have a closer contact with the referral sources. In fact, we are making some good breakthroughs right now on what the marketplace is calling interoperability, where we're connecting through digital platforms directly to the systems of major hospital sources, so we are building those out and we see the benefit of that. And I am encouraged, as we see the quarter proceed, March was firmer than the early part of the month and we are doing well in April. So I'm very confident that we can keep our costs in line and absorb some of these rate reductions, that we have shown that, and I hope that helps answer and give you a little more detail, Jim, on your question.

It does, Tim, thank you, and thanks, Kevin. And Dave, a question for you. I know the purchase of water remediation equipment was a reason to spend capital in 2015. Can you tell us what your capital spending budget is for 2016, and whether water remediation is a significant part of that number?

There's a significance, not relative. I think with the CapEx we estimate to be in the low-to-mid $30 million range, so call it $31 million to $34 million. Water restoration is going to be a part of that, but not a significant piece. That more relates -- to do with IT replacement of Roto-Rooter equipment, buildout of inpatient units, and as administrative offices leases our rolled-over or renewed buildouts there. Kind of the usual dogs and cats.

And is that a good number, possibly adjusted for inflation, going forward, in terms of what your steady rate capital spending should be?

Probably. The only reason I would hesitate is, every so often Roto-Rooter in put into the position of having to do a significant the buildout or construction, if there is nothing in a market that meets it -- needs storage equipment. VITAS has gone through, and it's a community-by-community basis, but making a decision in terms of does it make sense to do a buildout a of an inpatient unit for one, for disability within the committee that kind of goes beyond just the raw needs of a bad as well as they have been taking more expensive real estate located in better areas, to also increase the visibility. Those types of things tend to spike the CapEx, but again, on an average roll-forward basis I would say that low-to-\ mid $30 million is a good number. Kevin, would you like --

Okay. And actually, Kevin, one last question for you. Several years ago during the recession, you had discussed the fact that plumbers who had been working on new home developments were coming into your repair market. Has that reversed, or has there been any change in that dynamic now that housing has partly recovered?

I think so. I would say that the thing that is like the tsunami in -- since that time has been really, if you look at the Internet, if you look over an eight-year period, the percentage of Roto-Rooter's calls that come in over the Internet are now approaching 60%. In other words, they are coming in on numbers that only appear on the Internet. It was more than reversed eight years ago, as far as the percentage, with the rest coming basically from yellow page numbers.

You have to remember that what has happened during that period is in almost every major metropolitan book, we had a company-owned operation. We were the longest-standing advertiser with the biggest presence. So the plumbing section started in almost every -- almost every city with two pages of Roto-Rooter advertisements, and in several markets three pages.

The situation now is, they're looking on the Internet, and we do a great job, we have great -- we show up in that list of five companies on the first page. We do advertising. But we're just a little -- we're just one name in a group of five, as opposed to having the first or three pages of a section. That means Roto-Rooter has been able to overcome that burden by doing a number of things, including having a little less problem dealing with new construction plumbers.

But I guess that -- so what I'm saying Jim, is yes, I think we see that, but there are other issues that Roto-Rooter has to deal with. The biggest one is that marketing issue of having a less dominant position in the first thing that a consumer looks at. Now, the first thing they look at is the Internet and not the Yellow Pages. So a long-winded way of answering your question. I would say yes, we see that, but the much bigger factor is the change in marketing, which Roto-Rooter has done, I think, a very good job of dealing with.

Okay. Thank you again.

I'm showing no further questions at this time. I'd like to hand the call over to Management for closing remarks.

Okay. I was going to say one thing, I think one time we had no questions at the end of one of our meetings, but I will just add one question that I know I will get, because of the last two days our stock is down substantially. We have had a very good quarter. The question I always get at this point is: am I missing something? Is there something that came out that I didn't see, that type of thing.

And I guess what I am saying is, that is the question that I am asking myself here, and my best answer, and I will give Dave an opportunity to make a comment too, I don't think so. I think there is an issue -- we were happy with the results. I think one comment could be that yes, but there is a miss on sales, and as Tim said, well, you have to make a few adjustments, like we closed three programs last year, so -- and we don't make a big point of the unit-to-unit comparisons, because again, you start falling in on yourself when you make too many of those.

The second thing is that you have to remember that I think what -- again, just examining the data, it looks like there is more competition on -- for short-stay patients. Our view is that we still do -- we've always done a great job getting short-stay patients. You know, with 50% of our admissions through hospital discharge planners, a little more competition for those. To the extent that is having an effect a little bit on some of our numbers, you have to remember that those -- here is revenue dollars associated with those admits that we're not getting, but the fact of the matter is, there is not a lot of profit associated with those -- not getting those patients. That is why you don't see much effect on our census numbers or our overall reported profit numbers.

So bottom line is I think, yes, there is volatility in our stock price, there is volatility in the overall markets, but again, we are very comfortable with the quarter and our outlook for the rest of the year. With that, I think -- first of all, I compliment myself on an excellent answer to my own question. But with that, we will end the call and reinvigorate this in about three months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's [call]. You may now disconnect. Have a great day, everyone.