Chemed Corp (CHE) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chemed Corporation second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the call over to Sherri Warner with Investor Relations. Ms. Warner, you may begin.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2016 ended June 30, 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 July 25 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 25, 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 Nick Westfall, 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 2016 conference call.

I will begin with some of the highlights for the quarter, and David and Nick will follow up 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 2.2%. Consolidated net income in the quarter, excluding certain discrete items, increased 1.7% to $30.2 million. This equated to adjusted earnings per diluted share of $1.80, an increase of 5.3%.

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

Rebasing is revenue-neutral for routine health care billings if 37.6% of the total routine days of care is 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, this is a 38% to 62% ratio.

This change in reimbursement has reduced our revenue growth by roughly $11 million in the first half of 2016, and the full-year impact will be roughly $22 million. We anticipate a portion of this estimated reduction in revenue growth will be offset by increased efficiencies in 2017 in the 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.

Thanks, Kevin.

VITAS's revenue of $279 million in the second quarter of 2016, which is an increase of $2.3 million or 0.8% when compared to the prior-year period. This revenue is comprised of a Medicare reimbursement rate increase of approximately 60 basis points, a 4.4% increase in average daily census, offset by acuity mix shift which negatively impacted revenue 1.9 percentage points, and the Medicare rebasing which negatively impacted revenue 2% points.

VITAS did not have any adjustments to revenue related to the Medicare cap billing limitation in the current or prior-year quarter. At June 30, 2016, VITAS had 31 Medicare provider numbers, none of which has an estimated 2016 Medicare cap billing limitation.

Of VITAS's 31 unique Medicare provider numbers, 27 provider numbers have a Medicare cap cushion of 10% or greater for the 2016 Medicare cap period. Three provider numbers have a cap cushion between 5% and 10%, and one provider had a cap cushion between 0% and 5%.

VITAS generated an aggregate cap cushion of $266 million during the trailing 12-month period. Average revenue per patient per day in the quarter was $192.02, which is 3.4% below the prior-year period.

Routine home care reimbursement and high acuity care averaged $160.41 and $702.58, respectively. During the quarter, high acuity days of care were 5.8% of total days of care, which is 66 basis points less than the prior-year quarter.

The second quarter of 2016 gross margin was 21.5%, which is a 41-basis-point decline when compared to the second quarter of 2015. Our routine home care direct gross margin was 51.9% in the quarter, a decrease of 50 basis points when compared to the prior-year quarter.

Direct inpatient margins in the quarter were 4.6%, which compares to 6% in the prior-year quarter. Occupancy of our 32 dedicated inpatient units averaged 74.3% in the quarter, and compares to 73.9% occupancy in the second quarter of 2015. Approximately 76% of our inpatient days of care are in these dedicated units, and the remaining 24% of our inpatient care utilizing shorter-term contract beds.

Continuous care had a direct gross margin of 13.8%, a decline of 290 basis points when compared to the prior-year quarter. Average hours billed for a day of continuous care was 18.2 hours in the quarter, a slight decrease when compared to the 18.3 average hours billed for a continuous care patient in the second quarter of 2015.

Our selling, general, and administrative expense, excluding litigation cost, was $21.5 million in the second quarter of 2016, which is an increase of 2.5% compared to the prior-year quarter. Adjusted EBITDA totaled $38.6 million in the quarter, a decrease of 3% over the prior-year period. Adjusted EBITDA margin was 13.9% in the quarter, and is 55 basis points below the prior-year period.

Now let's take a look at our Roto-Rooter segment. Roto-Rooter generated sales of $112 million in the second quarter of 2016, an increase of $6.2 million or 5.9% over the prior year.

Commercial drain cleaning revenue increased 7.9%, and commercial plumbing and excavation increased 5.8%. Overall, commercial revenue increased 8.1%.

Residential plumbing and excavation increased 3.9%, and drain cleaning decreased 0.3%. Overall, residential sales increased 5.5%. Our commercial, residential, and water restoration revenue increased 32.7%, which equated to revenue of $12.1 million in the quarter.

Now let's take a look at Chemed's consolidated balance sheet. As of June 30, 2016, Chemed had total cash and cash equivalents of $17 million, and debt of $148 million.

As you remember, in June of 2014, Chemed entered into a five-year amended and restated credit agreement that consisted of a $100 million amortizable term loan and a $350 million revolving credit facility. The interest rate on this facility has a floating rate that is currently LIBOR plus 112.5 basis points. At June 30, 2016, the Company had approximately $253 million of undrawn borrowing capacity under this credit agreement.

Our consolidated capital expenditures through June 30, 2016, aggregated $20 million, and compares to depreciation and amortization during the same period of $17 million. During the second quarter of 2016, the Company repurchased 380,134 shares of Chemed stock for $49.9 million, which equates to a cost per share of $131.15. As of June 30, 2016, there is $50.2 million remaining of share repurchase authorization under this plan.

We've also increased our full-year guidance, which is as follows. Including the impact of Medicare rebasing, full-year 2016 revenue growth for VITAS, prior to any Medicare cap, is estimated to be in the range of 1.5% to 3%. Average daily census in 2016 is estimated to expand approximately 4% to 5%, and full-year adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14% to 15%. This guidance includes $2.5 million for Medicare cap billing limitations in the second half of 2016.

Roto-Rooter is forecasted to achieve full-year 2016 revenue growth of 4% to 5%. This revenue estimate is based upon increased job pricing of roughly 1%, and continued growth in water restoration services.

Adjusted EBITDA margin for 2016 is estimated in the range of 20% to 21%. Based upon the above, full-year 2016 adjusted earnings per diluted share, excluding non-cash expense for stock options, costs related to litigation, and other discrete items, is estimated to be in the range of $7.15 to $7.30. This compares to Chemed's 2015 reported adjusted earnings per diluted share of $6.98.

As an aside, the full-year impact on our diluted earnings per share from rebasing is estimated to be $0.82. So if you exclude rebasing, our 2016 guidance for adjusted earnings per diluted share would've been in the range of $7.97 to $8.12.

I'll now turn this call over to Nick Westfall, our Chief Executive Officer of VITAS.

Thanks, David.

Total average daily census in the second quarter of 2016 was 15,952 patients, an increase of 4.4% 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 5.3%. Our overall admissions are also somewhat distorted by the closing of these small programs.

Total admissions in the quarter were 16,180, a decline of 3%. On a unit-for-unit basis, admissions declined 1.4%.

This admissions decline is not spread evenly in the communities we serve. Florida, our largest market by state, had overall admissions growth of 3%. However, within the state of Florida, individual communities had admissions which ranged from a decline of 7.2% to an increase of 32.8%.

California, our second largest market by state, had a decline in admissions of 6.8%. Within California, our established programs had admissions ranging from an increase of 18.7% to a decline of 19.5%.

This type of local admission volatility is not unusual. Admissions are generated locally and 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 being said, admissions for the first half of 2016 have been below our expectations. We are reassessing and, where applicable, implementing revised marketing and education plans within certain communities.

The mission of these plans is to continually educate our community partners regarding the hospice benefits for their organizations, as well as the patients and families served. We are also emphasizing the strong VITAS infrastructure that allows for a timely response to referrals, and the admission of appropriate patients 24 hours a day, 7 days a week.

In addition, we continue to stress that VITAS has the capability of providing all acuity levels of hospice care, combined with the ability to make changes to the plans of care, and adjust acuity levels on a stat basis. This is, and will continue to be, an important distinction in the markets we service. Although the conditions of participation require hospices to have the capability and infrastructure to provide all levels of care on a 24-by-7 basis, there are many hospice providers who have chosen not to provide these required services.

During the quarter, admissions generated from hospital referrals, which typically represent over 50% of our admissions, declined 2.3%. Home-based referrals decreased 3.2%. Nursing home admissions declined 4.2%, and assisted living facility admission referrals increased 1/10 of 1%.

On a per patient per day ancillary costs, which include durable medical equipment, supplies, and pharmaceutical costs, averaged $15.92 and are 3.9% favorable to the prior-year quarter. VITAS's average length of stay in the quarter was 84.2 days, which compares to 78.5 days in the prior-year quarter.

Median length of stay was 16 days in the quarter, and compares to a median of 15 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 total days of care totaled 1,451,593 days of care in the quarter, an increase of 4.4%.

With that, I'd like to turn this call back over to Kevin.

Thanks, Nick. Now appropriate to consider any questions that listeners may have.

(Operator Instructions)

Jim Barrett.

Hi, this is Jim Barrett from CLK. Good morning, everyone.

Good morning, Jim.

My first question is for either you, Kevin, or Nick. The rebasing change in reimbursement, can you generalize about your nonprofit competitors?

Do they cater more to short-term patients as opposed to longer-term patients? Or maybe a better way to ask the question is, what do you see as the impact of this reimbursement change on your competitive set, broadly speaking?

Let me start, just give you my perspective, and then I will let Nick give his perspective. But let me start by saying that the government, based on their studies, and we kind of looked at it ourselves with the help of an outside entity, but theoretically, the rebasing is supposed be neutral. Okay?

And let me start by saying that, if there's a group that operates hospice below water, that is at a loss before charitable contributions, it's one of our -- usually one of our major competitors and that is -- would be hospices in major metropolitan cities that have a very close, if not exclusive relationship, with healthcare provider hospitals. So the hospital group owner either owned, either captive or affiliated. And to the extent that they had all short stay patients, that didn't have a variety of patients, the rebasing would help them to the extent that you have hospices with longer average length of stay. It would tend to hurt those groups, let me just say as far as averages.

So I think, Jim, that one of your questions is, okay direct competitors of ours? Clearly a direct competitor of ours in every market within which we operate is a large not-for-profit that has some strong affiliation with some of the healthcare networks. So in some respects it would help. It would tend to help that group.

With regard to almost everyone else in the hospice sector, it will tend to hurt a little bit. And to the extent that you have hospices with very long length of stay, that don't necessarily have the cap problem because they are now low reimbursement area, it's going to hurt them a lot.

But to the extent that we don't do any high acuity and they might operate at very high margins. It tends to take a whack out of what was a very high margin that is still healthy given the fact that they weren't really a full-service hospice. But Nick, anything you would like to add on as far as that? Of course his first question, he might have more.

Yes, I would echo Kevin's statements related to the macro picture. You know, Jim, the other aspect as we look at it isn't as much for-profit and not-for-profit, as much as it is the maturity and how long that hospice provider has been in business. And so what we are finding, and definitely see out in the marketplace, is that those less mature, smaller hospices are really struggling with the rebasing component associated with it. And that other hospice companies similar to ours, that have been around a longer time, are more mature, have a more comprehensive offering, are working our way through this transitional year and have a good footprint on not only the delivery at the bedside but relationship with the referral sources to navigate those waters.

So we are definitely seeing a host of our competitors out in the marketplace that are definitely struggling. That's both through word-of-mouth as well as them reaching out trying to understand and get a grasp on how to manage their business better. You know, it's not as much a for-profit, not-for-profit as it is the maturation and size of the hospice provider.

And Jim, the one thing, it's complicated also when you are talking about the effect of this rebasing.

With regard to VITAS, it's the details that have hurt us more than we would like, to the extent that we do offer high acuity services. We do get most of our, more than half of our, referrals from hospital discharge planners. That is people right from the intensive care unit.

We tend to have, in that first 60 days, we have a majority of our high intensity care, which as you've seen from our numbers, on a combined basis, the margin for that is about equal to what was the normal home care margin. To the extent that we burn up some of the 60 days of higher reimbursement and don't get it on the back end, that's an element that has been a specific hurt for us.

And again, as I said, it's unusual to have hospices that do provide. Only, I think the number was only 8% of hospices provide even a reasonable amount of continuous care, high intensity care. So it's hard to make too many broad statements unless you were talking about what type of hospice you are talking to that is full-service or otherwise.

And, Jim, this is Dave Williams. Kevin brings up real key point. So your question has a lot of depth to it that we spent a lot of time on. But, the final point is the whole point of getting that additional money in the first 60 days is because of the complexity and expense and the setup costs of patients entering hospice. And had CMS included that extra, on a revenue-neutral basis, that extra payment to all levels of care, not just routine home care, this action would have been neutral to slightly positive to VITAS.

For whatever reason CMS chose to actually penalize providers of high acuity care at the initial outset of hospice care. So to the extent that you are dependent upon getting very, very sick patients out of hospitals, which we are, this actually turned out to be a slight negative.

With that said, Chemed and VITAS is very much in support of the direction CMS is going with reimbursement because we think it creates a better correlation between reimbursement and the cost of appropriate care. But just the way the rules were structured and ignoring high acuity care, that actually resulted in a slight negative to us. But we view it as just a lapping issue.

It's a one-time hit on our growth and starting in January of 2017, when we start comping against this rebased revenue, our growth rate is going to return. So it bugs us a little bit but, because it's so directionally correct that CMS put in place, you kind of swallow it and move on.

And Jim, you've been following Chemed since before we purchased VITAS. You know we've said consistently over the time, we've always been in favor of a U-shaped curve before it had even been vaguely proposed, with the theory that once you reduce the financial exposure for long stay patient. The government would probably be smart if they adopted what the private insurance industry has already done for, hospice covered for people under 65 and that is make every encouragement to get people in it and not worry about the exposure for long stay patients because, number one, the savings that are associated with being in hospice and the in fact that you've reduced the reimbursement for those days after 60.

So again, it's as Dave says, it's something we've been espousing, basically, from the time that we made the VITAS purchase.

Well, that's very helpful, thank you. Then my second and last question is for you, Dave. I did note what has changed in your guidance since Q1, but having increased the impact rebasing by $0.24 you then increase your guidance by $0.05 to $0.10. Can you delineate what the factors are in that decision?

Sure, it's a combination of factors. Certainly better performance out of Roto-Rooter, as well as the fact that the first six months of 2016, we assume we're going to have $5 million of Medicare cap billing limitations. First half of the year we didn't have any so we took that $5 million down to $2.5 million of Medicare cap so that helped as well. Combined with a lower share count.

And although we took a hit on rebasing for VITAS expense management has gone phenomenally well. So you kind of roll all those factors in and we're able to actually -- we cut basically a dime out of the low end of our guidance and increase a nickel on the other side.

Okay.

And Jim, also look at -- Remember from the release of the discussion, as Dave said, we reduced share count. And not only did we reduce share count, we were able to do it very opportunistically at an average price, just in the quarter, of a $1.31. $131, not $1.31. $131. So very opportunistic. If you are looking why it's better than originally projected, it's all those factors.

Perfect. Okay. Thanks again, everyone.

I don't see any other questions in the queue. The only thing that I would suggest a discussion, a question that's kind of leading with a negative here is, obviously, there was one thing in our discussion today that was below expectation, that was admissions in VITAS. The only thing I would say is there's -- you have the inside baseball aspect of this as there was a change on January 1 in reimbursement.

Basically, the government further incentivized hospices to take on short stay patients by paying a higher reimbursement and it changed, I think, a little bit how, on the margin, how some hospices react to getting a reference to a patient who is not likely to live more than a few days. In our case, VITAS has always tried, for a variety of reasons, because they are professional and want to have the best reputation. They've done their level best to get of all those patients. I'm not sure that's mirrored by all competitors. There was a change January 1.

We are speculating on how the -- goes through the market. But one thing, I'm going to direct it to Nick, but one thing I did notice, Nick, was when you look at our referrals, generally speaking, they are much closer to our level of expectation. It's kind of a throughput difference that we are seeing. Any comments for this assembled multitude you'd like to make in that regard?

I think just add on to it is, referral performance to date has been more aligned with our beginning of the year expectations in a positive range. We haven't seen a pull-through totally from an admissions perspective. There's a lot of attributable factors, most of them Kevin alluded to.

But as an organization and going forward, we are very comfortable and confident with our performance because we're continuing to focus on being nimble and adaptive to our referral source needs and the needs of the patients and families and our focused is and will continue to be speed and quality of response at the most critical time for patients and family. And while it ultimately gets executed at a local level, at a macro level as well we are always continually improving our admission processes, implementing technology to support those processes and adding metric-driven transparency for better management and accountability.

So that three-pronged approach has proven to be very successful for us in the past and will continue to be as it relates to referral and admission. Very comfortable with it.

Thank you, Nick. Well, with that we will conclude our call for the second quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.