Chemed Corp (CHE) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chemed Corporation's Q3 2016 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Sherri Warner from Chemed Investor Relations. Ma'am, you may begin.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2016, ended September 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 October 26 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 October 26, 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 third-quarter 2016 conference call. I will begin with some of the highlights for the quarter and Dave and Nick will follow with additional operating details. I will then open up the call for questions.

In the quarter, Chemed generated $393 million of revenue, an increase of 1.7%. Consolidated net income in the quarter excluding certain discrete items generated adjusted earnings per diluted share of $1.73, a decrease of 2.8%. On a year-to-date basis adjusted earnings per diluted share are $5.14. This is a 2.4% increase over the prior year.

This earnings growth is below our historic growth rate and relates primarily to a shift in Medicare reimbursement methodology.

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 homecare 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 day 61 and thereafter. In addition, CMS provided a service intensity add-on payment, which provides for reimbursement of care provided by a registered nurse or social worker for routine homecare patients within seven days prior to death.

Rebasing is revenue neutral for routine homecare billings if 37.6% of the total routine days of care are provided to patients in their first 60 days of admission and 62.4% of the total routine homecare days of care provided to patients after the 60 days. This is basically a 38%-to-62% ratio.

This change in reimbursement has reduced our revenue growth by roughly $17 million in the first nine months of 2016, and the full-year impact will be roughly $24 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 conference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. As Kevin noted, the VITAS revenue of $283 million in the third quarter of 2016 is a decrease of 0.8% when compared to the prior-year period. The revenue decrease is composed primarily of an average Medicare reimbursement rate increase of approximately 0.6%, a 3% increase in our average daily census, offset by acuity mix shift which negatively impacted revenue 1.7% and changes in Medicare hospice reimbursement methodology, as Kevin noted, which negatively impacted revenue 2.1%.

Approximately $0.2 million of Cap was recorded in the quarter relating to the 2015 measurement period. The methodology used to calculate the Medicare Cap is in dispute. CMS is calculating the Medicare Cap liability using theoretical revenue that assumes no revenue reduction from sequestration.

At September 30, 2016, VITAS had 31 Medicare provider numbers, none of which had an estimated 2016 Medicare Cap billing limitation. Of VITAS's 31 unique Medicare provider numbers, 27 of these provider numbers have a Medicare Cap cushion of 10% or greater for the 2016 cap period, to provider numbers have a cap cushion between 5% and 10%, and two provider numbers have the cash cap cushion between zero and 5%. VITAS generated an aggregate cap cushion of $281 million during the trailing 12-month period. Average revenue per patient per day in the quarter was $189.94, which is 3.6% below the prior-year period.

Routine homecare reimbursement and high acuity care averaged $160.09 and $697.21, respectively. During the quarter high acuity days of care were 5.6% of total days of care, 58 basis points less than the prior-year quarter. Third quarter of 2016 gross margin, excluding Medicare Cap, was 20.7%, which is a 260 basis point decline compared to the prior-year period.

Our routine homecare direct gross margin was 51.4% in the quarter, a decrease of 230 basis points compared to the prior-year quarter. And our direct in-patient margins in the quarter were a -2.4%. Occupancy of our 32 dedicated in-patient units average 69.3% in the quarter and compares to 72.4% in the prior year's quarter.

Approximately 75% of our in-patient days of care are in these dedicated units with the remaining 25% of our in-patient care utilizing contract beds.

Continuous care had a direct gross margin of 12.2%, a decline of 350 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 slight increase when compared to the 18.2 average hours billed for a patient in the prior year.

Selling, general and administrative expense was $21.8 million in the third quarter 2016, which is 2.6% favorable compared to the prior year.

VITAS did generate $38.6 million of adjusted EBITDA in the quarter. This is a decline of $6.7 million. Approximately $6 million of this decline is from the rebasing of the Medicare reimbursement.

Adjusted EBITDA should compare favorably in 2017, once both years of operating results are under the same reimbursement methodology for Medicare.

Adjusted EBITDA was also impacted by relatively low margins in our continuous and in-patient care. This temporary margin decline is the result of restructuring short-term and long-term contract beds within our in-patient structure and other related costs incurred in delivering high acuity care.

We anticipate improved margins in the fourth quarter and more normalized margins in 2017.

Nick will be providing additional color on this temporary decline in the high acuity margins.

Now let's look at Roto-Rooter. Roto-Rooter generated sales of $110 million in the third quarter of 2016, an increase of $8.5 million or 8.4% over the prior year. $3.8 million of this increase is attributed to water restoration activity. Commercial drain cleaning revenue increased 6.7%. Commercial plumbing and excavation increased 10.2%. Overall, commercial revenue increased 10.2%.

Residential plumbing and excavation increased 4.5% and drain cleaning increased 2.2%. And the overall residential sales increased 8.1%. Commercial and residential water restoration revenue increased 46.3%, which equated to revenue of $11.9 million in the quarter.

On the Chemed's consolidated balance sheet, as of September 30, 2016, Chemed had total cash and cash equivalents of $21 million and debt of $111 million. As you may recall, in June 2014 we 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 September 30, 2016 we had approximately $288 million of undrawn borrowing capacity under this agreement.

Consolidated capital expenditures through September 30, 2016, aggregated $29.7 million and compares to depreciation and amortization during the same period of $25.9 million. On March 11, 2016 Chemed's Board of Directors authorized an additional $100 million for stock repurchase under Chemed's existing share repurchase program. The Company did not purchase any shares of Chemed's stock in the third quarter of 2016, and on a year-to-date basis the Company has purchased 780,134 shares of Chemed stock at an aggregate cost of $102.3 million. As of September 30, 2016, there is $50.2 million of share repurchase authorization remaining under the plan.

Our full-year 2016 guidance is as follows. Including the impact of the change in Medicare hospice reimbursement previously discussed, full-year 2016 revenue growth for VITAS prior to Medicare Cap is estimated to be in the range of 1% to 2%. Average daily census in 2016 is estimated to expand approximately 4.5% to 5% and full-year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 14.0% to 14.5%.

We are currently estimating $1.25 million for Medicare Cap billing limitations in the fourth quarter of this year.

Roto-Rooter is forecasted to achieve full-year 2016 revenue growth of 5% to 5.5%. This revenue estimate is based upon increased job pricing of approximately 1% and continued growth in water restoration services. Adjusted EBITDA margin for 2016 for Roto-Rooter is estimated to be in the range of 21.0% to 21.3%.

Based upon the above, full-year 2016 adjusted earnings per diluted share, excluding non-cash expense for stock options, cost related to litigation and other discrete items, is estimated to be in the range of $7.20 to $7.30. This compares to Chemed's 2015 reported adjusted earnings per diluted share of $6.98.

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

Thanks, David. Total average daily census in the third quarter of 2016 was 16,201 patients, an increase of 3% 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 4.0%. Total admissions in the quarter were 16,157, an increase of 0.2%. This low growth rate is distorted by the closings of this three small programs. On a unit-for-unit basis admissions increased 1.7%.

Admissions continue to be driven from local efforts and events unique to the community. Local admissions have volatility month to month and market by market. This volatility tends to be smoothed when you aggregate over a long enough time period and when we aggregate up on our national footprint.

For example, Florida, our largest market by state, had overall admissions growth in the quarter of 3.4%. However, within the state of Florida, individual communities had admissions in the most recent quarter that ranged from an increase of 38.9% to a decline of 5.8%. California, our second-largest market by state, had a decline in admissions of 4.2%. Within California our established programs had admissions ranging from an increase of 16.1% to a decline of 23.4%.

Although admissions have been soft in the first nine months of 2016, our recent admissions trends have been positive and I anticipate this trend continuing in the coming quarters. This improving trend is due to our focus on enhancing all aspects of our admissions infrastructure regarding people, processes and accountability.

This approach, combined with our continued healthy referral trends, will help to ensure we are admitting appropriate hospice patients in a timely, efficient manner. In addition, we have been awarded the CON license to service four counties in the Northwest Florida Panhandle and plan to begin servicing patients there in early 2017.

During the quarter, unit-for-unit admissions generated from hospital referrals, which typically represents over 50% of our admissions, increased 1.0%. Home-based referrals increased 4.2%. Nursing home admissions improved 1.7%. And assisted living facility admissions declined 1.3%.

Our per-patient per-day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $16.30 and are 1.1% above the cost of these items in the prior-year quarter.

Margins in our high acuity care were particularly challenging in the quarter. High acuity care is a combination of in-patient and continuous care. Although the reimbursement for high acuity is high, relative to routine home care, the costs associated with providing this care typically results in low margins.

As we previously mentioned, in the third quarter there were restructuring and process improvement efforts, which had costs that resulted in a temporary margin decline with both in-patient and continuous care.

Our in-patient care currently consists of 32 dedicated units as well as our contract bids. We are in the process of realigning this capacity so our in-patient facilities are appropriately positioned to meet the needs of our patients in every community we operate. This process involves reviewing all of our in-patient contractual arrangements and renegotiating, expanding or exiting some of these relationships.

This realignment process has triggered some expenses resulting in abnormally low margins in the quarter. We anticipate our in-patient restructuring will be completed by the end of this year, resulting in improving margins in the fourth quarter and a return to more historical in-patient margin levels in 2017.

Within continuous care, we went through some restructuring efforts to realign our supporting infrastructure to our current and projected needs. We've also enhanced our focus on the labor management of continuous care related to appropriate nursing to aid staffing assignments and appropriate utilization of outside nursing agencies based upon the patients' locations and individual needs. These efforts have resulted in a temporary continuous care margin decline in the quarter. We anticipate margins improving in the fourth quarter and returning to historical operating margins in 2017.

VITAS's average length of stay in the quarter was 87.7 days, which compares to 78.6 days in the prior-year quarter. Median length of stay was 16 days in the quarter and is equal to the prior-year quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market.

With that I would like to turn this call back over to Kevin.

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

(Operator Instructions) Jim Barrett, CL King & Associates.

Kevin, I had three questions for you. Is the outcome of the election of interest to VITAS in the hospice industry, or does it not matter which party is in control come November?

I would guess that it doesn't matter. If I look at over the years we have been associated with this business, it's all over the board. Some of the biggest supporters in Congress are Democrats. Republicans have been generally supportive, but it was during a Republican administration that the budget neutrality factor was put together.

So it's hard to say. I would say that -- a lot of supporters for hospice on both sides of the aisle. And again, the hospice is a bit of an outlier on the healthcare system in general.

And the biggest issue -- again, in my limited capacity to comment, to be a commentator on it, I'd say to the extent that if you want to look at Democrats as having -- wanting some nationalized policy for medical care and Republicans are going the other direction, you remember we are an industry that has already been nationalized. 97% of our business is with the government, whether we are talking about Medicaid or Medicare.

So fair to say we don't -- no impact on us.

Secondly, there was a drop in net expenses related to the OIG investigation. Does that simply reflect the ebbs and flow of spending, or are there any implications we can draw from that? And can you give us a current status update on that investigation, to the extent that you can?

Yes. First, yes, ebb and flow. The discovery period has closed. You can imagine, when the discovery period was raging, with depositions all over the country, expenses were very high.

We are now in a stage where technically the preparation for and during the mediation stage, which is required in this type of litigation -- I can't -- just so you know, there's another strange element to it that it's largely under wraps. We are not supposed to comment, the government is not supposed to comment during this stage.

But it's very preliminary, to the extent that we are having those discussions, they are talking about -- we are having discussions about scheduling, those type of meetings. That's why it's relatively quiet.

If you ask me as an observer -- you are probably familiar with the AseraCare case. That's going through the briefing stage, and there's a lot of amicus curiae briefs being filed. I see one filed by the AMA saying the government's position is unfair to doctors in general. I'm happy to see that.

But again, it's a case that we continue to take very seriously. The government does not take these matters lightly. And frankly, generally speaking, we expect the government to look out for the citizens' coffers. So we would have -- it's kind of tough. We'd be in a tough industry because we are a big Company, a public company, looking to deal with the government fairly. We wouldn't like it if everyone ran roughshod over the government and was a very tough competitor for us, doing things that we would never consider doing ourselves.

So generally speaking, the government enforcing laws is not something we see as a bad thing. It's just we are caught in the midst of a troubling matter that I personally think is going pretty well for VITAS. But it's very preliminary.

And then finally, what is your current view of the water restoration business? Where do you view it in terms of approaching maturation across the US?

I know it can be a lumpy business. But how do you think about that business today, given how rapid the growth has been?

Well, I'll put it this way. You've put your finger on one target, and that is we went to a state where we were making it available in each of our operations. It's now available everywhere. There's still profound variation as far as how well it's taken hold in various segments of the country. And I believe those are temporary. I think it's going to become more predictable.

I've internally characterized it as a program that we intentionally dealt with it kind of ready, fire, aim in many respects because it was so dynamic that we wanted to get it out and we didn't really have -- we hadn't really established to our satisfaction of best practices method of applying service.

We are getting there. And I recently, at a meeting of the group, I said -- I asked the question kind of similar to what yours is, how high is up? And a considered response was at this point, too early to tell. So that's what they were telling me. I wouldn't tell you too much different other than we are refining the service. I would say the biggest limitation on the business is we are still -- we get -- the good and bad is -- the good is we are getting all the leads from our own plumbers and drain cleaners.

We get virtually no business over the transom. That's a totally different business. I think we are still a ways away from cracking the code on that type of business.

But I think, from the people who are closer to it, they still see an upside to it. But keep in mind the geographic element has been handled at this point. We are offering it in all our programs.

Thank you very much.

Bill Sutherland, Emerging Growth Equities.

I guess this is for Nick. I just wonder if I could dive in a little bit more on your admissions trend vis-a-vis what you are doing to bring it back to a better pace. And then trying to understand why it varies so much community by community.

Sounds good. So I'll take the first part of that. I'll take it in order, Bill, if that sounds good.

So from a macro perspective something we've always focused on and are always improving, are evaluating every step in the process related to point we receive the referral to the point in which we are deploying personnel to educate the patient or family and ultimately admit appropriate patients onto service. And so as we break all of those pieces down, speed of response, of course, has always been and it's continuing to be a more important element to all of our referral sources as well as patients and families.

And so we have worked under the covers to methodically break that down, provide tools and transparency to our program managers that help allow us to look at recent trends and align staffing hours and models and speed-of-response capabilities.

We have also enhanced our personnel with mobile infrastructure that really helps to improve performance overall. And so from a macro perspective, it's really -- getting back to the comment that we made earlier, it's people, it's processes and it's governance and accountability. And we are very comfortable with the steps we are taking, the steps we are going to take and just continuing to improve our overall performance at a macro basis.

As it relates to the individual volatility on a market-by-market basis, there are a lot of factors, as you can imagine, that impact that. Some of them are people and personnel. Some of them are month-to-month variances. And some of them may be the actual capacity, if you start looking at hospitals, as an example. As much of it has to do with some of the larger referring institutions and how their business is doing, whether their beds are full, whether they are at capacity.

And so, those things -- this is not a new trend, necessarily. Right? There is discrete volatility on a market-by-market basis, sometimes on a month-to-month trend. But typically what we are always looking at is just improving that incrementally on a month-to-month basis, and have found that as we manage it on an account-by-account level the results tend to really flatline and directly improve in a positive manner month over month.

So you all were not calling out the volatility currently as something that's out of the norm? That's just the way it is, market by market?

Yes, that's correct, Bill.

And I would say, classically, if a very important salesperson leaves for a particularly effective admitting nurse leaves in one program, a smaller program, it can have a bigger -- it can have that impact because it's a people business. And I'd want to -- going to the first part of the question, I also want to say that in understanding the admissions trends insofar this year, it's important to understand what I think is a big cause of what causes deviation from the historical trend.

And again, from my perspective what I would say is, in looking at it, the shortfall has skewed short-term. So you would say, well, what has happened in our efforts to admit short-term patients?

And I would say that we haven't done anything different or I don't think that we haven't tried any new -- starting January 1, we continued to do our level best in getting them. We have always been, for a variety of reasons, actively pursuing patients that were very likely to have a very short stay and probably be unprofitable. We did that for a number of reasons to demonstrate our professionalism, to indicate to the referral sources that, again, we may be a for-profit company, but that's -- that doesn't affect our effect in the field, what we are trying to do in the field, which is provide the best -- better service than our competitors.

But what we saw January 1 was the government was -- further incentivized other hospices to go after these unprofitable patients by holding out the hope of profitability with a significant reimbursement increase. So, one way to look at it is at that point we were doing our level best to get those patients. All of a sudden, other hospices started trying harder, and that is may be speeding up their effort to see those patients.

So that was the change we saw. And what Nick is really suggesting is, well, if the other hospices are trying harder, we have to re-examine some of our efforts in that regard. I won't use the sports analogies that we were giving 105% before and now we have to give 110%. But you get the idea.

Historically, it's understandable. It's not something that was of immediate concern for us because over the short term probably 95% or higher of the patients we are talking about were going to be very short stay, and breakeven at best. The problem is, over time, the 4% to 5% of those patients that defy the odds, that have to come back and become relatively long -- average or long-stay patients -- those accumulate over time. And that's what you are losing out on. And we have every confidence that, again, the historic -- they are already approaching that. But we are fairly confident our historical levels of growth that is supplied by admitting growth will return in 2017.

That's right. Bill, the one last item from an enterprise perspective, just to reiterate some of Kevin's comments, is in certain markets where we would see a more significant pickup month to month, quarter by quarter, in many instances, as you are aware and everybody else on this call, a lot of the healthcare systems are continuing to consolidate. And we like to really drive an advantage which we have inside of the industry, which is our infrastructure costs and our overall scale and ability to provide all levels of care to those referring institutions not only through routine home care but through the high-acuity service lines as well, which is more advantageous, of course, for those patients and families as well as the overall system. So it has allowed us to have a differentiating advantage in those markets. And we see that trend continuing and are very comfortable with our forecasted guidance.

Thanks for that. And just one more -- so stepping back a little bit and thinking about the go-forward growth potential for VITAS and assuming Medicare keeps things the way they are after the rebates and assuming you get your admissions growth to a level you want, how should investors think about an ongoing growth outlook for VITAS at the top line, starting next year?

So you would look it up in a few components, and they are largely [additive]. So growth for VITAS is going to be based upon three things: the price increase of the federal government -- which we actually have that; the national rate is up about 2% and our rate is going to be roughly equivalent.

Then there's been a turnaround and you are going to look at your growth in admissions, which we really think are going to be up 2% to 4%. So let's call it 3%. Now, this is just a sustainable rate over multiple years. So again, 2% price increase, 2% to 4% -- let's call that 3%.

And then the third area that impacts our overall growth is length of stay. So when you get an admission, admissions are typically staying a couple days longer, on average, on a base of let's call it 80-ish days. So if you add those three, and you are really talking about mid to upper single-digit growth in revenue is sustainable.

The issue we actually, though, have is -- so that's the revenue growth. So let's call it somewhere between, to be conservative, 6% to 8%. But the other issue we are also wrestling with is the price increases we get from the federal government, by design, is lagging the inflation in the care model. And we have to make up for it in terms of we have a modest amount of infrastructure costs, about $80 million, $85 million a year, HR, IT, accounting, those type of things -- we can actually hold those in check. And there's other bedside costs that are fixed or step variable.

So making a long story short is mid to upper single digits in revenue growth. We anticipate, long-term, a slight degradation in the gross profit margin. And we're going to try to offset that with efficiencies on non-bedside care to try to maintain margins. But long term, you have to anticipate a slight erosion of margins. But we anticipate the patients we are caring for is growing at a faster rate. So that increases the overall bucket of profitability.

Got it. That's good. Thanks very much.

Okay. I think that completes the questions in the queue. So I want to thank everyone for your attention and look forward to, little more than three months from now, reporting on the year-end results. And at that time we give guidance for the following year. Thanks very much.

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