Chemed Corp (CHE) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chemed Corporation Q4 2016 earnings conference call. (Operator Instructions)

I would now like to turn the call over to Sherri Warner, Investor Relations. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2016, ended December 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 February 15 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 discussed 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 February 15, 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 fourth-quarter 2016 conference call. I will begin with some of the highlights for the quarter, and David and Nick will follow with some additional operating detail. I will then open up the call to questions.

In the quarter, Chemed generated $403 million of revenue, an increase of 1.2%. Consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per share of $2.10, an increase of 6.6%.

Our full-year 2016 adjusted earnings per diluted share is $7.24. This is a 3.7% increase over the prior year. This earnings growth is below our historical growth rate, and the slowing relates primarily to a shifted 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 home care and replaced it with a two-tier rate, 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 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 home care billings if 37.6% of routine days of care are provided to patients in their first 60 days of admission and 62.4% of total routine home care days provided to patients after the 60 days. Basically, this is a 38/62 ratio.

This change of reimbursement reduced our full-year 2016 revenue growth and adjusted EBITDA by roughly $24 million. The revised hospice reimbursement rebasing was the topic of discussion throughout 2016, since our 2016 revenue and operating results were being compared to a more favorable Medicare reimbursement methodology in the calendar year 2015. This unfavorable comparison goes away in 2017, since both 2017 and 2016 hospice revenue will reflect the rebased Medicare hospice reimbursement.

With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thank you, Kevin. The net revenue for VITAS was $284 million in the fourth quarter of 2016, which is a decrease of 0.1% when compared to the prior-year period. This revenue decrease is comprised primarily of an average Medicare reimbursement rate increase of approximately 2.1%, a 2.9% increase in our average daily census -- and this is offset by an acuity mix shift which negatively impacted our revenue 1.9% -- and the rebasing of Medicare hospice reimbursement that Kevin just mentioned negatively impact revenue an additional 2.3%.

VITAS did not have any adjustments to revenue related to the Medicare cap billing limitation in the current or prior-year quarter. As of December 31, 2016 VITAS had 31 Medicare provider numbers, none of which has an estimated 2017 Medicare cap billing limitation, and all 31 of our provider numbers have a cap quotient in excess of 10% for the trailing 12-month period.

Average revenue per patient per day in the quarter was $191.15, which is 3.0% below the prior-year period. Routine home care reimbursement and high-acuity care averaged $162.23 and $709.64, respectively. During the quarter, our high-acuity days of care were 5.3% of total days of care, 63 basis points less than the prior-year quarter.

The fourth quarter of 2016 gross margin was 24.1%, which is essentially equal to the fourth quarter of 2015. Our routine home care direct gross margin was 53.1% in the quarter, a decrease of 160 basis points when compared to the fourth quarter of 2015. And this decline is attributed to lower 2016 Medicare reimbursement from the rebasing.

Direct inpatient margins in the quarter were 1.2%, and occupancy of our 32 dedicated inpatient units averaged 68.2% in the quarter and compares to 68.6% occupancy in the fourth quarter of 2015. Approximately 75% of our inpatient days of care are in these dedicated units, with the remaining 25% of our inpatient care utilizing shorter-term contract beds.

Continuous care had a direct gross margin of 15.8%, which is a decline of 30 basis points when compared to the prior-year quarter. Average hours billed for a day of continuous care was 18.1 in the quarter, a slight decrease when compared to the 18.3 average hours billed for continuous care in the fourth quarter of 2015. Nick is going to provide additional discussion to our high-acuity care in his portion of this presentation.

Now let's turn to the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $119 million for the fourth quarter of 2016, an increase of $5.2 million or 4.5% over the prior-year quarter.

Commercial drain cleaning revenue decreased 0.1% and our commercial plumbing and excavation increased 11.7%. Overall, commercial revenue increased 6.1%. Our residential plumbing and excavation increased 1.0% and drain cleaning decreased 2.3%. And our aggregate residential sales increased 3.2%. Revenue from water restoration totaled $13.7 million in the quarter, which is an increase of 31.7% over the prior year.

Our full-year 2017 guidance is as follows. Revenue growth for VITAS in 2017 prior to Medicare cap is estimated to be in the range of 4% to 5%. Admissions and average daily census in 2017 are estimated to expand approximately 3% to 4%.

And full-year adjusted EBITDA margin for VITAS prior to Medicare cap is estimated to be 14.5% to 15%. And we are currently estimating $5.0 million for Medicare cap billing limitations in calendar 2017.

Roto-Rooter is forecast to achieve full-year 2017 revenue growth of 3% to 4%. This revenue estimate is based upon increased job pricing of approximately 1% to 2%, and modest growth in water restoration services. Our adjusted EBITDA margin for Roto-Rooter in 2017 is estimated in the range of 21.5% to 22%.

Based upon the above, full-year 2017 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 $7.80 to $8. This compares to Chemed's 2016 reported adjusted earnings per diluted share of $7.24.

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

Thanks, David. Total average daily census in the fourth quarter of 2016 was 16,160 patients, an increase of 3% over the prior year. Total admissions in the quarter were 15,889, an increase of 0.7% on a unit-for-unit basis.

This admissions performance includes the significant disruption towards referral flow on the east coast of Florida in October from the threat of Hurricane Matthew. Excluding the October admissions in the Florida markets, fourth-quarter 2016 admissions increased 2.2%.

Admissions have shown general strengthening starting in August of 2016. Even with the October hurricane disruption, our admissions have increased 2.4% during this 5-month period. This improving trend is a result of our continued 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.

During the quarter, unit-for-unit admissions generated from hospital referrals, which typically represent over 50% of our admissions, increased 2.1%. Home-based referrals declined 0.9%. Nursing home admissions improved 2.1%. Assisted living facility admissions declined 8.1% in the quarter.

On a per-patient-per-day ancillary costs, which include durable medical equipment, supplies, and pharmaceutical costs, averaged $14.99 in the quarter and are 6.8% favorable when compared to the $16.08, the cost that these items had in the prior-year quarter.

As we discussed in our third-quarter call, margins in high-acuity continue to be an area of focus both within inpatient and continuous care margins that showed sequential improvement in the fourth quarter. Although the reimbursement for high-acuity is relatively high compared to routine home care. The cost associated with providing this care typically results in low margins.

Our inpatient care currently consists of 32 dedicated inpatient units as well as our contract beds. On a market-by-market basis, we are continuously evaluating this capacity so our inpatient facilities are appropriately positioned to meet the needs of our patients in every community we serve.

This process involves reviewing all of our existing and potential future inpatient contractual arrangements, and, when necessary, working with our partners to renew, restructure, or exit to best service the community. Margins have improved sequentially by 360 basis points from the third quarter, and we anticipate continued improvement in margins throughout 2017.

Within continuous care, we have also enhanced our focus on the labor management of continuous care related to appropriate nursing to aid staffing assignments and the utilization of outside nursing agencies, based upon the patients' locations and the individuals' needs. These efforts improved our continuous care margins also 360 basis points when compared to the third quarter of 2016.

VITAS's average length of stay in the quarter was 91.4 days, which compares to 89.8 days in the prior-year quarter. Median length of stay was 16 days in the quarter and compares to the 17-day median in the prior-year quarter. Median length of stay is a key indicator into our penetration in the high-acuity sector of the market.

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

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

(Operator Instructions) Frank Morgan, RBC.

You touched on this a little bit, but I was just -- in terms of the referrals from hospital sources, I know in the past you've talked about how that has gotten more competitive and you've made some technology changes to better capture those referrals. So just a little bit of color on maybe what you've done there? And obviously there is some success going on there, but any color there would be appreciated.

I'm going to turn this over to Nick to answer. But let me start, Frank, by saying that the -- what -- just to emphasize one point we've made during the course of the year.

With the change in reimbursement, we saw one thing: we saw more competition for patients who very likely would be a shorter stay. A lot of those patients come from the hospital inpatient, the high-acuity aspects of the hospital referral side. So that's where a lot of competition came.

But let me start by saying, with regard to referrals, throughout the course of the year, despite some of the difficulty we had in predicting actual admissions, referrals were right at our historic rate.

But I just use that as kind of a background, but I'm going to turn it over to Nick, because they have expended a lot of effort on just the issue you are questioning.

And Frank, what I had alluded to inside of the fourth quarter is what you are seeing the results of, a multi-quarter strategic investment in a lot of different facets that encompass not only servicing our hospital referral sources better, but all of our referral sources better.

So that includes the ability to have focus on speed of response, irrespective of which setting that referral comes in, as well as leveraging and integrating in some of the technological infrastructure that many of those hospital systems use. Whether they are referring that patient out through traditional means of a phone call, whether they are tapping on the shoulder of one of our dedicated resources inside of their facility, or whether they are facilitating that referral through some of the electronic platforms that they have that we have now integrated into more efficiently to be able to respond more quickly, more effectively, and address the needs of the patient and their family at that time.

And Frank, just to give you an idea, and I think we have talked to you personally about this. What that really -- what the last point that Nick is making is, to the extent that as soon as they input the referral information into their system, contemporaneously we get it.

So just cutting out two or three steps of the admissions process with regard to initial contact, confirmation of the information, etc. There are some real changes going on as life becomes a little more complicated in the hospice area.

And we're breaking it down. It's not just the hospital setting, Frank. It's every step in the process to really make sure we are doing the best in which we can to really optimize that experience for our referral sources as well as the patients and families.

Would you think things will settle down now that we are starting to lap through this whole two-tiered system focus? Or do you think people will continue to be focused on the shorter-stay patients? Or is it wishful thinking to think that maybe this competition for referrals might -- pressure might ease off a little bit?

We've already seen that. First of all, to answer your question, yes. We think that we've lapped that dynamic change that we saw in the market. I think that as we have observed, the best explanation is that there were a whole class of patients that a lot of our competitors put forth very limited effort to get those patients who were very -- who looked very likely to be in hospice for two weeks.

They just were slow to respond. We were quick to respond. We got an outsized percentage of those patients. When the economics changed a little bit, we saw that change.

In other words, they went from 0 to 50% effort. During the course of the year, we saw those efforts flag a bit. And as Nick said, by the last -- four of the last five months of last year, we already saw that lapping and their efforts flagging a bit and retreating to the mean.

So yes, to put it this way, at this point, you can see that in our guidance we are looking for admissions to go back to their -- for the last 11 years, we have basically said we expect admissions to go up 3% to 5%. We anticipate that's what we are seeing. And as Nick says, he's hopelessly optimistic, with some of his efforts, that we can even move that expectation up a bit, to the extent that his procedures start bearing the fruit that he has already begun to see.

And I wouldn't lose sight of the fact, though, that -- remember, half of our patients pass away in about two weeks or less. And clearly, we lost money on those patients. There's no way you can recapture the setup costs.

And the reason I point that out is, long term, you have to have growing admissions, have growing census. But admissions is a very poor correlation to our revenue -- our growth in revenue in any given quarter or, frankly, in any given year. But long term, absolutely, we need to grow in admissions, and we think we are back there.

One more and then I'll hop back in the queue. Actually, two. Just any kind of update on what you are seeing in terms of labor, the labor backdrop? Obviously, a lot of our other providers talk about that as an issue.

And then, finally, how many -- how much legal expense in the quarter related to the DOJ? I think it was like $1.1 million last quarter, $1.2 million last quarter. Where was that? And any update you might have there? Thanks.

First I'm going to turn it over to Nick on labor.

On your labor question, Frank, I think we are -- the competition for the right talent out in the marketplace, we still -- that's an occurrence that has occurred throughout 2016. We still see it there.

And what we have done similarly along the lines are make strategic decisions as well as investments around investing in our people, making VITAS a very attractive place to work, to come to, and to stay at, and actively tracking the outcome of those things.

And we are very comfortable and optimistic that the culture and the Company that we have created and been successful in retaining our folks through through the long term, we will still be able to do. And we are actually starting to see a large influx of interested talent up and down the labor pool looking to join the organization. Because they are looking for stability. They are looking for an organization that does the right thing for patients and families, and one that they see career development and growth within.

And one thing -- to be candid, Frank, also, we're like everybody else. As I look at the labor expenses over the last three months or so, they are a few basis points higher rather than a few basis points lower.

There's no question this is -- it's a struggle out there. As you get towards full employment, things like this just get a little tougher. But then, luckily, that's one aspect of our reimbursement that changes automatically based on a hospital wage index and inflation. So that's the one thing that historically VITAS has been able to very well manage.

And a chart we always show is that basically over the last 12 years, VITAS has been able to hold field-level expense, dominated by the labor expense, within 1 percentage point with regard to total reimbursement. So they continue to have a pretty good hold on it, but it is getting a little tougher rather than a little bit easier.

And regarding the expenses related basically to the DOJ, Frank, for the quarter on a pre-tax basis, VITAS, we had $1.2 million in expenses, and that compares to $1.1 million last year. And for a full year, we had $5.3 million in 2016, and that compares to $5 million. So we have been running at roughly a $5 million annualized run rate pre-tax. And if anything, that will probably ramp up as we get deeper into this or theoretically closer to trial.

Any updates on when that might be?

No, no updates. We are still in the mediation process, which is a -- it's an interesting process, but that moves quite slowly. And there are no set number of additional meetings in the future. We just respond accordingly to the requests of the mediator.

One thing you can track, though, because it has an indirect impact on us, is the AseraCare litigation. As you know, they have received a favorable summary judgment last year, and I think now that actually the appeals process begins in March.

Well, except for oral argument, about the second week in March.

Okay, thank you.

I'm showing no further questions. I would now like to turn the call back over to Kevin McNamara for any further remarks.

I have no further remarks. Just thank everybody for their kind attention. And we will be here in about three more months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.