Chemed Corp (CHE) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Chemed Corporation Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Ms. Sherri Warner, Investor Relations. Ma'am, please proceed.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2017 ended March 31, 2017. 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 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 April 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 First Quarter 2017 Conference Call. I will begin with 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 $406 million of revenue, an increase of 4%. Consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per diluted share of $1.82, an increase of 12.3%. Both VITAS and Roto-Rooter performed well in the quarter, exceeding the high-end of our internal projections. VITAS, after lapping the disruption triggered by the 2016 rebasing, generated admissions growth in the quarter of 4.1% and average daily census growth of 3.6%. Roto-Rooter continues to show excellent results in our core plumbing and drain cleaning service segments as well as strong growth in water restoration. This resulted in Roto-Rooter having record revenue, adjusted EBITDA and adjusted EBITDA margin in the quarter.

During the quarter, we purchased 300,000 shares of Chemed stock at an average cost of $180.87. Since we restarted our share repurchase program in 2007, Chemed has repurchased 13.1 million shares, aggregating $923 million at an average share cost of $70.41. Including dividends paid during this period, Chemed has returned over $1 billion to our shareholders. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. Net revenue for VITAS was $282 million in the first quarter of 2017, which is an increase of 1.7% when compared to the prior-year period. This revenue increase is comprised of a net Medicare reimbursement rate increase of approximately 1.6%, a 3% -- 3.6% increase in average daily census, offset by acuity mix shift, which negatively impacted revenue $6.6 million or 2.4%. We also had 1 less day in the quarter when compared to the prior-year period, which negatively impacted our growth an additional 1.1%. VITAS did not have any adjustments to revenue related to the Medicare Cap billing limitation in the current or prior-year quarter. Of VITAS' 31 unique Medicare provider numbers, 30 of these provider numbers have a Medicare Cap cushion of 10% or greater for the 2017 -- have a 10% or greater, and 1 provider number has a cap cushion between 5% and 10% on a trailing 12-month period. Average revenue per patient per day in the quarter was $193.37, which is 0.8% below the prior-year period. Routine home care reimbursement and high acuity care averaged $163.37 and $715.10, respectively.

During the quarter, high acuity days of care were 5.4% of total days of care, 83 basis points less than the prior-year quarter. The first quarter 2017 gross margin for VITAS was 21.5%, which is a 49 basis point improvement when compared to the first quarter of 2016. Our routine home care direct gross margin was 51.3% in the quarter, a decrease of 80 basis points compared to the prior-year quarter.

Direct inpatient margins the quarter were 5.9% and compares to 5.7% in the prior-year period. Occupancy of our 32 dedicated inpatient units averaged 71.4% in the quarter and compares to 78.3% occupancy in the first quarter of 2016. As a reminder, approximately 76% of our inpatient days of care are in these dedicated units, and the remaining 24% of our inpatient care is utilizing contract beds.

Continuous care had a direct gross margin of 15.6%, which is an increase of 50 basis points compared to the prior year. Average hours billed for a day of continuous care was 17.7 in the quarter, a slight decrease compared to the 18.2 average hours billed for continuous care in the first quarter of 2016.

Now let's turn to Roto-Rooter. Roto-Rooter's plumbing and drain cleaning business generated sales of $124 million for the first quarter of 2017, an increase of $10.7 million or 9.5% over the prior-year quarter. Commercial drain cleaning revenue increased 3.3%, and commercial plumbing and excavation increased 7.8%. Overall, commercial revenue for Roto-Rooter increased 8.0%. Residential plumbing and excavation increased 5.8%, and drain cleaning just had a slight decline of 0.4%. Our aggregate residential sales increased 9.6%. Revenue from water restoration totaled $18.1 million in the quarter and is an increase of 45.1% over the prior year.

On March 10, 2017, Chemed's Board of Directors authorized an additional $100 million for stock repurchase under Chemed's existing share repurchase program. As of March 31, 2017, there is $95.9 million of remaining share repurchase authorization under this plan.

Our 2017 guidance is as follows: Revenue growth for VITAS in 2017, excluding any impact for Medicare Cap, is estimated to be 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, prior to Medicare Cap, is estimated to be 14.5% to 15.0%. We are currently estimating $3.7 million for Medicare Cap billing limitations in the 2007 (sic) [2017] calendar year.

Roto-Rooter is forecasted to achieve full-year 2017 revenue growth of 3% to 4%. This revenue estimate is based upon increased job pricing of approximately 2% and continued growth in water restoration services. Adjusted EBITDA margin for 2017 is estimated to be in the range of 21.5% to 22.0%. Based upon this, our full-year 2017 adjusted earnings per diluted share, excluding noncash expense for stock options, cost related to litigation and other discrete items is estimated to be a range of $7.80 to $8. This compares to Chemed's 2016 reported adjusted earnings per diluted share of $7.24. I'll now turn this call over to Nick Westfall, Chief Executive Officer of VITAS.

Thanks, David. VITAS had a solid quarter both financially and operationally. Our Average Daily Census for the first quarter of 2017 was 16,222 patients, an increase of 3.6% over the prior year. Total admissions in the quarter were 17,563, an increase of 4.1%. If you factor in the impact of the 2016 leap year, admissions increased 5.2%. 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 continual healthy referral trends, will help to sustain admission growth and ensure we are admitting appropriate hospice patients in a timely and efficient manner.

During the quarter, admissions generated from hospital referrals, which typically represent over 50% of our admissions, increased 3%. Home-based referrals increased 3.7%, nursing home admissions improved 3.3% and assisted living facility admissions increased 5.4% in the quarter.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $15.14 and are 2.1% favorable when compared to the $15.46, the cost that these items had in the prior-year quarter. We continue to be focused on improving margins in our high acuity care, specifically, our inpatient facilities. This focus is showing positive results, and we generated inpatient margins of 5.9% in the quarter. This is a 20 basis point improvement over the prior year and a 470 basis point improvement sequentially.

Our inpatient care currently consists of 32 dedicated units as well as contract beds. On a market-by-market basis, we continuously evaluate capacity so that 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 continue to strengthen, and we anticipate continued improvement in margins throughout 2017.

Within continuous care, we've also enhanced our focus on the labor management of continuous care related to appropriate nursing to aide staffing assignments and the appropriate utilization of outside nursing agencies based upon the patient's location and individual needs. These efforts improved our continuous care margins 50 basis points when compared to the first quarter of 2016.

VITAS' average length of stay in the quarter was 88.7 days, which compares to 83.7 days in the prior-year quarter. Median length of stay was 15 days in the quarter and is equal to the prior-year quarter. Median length of stay is a key indicator into our penetration into the high acuity sector of the market. With that, I'd like to turn this call back over to Kevin.

Thank you, Nick. I think now it's appropriate to consider any questions that come before the meeting.

(Operator Instructions) And I am showing no questions over the phone lines. So now I'd like to hand the call back over to Mr. Kevin McNamara, President and Chief Executive Officer, for closing comments and remarks. Sir?

I don't have any significant closing comments.

Pardon me, sir. We actually just got a question.

Okay.

The question will come from the line of Eugene Fox with Cardinal Capital Management.

Just a couple of questions. Your Roto-Rooter results were very strong on the top line, but yet you maintain guidance. Can you -- are we simply being conservative in light of the issues relative to water restoration, or is there something else?

I would just say we don't -- we try to give annual guidance. And almost as a rule, unless there was a remarkable development, we would not change the guidance after one quarter. I mean, it is something that we do sit down after 2 quarters and make a more in-depth analysis of it. And to the extent that the trends in Roto-Rooter continue, I would think that you would likely see a change there. But generally speaking, again, we try to avoid quarterly guidance. We like to give the elected annual guidance with just a little shaping, if forced almost by rationality. But your comment is well taken.

Got it. Kevin, as it relates to the hospice business, any developments on the litigation front?

Not really. I think that the bottom line is no, not really. I mean, we're in the "mediation stage," which just means it's still in the pretrial stage. The discovery section is largely closed. This is a time when both sides sit down and analyze it. But I mean, again, I think that from my perspective, as I've said generally, I don't see any adverse developments with regard to that whole case. But at the same time, when the Department of Justice has a case against you, it's not a good thing. I mean, there are one -- the U.S. government is our one significant customer. We like to be on good - have a good relationship with them, and pretty much every healthcare company, one way or another, has that same situation and has to deal with these whistleblower type cases. And the only true -- the only real defense to them is just make sure you do all your blocking and tackling on a day-to-day basis to stay on the right side of the angels. But really, no significant change.

Last question for me. You bought in $50 million worth of stock in the first quarter, but yet your share count actually went up quarter-over-quarter. Is that simply the timing of when you made the purchases, so we would likely see that be more reflected in -- for the balance of the year?

The short answer is yes. You do a weighted average in the quarter. The other issue is, given our guidance already announced the stock price has climbed, and that's certainly under the GAAP accounting for fully diluted shares. That will offset a portion but certainly, not remotely all of the share repurchasing.

Congratulations, nice job guys.

Our next question will come from the line of Bill Sutherland with The Benchmark Company.

I'm interested in any color that you guys might be able to provide on the VITAS kind of growth plan. I know you've been focused on your current markets in terms of improving the referral level. But I was just curious about any thoughts on new market growth or any other kinds of expansion.

Well, I'll turn it over to Nick here in a minute. But let me say, generally speaking, it's tough. There's some states that like to give you, for example, New York, where a for-profit company -- proving to be very difficult for a for-profit company to get to even be involved in healthcare. There are a number of states that don't have the right demographics to support a vibrant full-service hospice company like VITAS. Let me just say that, yes, we feel that over the last 10 years, we've opened a number of branches in cities. We've closed a few. I mean, it's a little bit hit or miss when you are opening a grass-roots startup. We've learned some lessons. We continue to focus on growing, with expansion in our, call it, our 3 major states, which are Florida, California and Texas. We have gotten, in the last 1.5 years, 2 CONs in Florida, which we're very excited about. But generally, it's a -- it's not a high-growth business, and we're not likely to become very aggressive on the acquisition front. But Nick, anything else you would want to add to that.

No, just to complement a few of Kevin's comments. Bill, as you pointed out, most of -- all of our growth, almost exclusively, has been organically over the past few years. We do have a few new starts and de novos that have just recently opened up or are in the pipeline here in 2017. And between the combination of new starts and/or the potential for acquisitions, we're always evaluating the markets we're not in today, what the right entrance strategy would be if we want to be into those markets. And from an acquisition perspective, as we've stated, I think, over the past few years and the past few quarters, we'll be opportunistic related to any of those opportunities that very frequently come across but have to be the right situation, have the right valuation associated with it and have some business and strategic value for us long term. So our game plan will remain consistent with how it's been in the past. And the combination of those sort of 3 pillars should allow for the growth that we're projecting and forecasting in our guidance.

Bill, let me just expand a little bit more as well. So Chemed's been in existence just a little under 50 years. Kevin McNamara has been here for 37 of those years. I have been for 27 years. And acquisition's always played a critical part of our growth and returning value to shareholders. But with that said, acquisitions have to have a return on capital that's adequate for the risk. And I can confidently say over the last 10, 12 years, the valuations have been so high, there's massive risk and mediocre to almost potentially a negative return. So said differently, we think the amount of cheap borrowing that has flooded the market has largely put us to the sideline on acquisitions in most cases, probably absent of Roto-Rooter franchisees. So we'll continue to evaluate acquisitions, including things outside of our core businesses of healthcare and plumbing services. But quite frankly, until sanity returns on fair return for capital risk, we probably will just stay organic on our growth.

And then just one follow-up on this line of thinking. Strategically, do you think of VITAS being exclusively focused on hospice going forward or would there be other post-acute types of care that you would want of co-locate with your hospice?

Bill, I think that's an excellent question. Today, our -- we're mostly comprised exclusively from a hospice perspective. There's also palliative care, which in -- some people see as interchangeable; others, it's uniquely different, a little bit from a component of the hospice benefit. But similarly, from an acquisition perspective, additional complementary service lines are one of those things that we would always continue to evaluate and have a lot of additional factors regarding reimbursement streams being complementary to the end-of-life business. But I think it's one in which, for both the short term and long term, any of those considerations would be exclusively in post-acute and exclusively really in the home care component of it, given our expertise, right, in managing a decentralized workforce and caring for patients and families out in the market, outside of the 4 walls of a built-in facility.

And we've tried, as Nick suggested, we've tried a number of expansions with limited success. So again, there no question. We don't want to take our focus away from our core business, which we, again, think just still has a nice but certainly not explosive upside, but a nice solid, predictable upside that has really been the basis of our -- the part of our basis of our growth for the last 13, 14 years.

And any of those pieces would need to be complementary in nature.

Okay. I think that...

So now I'd like to hand the call back over to Mr. Kevin McNamara, President and Chief Executive Officer, for closing comments and remarks.

Okay, well, I don't really have too many significant closing comments, other than to thank everyone for listening in. And I was pleased with the quarter, and we'll be back in about 3 months and hope to report on another good quarter. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody, have a wonderful day.