Chemed Corp (CHE) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Chemed Corporation Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Sherri Warner, with Chemed Investor Relations. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2017 ended December 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 February 14 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 February 14, 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 2017 Conference Call.

I will begin with highlights for the quarter, and David and Nick will follow with additional operating detail. I will then open up the call for questions.

The fourth quarter of 2017 had excellent operational performance, margin improvement and overall financial results.

In the fourth quarter of 2017, Chemed generated $428 million of revenue, an increase of 6.2%. Consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per diluted share of $2.32, an increase of 10.5%.

Both VITAS and Roto-Rooter performed well, exceeding the high end of our guidance. VITAS admissions increased 4.3% in the quarter. Average Daily Census expanded 4.7%. And our adjusted EBITDA, excluding Medicare Cap, increased 7.9%.

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 a record fourth quarter 2017 in revenue and profitability.

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 $292 million in the fourth quarter of 2017, which is an increase of 2.8% when compared to the prior year period. This revenue increase is comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 0.8%, a 4.7% increase in Average Daily Census, offset by Medicare Cap, which reduced revenue 0.9%, and acuity mix shifts, which negatively impacted revenue growth 1.7% when compared to the prior year period.

VITAS recorded $2.4 million in Medicare Cap billing limitations for 2 programs in the quarter, all of which are related to the 2018 Medicare Cap billing period.

At December 31, 2017, VITAS had 30 Medicare provider numbers, 2 of which have an estimated 2018 Medicare Cap billing limitation. Of these 30 unique Medicare provider numbers, 25 provider numbers have a Medicare Cap cushion of 10% or greater, 3 provider numbers have a cap cushion between 5% and 10%, and 2 provider numbers have a Medicare Cap liability on a trailing 12-month period.

Average revenue per patient per day in the quarter was $189.33, which is 1% below the prior year period. Our routine home care reimbursement and high acuity care averaged $163.50 and $713.35, respectively. During the quarter, high acuity days of care were 4.7% of total days of care, which is 58 basis points less than the prior year quarter.

The fourth quarter 2017 gross margin from VITAS, excluding Medicare Cap, was 24.5%, which is a 41 basis point improvement when compared to the fourth quarter of 2016.

Our routine home care direct gross margin was 53.9% in the quarter, which is an increase of 80 basis points when compared to the fourth quarter of 2016. And our direct inpatient margin in the quarter was 8.5% and compares to a margin of 1.2% in the prior year quarter.

Occupancy of our 28 dedicated inpatient units averaged 70.3% in the quarter and compares to a 68.2% occupancy in the fourth quarter of 2016. Continuous care had a direct gross margin of 16.8%, an increase of 100 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 17.5 in the quarter, which is a slight decrease when compared to the 18.1 average hours billed for continuous care patient in the fourth quarter of 2016.

Now let's take a look at the Roto-Rooter segment.

Roto-Rooter's plumbing and drain cleaning business generated sales of $136 million for the fourth quarter of 2017. And that's an increase of $16.8 million or 14.1% over the prior year quarter. Commercial drain cleaning revenue increased 1.7%, and commercial plumbing and excavation increased 2.5%. Overall, commercial revenue increased 3.3%.

Our residential plumbing and excavation increased 14.5%, and drain cleaning increased 10.4%. Our aggregate residential sales increased 21.8%.

Just as importantly, revenue from water restoration totaled $22.1 million, an increase of $8.4 million over the prior year quarter. Or another way to look at it is, half of our growth in revenue for Roto-Rooter came from water restoration, the other half came from core segments.

Our earnings guidance for 2018 is as follows.

Revenue growth for VITAS in 2018 prior to Medicare Cap is estimated to be in the range of 2.5% to 3.5%. Admissions and Average Daily Census in 2018 are estimated to expand approximately 3% to 4%. And full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.4%. We are currently estimating $5 million for Medicare Cap billing limitations in the 2018 calendar year.

Roto-Rooter is forecast to achieve full year 2018 revenue growth of 4% to 5%. This revenue estimate is based upon increased job pricing of approximately 2% and continued growth in water restoration services. Adjusted EBITDA margin for 2018 for Roto-Rooter is estimated at 22.3%.

Based upon the above, full year 2018 adjusted earnings per diluted share, excluding noncash expense for stock options, costs related to litigation, costs associated with tax reform and other discrete items, is estimated to be in the range of $10.60 to $10.85. This compares to Chemed's 2017 reported adjusted earnings per diluted share of $8.43. This 2018 guidance assumes an effective corporate tax rate of 25.7%.

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

Thanks, David.

VITAS had another solid quarter, both financially and operationally.

Our Average Daily Census in the fourth quarter of 2017 was 16,920 patients, an increase of 5.3% on a unit-per-unit basis over the prior year.

Total admissions in the quarter were 16,575, an increase of 4.9% on a unit-per-unit basis when compared to the fourth quarter of 2016.

During the quarter, admissions generated from hospitals, which typically represent over 50% of our admissions, increased 1.3%. Home-based admissions increased 6.5%. Nursing home admissions increased 10.2%, and assisted living facility admissions increased 10.5% in the quarter.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $14.30, and are 4.6% favorable when compared to the $14.99 costs for these items in the prior year quarter.

Our inpatient care currently consists of 28 dedicated units, as well as contract beds. We evaluate inpatient capacity on a market-by-market basis to ensure these facilities are appropriately positioned to meet the needs of our patients in every community we serve. The sustainable evaluation and management processes have improved our inpatient margins 730 basis points in the quarter.

Within continuous care, we've continued our focus on labor management specifically 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 100 basis points when compared to the fourth quarter of 2016. VITAS' average length of stay in the quarter was 91.4 days, which is equal to the average length of stay in the fourth quarter of 2016. Medium 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'd like to turn this call back over to Kevin.

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

(Operator Instructions) Our first question comes from the line of Frank Morgan from RBC Capital Market.

I think I would like to kind of go back and dive a little bit deeper into the assumptions, some of the underlying assumptions that go into the very strong 2018 guidance. And I guess I'm curious, just maybe to start first on the VITAS side. I believe you mentioned in the past that you might have one fewer program in that -- in the base. But I'm just curious, if you were to break out growth from, say, just organic versus, say, any of the plans for external growth or new development coming online in the year, kind of maybe give us some color on what that would look like.

Yes, now I'll -- this is Dave Williams, Frank. I'll turn this over to Kevin and Nick. But so the starting point in terms of, I call it, on the VITAS side, for lack of a better word, raw which it is always going to be days of care. And we expect the days of care organic growth to grow 3% to 4%. Now there's going to be acuity mix shift. Just because of our trend line over the last couple of years, we expect high acuity to trend down, but not at the same rate it's been trending down before. That draws a little bit of squirreliness into our revenue projections but doesn't really impact the overall profitability of the day of care, at least as we've discussed in prior calls. But basically, organic, call it 3% to 4% days of care growth. And then I'll turn it over to Nick and Kevin.

Yes. And just to reiterate Dave's comment. I mean, the vast majority of the entire projection of 2018, Frank, is embedded inside of organic growth and the continuation of the positive trends which we've seen in 2017 and expect to see in 2018.

Which is that to say we don't have a couple of new Florida online -- Florida operations coming online. We are starting January 1 of this year.

Correct. But the macro contribution of the overall guidance in 2018 is minimal.

We're excited by it, but it's hard to very well move the numbers.

Correct, at a macro level.

Got you. And certainly, I don't think, historically, you've ever put acquisitions in there, so just to reconfirm that. And then maybe just asking about the acquisition market, do you see any kind of change in a view there that might make that more interesting? Or is it still not very interesting at this point?

Well, to the extent that, from my perspective, VITAS is in a position that they see most, if not all, the acquisitions that are available. Although they have a intellectual curiosity in them, they all seem to have the same issue, and that is the acquisition candidates tend to have several programs, most of which have Average Daily Census below 100, with the upside potential not much higher than that. And I will say, given the nature of VITAS, that is a full-service hospice, with all 4 lines of service, with the kind of quality control issues and IT support, our breakeven point is just higher than that. So it's just hard for us to offer much more purchase price for programs we don't have much hope of ever making a profit. So that's what makes us kind of a bad candidate to approach these acquisition candidates. And again, we have kind of a high hurdle. We've been repurchasing stock. And to the extent that, after you risk adjust repurchasing stock and doing acquisitions, it's the rare acquisition in this field that makes sense. And the reason I highlight this field is the fact that, when you buy a hospice, you don't get much. The patients, by their very nature, are short term. There's very little bricks and mortar. And the one thing that's of real value is the referral networks, which, by definition, this only entitles up. So long-winded way, Frank, of answering your question, which is really, we're focusing on basically same-store organic growth.

Got you. And maybe a Nick question here. The -- when you look at -- with most of your growth coming organically, when you think about the saturation -- no, not the saturation, the penetration rate of hospice today and over the years, certainly the medPAC reports show the penetration rate increasing. But where do you feel we are in the marketplace in terms of actual penetration for this service? And does that give you comfort in the ability to continue to drive organic growth, say, 3% to 4%?

Well, Frank, if you've heard Dave and I talk about it, we come at that question a little differently. I'm surprised at the depths of the penetration of hospice with regard to non-trauma deaths. I mean, it's over 50%. It's a well-known, well-respected needed program. And Dave thinks that number could be higher. But the real issue comes at how early in the period of decline does a patient with a terminal diagnosis enter a hospice. And that's where -- that has effects on the penetration issue, which dwarfs whether we go from 51% to 54% as far as penetration by actual patient, and that's one where it's -- industrywide, we continue to see an expansion of that. We really see it, and it's good for us, is in senior communities, where they're very familiar with the benefits of hospice. They see it with their colleagues, their neighbors. Those people are more likely to choose hospice earlier, which means that the areas where we are right now, that is Florida and some of the retirement communities of California and Texas, where we are -- that trend is probably more pronounced from our perspective. So I would say that, again, when you look at penetration, I'm surprised that it's as high as it is. That is over 50% of the people have at least 1 day in a hospice, that type of thing. But a lot of work on penetration. We don't see the end of that any time in -- over the next several years.

Yes, frank. So Kevin, come at it from slightly different directions, but kind of reach the same endpoint. What I'd say is so that roughly 2.6 million deaths in the United States every year, a little over 500,000 of those deaths are non predictive or trauma deaths, so you're left about 2.1 million deaths annually in the U.S. that are really hospice eligible or hospice appropriate. And as Kevin mentioned, we do about 1.1 million, the industry, a patient who passes away had at least 1 day in hospice. So if you take 1.1 million out of 2.1 million, you end up with a little bit more than 50% penetration. But as Kevin mentioned, half of all admits in the hospice, they pass away in about 19 days or less. 30% actually pass away in 7 days or less. So I don't know if their right thinking, did a patient receive at least a hospice day to talk about penetration? I think it's potential days of care. So the growth in the over 65 will contribute to an expansion of the days of care in the industry. But really, it's actually materially impacting that median of 19 days. And what I will tell you though, or Kevin and I have seen this, that 19 day median length of stay for the industry has been rock-solid for a dozen years. So said differently, there's still this culture of chase cure of care for a significant portion of Medicare beneficiaries at any cost, and then there's still this reluctance for about half of our patients to enter hospice at the last possible moment. So the real question of explosive growth in the industry is when will we impact this median? When will the 19 move to 26?

And the last piece that adds on to it, Frank, is the tailwind inside of the industry is the value proposition on the hospice industry has never been more aligned with the ongoing reimbursement changes along all the other verticals across healthcare. And as we're seeing partners in the communities meet and are actively seeking mature partners that can help provide service, access education to those patients and families earlier so that the median length of stay and the adoption of hospice at the -- for appropriate patients occurs at the right time, and so that's another tailwind for the industry that I think continues, as well as provides an opportunity for us as a mature large national hospice organization and differentiate ourselves in the marketplace with what we can offer our partners in the local communities.

Got you. And maybe just to wrap up on VITAS in your assumptions. What do you see in the year ahead in terms of just the -- from a cost perspective and from a margin standpoint in VITAS?

I think it's embedded inside of some of the guidance, as we talked about the ongoing EBITDA margin. We're optimistic around the initiatives in which we continue to have in place where we've seen marginal improvement across our service clients. And we're balancing that against the ongoing labor and wage pressures that everybody's experiencing inside of the market. So we're still confident in our guidance for 2018 related to margins.

And in that regard, let me say, it's a constant battle. Labor costs are fully loaded, about 2/3 of all expenses of VITAS. The reimbursement, by definition, that hospice gets is a little below what the government determines as really industry inflation. It's a constant battle. But it's one that VITAS has been doing well. I will say that -- I hesitate to say, although VITAS is on top of this, it's no problem. It's a constant battle, but the one thing I look at is that is attrition rates, the average pay per hour, that type of thing, they've had good trends across all those fronts.

Got you. And just one final one. You did comment about drug costs being down. Anything in particular there you want to call out? I think you said down 4.6% year-over-year. Anything that -- is there anything in that one-time, or is that something we should think about as sustainable?

I think as you think about it, Frank, you should think about it as an ongoing run rate. It's actually aggregated ancillary costs, which are pharmacy, but also durable medical equipment, the home medical equipment piece and medical supply. So it's our full aggregated run rate for all ancillary services. It's not just drugs. But we feel comfortable in that run rate from a cost perspective. And we're driving that down by just optimizing utilization as well as contract negotiation as well.

Okay. And I'll just ask one more and hop off. But just to reconfirm, no buybacks still tend to the assumptions, correct?

That's correct.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin McNamara, President and Chief Executive Officer, for any further remarks.

Okay. Before signing off, I'd just make one comment with regard to a question we have gotten not on this line. And that is, you can see that we had a CapEx -- a projected cap exposure in the fourth quarter. We continue, part of our guidance, as always, to include a plug number with regard to cap. I would just say that -- remind people that, that projected cap in the fourth quarter, that is the first quarter of the government plan year, not unexpected to have some projected exposure in that fourth quarter. Overall, I think, as Dave indicated, with our overall situation with all our markets, we're comfortable with our cap situation. Good trends, nothing that should imply a dislocation in that, whatsoever. And I think that our -- in 2018, our plug number of cap is going to be -- may well prove very conservative as it has over the last 10 years.

So with that, I just wanted to thank everyone for their kind attention. And we'll be back in a couple of months to discuss the results of the first quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.