Chemed Corp (CHE) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Chemed Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Sherri Warner, Investor Relations. You may begin.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2018 ended June 30, 2018.

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 2018 Conference Call. I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I will then open the call up for questions.

Our second quarter of 2018 had excellent operational performance, margin improvement and overall financial results in both operating segments. In the quarter, Chemed generated revenue of $442 million, an increase of 6.4%. Our consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per diluted share of $2.81, an increase of 30.7%.

Both VITAS and Roto-Rooter performed well, exceeding the high end of our key operational and financial estimates. VITAS' admissions increased 3.4% in the quarter, Average Daily Census expanded 7.6% and our adjusted EBITDA, excluding Medicare Cap, increased 1.9%.

Roto-Rooter continues to show excellent results in our core plumbing and drain cleaning service segments as well as continued growth in water restoration.

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

Thank you, Kevin. First, let's remind everyone of some housekeeping matters that we talked about in the first quarter. As most of you are aware, effective January 1, 2018, the Financial Accounting Standards Board, or FASB, mandated certain changes in revenue recognition under generally accepted accounting principles, otherwise referred to as GAAP. For Chemed, this accounting standard mandated the reclassification of certain costs within the 2018 income statement when compared to prior year formats. This revenue recognition accounting standard was adopted on a modified retrospective basis. This means, our 2017 operating results were not restated and are reported using historical revenue recognition accounting standards.

It's important to note, though, that these reclassifications have zero impact on EBITDA, adjusted EBITDA, pretax income or net income. These reclassified expenses do impact comparative analysis between years on certain metrics such as sales, gross margin and selling, general and administrative expenses. This resulted in the reclassification of net room and board expenses associated with certain Medicaid patients residing in nursing homes to be reclassified from cost of services to revenue, effectively reducing VITAS' quarterly revenue and cost of sales by approximately $2.7 million.

In addition, uncollectible accounts receivable, commonly referred to as bad debt expense, historically had been included in selling, general and administrative expenses for both VITAS and Roto-Rooter. These are now netted in service revenue and sales. This reduced consolidated revenues and selling, general and administrative expenses by approximately $4.5 million in the quarter.

The discussion and analysis of operating results on this conference call as well as in our second quarter 2018 earnings release narrative does a pro forma reclassification of net 2017 room and board and estimated uncollectible receivables to facilitate analysis of operating results in a format consistent with the 2018 revenue recognition accounting standard.

With that, let's talk about our results. In the second quarter of 2018, VITAS net revenue, excluding Medicare Cap, was $297 million, which is an increase of 6.3% when compared to the prior year. This revenue increase is comprised primarily of a geographically weighted average Medicare reimbursement rate increase of approximately 0.6%; a 7.6% increase in Average Daily Census; and a Medicare Cap liability that reduced revenue growth by 0.1%. This growth is partially offset by acuity mix shift that reduced revenue growth 1.6% when compared to the prior year period. In the second quarter of 2018, VITAS accrued $536,000 in Medicare Cap billing limitations.

At June 30, 2018, VITAS had 30 Medicare provider numbers, 2 of which have a current estimated Medicare Cap billing limitation liability of approximately $971,000. Of VITAS' 30 Medicare provider numbers, 26 of these provider numbers have a Medicare Cap cushion of 10% or greater; 2 provider numbers have a cap cushion between 5% and 10%; and 2 provider numbers have a Medicare Cap billing limitation for the 2018 Medicare Cap period.

For VITAS, the average revenue per patient per day in the quarter was $188.69, which is 1.2% below the prior year period. Routine home care reimbursement and high acuity care averaged $164.51 and $707.96, respectively. During the quarter, high acuity days-of-care were 4.5% of our total days of care, which is 53 basis points less than the prior year quarter.

The second quarter of 2018 gross margin, excluding Medicare Cap, was 21.6%, which is a 54 basis point decline when compared to the second quarter of 2017.

Now let's turn to Roto-Rooter. Roto-Rooter's plumbing and drain cleaning business generated sales of $145 million for the second quarter of 2018, an increase of $15.4 million or 11.9% over the prior year. Revenue from water restoration totaled $24.8 million, an increase of $3.9 million or 18.4% when compared to the prior year quarter.

Commercial drain cleaning revenue increased 9.7%, commercial plumbing and excavation increased 8.8% and commercial water restoration grew 9.9%. Overall, commercial revenue increased 8.8%.

Our residential drain cleaning increased 12.5%, plumbing and excavation increased 15.4% and residential water restoration expanded 19.6%. Our aggregate residential sales increased 15.1%.

Roto-Rooter's gross margin in the quarter was 49.9%, an 89-basis-point improvement when compared to the second quarter of 2017. Adjusted EBITDA in the second quarter of 2018 totaled $36.5 million, an increase of 19.8%. The adjusted EBITDA margin in the quarter was 25.2%, which is a 165-basis-point improvement over the prior year, again, after recasting 2017 for the revenue recognition standard.

In June of this year, Chemed entered into a 5-year Amended and Restated Credit agreement that consists of a $450 million revolving credit facility. The interest rate on this facility has a floating rate that is currently LIBOR plus 100 basis points. At June 30, 2018, the company had approximately $310 million of undrawn borrowing capacity under this agreement.

Our guidance for 2018 has been updated and is as follows. Revenue growth for VITAS, prior to Medicare Cap, is estimated to be in the range of 4% to 5%. Admissions are estimated to expand 4.5% to 5%. Our Average Daily Census in 2018 is estimated to expand approximately 6.5%, and full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.9%. We are currently estimating $2.5 million for Medicare Cap billing limitations in the second half of the 2018 calendar year.

Roto-Rooter is forecasted to achieve full year 2018 revenue growth in 2018 of 12% to 13%. This revenue estimate is based upon increasing job pricing of approximately 2%, continued growth in core plumbing and drain cleaning services as well as revenue growth from water restoration. Roto-Rooter's adjusted EBITDA margin for 2018 is estimated at 24.0%.

Based upon the above, full year 2018 adjusted earnings per diluted share, excluding noncash expense for stock options, costs related to litigation and other discrete items, is estimated to be in the range of $11.35 to $11.55. 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 25.5%.

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

Thanks, David. VITAS had a solid second quarter, both financially and operationally. Our Average Daily Census in the second quarter of 2018 was 17,643 patients, an increase of 7.6% over the prior year. Total admissions in the quarter were 16,858, an increase of 3.4% when compared to the second quarter of 2017. On a year-to-date basis, our Average Daily Census has expanded 6.9% and our admission growth in the first half of the year has increased 3.7%.

During the quarter, admissions generated from hospitals, which typically represent roughly 50% of our admissions increased 1.2%. Home-based admissions increased 8.5%. Nursing home admissions declined 3.3% and assisted living facility admissions increased 8.2% in the quarter. Our routine home care direct patient gross margin was 52.6% in the quarter, a decline of 20 basis points when compared to the second quarter of 2017. Direct inpatient margin in the quarter was 4.2% and compares to a margin of 3.7% in the prior year quarter. Occupancy of our 27 dedicated inpatient units averaged 66.8% in the quarter and compares to 68.8% occupancy in the second quarter of 2017.

Continuous care had a direct gross margin of 17.3% a decline of 70 basis points when compared to the prior year quarter. Average hours billed for day of continuous care was 17.4 in the quarter, a slight decrease when compared to the 17.9 average hours billed for continuous care patient in the second quarter of 2017.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs averaged $14.39 and are 80 basis points favorable when compared to the $14.51 for the costs these items had in the prior year quarter.

VITAS' average length of stay in the quarter was 89 days and compares to 85.2 days in the second quarter of 2017. Median length of stay was 17 days in the quarter and compares to a median length of stay of 16 days in the prior year quarter. Median length of stay is a key indicator of 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) Our first question is from Frank Morgan from RBC Capital Markets.

Good morning. Certainly, a good quarter by any measure. I'm thinking about, as you look at the landscape today, where do you deploy the capital that you have? Just curious about where you see the best opportunities? Is it now more on the de novo development side and maybe your view on it?

Well, Frank, let me start by saying. I'll turn it over to Dave, but as Dave always says, yes, our first option is to look at internally operating assets like the new inpatient unit that VITAS has recently announced, equipment for the relatively new line of service, water restoration for Roto-Rooter. Those obviously have a very short payback. Both companies are working on, like they usually do, relatively small acquisitions. They're just in the same line of service. In Roto-Rooter that usually means a franchisee we purchase. It's either going to be repurposed as an independent contractor operation or large enough to be its own self branch. But that's certainly something we're currently working on and -- but again, that's not unusual. In VITAS' case, certainly virtually any hospice program in Florida that has a CON in a county that we are not in, that is always on their hit list and that to the extent that we're working on one or more of those that would be definitely a use of capital. When you go to historical uses of cash, we will continue our program of stock repurchases. We still have -- Dave, what do we have available under our current authorization out that is much of limitations.

$120 million-or-so.

$120 million. But there as we still have cash to put to work with regard to our repurchase program, very accretive. At numbers, beyond $4.00 a share. So when combine that with the fact that our average cost for over $1 billion of repurchases over the last 9 years or so, being in the low 70s, it's been a very attractive program and to the extent that we're using free cash flow to do it, to fund it, it's the gift that keeps on giving. But Dave, any other comments on use of capital at this point?

Without a doubt, it's going to be challenging relative to share repurchase where we're used to doing dollar averaging as well as being opportunistic. Looks like the opportunistic environment has then narrowed relative to what's buying our stock on a dip. However, as of today, we have about $55 million of net debt, that's cash on hand, less the draws against the revolver. The way we're producing cash flow, I will do a $176 million before the benefit from the tax deductibility of stock options, which that's a long way of saying is, we're going to generate a lot of cash. And our only promise to shareholders is, when we reinvest that through share repurchase or acquisitions, it will have a good risk-adjusted return. But this is a challenging environment for acquisitions as we've been talking about. Quite frankly, our recession might be our best opportunity on acquisitions than the current environment that is overvaluing things by at least 1 to 2x.

And let me add that Dave is only one here that's rooting for a recession.

Maybe just one more, and I'll hop off of. Obviously, a lot of things going on right, right now. A lot of interest from people that are newer to this space, particularly in the private equity side. But is there anything that you're particularly watching, that worries you, that you're really focused on, that you can think might really alter what's a pretty good environment? And now that you're completely paranoid, you can also see any new opportunities as well?

Well, let me start, Frank, by saying no, I don't. I mean, when we talk about what's in the offing for, let's say, reimbursement change is in the hospice. I don't see any that are in the horizon. I mean, there is still -- we're still -- the industry is still digesting its last change, which was the first change in many years. So in the regulatory front, of course, it seems a more impact on VITAS, I think, we see that is fairly stable, lot of changes in the industry, lot of acquisitions and mergers and discussions about the future of health care. But it just don't seem to be centering on end-of-life hospice side as far as disrupting our business model. With regard to Roto-Rooter, nothing on the regulatory front. I mean, I think, the biggest thing we're watching there is manpower. We've -- for growth, when you look at Roto-Rooter's first quarter, they were about as busy. They're winning the Google war, the phone is ringing. Their men are about as busy as they could be. For growth, we're looking to add more trained servicemen to handle those, the increased number of calls. So no, I think, we're looking certainly for a second half of profound stability in terms of regulatory environment. Nick, anything you would add to that?

No. I mean, to your comment, Frank, one of the quotes that my management teams heard to begin this year that's used quite frequently, right, is success breeds complacency, only the paranoid survive, as you were mentioning. So what I want to bring up is we feel very comfortable with, to reiterate Kevin's comment, the future inside of the industry. But with that being said in no way shape or form are we being complacent in the way in which we continue to evaluate our short-, mid- and long-term strategy and make sure we're positioned as an organization to be flexible should any changes come down the pipe and feel very comfortable with where we sit today, where the future holds. But at the same time, very consciously staying on top of making sure we have a seat at the table as well as aware of anything that's on the horizon.

Dave, anything to add?

The only thing I'd add, Frank, is, we had 2 major known unknowns starting a couple of years ago. Of course, there was the change in reimbursement threat. And once we finally saw what the proposed change in the reimbursement was, January of 2017, it was about as small a change you could have had and call that a rebasing. And I'd say that just reflects CMS' attitude of hospices (inaudible), but it could always use refinement. So we're not really concerned about anything CMS has discussed doing. But again, under any administration that could change on a dime. The other big known unknown was the Department of Justice litigation against us, which we settled out. Clearing out those 2 issues over the last couple of years has large -- we don't have significant concerns that we can see today that would impact our business models. But we're always looking at that's constantly discussed of, what changes could happen primarily in health care that would impact our model. So we're prepared for those changes, but we don't see anything on the horizon.

Frank Morgan -- Thank you.

At this time, I am showing no further questions. I would like to turn the call back over to Kevin McNamara, President and CEO, for closing remarks.

Thank you. We're happy with what we thought was a very solid quarter, excellent quarter, increased guidance, expecting better-than-anticipated performance for the rest of the year. And I want to thank everyone for attending this conference call. And we'll have another one in about 3 months. Thank you.

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