Chemed Corp (CHE) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Chemed Corporation's Third Quarter 2018 Earnings Call. (Operator Instructions) As a remainder, this conference call may be recorded.

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

Good morning. Our conference call this morning will review the financial results for the third of 2018 ended September 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 October 29 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 29, 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 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 third quarter of 2018 showed solid operational performance, margin improvement and overall excellent financial results in both of our operating segments. In the quarter, Chemed generated revenue of $444 million, an increase of 8.2% over 2017. And that is adjusted for the new revenue recognition accounting standard.

Our consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per diluted share of $3.07, an increase of 42.8%. Both VITAS and Roto-Rooter performed well in the quarter, exceeding the high end of our operation -- our operational and financial estimates. VITAS' admissions increased 2.5% in the quarter; Average Daily Census expanded 7.8%; and adjusted EBITDA, excluding Medicare Cap, increased 15.9%. Roto-Rooter continues to show excellent growth in our core Plumbing and Drain Cleaning service segments as well as continued growth in water restoration.

When we first provided 2018 guidance, we were anticipating adjusted earnings per diluted share to be in the range of $10.60 to $10.85. However, the first 6 months of 2018 generated strong revenue growth and improved margins. As a result, when we reported our second quarter 2018 results, we raised our adjusted earnings per diluted share guidance to $11.35 to $11.55.

The third quarter of 2018 operating results were outstanding, again, exceeding the high end of our internal estimates. As a result, we are further increasing our full year 2018 guidance for adjusted earnings per diluted share to a range of $11.80 to $11.90.

With that, I would like to turn this teleconference over to David.

Thanks, Kevin. For a couple of minutes, I'm going to go with the impact of the revenue recognition has on our comparability of our 2017 and 2018 operating results.

As most of you are aware, effective January 1, 2018, the Financial Accounting Standards Board, or FASB, mandated certain changes in our revenue recognition under GAAP. For Chemed, this accounting standard mandated the reclassification of certain costs within the 2018 income statement when compared to the prior year formats. This revenue recognition accounting standard was adopted on a modified retrospective basis. What this means is, our 2017 operating results were not restated and are not reported using -- and are reported using the historical revenue recognition accounting standards. These reclassifications have zero impact on our EBITDA, our adjusted EBITDA, pretax income or net income.

However, these reclassification expenses do impact comparative analysis between years and certain metrics such as sales, gross margin and selling, general and administrative expenses. This change in revenue recognition accounting standard 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 $2.6 million.

In addition, uncollectible accounts receivable, commonly referred to as bad debt expense, historically included in selling, general and administrative expenses for both VITAS and Roto-Rooter, are now netted in service revenue and sales. This reduced Chemed consolidated revenues and selling, general and administrative expenses by approximately $4.4 million in the quarter.

The discussion and analysis of operating results on this conference call as well as in our third quarter 2018 earnings release 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 the quarter. In the third quarter of 2018, VITAS' net revenue was $302 million, which is an increase of 6.5% when compared to the prior year period. This revenue increase of 6.5% is comprised primarily of a geographically weighted Medicare reimbursement rate increase of approximately 0.8%, a 7.8% increase in our Average Daily Census; and a Medicare Cap liability that reduced revenue growth by 0.6%. This growth is partially offset by acuity mix shift that reduced revenue growth 1.8% when compared to the prior year period.

In the third quarter of 2018, VITAS accrued $1.9 million in Medicare Cap billing limitations. At September 30, 2018, VITAS had 30 Medicare provider numbers, 2 of which have an estimated 2018 Medicare Cap billing limitation liability of approximately $2.9 million. Of our 30 Medicare provider numbers, 25 of these provider numbers have a Medicare Cap cushion in excess of 10%. Two provider numbers have a cap cushion between 5% and 10%, and one provider number has a cap cushion between 0% and 5%, with 2 provider numbers having a Medicare Cap billing limitation for the 2018 Medicare Cap period.

Our average revenue per patient per day in the quarter was $187.19, which is 0.8% below the prior year period. Reimbursement for routine home care and high acuity care averaged $163.58 and $744.15, respectively. During the quarter, high acuity days of care were 4.1% of our total days of care, and this was 54 basis points less than the prior year quarter.

Third quarter of 2018 gross margin, excluding Medicare Cap, was 23.3%, which is equivalent to the third quarter of 2017.

Now let's take a look at Roto-Rooter. Roto-Rooter generated quarterly revenue of $142 million for the third quarter of 2018, an increase of $15.4 million or 12.1% over the prior year quarter. Revenue from water restoration service segment totaled $25 million, an increase of $3.9 million or 18.3% when compared to the prior year quarter. Approximately, 90% of our water restoration revenue is generated from residential customers with the remaining 10% being generated from our commercial accounts.

Commercial drain cleaning revenue increased 9.7%, commercial plumbing and excavation increased 1.7% and commercial water restoration, which is less predictable than our residential water restoration declined 13.1%. Overall, our commercial revenue did increase 3.5%. Residential drain cleaning increased 13.1%, Plumbing and excavation increased 15.1% and residential water restoration increased 23.5% and our aggregate residential sales increased 16.1%.

Roto-Rooter's gross margin in the quarter was 49.2%, a 112 basis point increase compared to the prior year quarter.

Adjusted EBITDA in the third quarter of 2018 totaled $34 million, an increase of 18.2%; and our adjusted EBITDA margin in the quarter was 23.9%, which is a 123 basis point improvement over the prior year.

As you know, in June of this year, Chemed entered into a 5-year amended and restated credit agreement that consists of $450 million revolving credit facility. Interest rate on this facility has a floating rate that is currently LIBOR plus 100 basis points. At September 30, 2018, the company had approximately $284 million of undrawn borrowing capacity under our credit agreement.

Now let's turn to our guidance. Our revised guidance is as follows: revenue for VITAS in 2018 prior to Medicare Cap is estimated to be in the range of 4.5% to 5%. Admissions are estimated to expand approximately 3.5% to 4% and our Average Daily Census in 2018 is estimated to expand approximately 6.7%, with our full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.9%. We are currently estimating a $1.25 million for Medicare Cap billing limitations in the fourth quarter of 2018.

Roto-Rooter is forecasted to achieve full year 2018 revenue growth of approximately 13% to 14%. This revenue estimate is based upon increasing job -- increased job pricing of approximately 2%, continued growth in core plumbing and drain cleaning services as well as revenue growth from water restoration services. Roto-Rooter's adjusted EBITDA margin for 2018 is estimated at 23.6%.

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 $11.80 to $11.90. This compares to our initial 2018 guidance of $10.60 to $10.85. This guidance assumes an effective corporate tax rate of 25.2%.

Chemed's 2018 reported adjusted earnings per diluted share was $8.43.

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

Thanks, David. VITAS had a good third quarter, both financially and operationally. Our Average Daily Census in the third quarter of 2018 was 17,957 patients, an increase of 7.8% over the prior year. Total admissions in the quarter were 16,403, an increase of 2.5% when compared to the third quarter of 2017. On a year-to-date basis, our Average Daily Census has expanded 7.2% and our admissions growth in the first 9 months of 2018 has increased 3.3%.

During the quarter, admissions generated from hospitals, which typically represent roughly 50% of our admissions, increased 1.9%. Home-based admissions increased 5.1%, nursing home admissions declined 6.4% and assisted living facility admissions declined 1.1% in the quarter.

Our routine home care direct patient care gross margin was 53% in the quarter, an increase of 60 basis points when compared to the third quarter of 2017. Direct inpatient margin in the quarter was 3.1% and compares to a margin of 3.4% in the prior year quarter.

Occupancy of our 27 dedicated inpatient units averaged 64% in the quarter and compares to a 68.9% occupancy in the third quarter of 2017.

Continuous care had a direct gross margin of 17.3%, which is equivalent to the prior year quarter. Average hours billed for a day of continuous care was 17.8 in the quarter, a slight increase when compared to the 17.6 average hours billed for continuous care patients in the third quarter of 2017.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $13.85 and are 5.6% favorable when compared to the $14.67 the cost of these items accounted for in the prior year quarter.

VITAS' average length of stay in the quarter was 90 days and compares to 89.5 days in the third quarter of 2017. Median length of stay was 18 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 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) And our first question comes from the line of Joanna Gajuk from Bank of America Merrill Lynch.

So a couple of questions here. First, on the guidance and the change versus about 3 months ago. So the rough math implies that Roto-Rooter EBITDA outlook was reduced slightly, but -- and VITAS, I guess, before Medicare Cap, it was raised slightly. So can you talk about any changes for your outlook for corporate overhead versus what that was 3 months ago?

Yes, Joanna, so this is Dave. So yes, we tweaked down slightly Roto-Rooter's anticipated EBITDA margin, but revenue was obviously stronger. So we were -- we internally increased our estimates for Roto-Rooter's EBITDA. In VITAS, we actually just played around and tightened up relative to the overall operating metrics, but VITAS has an improvement for the full year 2018 than we were thinking even 90 days ago. In terms of our corporate overhead, that gets into a little more complicated depends on a starting point of where you want to talk about. For example, for the first 9 months, our raw EBITDA was $45.7 million of expense, so negative EBITDA. But then once you factor out the intercompany interest and noncash expenses such as our stock option and our LTIP compensation for the first 9 months that came out to be about $18 million. So I would really anticipate on adjusted EBITDA for corporate to be around $23.5 million to $25.5 million is not an unreasonable number.

It would be for the year, right?

For the year. But really, it all depends on -- because every analyst has a slightly different way they look at some of the adjusted EBITDA numbers. So that's really why -- it's kind of almost comical to us when we'll have a consensus for EBITDA and whether we beat it or miss, but every analyst has a different definition of what adjusted EBITDA is.

Right, but you're comparing to how you kind of talk about your adjusted EBITDA. You're saying that your outlook assumes $23 million to $25 million for corporate overhead for the year.

Relative to an adjusted EBITDA, that would be correct.

Right. For the adjusted -- comparable adjusted EBITDA. And then, I guess, on the last -- go ahead.

The other thing I'd caution everyone on is when you do look at our SG&A expense, take a hard look at our other income as well because there is a required generally accepted accounting principle play that when we have a rabbi trust. When the stock market is doing great, our deferred comp expense goes up in SG&A, but then our other income goes up for the performance of the equities relative to the deferred comp. And it goes the other way. When the market is correcting downward, our SG&A expense drops, but then we have another income expense line item for the under market performance of the equities, again that back up the deferred comp. So make sure when you're analyzing our corporate expenses, you make an adjustment for the rabbi trust impact.

Yes, that's fair point. And on the point that was made in the prepared remarks that was -- in terms of the length of stay at VITAS has been increasing. So should we think about this as creating potential issues around the Medicare Cap and also, I guess, in the context, in the prior commentary from MedPAC was the long stays are a potential area of abusing the industry. So any commentary on length of stay, I guess, you can provide in terms of how you're thinking about those levels going forward?

Yes. So this is Nick. It's sort of a two-part question. Internally, as we think about length of stay internally and forecasting, it's -- well, it's been moderately increasing by a few days. To put it in perspective, it's still very much in line with the overall industry and the overall length of stay increase the industry is experiencing, which, I believe, both CMS, MedPAC and others encourage and like because what it helps to indicate is earlier access and earlier identification of hospice appropriate patients into the benefit, keeping in mind prognostication is more likely they're not die as the disease runs its normal course inside of 180 days. So when we look at our average length of stay, that's also why we discuss our median length of stay, the median piece, which really is a reflection of inpatient capacity and other high acuity factors has a strong impact on that. And I'd sort of answered the other piece from a policy perspective in that question. But I think, overall, well, there is commentary regarding some of the statistical outliers that occur within the industry for a variety of factors, also including a larger percentage of appropriate patients being added into the benefit with dementia, Alzheimer's, et cetera. The overall average length of stay is still half that of the 6-month prognostication.

And this is Kevin McNamara. I just would add a couple of comments to that, we are looking at it. You've to also just for the fact that half of our business is in Florida, the super elderly population tends to be clustered so that they're very familiar, more so than any state in the union as far as the benefits of hospice so they're much more likely to avail themselves the service earlier in the period of their decline. And obviously, when you're talking about the overall policy with regard to the government, they know that the most expensive patient is a patient who has although being terminal for 6 to 12 months has continued to stay in the curative setting and then in the last few days enters hospice they know that, that very short length of stay has been -- that it's resulting to a very expensive patient generally speaking. So I think, for instance, as Nick mentioned, when you look at our median length of stay, it still suggests that half our patients probably fall within that range where they have -- avoided hospice probably for longer than is fiscally good for the government. So generally speaking, we see that as a good thing and the trend, but again, when we look at internal ones, projections and whatnot, when we start with the fact that we have Florida where we have a high -- we've always had a higher average length of stay in Florida than other states and then it just that business continues to be good and it continues to be slightly higher significant part of our total business. So those are things that affect those trends, but we think they're healthy trends.

Joanna, relative to your MedPAC, MedPAC is a very interesting group. Of course, they're advisory to Congress on health care. But MedPAC, if you read the last 10 years of reports, they've another number of interesting macro observations. Without a doubt, they talk about the long length of stay and the vast majority of hospice reimbursement is focused on long length of stay. However, with that said, over the last 10 years, basically for the industry as well as for VITAS, 11% to 13% of our admissions result in patients who live past 6 months or said differently, currently 87% of our admissions pass away in 6 months or less, even the same for the industry. MedPAC has said that they're really concerned about people who are in hospice for multiple years. I think 1 out of every 30,000 of our admissions results in a 3-year or longer length of stay, 1 out of 30,000. Of those 30,000 admissions, 15,000 of them passed away in 2 weeks or less. MedPAC has and historically been more concerned with the median length of stay. Why half of everyone who is admitted to hospice, they're only doing it in the last about 14 to 19 days. 30% of all hospice admissions result in a death in 7 days or less. So the focus is on the 11% to 13% that are statistical outliers and the reality is the cure of care system is being burdened with terminal patients who have no chance of getting cured, what we call futile care, and they're staying in the health care system. So MedPAC, and this layer is up now and then, the focus is on how do you get Medicare beneficiaries properly informed, how is their health care provider properly informed to get patients into hospice when curative care won't cure and that seems to be the focus on MedPAC and CMS as they're looking at all sorts of different changes in the Medicare system.

Right. That's super helpful. And related, I guess, topic, to some degree, in terms of the audits that's happening, a lot of providers, I guess, seem like really they talk about not being prepared, but I would think that VITAS is probably pretty well positioned there because, I guess, I would assume that having the systems in place such as home care, home-based should help. So any color there in terms of what do you see in your markets, in your agencies in terms of the audit?

Joanna, I just want to get clarity, I guess, on the question. Is it regarding being a preferred provider to some of the referral sources? Or are you talking about post-pay audits from the government?

The post-pay -- yes, the post-pay audits, yes, from the government.

Okay. So to comment on the post-pay component of it, we continue to be very comfortable with the historical performance as well as the resource capital and educational investments we've continued to make inside of the organization to not only keep compliance and governance top priority, which has resulted in a very positive track record in terms of our ability to educate and defend sometimes a false preliminary misunderstanding as part of those audit processes. So while those continue to happen and don't foresee that slowing down anytime soon, a lot of it's at a state level, a lot of it's at a Medicaid level, from a post-pay perspective, a lot of it is statistical analysis driven to begin with. Our team and our dedicated department that's there to support our programs has really helped to have a very strong compliance and governance approach and that has resulted in a positive track record that we don't see changing as it relates to our ability to defend some of those post-payment audit claims.

And I'm showing no further questions at this time. I would like to turn the call back over to Kevin McNamara for closing remarks.

Thank you. Just wanted to congratulate our executives over here in the room and/or maybe listening for another good quarter. And obviously, based on our increased guidance, our expectations for good strong -- continued good strong operating conditions in the foreseeable future. So thank you for your attention. And we'll terminate the call at this time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a great day.