Chemed Corp (CHE) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Chemed Corporation Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Sherri Warner with Investor Relations. You may begin.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2018 ended December 31, 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 February 20 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 20, 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 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 up the call to questions.

Our fourth quarter of 2018 showed solid operational performance, margin improvement and overall financial results in both of our operating segments.

In the quarter, Chemed generated revenue of $458 million, an increase of 6.8% over 2017 once revenue is adjusted for the 2018 revenue recognition accounting standard.

Our consolidated net income in the quarter, excluding certain discrete items, generated adjusted earnings per diluted share of $3.35, an increase of 44.4%.

VITAS' admissions were soft in the quarter, a slight increase over the prior year. Our Average Daily Census expanded 7.3%, and our adjusted EBITDA, excluding Medicare Cap, increased 11.2%. Roto-Rooter continues to show excellent growth in our core plumbing and drain cleaning service segments, as well as continued growth in the water restoration segment. In addition, operating expenses continue to be effectively managed in our industrial segment, resulting in Roto-Rooter increasing its adjusted EBITDA margin to 24%, an increase of 98 basis points.

Overall, for the year, our adjusted earnings per share were up 40%; the stock was up 15%; the overall market, down 7%; and the stock was up a little over 12% since December 31. So overall, a good year and a good start for this year.

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

Thanks, Kevin.

As most of you are aware, effective January 1, 2018, the Financial Accounting Standard 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. What this means is, our 2017 operating results were not restated in our report using historical revenue recognition accounting standards. These reclassifications have 0 impact on EBITDA, adjusted EBITDA, pretax income or our 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 a reclassification of net room and board expenses associated with certain Medicaid patients residing in the nursing homes to be reclassified from cost of services to revenue, and effectively reducing VITAS' 2018 quarterly revenue and cost of sales by approximately $2.2 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 also now netted in service revenue and sales. This reduced Chemed 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 fourth quarter 2018 earnings release, recast 2017 as if the new revenue recognition accounting standard was applied in 2017. This was done to facilitate analysis of 2017 and 2018 operating results in a format consistent with the 2018 revenue recognition accounting standard.

Now after that, let's talk about the fourth quarter.

For the fourth quarter, VITAS' net revenue was $307 million, which is an increase of 7.3% when compared to the prior year quarter. This revenue increase is comprised primarily of: a geographically weighted Medicare reimbursement rate increase of approximately 1.1%; a 7.3% increase in Average Daily Census; and a Medicare Cap liability that reduced revenue growth by 0.4%. This growth is partially offset by acuity mix shift that reduced revenue 1% growth when compared to the prior year. In the fourth quarter of 2018, VITAS did accrue $3.5 million in Medicare Cap billing limitations. At December 31, 2018, VITAS had 30 Medicare provider numbers, 2 of which have an estimated 2019 Medicare Cap billing limitation of approximately $13.6 million --

Of VITAS' 30 Medicare provider numbers on a trailing 12-month basis, 25 of these provider numbers had a Medicare Cap cushion of 10% or greater. One provider number has cap cushion between 5% and 10%, and 2 provider numbers have a cap cushion between 0 and 5%. And as I mentioned earlier, 2 provider numbers have a Medicare Cap billing limitation.

Average revenue per patient per day in the quarter was $189.06, which is 0.1% below the prior year period. Reimbursement for routine home care and high acuity care averaged $164.98 and $741.21, respectively. During the quarter, high acuity days of care were 4.2% of total days of care, 31 basis points less than the prior year quarter.

Fourth quarter of 2018 gross margin for VITAS, excluding Medicare Cap, was 24%, which is a 13 basis point increase compared to the fourth quarter of 2017.

Adjusted EBITDA, excluding Medicare Cap, totaled $55.5 million in the quarter, an increase of 11.2%. And adjusted EBITDA margin, excluding Medicare Cap, was 17.9% in the quarter and was a 59 basis point increase compared to the prior year period.

Now let's turn to the Roto-Rooter segment. Roto-Rooter generated quarterly revenue of $151 million for the fourth quarter of 2018, an increase of $15.6 million or 11.6% over the prior year quarter.

Revenue from the water restoration service segment totaled $24.3 million, an increase of $2.1 million or 9.7% compared to the prior year quarter. Approximately 90% of our water restoration revenue is generated from residential customers, and the remaining 10% is generated from commercial accounts. Commercial drain cleaning revenue increased 11.6%. Commercial plumbing and excavation increased 12.5%. And our commercial water restoration increased 12.4%. Overall, commercial revenue was up 12%.

Residential drain cleaning increased 9.4%. Residential plumbing and excavation increased 14.2%. And residential water restoration increased 9.3%, with aggregate residential sales expanding 11.4%.

Roto-Rooter's gross margin in the quarter was 48.8%, which is a 6 basis point decline when compared to the prior year. Adjusted EBITDA in the fourth quarter 2018 totaled $36.1 million, which was an increase of 16.3%. The adjusted EBITDA margin in the quarter was 24%, which is again a 98 basis point improvement over the prior year.

During the quarter, Chemed repurchased 130,524 shares of Chemed stock for $36.9 million, which equates to a cost per share of $282.77. As of December 31, 2018, there was approximately $47 million of remaining share repurchase authorization under this plan.

Chemed restarted its share repurchase program in 2007. Since that time, Chemed has repurchased 13.9 million shares, aggregating over $1.1 billion at an average share cost of $80.92. Including dividends over this period, Chemed has returned approximately $1.3 billion to shareholders.

Our 2019 guidance is as follows: revenue growth for VITAS in 2019, prior to Medicare Cap, is estimated to be in the range of 5.5% to 6%. Our admissions are estimated to expand approximately 3% to 4%. And Average Daily Census is estimated to expand approximately 4% to 5%.

Full year adjusted EBITDA margin prior to Medicare Cap is estimated to be at 15.9%. We are currently estimating $10 million from Medicare Cap billing limitations in calendar year 2019. This forecasted calendar year billing limitation relates to 2 programs that are located in high reimbursement urban markets.

Roto-Rooter is forecasted to achieve full year 2019 revenue growth of 9% to 10%. This revenue estimate is based upon increased job pricing of approximately 2%, continued growth in core plumbing and drain cleaning services, as well as continued but slowing revenue growth from water restoration services. Roto-Rooter's adjusted EBITDA margin for 2019 is estimated at 23.7%.

Based upon the above, full year 2019 adjusted earnings per diluted share, excluding noncash expense for stock options, tax benefits from stock options, costs related to litigation and other discrete items, is estimated to be in the range of $12.65 to $12.85. 2019 guidance assumes an effective consolidated corporate tax rate of 25.2%. For comparison, Chemed's 2018 reported adjusted earnings per diluted share was $11.93.

With that, I'll turn the call over to Nick Westfall, Chief Executive Officer of VITAS.

Thanks, David. VITAS had another solid quarter in the fourth quarter, both financially and operationally. Our Average Daily Census in the fourth quarter of 2018 was 18,149 patients, an increase of 7.3% over the prior year. Total admissions in the quarter were 16,579, a slight increase when compared to the fourth quarter of 2017. On a full year 2018 basis, our Average Daily Census has expanded 7.2%, and our admissions growth increased 2.5%.

During the quarter, admissions generated from hospitals, which typically represent roughly 50% of our admissions, increased 2%. Home-based admissions increased 2.5%. Nursing home admissions declined 5.1%. And assisted living facility admissions declined 7.4% in the quarter.

Our routine home care direct patient care gross margin was 53.9% in the quarter and is equivalent to the margin reported in the fourth quarter of 2017. Direct inpatient margin in the quarter was 3.9% and compares to a margin of 8.5% in the prior year quarter. Occupancy of our 27 dedicated inpatient units averaged 65% in the quarter and compares to 70.3% occupancy in the fourth quarter of 2017.

Continuous care had a direct gross margin of 18.4% and compares to a margin of 16.8% in the prior year quarter. Average hours billed per day of continuous care was 17.3 in the quarter, a slight decline when compared to 17.5 average hours billed for continuous care patient in the fourth quarter of 2017.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $13.58 and are 5% favorable when compared to the $14.30, the costs of these items accounted for in the prior year quarter.

VITAS' average length of stay in the quarter was 92.6 days and compares to 91.4 days in the fourth quarter of 2017. Median length of stay was 16 days in the quarter and compares to a median length of stay of 17 days in the prior year quarter. Median length of stay is a key indicator into our penetration of the high acuity sector of the market.

Before I turn the call back over to Kevin, I wanted to highlight, VITAS was recently awarded a Certificate of Need from Florida's agency for healthcare administration to operate Martin, Okeechobee and St. Lucie Counties in Southeastern Florida. I'd like to thank the Agency for Healthcare Administration for their selection of VITAS, and we look forward to servicing these patients and their families in those communities in 2019. Last, within the past few weeks, we've successfully opened up inpatient units in both Florida and Texas. We just began caring for patients here in Q1 of 2019.

With that, I'd like to turn the 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 Joanna Gajuk of Bank of America.

So first, on the guidance. So when I use the different pieces of the guidance that you provide here in terms of the revenues and margins by segment, and assuming a little bit of growth in the corporate overhead, I'm coming up with about annual EBITDA -- adjusted EBITDA of $580 million. So is that in the ballpark here?

We haven't been giving guidance for consolidated overall EBITDA, but that's in the ballpark.

All right. Because that obviously includes the $10 million Medicare Cap. And I guess you flagged that, that's related to 2 of these urban locations here. So can you just tell us what's going on there in the market? Is it the length of stay that's creeping up? And I know the reported numbers suggest that. So is it driven by a couple of these locations, and that's what's happening why the cap -- the Medicare Cap limitation is going to be so much higher this year versus prior years?

Well, I'm going to turn it over to Nick. But basically, let me just -- I'll tell you kind of in a layman's perspective. There are highly reimbursed urban areas, a couple of them with -- based on the wage index and what have you, the reimbursement -- that reimbursement, you hit cap at about 100 days of service, as opposed to 165 to 180 days in the rest of the country. So, I guess, when we have 2 strong growing programs in an environment like that, you're just metal against metal. And to the extent that you have little bubbles, and it's not something that overly concerns us, it's something that we watch. It's an opportunity, both positive, negative for us. That's something we watch very carefully, but both of the programs we're talking about are still very profitable. But Nick, anything you'd like to say as far as boots on the ground and what not?

Joanna, to answer your first question with it, that number does have that cap estimate inside of it. And then to just piggyback off Kevin's conversation with it. This has always been the case and the way in which the methodology of the cap calculation is performed. So going back, just reinforce some of Kevin's comments about higher reimbursement market, where routine home care day may be $242, $245 per day, that equates to about 120 days roughly for first-time Medicare admit before you'd reach the global uniform cap rate for fiscal year 2020, which is $29,205. And so all that really means, and that has always been the case, is that inside of those markets, we account for that in terms of our strategy where we just continue to take all appropriate patients and those -- and focus on those relationships with systems and referral sources, but we're going to have a full complement of patients that come on service. So it's not indicative of anything related to a longer length of stay inside of those markets. It just highlights the short-term sensitivity that can happen at the first part of growing program that's operating very healthily inside of those markets.

And let me also say that, to the extent you look at these numbers, when you add to the fact that every one of VITAS' operations, there are full-service hospitals -- hospices with high acuity treatments. I mean, when you figure higher acuity in there, it takes those numbers down to closer to 100 days.

So historically, we've put a estimate of $5 million into our forecast. We increased that to $10 million for this year, but are continuing to execute on our strategy here as we move into 2019, just to continue to service those markets and have a cap management philosophy embedded inside of those as well to take the full complement of patients across the market.

And there's also -- just to explain, there are a couple moving parts here. But in addition, the accounting for Medicare Cap liability has changed this year. So that's about -- that's another factor we've said that we might change the way we look at potential cap liability, and that's what -- this time of year, that's what we're talking about, is potential cap liability. But the accounting is a little more rigorous with regard to taking -- looking at the current estimate and booking it basically.

Okay, that's very helpful. But in terms of the length of stay, so obviously, for this year, it was up year-over-year, for the quarter, for the year. So what is your assumption for 2019 for length of stay, or average length of stay, assuming it's going to begin to creep up, or you kind of assume it's going to be flattish? I know it's hard to predict, but what's kind of embedded in your guidance here?

Our guidance is basically flat length of stay. Although historically, it has gone up about 1% or 2%.

Right. And then within that, if I may, the last one. On the VITAS guidance where that implies the margin will be slightly down year-over-year before the Medicare Cap, obviously. So anything to kind of flag here? Any issues you're having with labor costs creeping up. Because you would think, with this kind of pretty good revenue outlook for VITAS, I would expected a better kind of margin there, especially with the Medicare rate up, supposed to be somewhat better in terms of maybe acuity in terms of just headwinds. So can you just flag to us why the margins are calling for flattish or maybe slightly down on Medicare -- margin for VITAS.

Yes. I'll turn it over to Nick. But what Joanna's talking about is if you look at what the overall EBITDA margin was in 2018 and our guidance for '19, I think it's down about 10 basis points. And we would just call it, as we look at all the pieces, that's just kind of where we thought the model, the midpoint of our EBITDA margin would turn out. With that said, we've been talking about, for years, when we get an increase from the federal government, for example, our national rate was up 1.8%, (inaudible) Nick's average 1.1% for this past quarter. But really the government is giving us less than inflation in our care and business model. So we have to be more efficient in other areas to turn around and maintain margin. And I think those 10 basis point decline in margin, although it's very modest, it's just reflective of, in real dollars, the government is actually paying us less and less every year. So I'll turn it over to Nick and any comments on the wage pressures. But our shareholders should anticipate modest declines in margin, all other things held constant, because of the reimbursement from the federal government lags inflation.

Yes. And there is no undue pressure that we're feeling regarding the labor market. It's always been that case. We're always out there trying to recruit the best people and feel we do a pretty good job of that, and are competitive from a wage perspective. So just to reiterate Dave's point, even though it's a 10% decline, it's just balancing kind of -- 10 bps, 10 basis point decline. It's just a reflection of the reimbursement rate, balanced with continuing to grow the company and becoming more efficient in certain areas as well. So we feel good about that guidance, good about our ability to achieve this guidance. And hopefully, we're able to potentially even improve that no different than how we've done it throughout every quarter here in 2018. But time will tell over the course of 2019.

And just for the people listening, keep in mind, over time, we haven't had anything that has changed our retention rate of employees, put it that way. But at the same time, the tough job of telling that labor force, they shouldn't expect a pay increase more than 1.1% because that's what our reimbursement is going up, and that's a tough job.

And obviously, because the margins are still in the 15.9%, which is just pretty good, because I guess '18 came out much better margin than what the initial guidance was, right, with like 15.4%. So you obviously beat your guidance. So yes, I'm not saying that the margin is weak, I'm just trying to parse out the different pieces impacting that.

Our next question comes from Frank Morgan of RBC Capital Markets.

I guess, I would -- on the subject of guidance theme inside of VITAS, just curious about the -- what you're seeing in the marketplace, obviously, with expectations of good admission growth in 2019 versus what you came out in the fourth quarter. Anything you're doing differently that gives you confidence in that ability to drive that kind of growth after kind of what you saw at the end of the year? Any new initiatives? Any other changes in the marketplace that you're seeing out there?

Frank, what I'd point out is sort of 2 things. And one, the starting point becomes steady as she goes. We always have a variety of different initiatives that are being phased out. What gives us optimism and confidence in our guidance is sort of this multi-year path we've been upon, where we're able to continue to just improve our ability to partner and educate with patients' families and referral sources out in the community. And that, combined with just sort of the tailwind inside of the overall health care industry where everyone continues to recognize the value of the hospice benefit, allows us to help to leverage some of the tools, transparency and education that we have, combined with our ability to provide competence of care for every type of patient in every market, just makes us a very attractive partner. And we have been doing a pretty good job of fulfilling all those obligations with all of our partners across the country. And so we're just going to continue along that trajectory and continue to also try to capitalize on the opportunity we now have where some of our partners are engaging inbound to say, "We understand the value of the hospice proposition. Can you explain to us why VITAS and why we should make sure you're one of the top recommendations when patients and families are making -- have the right of choice for the provider?"

I'd also say you've been listening to the story for a while. Admissions are something that kind of wax and wane, and -- but if you go over the last 15 years, it tends to just -- it tends to stay in that 2.5% to 4% range over several quarters, and there's nothing, as Nick says, there's nothing that we're observing that would change that multi-quarter observation.

So nothing like more interest into the marketplace, overall, more agencies opening up in any of your markets? Or no impact on things like the palliative care movement where we should picking up speed that there might be a substitution? Any thoughts there?

Yes. I mean, Frank, that we've seen that in the market for, gosh, the last 2 to 3 years at a minimum. We actually -- we provide palliative care as well. Palliative care, when done right, is actually very additive to the hospice benefit. It doesn't cannibalize it necessarily. That would be my personal argument, some of the industry leadership argument as well. But all in all, nothing in 2019 that we see that's any different that occurred in 2018, which is why we feel good about the guidance, and we'll just continue to strategically improve our overall operations and our ability to be a good partner to every provider in the markets in which we operate.

Got you. Maybe a Dave question here. Obviously, with the strong cash flow and a low leverage, a lot of potential uses for capital. You have not been very active on the acquisition side. So just any kind of color there on your thoughts on acquisition and overall marketplace there and then alternative uses for capital. And then my obligatory Roto-Rooter question would be, now that it looks like water restoration was obviously a pocket of growth for you in that business, any other new programs of service lines that you're thinking to add there that might help sustain the growth on that side of the business?

Well, I'll talk about the capital, and I'll turn the Roto-Rooter question over to Kevin. But no, you're right, Frank. And actually, our priority on deploying capital hasn't changed. Of course, it's all about our risk-adjusted return. There's only so much hard assets, fixed assets we can put out into the field, so the reality is acquisitions, we look at nets, but the valuations are 12x, 14x, 15x EBITDA, which doesn't seem to leave enough upside for the shareholders, given the risk of an acquisition. So then we turn around, pay a dividend to expand our shareholder base and then share repurchasing. Even at today's stock prices, it is still accretive at our borrowing rate and what we earn in overnight money buying shares, obviously less solid at $315, then it was at what we bought last quarter at $272 a share. But without a doubt, we'll be opportunistic in dollar averaging and share repurchasing, but certainly not getting ahead of our fees. And then for Roto-Rooter, I'll turn it to Kevin.

And before I do that, I would also say -- point out that last year, we did make 2 nice acquisitions, the biggest Roto-Rooter acquisition ever on the West Coast, and a nice not-for-profit in Florida. We continue to look at things like that. They're not major company-turning type acquisitions, but they're nice additions. But with regard to Roto-Rooter, no, we don't -- we think the biggest change we're going to make this year is to really capitalize on something we've talked about in the past, and that is, really, compared -- most of our competitors are small, regional or smaller competitors, and we're basically -- with regard -- we're winning the Google war with regard to those competitors. We have regional call centers that do a great job of both taking the call and dispatching and analyzing the calls as they come in. Frankly, we have something called a lost revenue report that was climbing all last year as we continued to get such a strong level of calls. This year, the job one is to hire more technicians to take advantage of that businesses there. So that's our focus rather than a new service to roll out by Roto-Rooter technicians.

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

Okay. No significant closing remarks other than good solid fourth quarter for us and a good launching pad for this year. And thank you very much for your attention.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.