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Edited Transcript of CHE earnings conference call or presentation 30-Apr-19 2:00pm GMT

Q1 2019 Chemed Corp Earnings Call

CINCINNATI May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Chemed Corp earnings conference call or presentation Tuesday, April 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Williams

Chemed Corporation - Executive VP & CFO

* Kevin J. McNamara

Chemed Corporation - CEO, President & Director

* Nicholas Michael Westfall

VITAS Healthcare Corporation - CEO & President

* Sherri Warner

Chemed Corporation - Director of IR

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Conference Call Participants

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* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Chemed Corporation's First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Sherri Warner with Investor Relations. Ma'am, you may begin.

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Sherri Warner, Chemed Corporation - Director of IR [2]

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Good morning. Our conference call this morning will review the financial results for the first quarter of 2019 ended March 31, 2019.

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 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 April 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, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [3]

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Thank you, Sherri. Good morning. Welcome to Chemed Corporation's First Quarter 2019 Conference Call. I will begin with the highlights for the quarter, and David and Nick will follow up with additional operating detail.

I will then open the call up for questions.

The first quarter of 2019 was just slightly below the midpoint of our expected quarterly earnings. During the quarter, Roto-Rooter and VITAS incurred slightly higher expense rates that pressured our margins, although no single expense category had a significant increase. In totality, it took the luster off an otherwise solid quarter. Dave will provide additional detail on these items.

In the quarter, Chemed generated revenue of $462 million, an increase of 5.2%. Our consolidated net income in the quarter, excluding certain discrete items, was $2.92 per diluted share, an increase of 7.4%.

VITAS' admissions were difficult in the quarter having 521 less admits than the prior year quarter. Our Average Daily Census did expand 6.6% and our adjusted EBITDA, excluding Medicare Cap, increased 16%.

Roto-Rooter continues to show excellent growth in our core plumbing and drain cleaning service segments. Water restoration service demand was essentially flat in the quarter as we get closer to full penetration in our markets.

Margins in water restoration and excavation were slightly below our internal goals, primarily from an increase in our direct hourly labor workforce and increased hiring and training expenses as we expand our technician mission-based workforce.

I anticipate this blip in Roto-Rooter's expenses to be managed back down over the next couple of quarters.

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

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David P. Williams, Chemed Corporation - Executive VP & CFO [4]

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Thank you, Kevin. In the first quarter of 2019, VITAS' net revenue was $307 million, which is an increase of 5.1% when compared to the prior year period. The revenue increases comprised primarily of the following: a geographically weighted average Medicare reimbursement rate increase of approximately 0.6%; a 6.6% increase in Average Daily Census; and the Medicare cap liability that reduced revenue growth by 1.8%. This growth is partially offset by the combination of acuity mix shift, fluctuations in net room and board, contractual adjustments and other factors, that combines -- that combined negatively impacted revenue growth 0.4% when compared to the prior year period.

In the first quarter of 2019, VITAS accrued $3.4 million in Medicare Cap billing limitations. At March 31, 2019, VITAS had 30 Medicare provider numbers. Three of these have an estimated 2019 calendar year Medicare Cap billing limitation of approximately $10 million.

Of VITAS' 30 Medicare provider numbers, on a trailing 12-month basis, 25 provider numbers have a Medicare Cap cushion of 10% or greater; one provider number has a cap cushion between 5% and 10%; and one provider number has a cap cushion between 0% and 5%. And as I mentioned earlier, 3 of our provider numbers are currently in a Medicare Cap billing limitation, primarily in very high reimbursement areas.

Average revenue per patient per day in the quarter was $191.20, which is 0.2% above the prior year period. Reimbursement for our routine home care and high acuity care averaged $165.31 and $750.13, respectively.

During the quarter, high acuity days of care were 4.4% of total days of care, which is 22 basis points less than our prior year quarter.

The first quarter of 2019 gross margin, excluding Medicare Cap, was 22.7%, which is a 102 basis point increase when compared to the first quarter of 2018.

Selling, general and administrative expenses was $21.5 million in the first quarter of 2019, which is an increase of 5.0% compared to the prior year quarter.

Adjusted EBITDA for VITAS, excluding Medicare Cap, totaled $49.7 million in the quarter, an increase of 16%.

Adjusted EBITDA margin, excluding Medicare Cap, was 16.0% in the quarter, which is a 126 basis point increase when compared to the prior year period.

Now let's turn to the Roto-Rooter segment. Roto-Rooter generated quarterly revenue of $155 million for the first quarter of 2019, an increase of 5.5% over the prior year quarter. Revenue from water restoration service segment totaled $27.7 million, essentially flat with 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 8.3%, commercial plumbing and excavation increased 5.3% and commercial water restoration totaled $2.8 million, a decline of 26.4%.

Overall, commercial revenue increased 3.4%.

Residential drain cleaning increased 5.8%, plumbing and excavation increased 7.5% and residential water restoration totaled $24.9 million, which is an increase of 3.8% resulting in our aggregate residential sales increased 5.9%.

Roto-Rooter's gross margin in the quarter was 47.0%, a 44 basis point decline when compared to the first quarter of 2018.

Adjusted EBITDA in the first quarter of 2019 totaled $33.5 million, a decrease of 1.1%. And the adjusted EBITDA margin in the quarter was 21.6%, which is a 145 basis point decline over the prior year.

As Kevin mentioned earlier, the decline of Roto-Rooter's adjusted EBITDA margin is a combination of several small factors. Hourly labor under larger multi-day excavation and water restoration jobs ran higher than normal contributing to brand's contribution margins declining 90 basis points.

Advertising with paid search increased due to a decline in natural search in certain sub-domains. The remaining margin shortfall is attributable to a higher technician recruiting fees, equipment repairs and insurance accruals.

During the quarter, we repurchased 150,000 shares of Chemed stock for $49.2 million, which equates to a cost per share of $328.33.

On February 22, 2019, Chemed's Board of Directors authorized an additional $150 million for stock repurchase under Chemed's existing share repurchase program. And as of March 31, 2019, there was approximately $147 million of remaining share repurchase authorization under this plan.

I will now turn this call over to Nick Westfall, our President and Chief Executive Officer of VITAS.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [5]

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Thanks, David. VITAS had a solid start to the year. Our Average Daily Census in the first quarter of 2019 was 18,345 patients, an increase of 6.6% over the prior year.

Total admissions in the quarter were 17,758. This is a 2.9% decline when compared to the first quarter of 2018. However, admissions increased 7.1% sequentially from the fourth quarter of 2018 through the first quarter of 2019.

I should also note that the first quarter of 2018 remains the highest admissions quarter in VITAS' history.

During the quarter, year-over-year admissions generated from hospitals, which typically represent roughly 50% of our admissions, decreased 1.6%, home-based admissions decreased 3.9%, nursing home admissions declined 5.1% and assisted living facility admissions declined 6% in the quarter. Our routine home care direct patient care gross margin was 52.7% in the quarter, a 60 basis point increase over the prior year. Direct inpatient margin in the quarter was 6.5% and compares to a margin of 7.5% in the prior year quarter. Occupancy of our 27 dedicated inpatient units averaged 72.8% in the quarter and compares to 72.2% occupancy in the first quarter of 2018.

Continuous care had a direct gross margin of 18.2% and compares to a margin of 17.7% in the prior year quarter. Average hours billed per day of continuous care was 17.5 in the quarter, a slight increase when compared to the 17.2 average hours billed for continuous care patient in the first quarter of 2018.

Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs, averaged $13.08 in the quarter and are 9.6% favorable when compared to the $14.47, the cost for these items in the prior year quarter.

VITAS' average length of stay in the quarter was 91.3 days. This compares to 92.6 days in the fourth quarter of 2018 and 87.9 days in the first quarter of 2018. Median length of stay was 15 days in the current and 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.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joanna Gajuk with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [2]

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So first, actually on the last commentary around VITAS, the margins excluding Cap were up nicely year-over-year. So sounds like some labor cost management and some other things. So can you flush that out for us? What drove that improvement? And also you kept your full year guidance unchanged. So that guidance calls for margins to be down for the year. So can you talk about that dynamic as well?

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [3]

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Sure. As it relates to the margin improvement as you alluded to has a consolidated EBITDA as well as on the individual direct service lines. It's a combination of a lot of different things, Joanna, and it's really just the ongoing execution of not only prudent labor management, but also balancing out a host of other cost contributors to delivering care, whether it's consolidated ancillary services, whether it's back-office and corporate infrastructure associated with it. So all in, that was what was feeding my comment that we started the year solid from a labor-management perspective and anticipate the continuation of really paying attention to that on a day-to-day basis. As it relates to the remaining year's guidance regarding overall margins, that guidance was built based upon our full year budget projections to start the year. And while we're encouraged with the marginal improvement, we're anticipating this continuing to drive top line growth and try to balance expense management with it. So not a lot of other color commentary for the remaining of the year margins.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [4]

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No, and I would just add that it's -- at the end of the first quarter would be a very unusual situation to us -- for us to amend the guidance after the first quarter is something we tend to look at after the second quarter. But yes, there's no real room for it, it was not an unusual quarter. I mean we have, I'd say, there's 3 factors that we will look at, at the end of the second quarter. And it's going to be one where we add cap, and I think we're in a good place at either reimbursement, rebasing going to be final by then. That will be very significant to us. And just the other general trends in the business, and I'd say that it would've been unusual for us to make a change in the first quarter. We don't see any major reasons. We're not ignoring anything to keep to that kind of corporate practice.

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David P. Williams, Chemed Corporation - Executive VP & CFO [5]

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Yes. And Joanna, this is Dave Williams. The only thing I would add to that is you can debate the movement of some of the operational metrics that we give in our guidance, but as of today, I would say I have significantly stronger belief that our guidance is going to be achieved, potentially even the higher end of the guidance, based upon the rebasing. So if anything, we're more firm in terms of our EPS, but you can certainly debate any individual operating metric and the guidance we released a couple of months ago.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [6]

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Right. So on that front, before I ask my other question about the guidance but -- because you bring it up again the proposed rebasing, right, so clearly based on the how VITAS' mix is shaping up, now it would be pretty nice increase. So we estimate about 3% increase just from the rebasing. So is that in the ballpark? And I guess, obviously, it would benefit Q4. But I guess, if this is what's happening under this proposal basing if this is finalized right, this rate -- the rates for some of this category, the general inpatient will be up 30%, continuous care also almost 40% up, inpatient which type -- respite care up more than double essentially. So is there a risk that utilization of these services would increase over time and then CMS would have to come back and reduce overall spending to kind of adjust for that? Or any color you can give us there in terms of how you look at the proposal?

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David P. Williams, Chemed Corporation - Executive VP & CFO [7]

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Okay. Joanna, Dave Williams. I'll just briefly answer that and turn it over to Nick and Kevin. But I'd remind you one is a proposed rule and so there's always a lot of potential movement. But with the previous rebasing that happened 2016, so 3 years ago, high acuity wasn't really addressed by CMS and that revenue neutral rebasing. And without a doubt, we took a hit relative to the interplay between high acuity and routine home care of about $24 million. It appears to us that CMS is kind of recognized the disincentive that they inadvertently created on high acuity care and are correcting for that. But until the rule goes final, and then we can truly calculate everything out. We just feel very confident that CMS is addressing the needs that all hospices provide, all levels of care, and we view this as positive for all hospices that tend to provide the appropriate continuous care and inpatient care for their patients' needs. But I'll turn it over to Nick now for more detail.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [8]

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Yes, I mean, just in regards to the future potential that you alluded to, Joanna, on a macro level for the entire industry, not only VITAS, we're extremely encouraged by CMS' recognition of the value of providing all 4 levels of care as well as a recognition around the costs associated with providing those cares that influenced some of the rate proposal. At the end of the day, it ends up rewarding the mature hospice providers who provide all levels of care that are consistent and required under the regulatory conditions of participation. And ultimately, it allows for patients and families to receive the full value of the benefit as was originally designed and enacted in 1983. So there are a lot of other benefactors starting with the patients and families with the recognition of that, the encouragement for hospice providers who continue to provide all 4 levels of care and take care of patients and families in their setting of choice.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [9]

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And let me add one other thing. It clearly goes to the ultimate question is, could CMS do the math again and decide this is too expensive and make other cuts. With their thinking, and I don't have any reason to think it's not right, it's revenue neutral. And you got to remember add what Dave just said, as to the extent that, yes, it makes the hospice providers that are full service took a hit inadvertently and maybe improperly from the last revenue neutral iteration 3 years ago. This is a way of restoring that. Now -- but keep in mind, to the extent, so well, that does give a big incentive for other hospices to add these services that are expensive to the government and run up the total expenditures. You got to remember, they'll go through the same process we will. They will be hit in their normal reimbursements as they add high equity, so that -- they basically will add them to get to an equipoise. That's what we're looking to return to as they add that -- yes, they're encouraged to add the high equity, but it won't be windfall for them. There is the -- there will be the negative effect of the changes previously made. So the real question is -- I think what we're really trying to say is the government has scored this as revenue neutral.

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David P. Williams, Chemed Corporation - Executive VP & CFO [10]

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And I believe -- and we also believe, Joanna, that this is the right thing for the industry to encourage them to provide all levels of care and this should raise the quality of hospice care throughout the country, so we do this. This is a very, very positive thing for the patients and our patient's family.

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Nicholas Michael Westfall, VITAS Healthcare Corporation - CEO & President [11]

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And Joanna, the last comment regarding it is not only is it positive for the country, but it's positive in the hospice industry, but for the overall health care industry, in total, because it's been proven for a very long time that if you're able to provide care for an hospice appropriate patient through high equity, they have a significantly lower likelihood of feeling as though they have to revoke of the hospice benefit and reengage in other health care services, which has significant cost to it. So for the overall cost equation of the health care industry, it's very positive and encouraging. It's not beneficial only for hospice, but for the overall health care industry and appropriate reduction of costs by keeping patients, who are appropriate on the benefit during a period of crisis.

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Operator [12]

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Thank you. And I'm not showing any further questions at this time. I'd now like to turn the call back to Mr. Kevin McNamara for any closing remarks.

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Kevin J. McNamara, Chemed Corporation - CEO, President & Director [13]

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So my only closing remark is that I thank everyone for their kind attention, and we think it was a pretty good quarter, and we'll see you in 3 months.

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Operator [14]

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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 wonderful day.