Chemed Corp. (CHE)

CHE 
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Chemed Corporation (CHE)

Q3 2008 Earnings Call

October 22, 2008 10 am ET

Executives

Kevin J. McNamara President, Chief Executive Officer, Director

David P. Williams Chief Financial Officer, Executive Vice President

Timothy S. O'Toole Executive Vice President, Director

Sherri Warner Investor Relations

Analysts

Darren Lehrich Deutsche Bank

Dawn Brock JPMorgan Chase & Co.

[Brendan Strong Barclays Capital]

Jim Barrett CL King & Associates

Eric Gommel Stifel Nicolaus

Kemp Dolliver Cowen and Company

Craig Rosenblum Millbrook Capital

Gene Fox Cardinal Capital Management

Presentation

Operator

Good morning ladies and gentlemen. Welcome to the Chemed Corporation’s third quarter 2008 conference call. (Operator’s Instructions) I will now like to turn the call over to Sherri Warner, the Chemed Investor Relations. Please proceed.

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the third quarter of 2008 ended September 30, 2008. 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 21, 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. Our reconciliation of these non-GAAP results is provided in the Company's press release dated October 21 which is available on the Company's website at www.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 Tim O’Toole, Chief Executive Officer of Chemed VITAS Healthcare Corporation Subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin J. McNamara

Thank you, Sherri. Good morning everyone. Welcome to Chemed Corporation's third quarter 2008 conference call. I will begin with an overview of the quarter. I will then turn over the call to David Williams, Chemed's Chief Financial Officer. This will be followed by Tim O’Toole, Chief Executive of our VITAS Subsidiary, for a discussion on some of our hospice metrics. I will then open up this call for questions.

Chemed consolidated revenue in the quarter totaled $288 million, and net income was $17.9 million. This equated to diluted earnings per share of $0.79. If you adjust for non-cash items, or items that are not indicative of ongoing operations, earnings per diluted share were $0.90 in the quarter.

Our VITAS business segment had revenue of $205 million in the quarter, an increase of 8.7%, and generated adjusted EBITDA of $31.1 million, equating to a 15.2% adjusted EBITDA margin. VITAS’ gross margin in the third quarter of 2008 was 23.6%. This is 183 basis points above the gross margins in the prior year quarter and 170 basis points increase sequentially.

We accomplished this improvement in gross margin through reinforcement of existing labor management tools such as daily scheduling meetings, rebalancing the mix of nurses and home healthcare aides in our hospice teams, and through more cost-effective utilization of agency staff.

VITAS did not have any billing restrictions related to Medicare Cap for its third quarter 2008 operating activity. September 30, 2008 VITAS has not accrued any Medicare billing restrictions for the 2008 or 2007 cap years. Of VITAS’ 36 unique Medicare provider numbers, 30 provider numbers or 83% have a cap cushion greater than 20% for the 2008 cap year. Three provider numbers are between 10% and 20% and three provider numbers have cap cushion of less than 10%.

Our Roto-Rooter business segment continues to be marginally impacted by the slowdown in the economy. This is evidenced by a 13% decline in third quarter customer calls into Roto-Rooter centralized call centers. We have been able to substantially offset the revenue impact of this decline in call volume through a combination of selective price increases, favorable job mix shift to higher revenue per job, increased excavation work, and increased conversion rates of calls to paid jobs.

We are in preliminary discussions as well as final negotiations to acquire a number of Roto-Rooter franchise territories. This significant increase in activity is attributable to the current state of the capital markets, the potential increase in tax rates and the recessionary difficulties that our franchisees are experiencing. The timing or actual completion of these acquisitions cannot be predicted; however, we intend to be highly disciplined in terms of valuation and risk to ensure these acquisitions will be immediately accretive to our earnings.

I believe the Roto-Rooter business model continues to be recession-resistant. This is a result of Roto-Rooter’s focus on emergency plumbing and drain-cleaning jobs that customers find difficult to defer. In addition, our variable cost structure minimizes the negative financial impact when demand is soft. This is primarily achieved through the utilization of plumbing and drain-cleaning technicians that are paid exclusively by commission.

Both of Chemed’s business segments are well-positioned to weather the current challenges in our economy. Given our string balance sheet and capital structure, a difficult economy may provide us with future opportunities relative to our competition.

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

David P. Williams

Thanks, Kevin. As Kevin mentioned, the net revenue for VITAS was $205 million in the third quarter of 2008 which is an increase of 8.7% over the prior year. The revenue growth was a result of an increased ADC of 4.4% and a Medicare price increase that average to approximately 3.2%.

Our average revenue per patient per day in the quarter was $185.13 which is 3.8% above the prior year period. Routine homecare reimbursement and high acuity care averaged $146.57 and $645.75, respectively per patient per day in the third quarter of 2008. During the quarter, our high acuity days of care was 7.7% of total days of care. Quarterly high acuity days of care have averaged between 8.0% and 8.4% throughout 2007.

Any shift in revenue mix will typically have a noticeable impact on our overall revenue, given the significant disparity in reimbursement between routine homecare and high acuity care. However, this marginal shift in the high acuity days of care typically has minimal impact in overall profitability.

During the third quarter of 2008, VITAS’ direct routine homecare margin was 52.4%. This compares to 51.5% in the second quarter of 2008 and 51.0% in the third quarter of 2007. Again we’ve shown a nice progression and improvement of margin that is coming from our labor management.

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