Chemed Corp. (CHE)

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Chemed Corporation (CHE)

Q4 2012 Earnings Call

February 19, 2013 10:00 a.m. ET

Executives

Kevin McNamara - President and CEO

David Williams - EVP and CFO

Sherri Warner - IR

Tim O'Toole - EVP and CEO, VITAS Healthcare Corporation Subsidiary

Analysts

Darren Lehrich - Deutsche Bank

Frank Morgan - RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen and welcome to Chemed Corporation’s Fourth Quarter 2012 Conference Call. My name is Aaron and I will be your conference call facilitator today. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. I would now like to turn the call over to Sherri Warner with Chemed Investor Relations. Please proceed.

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2012 ended December 31, 2012.

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 18 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 18, 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 Tim O'Toole, Chief Executive Officer of Chemed VITAS Healthcare Corporation Subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin McNamara

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's fourth quarter 2012 conference call. I will begin with some of the highlights for the quarter and David and Tim will follow with additional operating detail. I will then open up the call for questions.

Chemed consolidated revenue in the quarter totaled $369 million and net income was $26.7 million. We adjust for certain non-cash items and items that are not indicative of ongoing operations. Adjusted net income for the quarter totaled $29.9 million and equated to adjusted earnings per diluted share of $1.57. This is an increase of 8.3% when compared to adjusted earnings per diluted share of $1.45 in the fourth quarter of 2011. During the quarter our hospice business segment generated revenue of $273 million, an increase of 7.2% over the comparable prior year period, and provided adjusted EBITDA of $44 million, an increase of 9.8%. This equated to an adjusted EBITDA margin of 16.1%.

Admissions in the quarter totaled 16,004, an increase of 5.4% over the prior year. VITAS accrued a $900,000, 2013 Medicare Cap billing limitation in the fourth quarter of 2012 that related to three programs. The government's Medicare Cap fiscal year begins on September 29. The first quarter of Medicare Cap year has the potential to be volatile if a programs experiences any unusual admission or discharge patterns. This is also attributed to a seasonality pattern in which admissions and discharges tend to sequentially decline in November, December, and then subsequently spike in January and February. As the year progresses, individual program Medicare Cap calculations become significantly less volatile and more predictable on the year-to-date basis.

Actual January 2013 admissions and discharges in these programs did increase sequentially, and consistent with prior years we anticipate reversing all or a significant portion of this Medicare liability in the first quarter of 2013. The Medicare Cap 2012 fiscal year is based upon Medicare admissions from September 29, 2011 through September 28, 2012 and is compared to Medicare hospice billings from November 1, 2011 through October 31, 2012. Medicare will retroactively prorate Medicare beneficiaries who receive hospice care in multiple hospice providers. Based upon admissions and Medicare revenues during these periods including the proration, VITAS has estimated that there were zero billing on the patients for the 2012 Medicare Cap fiscal year.

In fact VITAS generated an aggregate cap cushion of approximately $213 million during the trailing 12-month period. Now let's turn to our Roto-Rooter business segment. In the fourth quarter of 2012, Roto-Rooter generated $95.6 million in revenue essentially equal to the prior year, this resulted in $17.1 million of adjusted EBITDA, a decline of 4.2%. I am disappointed with Roto-Rooter's 2012 operating performance. In 2011, Roto-Rooter had its second best year ever in terms of profitability. Our 2012 business plan had initially anticipated 2012 exceeding that operating performance. However in 2012, we in ended the year, generated an adjusted EBITDA of slightly over $58 million, essentially equal to our 2010 [Cap-rated] results.

The 2012 operating results were the results of unusually soft demand for emergency residential services, primarily in the first half of 2012. We also incurred unusually large healthcare expenses in 2012 which pressured Roto-Rooter's operating margins. We did achieve solid growth in the commercial sector, which tends to receive less emergency or weather-triggered services. For the full-year 2012, commercial jobs increased 2%, with plumbing jobs increasing 4.5% and drain cleaning jobs increasing 1.3%. However, this growth in the commercial sector was not high enough to offset weak residential sewer and drain demand.

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