Chemed Corporation (CHE)
2013 Barclays Global Healthcare Conference Call
March 13, 2013 3:15 PM ET
David Williams – EVP and CFO
Brendan Strong – Barclays Capital
Brendan Strong – Barclays Capital
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Thank you. As everyone knows Chemed, where we actually have two significant subsidiaries, our largest subsidiary makes up about two-thirds of our revenue in our overall profitability is VITAS. And the other business we have is Roto-Rooter. But obviously this is a healthcare conference, I’m going to actually direct all of my comments to the healthcare section, but if anyone has a question regarding Roto-Rooter, please feel free to ask, I am here and obviously we’re going to brief Q&A during this formal presentation as well as in the breakout session.
So we’ve obviously had meetings all day today primary one-on-ones, there certainly was a common thing and that seems to be where – government reimbursement, where it’s going. But the first thing I’d actually like to point out is talk a little bit about Chemed, our overall profitability since we owned VITAS starting in February of 2004, as well as what we’ve done with your company in terms of increased profitability. And this we think is a very, very interesting chart that we show and this by the way is on our investor presentation you can go and see this updated every quarter. But really as a benchmark of starting in 2003, the last four year where we did not own VITAS, 100% of it and then starting in 2004 when we owned it, you can actually see the green line going left or right, we showed a steady increase in our overall profitability on an adjusted EPS basis.
When I say adjusted EPS basis, it’s typically adjusted for expenses, not indicative of recurring operations and/or non-cash expenses. Those are the two largest things we pull out here is the non-cash expense related to Black-Scholes formula and our stock options, as well as the non-interest portion of our interest expense relating to our convert debt. So we include the 1.785% coupon payment in our debt, but we exclude the rest of the interest expense up to 6.5% that GAAP accounting requires us to expense that result in not a single penny of cash to anyone.
So another way of – long way of saying it is the green line basically has worked out to be our free cash flow per share, and cash flow we define as cash from operations plus capital expenditures. And we’ve got a steady increase of our adjusted EPS during this timeframe but then on the right side of that grid in the blue line basically shows a significant fluctuation in our stock price. And this is basically an expansion and contraction of the multiple our stocks trade at.
This also creates significant opportunity if you have a authorized share repurchase program, which we have it, we’ve had in place and we’ve been significantly utilizing starting in 2007, so we actually have taken advantage of these dips in the stock price. So what we say is management controls the green line, that’s within our control. Our shareholders decide the multiple our stock is going to trade at. You guys are responsible for the blue line. And we like to think we’ve done a pretty good job of managing upward the green line and producing a lot of cash flow. And we’ve now purchased over 33% of our outstanding share count.
We’ve repurchased through our share repurchase program and the average purchase price has been around now $55 a share, some repurchase shares as low as $39. And that’s been a great return for everyone concerned. So our attitude on share repurchases is part of our capital allocation program. First and foremost we want to do acquisitions, but acquisitions should be looked at in terms what do you pay as a multiple of EBITDA, but just as importantly what is our stock price trading at. And quite frankly if our stock is trading at a valuation less than these acquisitions, unless there is significant upside, or a massive amount of synergies available that are still retained for our shareholders, we believe we’re better off buying our stock.
So that’s why we’ve been passing on a lot of acquisitions that have been valued at a10 to 12 times EBITDA, and we’re buying our stock at about five times EBITDA, in some cases lower. So as a result, we’ve returned a lot of cash to shareholders over the last six years. In addition, we also think the dividend is important. Our dividend yield now is roughly 1% and we’ve had a steady increasing dividend over the last four years. We expect that dividend to continue, it’s not guaranteed it’s decided by the Board of Directors, but we think a combination of share repurchase and dividend while we’re waiting for intelligent acquisitions that will deliver value to shareholders is important.
In terms of as I talked about briefly now about 75% of our revenue comes from VITAS, about 25% comes from Roto-Rooter. We expect the VITAS business to continue to grow as Roto-Rooter is an industry that has very, very minimal growth. I’m going to quickly go to VITAS that’s where our growth is coming from that’s where increase in profitability comes from, but that also brings up the other issue is this is largely a government program hospice. 91% of our revenue comes from Medicare, 4% to 5% from Medicaid as a reimbursement basically that mimics the Medicare rates and then we have about 4% that’s private pay.