Chemed Corp. (CHE)

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CHEMED Corporation (CHE)

Q1 2008 Earnings Call

April 25, 2008 10:00 am ET

Executives

Kevin J. McNamara- Chief Executive Officer, President

Spencer S. Lee- Executive Vice President, Chairman of Roto-Rooter Inc. and Chief Executive Officer of Roto-Rooter, Inc.

David P. Williams- Chief Financial Officer and Executive Vice President

Timothy O’Toole- Executive Vice President, Director, and Chief Executive Officer of Vistas

Arthur V. Tucker, Jr. - Principal Accounting Officer, VP and Controller

Analysts

Kemp Dolliver- Cowen and Company

Eric Gommel- Stifel Nicolaus & Company, Inc.

Darren Lehrich- Deutsch Bank Securities

Jim Barrett- C.L. King & Associates, Inc.

Dawn Brock- J.P. Morgan

Paul Kleinschmidt- Argus Research Co.

Frank Morgan- Jefferies & Co.

Michael Wiederhorn- Oppenheimer & Co.

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the CHEMED Corporation first quarter 2008 conference call. My name is Jeheyda and I will be the coordinator for today’s call. 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 will not like to turn the call over to Ms. Sherry Warner with CHEMED Investors Relations. Please proceed.

Sherry Warner

Good morning. Our conference call this morning will review the financial results for the first quarter of 2008, ending March 31st 2008. Before we begin let me remind you that the Safe Harbor Provisions of the Private Securities Reform Act of 1995 apply to this conference call. During the course of this call the company will make various remarks concerning the companies’ expectation, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by those forward-looking statements as a result of a variety of factors including those identified in the company’s news release of April 24th and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect managements 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 EBIDTA, and adjusted EBIDTA. A reconciliation of these non-GAAP results is provided in the company’s press release dated April 24, 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 CEO of CHEMED Corporation; Dave Williams Executive Vice President and CFO of CHEMED; and Tim O’ Toole CEO of CHEMED’s Vitas Healthcare Corporation subsidiary. I will not turn the call over to Kevin McNamara.

Kevin McNamara

Thank you Sherry. Good morning everyone. Welcome to CHEMED Corporations First 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 CFO. This will be followed by Tim O’Toole, CEO of our Vitas subsidiary for a discussion on some of our hospice metrics. I will then open this call up for questions. CHEMED consolidated revenue in the quarter totaled $285 Million and net income was $16.8 Million. This equate to diluted earnings per share from continuing operations of $.69. If you adjust for non cash items, or items that are not indicative on on-going operation, earnings per diluted share were $.73 in the quarter, which equals our prior year’s earnings. I’m disappointed with Vitas net income for the quarter. Specifically our field-based margins. As our ADC growth has moderated leaving just three additional staff per hospice team is putting pressure on our margins. Clearly we need to improve our ability to flex direct patient care labor on a daily basis to minimize inefficiencies. This tighter control of labor must be accomplished in an environment that ensures a high level of patient care. The logistics involved in tightly controlling labor on a real-time basis is complex. We currently admit over 15,200 patients and discharge at approximately 15,000 patients in a quarter. Our median length of stay is 13 days, which means half of our admits will require implementation of an extensive plan of care and will require significantly more visits per day than our average patient. In our hospice teams if we are over-staffed by as few as 2-3 FPE’s on any given day our margins will be negatively impacted by nearly 200 basis points. With that said it is imperative that we improve our consistency in managing labor and minimizing any over-staffing. This will involve improving our existing labor reports, as well as evolving the culture within the field to provide quality patient care with an efficient cost management. On a positive note, we had excellent admissions in the quarter, growing 7.8% to over 15,200 Admits and revenue growth of 7.9%. VITAS had revenue of $199 Million and generated income of $13.3 Million. Adjusted EBIDTA for Vitas totaled $23.6 Million in the quarter ,equating to an 11.9% margin. Gross Margin in the first quarter of 2008 was 20%. This is 257 basis points below the adjusted margins for the first quarter of 2007. This margin decline is a combination of increased expenses related to our strong admissions as well as increased costs for direct patient care labor. Vitas has expanded its investment in the admissions process, increasing spending $2.1 Million in the quarter. At the end of the first quarter of 2008, Vitas had 252 sales representatives, an increase of 17%, and a total of 432 Admissions Coordinators and nurses, an increase of 19% over the prior year period. Overall staffing and admissions process also increased 4.3% when compared to the fourth quarter of 2007. This increase in our admissions infrastructure caused a decline of 106 basis points in gross margin in the first quarter. The payback of this increased staffing generated over the next several quarters as the additional patient census remained in hospice for the subsequent quarters. The remaining margin decline is due to an increase in direct patient care labor. This additional labor expense is a combination of salary rate increases for existing employees as well as excess staffing relative to the current patient census.

In the first quarter of 2008 field salary increases averaged 4.2% over the prior year period which is largely commensurate with the local market salary requirements. This is above the 3.0% inflation per diem increase we received from CMS in October of 2007. Over the past several years the CMS calculated inflation factor has been below the actual cost inflation on direct patient care costs, primarily wages. Historically we have been able to offset this inflation adjustment shortfall to scale and in management systems and infrastructure.

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