Chemed Corp. (CHE)

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Chemed Corporation (CHE)

Q2 2008 Earnings Call Transcript

July 29, 2008 10:00 am ET

Executives

Sherri Warner - IR

Kevin McNamara - President and CEO

Dave Williams - CFO

Tim O'Toole - EVP

Analysts

Jim Barrett - CL King & Associates

Pito Chickering - Deutsche Bank

Dawn Brock – JP Morgan

Frank Morgan - Jefferies & Company

Kemp Dolliver - Cowen & Company

Brian Citino - Lehman Brothers

Jerome Land - Millbrook

Presentation

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the second quarter of 2008 ended June 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 July 28, 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 July 28, which is available on the Company's website, 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 McNamara

Good morning, everyone. Welcome to Chemed Corporation's second 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 $283 million, and net income was $17.3 million. This equated to diluted earnings per share from continuing operations of $0.73. If you adjust for non-cash items, or items that are not indicative of ongoing operations, earnings per diluted share were $0.77 in the quarter.

Our VITAS business segment had revenue of $199 million in the quarter, an increase of 7.2%, and generated adjusted EBITDA of $26.3 million, equating to a 13.2% adjusted EBITDA margin. VITAS gross margin in the second quarter of 2008 was 21.9%. This is 183 basis points above the gross margin for the first quarter of 2008.

We accomplished this sequential 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.

Long-term, we need to revise our scheduling process to aid each of our 200 hospice teams to appropriately flex their staffing schedules as the size of our census and the needs of our patients change. Tim O'Toole will get into more detail on this later in the conference call.

VITAS did not have any billing restrictions related to Medicare Cap for its second quarter 2008 operating activity. As of June 30, 2008, VITAS has not accrued any Medicare billing restrictions for the 2008 or 2007 cap years. Now VITAS 36 Medicare provider numbers, 31 provider numbers or 86% have a cap cushion greater than 20% for the year. Three provider numbers are between 10% and 20%, and two provider numbers have cap cushions of approximately 6%.

Our Roto-Rooter business segment is being impacted by the slowdown in the economy. This is evidenced by a 14% decline in second quarter customer calls into Roto-Rooter's 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 revenues per job, increased excavation work, and increased conversion rates of calls to paid jobs.

I believe the Roto-Rooter business model is 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, we have a variable cost structure that minimizes the negative financial impact when demand is soft. This is primarily through the utilization of plumbing and drain cleaning technicians and are paid exclusively by commission.

Both of Chemed's business segments are well positioned to weather the current challenges in our economy. In addition, given our strong 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 the teleconference over to David Williams, our Chief Financial Officer.

Dave Williams

Thanks, Kevin. Net revenue for VITAS was $199 million in the second quarter of 2008, which is an increase of 7.2% over the prior year period. This revenue growth was a result of increased average daily census of 3.9% and a Medicare price increase of approximately 3.2%.

Average revenue per patient per day in the quarter was $184.64, which is 3.2% above the prior year period. Routine homecare reimbursement and high acuity care averaged $145.68 and $642.30, respectively per patient per day in the second quarter of 2008. During the second quarter of 2008, high acuity days of care was 7.8% of total days of care. Quarterly high acuity days of care have averaged between 8.0% and 8.4% in 2007.

Any shift in our days of care mix will typically have a noticeable impact on overall revenue, given the significant disparity in reimbursement. However, the marginal decline in high acuity days of care was more than offset by a geographic mix of high acuity patients residing in areas of higher reimbursement rates. In addition, continuous care average 18.5 hours per patient care day in the second quarter of 2008, which is a 2.2% increase over the second quarter 2007 average of 18.1 hours.

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