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Chemed Corp (CHE) Q2 2019 Earnings Call Transcript

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Chemed Corp (NYSE: CHE)
Q2 2019 Earnings Call
Jul 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Chemed Corporation's Second Quarter 2019 Earnings Call. [Operator Instructions].

It is now my pleasure to introduce, Sherri Warner with Chemed Investor Relations.

Sherri Warner -- Investor Relations

Good morning. Our conference call this morning will review the financial results for the second quarter of 2019 ended June 30, 2019.

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 25th 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 July 25th, 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 Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin J. McNamara -- President & Chief Executive Officer

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's second quarter 2019 conference call. I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I will then open the call for questions. The second quarter 2019 results were very solid. At the higher end of various operational metrics for both VITAS and Roto-Rooter. In the quarter Chemed generated revenue of $474 million, an increase of 7.2%.

Our consolidated net income in the quarter excluding certain discrete items was $3.36 per diluted share, an increase of 19.6%. VITAS's admissions were solid in the quarter, increasing 3.8% over the prior year. Our average daily census expanded 5.9% and our adjusted EBITDA excluding Medicare Cap increased 25.6%. Roto-Rooter generated solid growth and continues to show excellent growth in our core plumbing and drain cleaning service segments. I was also pleased with our water restoration service demand in the quarter, expanding 14% when compared with the prior year.

As I discussed last quarter, there are a number Roto-Rooter initiatives that in the short term increase our expenses primarily in the areas of field-labor, as well as increased costs related to training, as we expand our technician commission based force. I anticipate the margin impact from these initiatives, will continue to be reduced over the coming quarters. As most of you are aware, earlier this month we acquired franchise territory serving Alameda County and portions of southwestern San Joaquin County in California. The service areas include the cities of Oakland, Berkeley, Hayward, Fremont, Livermore, Pleasanton and Tracy, California.

The newly acquired territory has an annual sales of $11 million and serves a population of approximately 1.7 million people. This acquisition follows our purchase of five neighboring Northern California franchise territories in October of last year. These acquisitions are immediately accretive. However typically takes several months of reengineering and infrastructure realignment to get newly acquired territories to perform at the level of our Roto-Rooter operational benchmarks. Typically we update our annual guidance mid-year, when we issue our second quarter earnings. However, given the magnitude of potential changes in hospice reimbursement, Chemed will issue updated guidance in August -- early August following CMS issuing the final rule [Phonetic] on the Fiscal Year 2020 Hospice Wage Index and Payment Rate Update.

With that, I would like to turn this conference over to David.

David P. Williams -- Chief Financial Officer

Thanks, Kevin and good morning. In the second quarter of 2019 VITAS had net revenue of $313 million, which is an increase of 5.4% when compared to the prior year period. In the second quarter of 2019, VITAS did accrue $3.2 million in Medicare Cap billing limitations. Of this amount, $847,000 relates to prior year Medicare Cap redeterminations. And $2.4 million relates to the 2000 Medicare Cap year. At June 30, 2019 VITAS had 30 Medicare provider numbers, three of which have an estimated 2019 calendar year Medicare Cap billing limitation of approximately $9 million.

Average revenue per patient per day in the quarter for VITAS was $189.64, which is 0.5% above the prior year period. Reimbursement for routine home care and high acuity care averaged $165 and $751.12 respectively. And during the quarter, our high acuity days-of-care were 4.2% of our total days of care, essentially equal to the prior year quarter. The second quarter of 2019 gross margin for VITAS excluding Medicare Cap was 23.7%. This is a 208 basis point increase when compared to the second quarter of 2018. Adjusted EBITDA, excluding Medicare Cap totaled $54.8 million in the quarter, which is an increase of 25.6%. And adjusted EBITDA margin, excluding Medicare Cap was 17.3% in the quarter, which is a 267 basis point expansion, when compared to the prior year period.

Now let's turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $161 million, an increase of 10.9% over the prior year. Revenue from our water restoration service segment totaled $28.2 million, a healthy increase of 14% when compared to the second quarter of 2018. Roto-Rooter's gross margin in the quarter was 48.7%, a 121 basis point decline compared to the prior year quarter and 164 basis point improvement over the first quarter of 2019. Adjusted EBITDA in the second quarter of 2019 totaled $38.8 million, an increase of 6.2%.

I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of VITAS.

Nicholas Westfall -- President & Chief Executive Officer

Thanks, Dave. Overall, I was pleased with VITAS' operating results in the second quarter. Our average daily census in the second quarter of 2019 was 18,681 patients, an increase of 5.9% over the prior year. Total admissions in the quarter were 17,491, this was a 3.8% increase in emissions when compared to the second quarter of 2018. During the quarter, admissions increased in three of our four pre-admit locations. Hospitals, which typically represent roughly 50% of our admissions increased 2.6%. Home-based admissions increased 4.2% and nursing home admissions expanded 4.6%. Assisted living facility admissions did decline a modest 1.1% in the quarter.

VITAS' average length of stay in the quarter was 91.1 days, this compares to 91.3 days in the first quarter of 2019 and 89 days in the second quarter of 2018. Our median length of stay was 16 days in the current quarter and compares to 17 day median length of stay in the prior year quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market.

With that I'd like to turn this call back over to Kevin.

Kevin J. McNamara -- President & Chief Executive Officer

Thank you, Nick. I will now open this teleconference to questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Joanna Gajuk with Bank of America. Your line is now open.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning. So first, I guess on the quarter, which was significantly above our estimate on consensus. So can you describe to us how does it compare versus your internal expectations?

David P. Williams -- Chief Financial Officer

I'll turn this over to Kevin, this is Dave Williams. But after the headline, both VITAS and Roto-Rooter exceeded our expectations in the quarter, in a variety of operating metrics, and we consider it a continuing trend line, you will be surprised if this doesn't extend into the third and fourth quarters. But I'll turn it over to Kevin for more color.

Kevin J. McNamara -- President & Chief Executive Officer

The only thing I was going to say is that, as they said, kind of a thorough going basis it exceeded our expectations. But this year, as we said from the start, following a year like last year was we were going with some tough comparables, particularly in the first half, with regard to Roto-Rooter. But it was just a lot of blocking and tackling. And there were a lot of unusual items, it was just again some thorough-going good results on a variety of fronts.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Just to stay on the topic. So VITAS margins were exceptionally strong in this quarter, and I guess, Q1 as well. So can you just talk about -- flush it out a little bit more in terms of what, what drove that strength. And to your point, is that sustainable, because I guess your original guidance was kind of calling for margins to be down year-over-year because of the strengthening in the last year's margins too. So can you just flush out the kind of the drivers of the strength in VITAS margins?

Nicholas Westfall -- President & Chief Executive Officer

Sure. So this is Nick. Our strength is of course as you may imagine a combination of a lot of different factors going on, not only from a top line growth perspective, but from a full execution, on a lot of operational fronts, as well, that helped to drive efficiency, and at the same time improving our overall quality of care. So as we look at it on a go-forward basis, as Dave alluded to, feel comfortable with the continued execution on the VITAS end, of the marginal performance we've seen for the first half of the year. And being mindful of our continual pressure from an expense perspective of attracting and retaining high qualified caregivers in the workforce. And what that looks like from a cost and wage perspective going forward. So long-winded way Joanna saying, if you feel very comfortable with how we've executed for the first half of the year and that those trends should continue for the second half.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Okay, that's helpful. And if I may, the last on the VITAS side of things to obviously the -- the hospice final regulation spending, that's why you waiting to update your full-year outlook. So as it was proposed, we had estimated it would be $40 million or so annualized benefit, just on the Medicare side of things? The first -- are we in the ballpark and also the market basket update was pretty strong. So what's the difference there versus what's included in the guidance -- in the prior guidance?

David P. Williams -- Chief Financial Officer

Joanna, we for the guidance we issued in the first quarter for the full year 2019, we had an estimated increase for VITAS from the federal government of 1.5%, starting October 1, 2019.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Okay. And any comment on the estimated impact we had of for -- from the rebasing or we roughly in the ballpark?

David P. Williams -- Chief Financial Officer

I defer you to the proposed rule that did an analysis by a Medicare provider numbers, but we're really want to wait until the rule goes final, and because there could be --, we know every now and then the rule comes through exactly as written and every now and then it comes through radically different, so we need to wait

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Right. I agree with that.

Kevin J. McNamara -- President & Chief Executive Officer

As various commentaries have suggested it's going to be a nice improvement for us.

David P. Williams -- Chief Financial Officer

Absolutely. It's significant and CMS alluded to that. I think it worked out to be an average increase of 2.7%, but without a doubt when you're running a 35% or 40% increase in the high acuity care that will more than offset the $24 million haircut we talked at the last rebasing.

Kevin J. McNamara -- President & Chief Executive Officer

That is couple of years ago.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Right. So if I just close that topic, so I guess the industry comments to CMS to the proposal included our request to phase-in of the rebasing. So what's your view there? And this will be my last question. Thank you.

David P. Williams -- Chief Financial Officer

Yeah, I will turn this over for Nick and Kevin as well, but CMS very consciously has recognized an issue where reimbursement wasn't adequate to get high acuity care provided to the patient base. So, we'd be very surprised to see a phase and because that means CMS is acknowledging high acuity care will be phased in for the Medicare beneficiaries that really need it today. So we'd be surprised by that, particularly since, even if routine home care has kept relatively flat, based upon the analysis in the proposed rule, CMS still considers the reimbursement under routine home care too high. So we think of phase and it's always possible. We don't think it's likely, but again that's all the reason why we wait for the rule to go final

Kevin J. McNamara -- President & Chief Executive Officer

Yes, and my understanding is as far the -- without the phase in it's still revenue neutral on the whole.

David P. Williams -- Chief Financial Officer

Yes. It's completely revenue neutral. It's a question of motivation on providers.

Nicholas Westfall -- President & Chief Executive Officer

That's right. Joanna, the other component when you think about it from a care delivery system across the overall industry, the piece we really liked irrespective of the output for VITAS was the recognition that Dave alluded to, of the value and frankly the requirement for hospice providers to provide all four levels of care. And so we're very encouraged by that acknowledgment by CMS, because what it really allows for is recognition and rewarding of mature hospice providers that are following the conditions of participation, and able to provide care for patients when they experience a period of crisis, keeping them on the hospice benefit and avoiding unnecessary reputations to go back in the hospitals, etc, which really diminish and dilute overall patient and family satisfaction. So take the economics away from it as well, it's something that will be beneficial for the country and beneficial for patients and families going forward.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Thank you so much.

Operator

Thank you. And our next question comes from the line of Frank Morgan with RBC Capital Markets. Your line is now open.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. I guess still on that topic. Anything beyond the final rule coming that we should be looking forward to or anticipating with regard to policy initiatives and just wanted to also, obviously there is this discussion around this carve-in of hospice on a voluntary basis where they make plans, but in anything else like that, that we should be mindful of or on the lookout for as we move into the latter part of the year?

David P. Williams -- Chief Financial Officer

This is Dave. No, not at this point. We really think CMS is kind of ahead of the curve on expectation of what they're doing with hospice. But since you brought up that demonstration project on the carve-in, CMS is certainly scrambling and CMMI is scrambling to try to get a demo project designed and implemented. But we're talking about years before you would see any impact on the overall approach to reimbursement. It will take probably another year to get the study rolling, a couple of years to actually do the study and analyze the data. So the carve-in, carve-out is a great discussion, but we don't see a lot of major impact on hospice reimbursement coming from that, in the near term.

Nicholas Westfall -- President & Chief Executive Officer

And Frank, some of the other demonstrations that are rolling out, just help to further reinforce the value of the hospice benefit. So while there is nothing that is significant, outside of the finalization of the wage role and the potential demonstration project from a directional perspective. They're all indicative of trying to find ways to identify how to provide education out of the community and increase -- increased access to hospice and increase earlier access to hospice, which we find encouraging for both VITAS as well as the industry.

David P. Williams -- Chief Financial Officer

And Frank, we were and the -- the NHPCO and our sales, we were taken a little aback by the magnitude of the rebasing. We didn't see it coming from CMS. We can sort of very, very, very positive. That's just another way of implying things, always take us off-guard, but everything we've seen, CMS do regarding hospice has to encourage the utilization in the expansion, not pull it back. So we think it's the opportunity for increased penetration and better utilization of hospice is still coming down the road.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. Two more -- more company-specific and industry specific on. In terms of just labor availability, obviously you had good labor productivity management in the quarter on the VITAS side. But how do you see the overall marketplace and given these pressure from a low unemployment environment in terms of pressure on rates and availability of labor? And then my last question was just one on potential, should we expect to really see any kind of changes on the M&A side, I know you've done some franchises on the Roto-Rooter side. But anything that -- any change in your view on the M&A market either in Roto-Rooter or in VITAS. Thanks.

Nicholas Westfall -- President & Chief Executive Officer

So Frank, this is Nick. Let me take the first question regarding the labor market, then I'll turn it over to Kevin for -- an M&A, to answer your M&A question. On the labor market side, how we look at it is, I don't want to make a macro-comment because it's very much market-by-market specific and discipline-by-discipline specific. The thing we've been able to do, that's allowed us to be successful is really hone-in on building education and awareness, as to what drives people to VITAS and what drives people to stay at VITAS and the type of individual, we're looking for really aligns with our culture and mission. And we found, well, it takes a little bit of work and effort to identify that clinician, once they're in and on-board, we do an excellent job of continuing to retain them, grow them and provide them plenty of opportunities for growth. So well, a lot of commentary comments regarding the shortage of the labor force, while it's -- we do have unique challenges on certain markets.

Overall, I'm pleased with where we stand today to attract and retain. And I can tell you, there is not a single day that goes by without us, focusing on how we can improve that as a Company, because that's ultimately going to continue to determine how successful we are going forward, the quality of our people.

I'll turn it over to Kevin on the M&A side.

Kevin J. McNamara -- President & Chief Executive Officer

As we talked about on the M&A side. Roto-Rooter as we said, really starting six months ago. We paid up with the change in tax law, allowed us to increase the amounts we were paying for Roto-Rooter franchises, and we got their attention, to be honest we've already completed two. And what surprised me to the extent to see further activity there. On the VITAS side, nothing, I mean, the biggest impediment on the VITAS side is not the lofty multiples of EBITDA that are being paid. It's fitting within the VITAS space that is programs that have the potential to be large professionally managed processes, that is we're talking about programs, certainly higher than 120, but maybe with -- in a market that has the potential to get, say 250 or 300. The acquisition targets that you see out there -- that's not what they're composed of. So that's the biggest impediment. But to the extent that there is, to the extent there is almost anything in Florida in a county we're not in or [Indecipherable] of large programs are struggling, not for profit this large, in a major metropolitan area. We would certainly be interested, but that's not what we're seeing at this point.

David P. Williams -- Chief Financial Officer

And Frank always constantly weighing [Phonetic] against the alternative, if we wanted to enter into a certain market is what's the most appropriate market entry strategy. Is a de novo approach versus an acquisition and really continue to build that into our strategic footprint and making sure that we get lift up operated and grow it quickly and effectively like we've done here in the last few years with a few of the new starts in some of the -- the small acquisition, tuck-in acquisitions we've done.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. Thank you very much.

Operator

Thank you. And I'm showing no further questions at this time. So with that, I'll turn the call back over to Kevin McNamara for closing remarks.

Kevin J. McNamara -- President & Chief Executive Officer

Well, my remarks will be limited to thanking the employees for delivering a very good solid quarter. I think it was well planned out to the extent that we exceeded our expectations. I think that was metric driven, this again stronger. There is a little stronger business out there. And, yeah, we're looking forward to the next two quarters, and we will get, be getting back to you in any event, in relatively short order when the wage rule becomes final. But other than that, I thank you for your kind attention and we'll talk again in three months.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Sherri Warner -- Investor Relations

Kevin J. McNamara -- President & Chief Executive Officer

David P. Williams -- Chief Financial Officer

Nicholas Westfall -- President & Chief Executive Officer

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Frank Morgan -- RBC Capital Markets -- Analyst

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