Chemed Corp (NYSE:CHE)
Q4 2015 Earnings Conference Call
February 18, 2016, 10:00 ET
Sherri Warner - IR
Kevin McNamara - President & CEO
Dave Williams - EVP & CFO
Tim O'Toole - CEO, VITAS
David Williams - EVP & CFO
Frank Morgan - RBC Capital Markets
Toby Wann - Obsidian Research Group
Welcome to the Chemed Corporation Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Sherri Warner with Investor Relations.
Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2015 ended December 31, 2015. 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 the 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 17 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 companies press release dated February 17 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's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.
Thank you, Sherri. Good morning. Welcome to Chemed Corporation's fourth quarter 2015 conference call. I will begin with some of the highlights from the quarter and David and Tim will follow with some additional operating detail. I will then open up the call to questions.
We finished 2015 with excellent revenue and earnings in our VITAS and Roto-Rooter operating segments. For the quarter, Chemed generated $399 million of revenue, an increase of 5.1%. This took our full year revenue to over $1.5 billion and represented a consolidated full year revenue growth of 6%.
Consolidated net income in the quarter, excluding certain discrete items, increased 8.9% to $34.2 million and equated to adjusted earnings per diluted share of $1.97, an increase of 9.4%. We finished 2015 with total adjusted earnings per diluted share of $6.98, an increase of 15% when compared with 2014 earnings. VITAS and Roto-Rooter continues to generate solid operating metrics which translate into excellent profitability and cash flows in both operating segments.
As most of you are aware, on January 1, 2016, CMS implemented certain changes to the Medicare hospice reimbursement per diem. This rebasing eliminated the single tier per diem for routine home care and replaced it with a two tiered rate. And the higher rate for the first 60 days of the hospice patients care and lower rate for days 61 and after.
In addition, CMS provided for a service intensity add-on payment which provides for reimbursement of care provided by a registered nurse or social worker, for routine home care patience, within seven days prior to death. The reimbursement for continuous care in-patient and respit care were not impacted by this rebasing. The two tiered national per diem rate for routine home care provides for $25 of additional per diem for the first 60 days of patient visit hospice. This takes the national routine home care per diem to roughly $187.
Once a patient has been in hospice for more than 60 day the routine home care per diem is reduced $40 going from $187 to approximately $147. These are national per diem rates and actually reimbursement is adjusted based upon variations in geographic cost of living. Rebasing is revenue neutral to hospice if it has a 37.6% of total routine home care days-of-care being provided to patients in their first 60 days of admission and 62% of total routine home care days provided to patients after the 60 days. Basically a 38% to 62% ratio.
Historically, VITAS has had a 32% to 68% aggregate base of care ratio. VITAS high acuity care represents 6% to 7% per from days-of-care. VITAS high-acuity days-of-care provided to patients from the first 60 days of admission is more heavily weight and represents approximately 15% of total days-of-care. This results in a VITAS home care days-of-care ratio of about 29% to 71%.
The estimated financial impact from rebasing is similar to sequestration, they have the effect of a one year reduction in revenue and profitability growth by approximately $16 million when compared to the prior year. However similar to how we overcame that financial impact of sequestration, VITAS anticipates a significant portion of this $16 million reduction in revenue will be offset by increased efficiencies in 2016 and 2017 in the areas of non-bedside field operations and general administration.
With that, I would like to turn this teleconference over to Dave Williams, our Chief Financial Officer.
Thanks, Kevin. As Kevin noted, net revenue for VITAS was $284 million in the fourth quarter of 2015 which is an increase of $10.1 million or 3.7% when compared to the prior year period. This revenue increase is comprised of an average Medicare reimbursement rate increase of approximately 0.6% a 5.8% increase in average daily census, offset by level of care and geographic mix shift when compared to the prior year.
In the fourth quarter of 2015, VITAS did not record any adjustments in the estimated Medicare Cap billing limitations. This compares to $500,000 of Medicare Cap billing limitations reversed in the fourth quarter of 2014. At December 31, 2015, VITAS had 31 Medicare provider numbers, none of which has an estimated 2015 Medicare Cap billing limitation.
Average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $196.98 which is 1.8% below the prior year period. Routine home care reimbursement and high acuity care averaged $165.06 and $704.93, respectively. During the quarter high acuity days-of-care were 5.9% of total days-of-care, 78 basis points less than the prior year period.
The fourth quarter 2015 gross margin, excluding the impact of Medicare Cap, was 24.1% which is 12 basis points less than the fourth quarter of 2014. Our routine home care direct gross margin was 54.7% in the quarter a decrease of 20 basis points when compared to the comparable prior year quarter. Direct inpatient margins in the quarter were 1.3% which compares to 7.2% in the prior year quarter.
Occupancy of our 33 dedicated inpatient units averaged 68.6% in the quarter and compares to 74.7% occupancy in the fourth quarter of 2014. Approximately 77% of our inpatient days-of-care are in these dedicated units and the remaining 23% of our inpatient care utilized short term contract debts.
Continuous care had a direct gross margin of 16.1% a decline of 210 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 18.3 in the quarter, a slight decline when compared to the 18.5 average hours billed for continuous care in the fourth quarter of 2014.
Selling, General and Administrative expenses were $23.1 million in the fourth quarter of 2015 which is an increase of 5.9% when compared to the prior year. Adjusted EBITDA, excluding Medicare Cap, totaled $46.4 million in the quarter an increase of 2.7% over the prior year. Adjusted EBITDA margin was 16.3% in the quarter and is a decline of 19 basis points to the prior year.
Now let's turn to Roto-Rooter. Roto-Rooter generated sales of $114 million for the fourth quarter of 2015 which is an increase of $9.1 million or 8.7% over the prior year quarter. Commercial drain cleaning revenue increased 7.5% and commercial plumbing and excavation increased to 8.8%. Overall Roto-Rooter's commercial revenue increased 8.1%.
Residential plumbing and excavation increased 11.1%. Drain cleaning increased 2.3% and water restoration increased 27.6% which equated to total residential water restoration revenue of $8.7 million in the quarter. Overall, residential sales increased 10.1%.
Now let's take a look at Chemed's consolidated balance sheet. As of December 31, 2015, Chemed had total cash and cash equivalents of $14.7 million and debt of $91.3 million. The Company repurchased $11.3 million of Chemed stock in the fourth quarter and this equates to 75,000 shares of Chemed stock repurchased at an average cost of $151.09. Chemed currently has $52.5 million of authorization remaining under the share repurchase program.
Our earnings guidance for 2016 is as follows. Including the impact from rebasing, full year 2016 revenue growth for VITAS, prior to Medicare Cap, is estimated to be in the range of 2.5% to 3.5%. Admissions in 2016 are estimated to increase 3% and full year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 14% to 15%. This guidance also assumes $5 million for Medicare Cap billing limitations in the calendar year.
Roto-Rooter's forecasted to achieve full year 2016 revenue growth of 3.5% to 4.5%. This revenue estimate is based upon increased job pricing of approximately 1% and continue growth in water restoration services. Roto-Rooter adjusted EBITDA margin for 2016 is estimated to be in the range of 20% to 21%.
Based upon the above, full year 2016, adjusted earnings per diluted share, excluding non-cash expense for stock options, costs related to litigation and other discrete items, is estimated to be in the range of $7.05 to $7.25. This compares to Chemed's 2015 reported adjusted earnings per diluted share of $6.98. As a reminder though, the impact on diluted earnings per share from rebasing in 2016 is estimated to be $0.56 per share. So excluding rebasing, the 2016 guidance for adjusted earnings per share would have been in the range of $7.61 to $7.81.
I'll now turn this call over to Tim O'Toole, Chief Executive Officer of VITAS.
Thank you, David. We admitted a total of 15,790 patients in the quarter which was 3.2% below the fourth quarter of 2014. For the full year 2015, we admitted 65,872 new patients which equates to an increase of 2.8%. During the quarter, admissions generated from hospital referrals which typically represent over 50% of our admissions declined 3.8%.
Home based referrals increased 0.4%, nursing home admissions declined 12% and assisted living facility admission referrals increased 6.2%. On a per patient per day pharmaceutical cost, average $6.63 and are 3.8% favorable to the prior year quarter. Medical equipment per patient per day cost in the quarter totaled $6.61 and compares to $6.41 in the fourth quarter of 2014.
VITAS' average length of stay in the quarter was 89.8 days which compares to 82.7 day in the prior year quarter and 78.6 days in the third quarter of 2015. Our full year 2015 average length of stay was 81.6 days, a slight decline from our 2014 average length of stay of 82.4 days. Median length of stay was 17 days in the quarter and compares to a median of 15 days in the prior year quarter.
Our full year median length of stay in 2014 and 2015 was 15 days. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our Days-of-Care totaled 1, 444,147 days in the quarter, an increase of 5.8%. Non-nursing home routine home care days increased 7.9% in the quarter and nursing home routine home care increased 2.2%.
With that I'll turn the call back over to Kevin.
Thanks, Tim. It's now appropriate to consider questions.
[Operator Instructions]. Our first question comes from Frank Morgan from RBC Capital Management.
I guess I observed that the admissions in the quarter certainly weaker than you've had for the last seven quarters. Is there anything in particular that you can call out there? I know you're assuming 3% admission growth for next year. Were there any specific issues that we should consider and reconcile to going back to that 3% level?
Before I turn it over to Tim, Frank but let me just say this is the first quarter where we had -- what we, on a comparative basis we were past the problems that failure to thrive and general debility we're having on the admissions. And I think to the extent that in that quarter a year ago you also had some catch up.
In other words you had your normal admissions and a certain number of admissions that had been delayed probably I don't really want to say improperly, but without any type of medical or legal necessity during that period. So another way of saying I think we were comparing against usually high base that again, is not overly an alarming generally, but now Tim? There may have been a few other items that you were seeing, but go ahead.
I think we've talked before about regional differences and we're seeing strengths in some of our really strong operations. And we're seeing some of the operations that aren't as strong we've seen the admissions go down a little bit. So but as far as trends, no trends to note.
I think the business is very firm. We were working off of some very good growth in the last several quarters. So to answer the question, no we're very comfortable with the outlook we're presenting and it's early in the year we're into January and February and we're doing well and we're comfortable.
And just to amplify Tim's point. Obviously the most important market for us is Florida. Our admissions were very good in the quarter. Second most important market, California, they were fine. And one thing we don't really didn't highlight and we don't do a lot of addition and subtraction of programs and talk about same-store. But in fact, three programs that were closed in the fourth quarter of last year accounted for just about half of the decline in admits. So again, there is nothing in those numbers that is alarming to us.
And Frank just to go one more step as Kevin mentioned, so Florida is our largest state that we have our census in. California is a distant second and again those were both very positive. And then just a couple states kind of drove us nuts and they did have negative results. As well as overall our hospital referral admissions were just unusually soft and that's just more of a function of literally the census they're running in those hospitals.
Got you that's good and this is just a clarification. I thought at one point I heard when you were talking about the two tiered system I thought I heard high acuity was 15% of total days and then later I thought I heard 5.9%. Could you help me straighten that out?
Yes, so what we said is you could look at like for example, this quarter, 5.8% of our days-of-care were high acuity. But that's high acuity skews more towards the 60 days or less days-of-care. So said differently our high acuity patients, less of them make it past 60 days. So if you look at just the population of days-of-care within the first 60 day of admission, high acuity patience made up 15% of those days-of-care. So more heavily weighting of high acuity in the first two months of admission.
Frank just another way to understand it is this and this really explains why on a revenue neutral change to the industry, there's, in our case, a projected $16 million or $0.58 a share hurdle to get over. Theoretically in hospice, where there isn't a lot of high acuity done, a large percentage of it is in the latter stages of the stay and very often in the last 10 days of life.
Well VITAS is very unusual in that over 50% of their referrals come from hospital discharge planners. In other words very sick, very infirm patients which is one of the reasons why our median life of stay is so low. I guess and the point is so in those first days, because the patients are coming directly from the hospital settings, an unusual percentage of our patients have high acuity in those early days which is one reason why it's skewed, as compared to other hospices. But again those numbers are in line with our expectation, but just kind of explain why we deviate from the norm and the changes are not revenue neutral to us.
My editorial would be to a certain extent it's a bit of a penalty for the hospices that have the capability of providing high acuity care on a staff basis to patients. The change in reimbursement which we think is directionally correct by CMS, without a doubt and unintended consequences was to nick a little bit hospices that do have the ability and do provide significant high acuity care.
What we said our position when they were making this change was be a little more scientific about it and don't count high acuity base towards that 60 day threshold. And you saw the response was just to rule that it kind of works more, little more simple for them to administer. So again it's something that we view as kind of like sequestration. We wish it were otherwise, but we'll deal with it.
One final one. I'm just curious, no mention of investigation update in your prepared remarks, but anything happening on that front you could share and then I'll get back in the queue?
No, these things grind and they do grind exceeding fine. No significant developments. I guess the last time I talked to our very competent lawyers they don't expect trial in 2016. There have been no settlement discussions of any type.
We're still going through the discovery process. And again, if I'm being fair, I'm saying, I think I'm very happy with the way things are going. If you talk to the government lawyers they would probably think because they are true believers they would probably think things are going well for them, who knows. But no significant developments.
Next question comes from Toby Wann from Obsidian Research Group.
Just wanted to see if you guys could shed a little light on the significant increase in the average length of stay, as well as the median length of stay on both a year-over-year and sequential basis? It doesn't look like there's been much shift in terms of admissions and/or average daily census diagnosis groups. So just trying to tease out what happened there and get a better understanding of how that changed so much?
I'll turn it over to Dave. Let me first say these numbers bounce around within the quarter and I would say that in a quarter where we have on a comparative basis admits down you would expect to see these aberrations. You've got to remember the average length of stay is calculated based only upon the average length of stay of the people discharged.
And so since half our patients that are admitted are with us a little over two weeks, if that number is down it will have a significant impact on the average length of stay. So again, the numbers are about what we would expect. Don't see any significant change. But Dave, I know you've looked at this issue just since we've reported our numbers. Any further comment?
No that's exactly as Kevin stated so it's 90 days in the quarter, the average and median can only be calculated or the way we do it, from discharged patients. And to the extent that you have soft admissions and half of your admissions are with you two weeks or less, 25% of our admissions are only with us seven days, to the extent that you lost those patients and that averaging, that typically will spike your average and median.
Realistically, a rolling four quarters is a better way to look at what's really going on in a patient census. But again out of tradition we report both the quarter and year-to-date.
And keep in mind also, this is an aside, but with regard to those lost short stay admissions, they have an effect on this number but in many respects, we've lost money treating those patients. So to the extent that we had fewer of those patients it's in the short run, not all that bad.
Well I guess I don't see any more questions in the queue unless somebody speaks now, they won't have to forever hold their peace but they will hold their peace for three months or so. And I thank everyone for their attention to the presentation. Thank you.
Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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