Chemed Corp
NYSE:CHE
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Chemed Corp
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Good day, ladies and gentlemen and welcome to the Chemed Corporation First Quarter 2019 Earnings Conference Call. [Operator Instructions] And as a reminder this conference call is being recorded.
I would now like to introduce your host for today's conference Sherri Warner with Investor Relations. Ma'am you may begin.
Good morning. Our conference call this morning will review the financial results for the first quarter of 2019 ended March 31, 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 April 29 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 April 29th, 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.
Thank you, Sherri. Good morning. Welcome to Chemed Corporation’s first 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 call up for questions.
The first quarter of 2019 was just slightly below the midpoint of our expected quarterly earnings. During the quarter Roto-Rooter and VITAS incurred slightly higher expense rates than pressured our margins. Although no single expense category had a significant increase. In totality it took the lesser often otherwise solid quarter. Dave will provide additional detail on these items.
In the quarter Chemed generated revenue of $462 billion an increase of 5.2%. Our consolidated net income in the quarter excluding certain discrete items was $2.92 per diluted share an increase of 7.4%. VITAS's admissions were difficult to the quarter having 521 less admits than the prior year quarter. Our average daily census did expand 6.6% and our adjusted EBITDA excluding Medicare cap increased 16%.
Roto-Rooter continues to show excellent growth in our core plumbing and drain cleaning service segments. Water restoration service demand was essentially flat in the quarter as we get closer to the penetration in our markets. Margins in water restoration and excavation were slightly below our internal rolls primarily from an increase in our direct hourly labor workforce and increased hiring and training expenses as we expand our technician commission based workforce.
I anticipate this blip in Roto-Rooter's expenses to be managed back down over the next couple of quarters. With that I would like to turn this teleconference over to David.
Thank you, Kevin. In the first quarter of 2019 VITAS's net revenue was $307 million which is an increase of 5.1% when compared to the prior year period. The revenue increases comprised primarily of the following; a geographically weighted average Medicare reimbursement rate increase of approximately 0.6%, a 6.6% increase in average daily census, in a Medicare cap liability that reduce revenue growth by 1.8%. This growth is partially offset by the combination of acuity makeshift, fluctuations in net room and board, contractual adjustments, and other factors that combined negatively impacted revenue growth 0.4% when compared to the prior year period.
In the first quarter of 2019, VITAS accrued $3.4 million in Medicare cap billing limitations. At March 31st 2019 VITAS had 30 Medicare provider numbers. Three of these have an estimated 2019 calendar year Medicare cap limitation of approximately $10 million. A VITAS is 30 Medicare provider numbers on the trailing 12 month basis 25 provider numbers have a Medicare cap cushion of 10% or greater one provider number has a cap cushion between 5% and 10% and one provider had number has a cap cushion between 0% and 5%.
As I mentioned earlier three of our provider numbers are currently in a Medicare cap billing limitation primarily in very high reimbursement areas. Average revenue per patient per day in the quarter was $191.20 which is 0.2% above the prior year period. Reimbursement for our routine home care and high acuity care averaged $165.31 and $750.13 respectively.
During the quarter high acuity days of care were 4.4% of total days of care which is 22 basis points less than a prior year quarter. The first quarter of 2019 gross margin excluding Medicare cap was 22.7% which is 102 basis point increases when compared to the first quarter of 2018. Selling general and administrative expenses was $21.5 million in the first quarter of 2009 teen which is an increase of 5.0% compared to our prior year quarter. Adjusted EBITDA from for VITAS excluding Medicare cap totaled $49.7 million in the quarter, an increase of 16%. Adjusted EBITDA margin excluding Medicare cap was 16.0% in the quarter which is a 126 basis point increase when compared to the prior year period.
Now let's turn to the Roto-Rooter segment. Roto-Rooter generated quarterly revenue of $155 million for the first quarter of 2019 teen an increase of 5.5% over the prior year quarter. Revenue from water restoration service segment totaled $27.7 million essentially flat with the prior year quarter. Approximately 90% of our water restoration revenue is generated from residential customers and the remaining 10% is generated from commercial accounts.
Commercial drain cleaning revenue increased 8.3%. Commercial plumbing and excavation increased 5.3% and commercial water restoration totaled $2.8 million a decline of 26.4%. Overall commercial revenue increased 3.4%. Residential drain cleaning increase 5.8%. Plumbing and excavation increased 7.5% and residential water restoration total $24.9 million which is an increase of 3.8% resulting in our aggregate residential sales increased 5.9% Roto-Rooter's grows a margin in the quarter was 47.0% a 44 basis point decline when compared to the first quarter of 2018. Adjusted EBITDA in the first quarter of 2019 total $33.5 million a decrease of 1.1% and adjusted EBITDA margin in the quarter was 21.6% which is 145 basis point declines over the prior year.
As Kevin mentioned earlier the decline of Roto-Rooter's adjusted EBITDA margin is a combination of several small factors. Hourly labor under a larger multi-day excavation and water restoration jobs ran higher than normal contributed the branch contribution margins declining 90 basis points. Advertising with paid search increased due to a decline in natural search and certain sub domains. The remaining margin shortfall is attributed to higher technician recruiting fees, equipment repairs, and insurance across.
During the quarter we repurchased a 150,000 shares Chemed stock for $49.2 million which equates to a cost per share of $328.33. On February 22nd 2019 Chemed's Board of Directors authorized an additional $150 million for stock repurchase under Chemed's existing share repurchase program. And as of March 31st, 2019 there was approximately $147 million of remaining share repurchase authorization under this plan.
I will now turn this call over to Nicholas Westfall, our President and Chief Executive Officer of VITAS.
Thanks David. VITAS had a solid start to the year. Our average daily census in the first quarter of 2019 was 18345 patients, an increase of 6.6% over the prior year. Total admissions in the quarter were 17758. This is a 2.9% decline when compared to the first quarter of 2018. However, admissions increased 7.1% sequentially from the fourth quarter of 2018 through the first quarter of 2019.
I should also note that the first quarter of 2018 remains the highest admissions quarter in VITAS's history. During the quarter year-over-year admissions generated from hospitals which typically represent roughly 50% of our admissions decreased 1.6%, home based admissions decreased 3.9%, nursing home admissions declined 5.1% and assisted living facility admissions declined 6% in the quarter.
Our routine home care, direct patient care gross margin was 52.7% in the quarter a 60 basis point increase over the prior year. Direct in patient margin in the quarter was 6.5% in comparison to margin of 7.5% in the prior year quarter. Occupancy of our 27 dedicated in patient units averaged 72.8% in quarter in comparison to 72.2% occupancy in the first quarter of 2018. Continuous care had a direct gross margin of 18.2% in compares to a margin of 17.7% in a prior year quarter.
Average hours billed for a day of continuous care was 17.5 in the quarter a slight increase when compared to the 17.2 average hours billed for continuous care patient in the first quarter of 2018. Our per patient per day ancillary costs which include durable medical equipment, supplies and pharmaceutical costs average $13.08 in the quarter and are 9.6% favorable when compared to the $14.47 the cost for these items in the prior year quarter. VITAS's average length of stay in the quarter was 91.3 days. This compares to the 92.6 days in the fourth quarter of 2018 and 87.9 days in the first quarter of 2018. Median length of stay was 15 days in the current and prior year quarter. Median length stay is a key indicator of our penetration in the high acuity sector of the market.
With that I'd like to turn this call back over to Kevin.
Thank you, Nick. I will now open this teleconference to questions.
Thank you. [Operator Instructions] Our first question comes from Joanna Gajuk with Bank of America. Your line is open.
Good morning. Thank you for taking the question here. So first actually on the last commentary around VITAS the margins excluding cap were up nicely year-over-year. So it sounds like some labor cost management and some other things. So can you flash that out for us what drove that improvement and also you've kept your full year guidance unchanged. So that guidance cause for margins to be down for a year. So can you talk about that dynamic as well? Thank you.
Sure. As it relates to the margin improvement as you alluded to as a consolidated EBITDA as well as on the individual direct service lines, it's a combination of a lot of different things Joanna and it's really just the ongoing execution not only prudent labor management but also balancing out a host of other cost contributors to delivering care whether it's consolidated ancillary services, whether it's back office and corporate infrastructure associated with it.
So all in that's what was feeding my comment that we started the year solid from a labor management perspective and anticipate the continuation of really paying attention to that on a day-to-day basis. As it relates to the remaining year's guidance regarding overall margins that guidance was built based upon our full year budget projections to start the year and while we're encouraged with the marginal improvement we're anticipating just continuing to drive top-line growth and try to balance expense management with it, so not a lot of other color commentary for the remaining of the year margins.
No and I will just add that it is the end of the first quarter would be a very unusual situation to us to amend the guidance after the first quarter but something we tend to look at after the second quarter. But there is still reliever for it. It was not an unusual quarter I mean we have I'd say there's three factors that we will look at it in the second quarter and it's going to be one where we on cap and I think we're in a good place either reimbursement rebasing going to be final by then. That will be very significant to us and just the other general trends in the business and I'd say that it would have been unusual for us to make a change in the first quarter. We don't see any major reasons. We're not ignoring anything to keep to that corporate practice.
And Joanna this is Dave Williams. The only thing I would add to that is you can debate the movement of some of the operational metrics that we've given our guidance but as of today, I would say I have significantly stronger belief that our guidance is going to be achieved potentially even the higher end of the guidance based upon the rebasing. So if anything were more firm in terms of our EPS, but you can certainly debate any individual operating metric and the guidance we released a couple of months ago.
So on that before, as for my other question got I because you bring you have agenda proposed to rebasing. All right so clearly based on the how VITAS is mix shaking out now it would be pretty nice increase. So we estimate about 3% increase just from the rebasing. So is that in the ballpark?
And I guess obviously it would benefit Q4 but I guess if this is what's happening the under this proposal basing if this is finalized this way the way it’s for some of these categories are generally patient will be a 30% continuous care also more or almost 40% up in patient more than that essentially. So is there a risk that utilization of these services would increase over time and then CMS would have to come back and reduce overall spending to kind of adjust for that or any color you can give us there in terms of how you look at the proposal?
Joanna, Dave Williams, I'll just briefly answer that and turn it over to Nick and Kevin but I'd remind you it's a proposed rule and so there's always a lot of potential movement but with the previous rebasing that happened 2016 so three years ago high acuity wasn't really addressed by CMS on that revenue neutral rebasing and without a doubt we took hit relative to the interplay between high acuity home care about $24 million it appears to us that CMS is kind of recognized the distance that they inadvertently created on high acuity care and they're correcting for that but until the rule goes final and then we can't really calculate everything out we just feel very confident that CMS is addressing the needs that all hospices provide all levels of care and we view this as positive for all hospices that tend to provide the appropriate continuous care and in patient care for their patients needs but I'll turn it over to Nick now for more detail.
Yes I mean just in regards to the future potential that you alluded to Joanna on a macro level for the entire industry not only VITAS we're extremely encouraged by CMS's recognition of the value of the providing all four levels of care as well as a recognition around the costs associated with providing those cares that have that influenced some of the rate proposal. At the end of the day it ends up rewarding the mature hospice providers who provide all levels of care that are consistent and required under the regulatory conditions of participation and ultimately it allows for patients and families to receive the full value of the benefit as was originally designed and enacted in 1983.
So there are a lot of other benefactors starting with the patients and families with the recognition that the encouragement for hospice providers can continue to provide all four levels of care and take care of patients and families in their setting of choice.
Let me add one other thing. It really goes to the ultimate question could the CMS do the math again and decide this is too expensive and make other cuts. Remember they are thinking I don't have any reason to think it's not right it's revenue neutral and you got to remember and what they've just said as to the extent that yes it makes the hospice providers a full-service took a hit inadvertently and maybe improperly from the last revenue-neutral iteration three years ago. This is a way of restoring that. Now but keep in mind into the accessible does this give a big incentive for other hospices to add these services that are expensive to the government and you can run up the total expenditures.
Remember they will go through the same process we will. They will be hit in their normal reimbursements as they add high acuity so that basically we will add them to get to an accurate points. That's what we're looking to return to as they add that. Yes they're encouraged to add the high acuity but it won't be a windfall for them. There will be the negative effect of the change in the things have previously made. So the real question is, what I really try to say is the government has scored this as revenue neutral and I believe it.
And we also believe Joanna that this is the right thing for the industry to encourage them to provide all levels of care and this should raise the quality of hospice care throughout the country. So we view this as a very-very positive thing for the patients and our patients family.
Joanna the last comment regarding it is not always a positive for the country but it's positive in hospice industry but for the overall health care industry in total because it's been proven for a very long time that if you're able to provide care for an a hospice appropriate patient through high acuity they have a significantly lower likelihood of feeling as though they have to revoke hospice benefit and re-engage in other health care services which has significant cost to it. So for the overall cost equation of the healthcare industry it's very positive and encouraging that's not beneficial only for hospice but for the overall health care industry and appropriate reduction of cost by keeping patients who are appropriate on the benefit during a period of crisis.
That's very, very helpful color. I appreciate. I guess I'll go back to the queue.
Thank you and I'm not showing any further questions at this time. I'd now like to turn the call back to Mr. Kevin McNamara for any closing remark.
My only closing remark is that I thank everyone for their kind attention and we think it was a pretty good quarter and we'll see in three months.
Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.