Chemed Corp
NYSE:CHE
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Chemed Corp
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Good day ladies and gentlemen and welcome to the Fourth Quarter 2017 Chemed Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder today's program is being recorded.
And now I'd like to introduce your host for today's program, Sherri Warner with Chemed Investor Relations. Please go ahead.
Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2017 ended December 31, 2017.
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 February 14 and in various other filings with the SEC.
You're 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 February 14, which is available on the company's Web site 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, Chief Executive Officer of Chemed's of 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 2017 conference call.
I will begin with highlights for the quarter and David and Nick will follow with additional operating detail. I will then open up the call for questions.
The fourth quarter of 2017 had excellent operational performance, margin improvement and overall financial results. In the fourth quarter of 2017, Chemed generated $428 million of revenue, an increase of 6.2%. Consolidated net income in the quarter excluded certain discrete items generated adjusted earnings per diluted share of $2.32 an increase of 10.5%.
Both the VITAS and Roto-Rooter performed well exceeding the high-end of our guidance. VITAS admissions increased 4.3% in the quarter, average daily census expanded 4.7% and our adjusted EBITDA excluded Medicare cap increased 7.9%. Roto-Rooter continues to show excellent results in our core plumbing and drain cleaning service segments as well as strong growth in water restoration. This resulted in Roto-Rooter having a record fourth quarter 2017 in revenue and profitability.
With that I would like to turn this teleconference over to David Williams, our Chief Financial Officer.
Thank you, Kevin.
The net revenue for VITAS was $292 million in the fourth quarter of 2017, which is an increase of 2.8% when compared to the prior year period. This revenue increase is comprised of a geographically weighted average Medicare reimbursement rate increase of approximately 8x of 1%, a 4.7% increase in average daily census offset by Medicare cap which reduced revenue nine tenths of 1%.
In acuity mix shift, which negatively impacted revenue growth 1.7% when compared to the prior year period. VITAS recorded $2.4 million in Medicare cap billing limitations for two programs in the quarter. All of which are related to the 2018 Medicare cap billing period. At December 31, 2017 VITAS had 30 Medicare provider numbers two of which have an estimated 2018 Medicare cap billing limitation.
Of these 30 unique Medicare provider numbers, 25 provider numbers have a Medicare cap position of 10% or greater, 3 provider numbers have a cap cushion between 5% and 10% and 2 provider numbers have a Medicare cap liability on a trailing 12-month period. Average revenue per patient per day in the quarter was $189.33 which is 1% below the prior year period.
Our routine homecare reimbursement and high acuity care averaged $163.50 and $713.35 respectively. During the quarter, high acuity days of care were 4.7% of total days of care which is 58 basis points less than the prior year quarter. The fourth quarter of 2017 gross margin for VITAS excluding Medicare cap was 24.5% which is a 41 basis point improvement when compared to the fourth quarter of 2016.
Our routine homecare direct gross margin was 53.9% in the quarter, which is an increase of 80 basis points when compared to the fourth quarter of 2016. In our direct inpatient margin in the quarter was 8.5% and compares to a margin of 1.2% in the prior year quarter. Occupancy of our 28 dedicated inpatient units averaged 70.3% in the quarter and compared to 68.2% occupancy in the fourth quarter of 2016.
Continuous Care had a direct gross margin of 16.8% an increase of 100 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 17.5 in the quarter which is a slight decrease when compared to the 18.1 average hours billed for continuous care patient in the fourth quarter of 2016.
Now let's take a look at the Roto-Rooter segment. Roto-Rooter plumbing and drain cleaning business generated sales of $136 million for the fourth quarter of 2017 and that's an increase of $16.8 million or 14.1% over the prior year quarter.
Commercial drain clean revenue increased 1.7% and commercial plumbing and excavation increased 2.5%. Overall, commercial revenue increased 3.3%. Our residential plumbing and excavation increased 14.5% and drain cleaning increased 10.4%. Our aggregate residential sales increased 21.8%. Just as importantly revenue from water restoration totaled $22.1 million, an increase of $8.4 million over the prior year quarter or another way to look at it is half of our growth in revenue for Roto-Rooter [indiscernible] water restoration, the other half came from core segments.
Our earnings guidance for 2018 is as follows; revenue growth for VITAS in 2018 prior to Medicare cap is estimated to be in the range of 2.5% to 3.5%. Admissions in average daily census in 2018 are estimated to expand approximately 3% to 4%. And full year adjusted EBITDA margin prior to Medicare cap is estimated to be 15.4%. We are currently estimating $5 million for Medicare cap billing limitations in the 2018 calendar year.
Roto-Rooter is forecast to achieve full year 2018 revenue growth of 4% to 5%. This revenue estimate is based upon increased job pricing of approximately 2% and continued growth in water restoration services. Adjusted EBITDA margin for 2018 for Roto-Rooter is estimated at 22.3%. Based upon the above full year 2018 adjusted earnings per diluted share excluding non-cash expense or stock options, cost related to litigation, costs associated with tax reform and other discrete items is estimated to be in the range of $10.60 to $10.85. This compares to Chemed's 2017 reported adjusted earnings per diluted share of $8.43 with 2018 guidance assumes an effective corporate tax rate of 25.7%.
I'll now turn this call over to Nick Westfall, Chief Executive Officer of VITAS Healthcare.
Thanks David.
VITAS had another solid quarter both financially and operationally. Our average daily census in the fourth quarter of 2017 was 16,920 patients, an increase of 5.3% on a unit for unit basis over the prior year. Total admissions in the quarter were 16,575, an increase of 4.9% on a unit for unit basis when compared to the fourth quarter of 2016.
During the quarter emissions generated from hospitals which typically represent over 50% of our admissions increased 1.3%. Home-based admissions increased 6.5%; nursing home admissions increased 10.2%; and assisted living facility admissions increased 10.5% in the quarter.
Our per patient per day ancillary costs, which include durable medical equipment, supplies and pharmaceutical costs averaged $14.30 and are 4.6% favorable when compared to the $14.99 cost for these items in the prior year quarter.
Our inpatient care currently consists of 28 dedicated units as well as contract beds. We evaluate inpatient capacity on a market-by-market basis to ensure these facilities are appropriately positioned to meet the needs of our patients in every community we serve. The sustainable evaluation and management processes have improved our inpatient margins 730 basis points in the quarter.
Within continuous care, we continued our focus on labor management specifically related to appropriate nursing to aide staffing assignments and the appropriate utilization of outside nursing agencies based upon the patients' location and individual needs. These efforts improved our continuous care margins 100 basis points when compared to the fourth quarter of 2016.
VITAS average length of stay in the quarter was 91.4 days, which is equal to the average length of stay in the fourth quarter of 2016. Median length of stay was 16 days in the quarter and is equal to 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.
Thank you, Nick. I will now open this teleconference to questions.
Certainly. [Operator Instructions] Our first question comes from the line of Frank Morgan from RBC Capital Markets. Your question please.
Good morning. I think I would like to kind of go back and have a little bit deeper into the assumptions some of the underlying assumptions that go into the very strong 2018 guidance. And I guess I'm curious just maybe to start first on the VITAS side, I believe you mentioned in the past that you might have one fewer program in the base. But, I'm just curious, if you were to break out growth from say just organic versus say any plans for external growth or new development coming online in the year or kind of maybe give us some color on what that would look like?
Yes. This is Dave Williams, Frank. I'll turn this over to Kevin and Nick. But, so the starting point in terms of what I call it on the VITAS side for like of a better word raw widgets is always going to be days of care and we expect the days of care organic growth to grow 3% to 4%.
Now there's going to be acuity mix shift just because of a trend line over the last couple of years. We expect higher acuity to trend down, but not at the same rate has been trending down before. That throws a little bit of squirreliness into our revenue projections but doesn't really impact the overall profitability of a day of care as we've discussed in prior calls. But basically organic call it 3% to 4% days of care growth. Then I will turn it over to Nick and Kevin.
Yes. And just to reiterate Dave comments, I mean the vast majority of the entire projection of 2018 Frank is embedded inside of organic growth and continuation of the positive trends of which we've seen in 2017 and expect to see in 2018.
Which is that say we don't have a couple of new Florida operations coming online starting January 1 of this year.
Correct. But macro contribution of the overall guidance in 2008 was minimal.
We are excited by it. But, it's hard to -- they won't move the numbers.
Correct. At a macro level.
Got you. And certainly, I don't think historically you'd ever put acquisitions in there. So, just to reconfirm that? And then, maybe just ask you about the acquisition market, do you see any kind of change in a view there that might make that more interesting or is it still not very interesting at this point?
Well, to the extent that -- from my perspective, VITAS is in a position that they see most, they have done all the acquisitions that are available although they have intellectual curiosity in them. They all seem to have the same issue and that is the acquisition candidates tend to have several programs most of which have average daily census below 100 with the upside potential not much higher than that. And I would say given the nature of VITAS that is a full service hospice with all four lines of service with the kind of quality control issues and IT support, a breakeven point is just higher than that. So it's just hard for us to offer much of a purchase price for programs where we don't have much hope of ever making a profit.
So that's what makes us kind of a bad candidate to approach these acquisition candidates. So and again, we have a kept a high hurdle, we have been repurchasing stock and to the stock that have your risk adjust repurchasing stock and doing acquisitions, it's the rare acquisition in this field that makes sense. And the reason I highlight this field is the fact that when you buy a hospice you don't get much. The patients by their very nature are short-term. There is very little bricks and mortar. And the one thing that's of real value is the referral networks which by definition there's no way you can tie those up. So long winded way of answering your question which is really -- we're focusing on things that are basically same-store organic growth.
Got you. And maybe a Nick question here. When you look at -- with most of your growth coming organically, when you think about the saturation -- not the saturation, the penetration rate of hospice today, I know over the years certainly the [MedTech] [ph] report to share the penetration rate increasing, but where do you feel we are in the marketplace in terms of actual penetration for this service. And is that, you coppered in the ability to continue to drive organic growth say 3% to 4%?
Well, thank you. We've heard Dave and I talk about it. We have -- we come at that question a little differently. I'm surprised at the depth of the penetration of hospice with regard to non-trauma [indiscernible]. I mean it's over 50%, it's a well known, well respected needed program. Dave things that number could be higher. But the real issue comes at -- how early in the period of decline does a patient with a terminal diagnosis enter a hospice and that's where -- that as the effect on the penetration issue which dwarfs whether we go from 51% to 54% as far as penetration by actual patient. And that's one where -- it's industry wide we continue to see an expansion of that.
And we really see it and it's good for us. It's in senior communities where they are very familiar with the benefits of hospice. They see it with their colleagues, their neighbor. Those people are more likely to choose hospice earlier which means that the areas where we are right now that is Florida and [indiscernible] to California and Texas where we are that trend is probably more pronounced from our perspective.
So I would say that again when you look at penetration I'm surprised that it's as high as it is. That is over 50% of the people have at least one day in hospice that type of thing. But, a lot of work on penetration that we'll see at the end of that any time in over the next several years.
Yes, Frank. Kevin and I comment this from slightly different directions but kind of reach the same end point. What I would say as -- so that roughly 2.6 million deaths in the United States every year a little over 500,000 of those deaths are non-predict over trauma deaths. So you left about 2.1 million deaths annually in the U.S. that are really hospice or eligible or hospice appropriate.
As Kevin mentioned, we do about 1.1 million the industry, a patient who passes away had at least one day in hospice. So I do you think 1.1 million out of 2.1 million, you end up with a little bit more than 50% penetration. But as Kevin mentioned, half of all admit into hospice, they pass away in about 19 days or less, 30% actually pass away in seven days or less. So I don't know the right thing. Did a patient receive at least a hospice day to talk about penetration? I think its potential days of care. So the growth in the over 65 will contribute to an expansion of the days of care in the industry. But really it's actually materially impacting that median of 19 days.
And what I would tell you though, Kevin and I have seen is that 19 day median length was stay for the industry has been fair, it's been rock solid for a dozen years. So said differently, there's still this culture of take care of care for a significant portion of Medicare beneficiaries at any cost. And then there's still this reluctance for about half of our patients to enter hospice at the last possible moment.
So the real question of explosive growth in the industry is, when will we impact this median. When will the 19 move to 26.
The last piece that adds onto it Frank is the tailwind inside of the industry is the value proposition of the hospice industry has never been more aligned with the ongoing reimbursement changes along the other -- all the other verticals across healthcare. And as we're seeing partners and the communities need and are actively seeking mature partners that can help provide service, access education to those patients and families earlier so that the median length of stay in the adoption of hospice for appropriate patients occurs at the right time. And so that's another tailwind for the industry that I think continues as well as provides an opportunity for us as a mature large national hospice organization that differentiate ourselves in the marketplace with what we can offer to our partners in the local communities.
Got you. And maybe just to wrap up on VITAS in your assumptions, what do you see in the year ahead in terms of just from a cost perspective and from margin standpoint in VITAS?
I mean I think it's embedded inside of -- some of the guidance as we talk about the ongoing EBITDA margin. We're optimistic around the initiatives in which we continue to have in place where we've seen marginal improvement across our service lines. And we're balancing that against the ongoing labor and wage pressures that everybody is experiencing inside of the market. So we feel confident in our guidance for 2018 related to margins.
In that regard, let me say it's a constant battle, labor costs are fully loaded about two thirds of all expenses of VITAS. The reimbursement by definition that hospice gets is a little below what the government determines is really industry inflation. It's a constant battle. But, it's one that VITAS is doing well. I would say that -- I have everything to say, oh no VITAS is on top of this, this is no problem. It's a constant battle. But the one thing, I look at is attrition rates, the average pay per hour that type of thing, they had good trends across all those fronts.
Got you. And just one follow-on, you did comment about drug costs being down anything particular there you want to call it, I think you said down 4.6% year-over-year. Anything that is -- anything in that one time or is that something we should think about is sustainable?
I think as you think about it Frank you should think about it as an ongoing run rate. It's actually aggregated ancillary costs which are pharmacy, but also durable medical equipment, home medical equipment piece and medical supplies. So it's our full aggregated run rate for all ancillary services. It's not just drugs. But we feel comfortable in that run rate from a cost perspective and we're driving that down by just optimizing utilization as well as contract negotiations as well.
Okay. And just -- I'll just ask one more and hop off it, just to reconfirm, no buybacks built into the assumptions, correct?
That's correct.
Okay. Thank you. I will hop off
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin McNamara, President and Chief Executive Officer for any further remarks.
Okay. Before signing off, I will jus say one comment, with regard to a question we have gotten not on this line and that is, we could see that we had -- a projected cap exposure in the fourth quarter. We continue to part of our guidance as always to include a plug number with regard to cap. I would just say that -- remind people that that projected cap in the fourth quarter. That is the first quarter on the government planned year, not unexpected to have -- some project exposure that fourth quarter.
Overall, I think Dave indicated with our overall situation in all our markets. We are comfortable with our cap situation. Good trends nothing that should apply a dislocation in that whatsoever and I think that our -- in 2018, our plug number of cap is going to be -- may well prove very conservative as it as in the last 10 years.
So with that I just wanted to thank everyone for their kind attention and we'll be back in like a couple of months to discuss the results of the first quarter. Thank you.
Thank you. Ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.