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Chemed Corp (CHE -0.96%)
Q1Â 2019 Earnings Call
April 30, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen and welcome to the Chemed Corporation's First Quarter 2019 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 follow at that time. (Operator Instructions) 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.
Sherri Warner -- Head of Investor Relations
Good morning. Our conference call this morning will review the financial results for the first quarter of 2019 ended March 31st, 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 29th 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.
Kevin McNamara -- President and Chief Executive Officer
Thank you, Sherri. Good morning. Welcome to Chemed Corporation's first quarter 2019 conference call. I will begin with the highlights for the quarter and David and Nick will follow-up with additional operating detail. I will then open the 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 that pressured our margins, although no single expense category had a significant increase. In totality, it took the luster off an otherwise solid quarter. Dave will provide additional detail on these items.
In the quarter, Chemed generated revenue of $462 million, 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' admissions were difficult in 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 full penetration in our markets. Margins in water restoration and excavation were slightly below our internal goals, primarily from an increase in our direct hourly labor workforce and increased hiring and training expenses as we expanded our technician mission-based workforce. I anticipate this blip in Roto-Rooter expenses to be managed back down over the next couple of quarters.
With that, I would like to turn this teleconference over to David.
David Williams -- Executive Vice President and Chief Financial Officer
Thank you, Kevin. In the first quarter of 2019, VITAS' net revenue was $307 million, which is an increase of 5.1% when compared to the prior year period. The revenue increase is 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 and a Medicare Cap liability that reduced revenue growth by 1.8%. This growth is partially offset by the combination of acuity mix shift, fluctuations in net room and board, contractual adjustments, and other factors that combine negatively impacted revenue growth of 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 billing limitation of approximately $10 million. Of VITAS' 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 number has a cap cushion between 0% and 5%. And 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 homecare and high acuity care average $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 our prior year quarter. The first quarter of 2019 gross margin excluding Medicare Cap was 22.7%, which is a 102 basis point increase when compared to the first quarter of 2018. Selling, general and administrative expenses was $21.5 million in the first quarter of 2019, which is an increase of 5% compared to our prior year quarter. Adjusted EBITDA for VITAS excluding Medicare Cap totaled $49.7 million in the quarter, an increase of 16%. Adjusted EBITDA margin, excluding Medicare Cap was 15% in the quarter, which is 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, 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 increased 5.8%, plumbing and excavation increased 7.5% and residential water restoration totaled $24.9 million, which is an increase of 3.8%, resulting in our aggregate residential sales increased 5.9%.
Roto-Rooter's gross margin in the quarter was 47%, a 44 basis point decline when compared to the first quarter of 2018. Adjusted EBITDA in the first quarter of 2019 totaled $33.5 million, a decrease of 1.1%. And the adjusted EBITDA margin in the quarter was 21.6%, which is 145 basis point decline 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 (ph) labor under larger multi-day excavation and water restoration jobs were higher than normal, contributing to branch contribution margins declining 90 basis points. Advertising with paid search increased due to (inaudible) search and certain sub domains. The remaining margin shortfall is attributed to higher technician recruiting fees, equipment repairs and insurance accruals.
During the quarter, we repurchased 150,000 shares of 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, it was approximately $147 million of remaining share repurchase authorization under this plan.
I will now turn this call over to Nick Westfall, our President and Chief Executive Officer of VITAS.
Nicholas Westfall -- Chief Executive Officer of VITAS Healthcare Corporation
Thanks, David. VITAS had a solid start to the year. Our average daily census in the first quarter of 2019 was 18,345 patients, an increase of 6.6% over the prior year. Total admissions in the quarter were 17,758, 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' 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 homecare, direct patient care gross margin was 52.7% in the quarter, a 60 basis point increase over the prior year. Direct inpatient margin in the quarter was 6.5% and compares to a margin of 7.5% in the prior year quarter. Occupancy of our 27 dedicated inpatient units averaged 72.8% in the quarter and compares to 72.2% occupancy in the first quarter of 2018. Continuous care had a direct gross margin of 18.2% and compares to a margin of 17.7% in the prior year quarter. Average hours billed per 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 averaged $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' average length of stay in the quarter was 91.3 days. This compares to 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 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 McNamara -- President and Chief Executive Officer
Thank you, Nick. I will now open this teleconference to questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Joanna Gajuk with Bank of America. Your line is open.
Joanna Gajuk -- Bank of America Corporation -- Analyst
Good morning. Thank you for taking the question here. So first, actually on the last commentary around VITAS, the margins excluding Medicare-Cap (ph) mostly year-over-year, sounds like some labor cost management and some other things. So can you flush that out for us, what drove that improvement. And also you kept your full year guidance unchanged. So that guidance calls for margins to be down for the year. So can you talk about that dynamic as well? Thank you.
Kevin McNamara -- President and Chief Executive Officer
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 of 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 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 are 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.
Nicholas Westfall -- Chief Executive Officer of VITAS Healthcare Corporation
And I'd just add that, end of first quarter would be a very unusual situation for us to amend the guidance for the first quarter. That's something we tend to look at after second quarter, but there is still room 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 at the end of the second quarter and it's going to be one where we're on cap and I think where we're in a good place, but reimbursement rebasing are going 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 kind of corporate practice.
David Williams -- Executive Vice President and Chief Financial Officer
Yeah. 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 gave in 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, we're 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.
Joanna Gajuk -- Bank of America Corporation -- Analyst
Right. So on that front before I ask another question about it, (inaudible) to propose rebasing, right. So clearly based on how VITAS' served mix is checking 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 from Q4 but I guess if this is what's happening under this proposal if this is finalized, the rates for some of this category that general inpatient will be up 30%, continuous care also almost 40% up, Inpatient Care and Respite Care up more than double 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 that proposal?
David Williams -- Executive Vice President and Chief Financial Officer
Okay. Joanna, Dave Williams. I'll just briefly answer that and turn it over to Nick and Kevin. But I'd remind you one is a proposed rule and so there's always a lot of potential movement, but with the previous rebasing that happened in 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 and routine home care of about $24 million. It appears to us that CMS is kind of recognized but disincentive that they inadvertently created on high acuity care and they are correcting for that, but until the rule goes final and then we can truly 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 inpatient care for their patients needs.
But I'll turn it over to Nick now for more detail.
Nicholas Westfall -- Chief Executive Officer of VITAS Healthcare Corporation
Yeah. 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' recognition of the value providing all four levels of care as well as a recognition around the costs associated with providing those cares 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 it was originally designed and enacted in 1983. So there are lot of other benefactors starting with the patients and families with the recognition or the encouragement for hospice providers to continue to provide all four levels of care and take care of patients and families in their setting of choice.
Kevin McNamara -- President and Chief Executive Officer
And let me add one other thing, it really goes to the ultimate question is, could CMS do the math again and decide this is too expensive and make other cuts. They are thinking -- they don't have any reason to think it's not right, it's revenue neutral and you got to remember, add what they've just said, as -- to the extent that, yes, it makes the hospital provider that are 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, but keep in mind if to the extend (inaudible) give a big incentive for other hospitals to add these services that are expensive to the government and run up the total expenditure, you will 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 they basically will add them to get to (inaudible) points, that's what we're working the return to as they add, yes, they are encouraged to add the high acuity, but it won't be a windfall for them, there will be the negative effect of the changes previously made. So the real question is -- what I am really trying to say is that government has scored (ph) this as revenue neutral and I believe it.
David Williams -- Executive Vice President and Chief Financial Officer
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 in our inpatients family.
Nicholas Westfall -- Chief Executive Officer of VITAS Healthcare Corporation
Joanna the last comment regarding, it is not always a positive for the country but it's positive for hospice industry, but for the overall healthcare industry in total, because it's been proven for a very long time that if you're able to provide care for hospice appropriate patient through high acuity, they have a significantly lower likelihood of feeling as though they have to revoke off the hospice benefit and reengage in other healthcare services, which has significant cost to it. So for the overall cost equation, the healthcare industry it's very positive and encouraging that's not beneficial only for hospice, but for the overall healthcare industry and appropriate reduction of cost by keeping patients who are appropriate on the benefit during a period of crisis.
Joanna Gajuk -- Bank of America Corporation -- Analyst
Okay. That's a very helpful color. I appreciate. I guess I'll go back to the queue.
Operator
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 remarks.
Kevin McNamara -- President and Chief Executive Officer
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.
Operator
Ladies and gentlemen, thank you participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.
Duration: 23 minutes
Call participants:
Sherri Warner -- Head of Investor Relations
Kevin McNamara -- President and Chief Executive Officer
David Williams -- Executive Vice President and Chief Financial Officer
Nicholas Westfall -- Chief Executive Officer of VITAS Healthcare Corporation
Joanna Gajuk -- Bank of America Corporation -- Analyst
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