Good day ladies and gentleman, and welcome to the Third Quarter 2015 Chemed Corporation Earnings Conference Call. My name is Jasmine and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Ms. Sherri Warner. Please proceed.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2015 ended September 30, 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 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 October 22 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 October 22 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 third quarter 2015 conference call. I will begin with some of the highlights for the quarter and David and Tim will follow with some additional operating detail. I will then open up the call up for questions. Chemed generated $386 million of revenue in the quarter, an increase of 7.8%. This revenue growth translated into a 17.3% increase in net income. Excluding certain discrete items, Chemed's total net income increased 18.7%. Our adjusted diluted earnings per share aggregated $1.78, which is an increase of 20.3% when compared to the third quarter of 2014. VITAS and Roto-Rooter continue to generate solid operating metrics, which translates into excellent profitability and cash flows in both operating segments. During the quarter, VITAS provided 1.4 million days of care to 32,000 unique patients. This generated $285 million in revenue representing a 7.4% increase when compared to the prior year. Admissions increased 3.1% and average daily census increased 7.4% in the quarter. Admissions totaled 16,131, which took our daily average census to 15,722 patients in the quarter. Roto-Rooter generated sales of $101 million. This is a revenue increase of $8.2 million or 8.8% compared to the prior year. Water restoration accounted for $2.8 million of this revenue growth with water restoration services aggregating $8.2 million in the quarter. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Good morning. As Kevin noted, net revenue for VITAS was $285 million in the third quarter of 2015 and that’s an increase of $19.6 million, or 7.4%, when compared to the prior-year period. This revenue increase is comprised of an average Medicare reimbursement rate increase of approximately 1.4%, a 7.4% increase in average daily census, along with a favorable comparison from Medicare Cap. These growth factors were partially offset by mix shifts and level of care, as well as patient census geography. In the third quarter of 2015, VITAS did not record any adjustments in estimated Medicare Cap billing limitations. This compares to $2.5 million of Medicare Cap billing limitations recorded in the third quarter of 2014. At September 30, 2015, VITAS had 34 Medicare provider numbers, none of which have an estimated Medicare Cap billing limitation for the 2015 year. Average revenue per patient per day in the quarter, excluding the impact of Medicare Cap, was $197.04 which is 9/10 of a percent below the prior-year period. Routine home care reimbursement and high acuity care averaged $164.22 and $699.04, respectively. During the quarter, high acuity days of care was 6.1% of our total days of care, 54 basis points less than the prior-year quarter. The third quarter of 2015 gross margin, excluding the impact of Medicare Cap, was 23.3% which is 64 basis points above the third quarter of 2014. Our routine home care direct gross margin was 53.7% in the quarter, a decrease of 10 basis points when compared to the third quarter of 2014. Direct in-patient margins in the quarter were 3.8% which compares to 4.9% in the prior year. Occupancy of our 34 dedicated in-patient units averaged 72.4% in the quarter and compares to 71.1% occupancy in the third quarter of 2014. Approximately, 78% of our…

Thank you, David. Admissions in the quarter totaled 16,131 patients, an increase of 3.1% over the prior year. On a year-to-date basis, VITAS admitted 50,082 patients which equates to an increase of 4.8%. During the quarter, admissions generated from hospital referrals which typically represent over 50% of our admissions increased 6.2%. Home-based referrals were relatively unchanged, nursing home admissions declined 5.6% and assisted living facility admission referrals increased 2.2%. Our per patient per day pharmaceutical cost averaged $6.64 in the quarter which is equivalent to the prior year. Medical equipment per patient per day cost in the quarter totaled $6.66, which is slightly favorable to the third quarter of 2014. VITAS’s average length of stay in the quarter was 78.6 days, which compares to 83.7 days in the prior year quarter and 78.5 days in the second quarter of 2015. Average length of stay is calculated using total discharges during the period. Median length of stay was 16 days in the quarter and compares to a median of 15 days in the prior-year quarter and second quarter of 2015. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,446,461 days in the quarter, an increase of 7.4%. And our nursing home routine home care days increased 8.9% in the quarter and nursing home routine home care increased 5%. With that, I'll turn the call back over to Kevin.

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

[Operator Instructions] And our first question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. I think you called out a little bit higher level of legal expenses in the last quarter and I am just curious is, could you give us any commentary on that and maybe any kind of updates on what may be going on?

Frank, I’ll just start by saying that, this is a stage of litigations, purely in the middle of discovery, but lot of depositions taken at this point. And that’s just, that’s where you run into the expense, lot of preparation, deposition of people identified by the government, number of representatives of the companies that’s testifying in their official capacity kind of record keepers and things like that. So, busy quarter in terms of activity and Dave, I don’t know if you have anything to say on the actual expense levels.

No, we expected it to come in lumpy. Obviously, we are up about 700,000 for the quarter and we are going to be right now year-to-date we are about $2 million pre-tax higher than the prior year ebbs and flows but we are certainly in an expensive part during the deposition. But we expect – I expect it to be lumpy for really the next couple of years.

And I think, I saw a number, with the litigation costs in both periods, we are still up 19, that’s over 19% for the period.

Got you, and anything you can read into – I know that the SarahCare, the Golden Living and the Old Beverly seem to be tangled up pretty extensively right now down in Alabama. Is there anything about that particular scenario that you could read through to you or is that just, any thoughts on that?

Well, I’ll give you my thoughts and first of all not that, let me give with one caveat. I’d say that, the allegations on that case are different. I mean, there were specific programs and activities that were alleged to have occurred which don’t really seem to be a part of our litigation. I mean ours tended to be more that in main part that you have more continuous care than any everybody else and rather than, you have a program that’s incentivizing doctors that type of thing. Having said that, I am sure it emboldened the government, you had a situation where you had a government witness as they normally do that say, all long stayed patients are improper and at least at this stage of litigation as I read it the jury pretty much bought the government’s expert’s theory on that. So, not good. It is preliminary, certainly from a litigation point, but it’s not positive. I am sure it will embolden the government to pursue that line of expert testimony, no question.

Got you. Switching gears, you talked about pharmacy cost and certainly in the, we hear a lot of talk about generic inflation and I am just curious, are you seeing anything on your front in terms of either specialty or either old generics where you are seeing some inflationary pressures?

Well, I mean, this is Tim. There is inflation in generics and that’s been accelerating the last year and expected to a little bit in the future. We’ve been very pleased with our efforts to really have a good handle on the transparency of it and we have been able to lower the cost of our drug utilizations and – of it and we have been able to lower the cost of our drug utilizations in other area just by being very aggressive in our negotiations with providers et cetera. So, again that is a fact that is happening with generics but we have not seen it increase our cost necessarily and I do not expect that to impact us in the near term.

Okay, thank you very much.

And our next question comes from the line of Jim Barrett with C.L. King & Associates. Please proceed.

Good morning everyone.

Good morning.

Kevin, I had just three questions for you. You had above average daily census growth in the quarter. What is your sense as to how that compares to the industry growth and do you believe this is the new normal?

Well, let me just say that we are very pleased with our growth and our results in the last several quarters and we think it’s because of all of the issues that we’ve talked about over the last several years with our resources at VITAS being above the level of resources, competitors are putting the marketplace and our strategies of working with the very large hospital groups that need transition care and they need people to be connected with them that they can track the patients and see that they are not being readmitted to the hospital if that’s not appropriate and all of those issues are falling our way. So, as far as, we don’t see that changing and we feel very comfortable with our outlook.

Good. And, Tim, what are your thoughts on the changes in payment for hospice by Medicare for the current fiscal year?

I am favorable to the changes. It’s – there were a lot of things that are happening over the last several years and they had several methodologies and this methodology to provide a little more on the daily rate for patients under 60 days and little less above 60 days. It mirrors what the government wants, they want cost aligned to the shorter stay patients, not to the longer stay. The marketplace is moving to have more focus on the shorter stay patients and you can see that our average length of stay has moved down a little bit over the last year, 4, 5 days and the industry I think, you will see that continue and under the new methodology with higher reimbursement for under 60 days as our total length of stay comes down, more of our mix will be in that higher reimbursement area and it plays right into the strength of VITAS because we do take on a lot of short stay patients. As you know our median length of stay is 15 days and the industry is about 18. So with us, that’s favorable. So we do not expect it to be a big impact. It’s a couple percentage points, one way or the other as you look out to next year depending upon our mix of business which we cannot predict necessarily, but we are - I’m favorable to it and it will have implementation issues. We are working very hard. We will be prepared to do everything correctly. Some of the payor systems at the state level and federal system might have to catch up, might be a little issues there as we go through it. But we’ve been preparing, we know we are prepared. So, on balance I am favorable to that change and I think it will help the industry align to what the government seeks.

Jim, this is Dave. So, as Tim said, we are very favorable, we think it’s directionally correct. We fully anticipate over a period of time of years CMS will continually evaluate the data and make adjustments to how they reimburse over a timeframe be over 60, under 60, might end up with more parts. Now, a very simplistic approach, we have a very complicated clinical care model. We get a lot of our – over half of our admissions come from hospital discharge planners. Those patients come in very ill. Some of those patients never see a day of routine home care. So the mix between high acuity and routine home care and the fact that our shorter length of stay tend to be high acuity patients there is a fair amount of moving parts if you just want to then carve out routine home care. So that’s a long way of say it. This is going to impact the industry’s clinical care model as well as VITAS’ and the government is reallocating the resources to different types of patients depending on the length of stay. So we expect to see an evolution on our care model as well as on the business model. A long way of saying is, this is going to be dynamic. We think it’s positive for VITAS’ care model on the long-term. But, it doesn’t mean there is going to be a windfall of revenue starting with this next year.

So, should investors view it as financially in broad terms to Tim’s point a few percentage points either way as neutral to VITAS?

Yes, Jim, I agree with – I think, yes, exactly what Tim said, put it this way and I’ll give you the most simplistic way to review exactly what Tim said. Put it this way and I’ll give you the most simplistic way to review it and keep in mind there are about 11 moving parts and I’ll talk about two of them. As you know that, for people, for patients under 60 days you get about $28 more for people over 60 days, it’s $14. You do the math and you could say, if 66% of your patients are over 60 days and 33 are under you can see how that would be a breakeven in that regard. So to the extent that a hospice is running 65 or as opposed to 70 you could see there will be a couple percentage points deviation there. And that’s the number one and two moving parts, but there are about 11 more. So, I guess, and there is really no transition period into it. It just starts January 1, so. What Tim is saying is right. It’s got – certainly be effective that as I look at it is less than the sequestration with the industry seem to shrug off and deal with, but it will just get day one and Dave is just counseling people to say, remember, it’s day one, it’s a snapshot. And the industry will have to – we’ll probably in the care model, we’ll just make some slight adjustments, but going back to Tim’s original comment, it seems directionally correct for VITAS. In other words, the number one problem to VITAS and it’s out in the field, people who are gaming the system. Okay, the government doesn’t like gamers to the system, VITAS with its approach to the market is not a gamer of the system. It’s going to hit the gamers of the system probably pretty harder, it’ll be hard to find a new game. Just having all long stayed patients are running at high margin is, that’s going to take a pick in the teeth that model. So, in that regard, we are happy with it, but and just what Dave is really saying is, yes, there will be some short-term issues just like they were in the first quarter too is sequestration. But, that we don’t see it will be a major impediment.

Okay, thanks Kevin, and the last quick one Dave. Why are share repurchases running so modestly versus historical trends?

I wouldn’t say modestly, I’d say, our share repurchase consists of kind of more methodical quarterly purchasing, call it dollar averaging and then we still keep a chunk of it for opportunistic and certainly when your stock get to an all-time high, you don’t want to be as opportunistic as when you see the stock is down 5% or 6%. So, we just want to take advantage of market for rationality as well as dollar averaging.

And Jim, really, it’s – do we have not deviated from our belief that absent a change in better use of our capital, we expect to use our free cash flow to buy – to pay dividends and buy in shares. So, it’s adequate, so about $100 million of stock repurchases in a year, that’s what – we hold to that, but Dave’s really saying, some years it maybe 70s, some years it maybe 130, all things being equal.

If my choice is to buy stock at 124 or 154, I like 124, but even at 154, it’s still incredibly accretive.

Okay, thanks everyone.

And our next question comes from the line of Toby Wann with Obsidian Research Group. Please proceed.

Hey, thanks for taking the questions guys. Just quickly on the fourth quarter, if we could kind of bridge to your guidance relative to where everybody on the street is, it looks like it implies about $1.73 to $1.78 consensus out there to $1.90. I guess, kind of, my question really is, what’s – help me bridge to where I guess the street is getting it wrong, myself included?

Couple things on that. One, first, I don’t get into reconciling or explain it individuals probably should adjust their model, as well as we want to be conservative and – but it’s just one factor, for example, I think the overall increase if you take out all of the cuts from the market basket that CMS put through was I think between 90 basis points in a full percentage point. Last year, we got more than the average that CMS increased things based upon our geographic location of our patients. Typically, it goes this way, this year we are going to get slightly less. We think we’ll get about 6 tenths of a percent increase, October 1 based upon all the CBSAs we have where our patients are located. So, we are going to get a little less of an increase. But, we are still getting our feel for water restoration how that ramps up on the Roto-Rooter side, the VITAS side, we’ve been on very, very good. Tim and his management team have done an incredible job of managing expenses keeping care at the bedside by pulling back on cost on the backroom and we are being a little conservative on whether that can continue to hold and we’ll see how the quarter goes as well as we are working on our 2016 business plan. But I’d suspect, we are being a little more rational on our price increase we got from the federal government and we are being a little more cautious on the growth. At one area, that you should be cautious on is, for example last quarter, Q2, our admissions was higher than our growth in average daily census. This quarter it’s a little different where our ADC is higher than our admissions growth and it depends on the timing of when those admissions happens and we finished Q2 with a very high average daily census. So we really think on a sustainable basis, we think we can get 3% to 5% growth in admissions and that will translate into roughly 3% to 5% growth in ADC. But, the timing of when these things happen, sometimes you have a phenomenal quarter and sometimes you are slightly below that average, but we expect to stay within the 3% to 5% growth admission and census, that maybe a little higher than that.

And let me also say, for all the year, if you look at the analysts they’ve – our view of it, we don’t – and again, we don’t get involved in models as Dave said, but our view of them was they are high in the first several quarters, I mean, they are too low in the first several quarters and high in the fourth quarter and if you look at the results, there has been a $0.10 to $0.15 beat every quarter and we still said during that period and they look still to be high in the fourth quarter. We’ve – now that we’ve given guidance and there is one quarter left, okay, obviously we are giving guidance in the quarter, now at this point. And what I think Dave says is, yes, our change in guidance at this point, it’s not aspirational, I mean, we might say it’s conservative but at the very least it’s – at this point, when you are running two pretty basic predictable businesses, we should be able to predict these are fairly narrow range. So, I really don’t think there is too much deviation from, call it the streets models and what we are currently running or at least projecting for the next three months. It is – at this point in a pretty narrow range.

Okay, now that’s helpful and thanks for the additional color. And then, just with regards to SarahCare and not – that whole case and verdict and I know it’s a different animal altogether but there are some read-through that we could probably make. If it’s quantified that their exposure is kind of a $150 million to $200 million, I mean, just if it’s kind of conceptually think about what Chemed’s exposure could be? How can we kind of book in that to kind of know not necessarily with any degree of certainty, but just what’s the potential range? Or is that even knowable at this point, given where we are in the proceedings?

You keep – Toby, from that standpoint, you are talking about, our captive hospice of a nursing home chain and we’d say, we are a completely different animal in terms of where our patients come from in our clinical care model.

Well, Toby also let me say, the question that you are asking, this is like some kind of – as the kind of questions we have with our accountants every quarter to the extent that we could do what you are saying and we thought there was a significant possibility of liability we book something, okay. So, I mean, by definition we are saying, it’s pretty difficult. I will say this that when you talk about – depending on what probability of plug-in. Let me put it, I want to characterize it, it was that in that the Jury pretty much blot the government’s experts that basically all hospice patients are ineligible. Okay, I mean, from that regard, it was – it’s a decision that will embolden the big thinkers and government. And it’s a decision that will embolden the big thinkers and government. I’ll tell you that, as they go in the other side, what seems counterintuitive, up to this point, the government really never face litigation risk. With every case just got settled before even went this far and when you go before Jury, there is risk and even though, maybe the result was something that was pleasing the government, they probably had several sleepless nights as far as waiting for the Jury to come back and that’s a kind of thing that cuts the other way. But to answer your question, I’ll state the obvious, if you said, what if all – in all hospice including ours, all patients over 90 days and the expert probably say they were ineligible from the start is crazy that is, let’s say it’s possible that a Jury could hold that. And then you multiply that number by three, you are talking about numbers that are crazy that be ruling as to all the healthcare, because every – as you know, every healthcare company has – resemble our cases. So, I am not – I hope I am not talking in circles here, other than to say, ping in what Dave said, what we take from the SarahCare decision is, I want to decision, preliminary decision is, that the Jury blot the government’s theory that virtually all hospice patients were ineligible. Okay, that’s not good for any healthcare company and if any healthcare company that had faced that type of finding, it would be a negative. We don’t expect that type of finding. As Dave says, to the extent that you got to remember our – over 93% of our patients come from doctors that have no connection to VITAS and whatsoever, and they are saying our professional opining they are eligible for hospice and then our doctors evaluate them as well. Little different from a captive nursing home where they are basically getting patients who are being found eligible.

Self-referring

By self-referring. So, but the answer is, I don’t want to run from it, I want to say that, anytime you are facing the government, there is a reason why all these cases settle and that is the government holds the upper hand and the companies say, live to fight another day, I am paying it off with the shareholders money, let’s go on. There is a couple reason why that gotten really applied to VITAS it’s not just – this is not just – hope that will impact the graveyard, that number one of that hope it’s not foolishness, but, you got to remember since there is no allegation at this point of really bad activity, I mean, if you read our complainant said, well, sales people sells under pressure to impress referral sources and if they didn’t do that, they’d lose their job. If that’s the worst saying that that was alleged, how can we settle the case and then go on to the future. I mean, if you are facing liability for something that is vanilla as that, what is, how do you run a company in the future? So, I mean there is a couple of things that make it different, but, again, it’s – I can tell you right now, had it been a good decision for SarahCare. The government would have left without say, well, that’s Alabama, they don’t know what they are doing, that has no application to us. So, I mean, I didn’t take it as overly good or overly bad because I knew that under the better circumstances, they wouldn’t have given us any – they wouldn’t have paid any attention to us.

Okay, no, I appreciate you guys address on that. And then just one last question I had, as RAC activity is kind of scheduled to start back up next year assuming CMS can kind of get that whole program launched again, which is a bigger function I met. Kind of how are you guys thinking about that in terms of just preparations? I know those things could kind of be disruptive when recovery audit contractors come in, but just kind of walk us through you are prep for that at some point next year?

Well, Toby we haven’t seen any approved work plan for – put up by CMS for RAC audits related to hospice, have you?

I know the RFPs go out November the 1.

We’ve been having focused medical reviews that come in on a regular basis. We do very, very well with those. Having focused medical reviews that come in on a regular basis, we do very, very well with those. It’s hard to comment on what they might do in the future. The key is going to be what work plan is approved and what are the – what’s the direction RACs are given, but to-date, hospice is actually – it hasn’t been a factor to-date.

And let me say, as Dave said, the CMS is having a focused medical review, that’s like a RAC audit done by people who know something about the field, I mean, to the extent that just say, what happens when you just turn loose a bunch of know nothing third-party who are just going to deny everything that isn’t mailed down, okay, that opens up a whole new kind of words. But generally, the hospice industry regularly faces outside review by fairly knowledgeable sources.

Tim is going to close it, if we heard any rumblings, regarding.

No, I don’t see anything happening in that regard, but of course we expect it to happen at sometime in the future and for several years since the company was founded. What we have always tried to do is be a 100% compliant with every issue and we’ve seen over the years that VITAS does a very good job of it. So we are preparing. We are re-doubling, re-tripling every effort on all compliance matters and I think that will leave us in a very strong position when those begin.

Okay, thanks for your time guys. I appreciate it and congrats on the quarter.

At this time, we have no further questions. I would now like to turn the conference over to Mr. Kevin McNamara for closing remarks.

No, my remarks are limited to thanking everybody for listening and again we have one quarter left. We’ll have our report at that point and give guidance for the following year in that call. So, thanks everyone for their kind attention.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a great day.