Ladies and gentlemen, thank you for standing by. And welcome to the Chemed Corporation's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sherri Warner with Investor Relations. Please go ahead, ma'am.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2020 ended June 30, 2020. 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 July 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 July 29, 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 second quarter 2020 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 up the call for questions. First, let's start with the obvious. Operating two separate and distinct service business segments with 17,000 employees during a national pandemic brings unique, unpredictable and abrupt challenges. Fortunately VITAS and Roto-Rooter have been classified as essential services allowing Chemed to operate during the pandemic. Maintaining operations in this environment is far from business as usual. First and foremost, our number one focus has been and will remain on the safety and well-being of our employees, patients and customers. We will maintain this focus regardless of the cost to safely operate during the pandemic. April 2020 was probably the most challenging month, we have ever seen significant operating issues emerge daily, triggered primarily from incredibly fast-moving and sometimes contradictory federal, state and local government regulations. Logistical operating issues were identified, analyzed and solutions for put in practice immediately. We were able to develop and continuously refine effective workarounds on supply chain issues, labor and scheduling issues, patient access restrictions, employee safety, healthcare protocols, technology solutions as well as information security protocols allowing our employees to continuously serve our local communities in a safe agile manner. We closely followed the myriad of federal, state and local regulations in the development and implementation of infrastructure necessary to safely allow our field, support and corporate support staff to safely limit as much as practical, physical interaction among our 17,000 employees. On the VITAS segment, the federal government and specifically HHS and CMS have been exceptionally supportive in terms of relaxing regulations, allowing the use of telehealth capabilities where appropriate and providing pragmatic flexibility…

Thanks, Kevin. VITAS' net revenue was $327 million in the second quarter of 2020, which is an increase of 4.7% when compared to our prior year period. This revenue increase is comprised primarily by 2.8% increase in days of care, a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration on May 1 of 2020 of approximately 5.4% and acuity mix shift, which reduced the blended average Medicare rate increase by approximately 310 basis points. The combination of increased Medicare Cap and a decrease in Medicaid net room and board pass-throughs, as well as reductions in other contra revenue activity, reduced total revenue growth in additional 42 basis points in the quarter. Our average revenue per patient per day in the second quarter of 2020 was $194.02, which including the impact from acuity mix shift is 2.3% above the prior year period. Reimbursement for routine home care and high acuity care averaged $165.22 and $985.23, respectively. During the quarter, high acuity days of care were 3.5% of our total days of care, 69 basis points less than the prior year quarter. This 69 basis points mix shift and high acuity days of care reduce the increase in average revenue per patient per day from 5.4% to 2.3% in the quarter. VITAS accrued $5.8 million in Medicare Cap billing limitations and then second quarter of 2020. This $5.8 million of Medicare Cap, includes approximately $2.3 million of cap liability attributed to the pandemic. The suspension of sequestration resulted in additional 2% increase in reimbursement effective May 1 of 2020. In Medicare, provider numbers that we're in a Medicare cap liability situation, there is 2% reimbursement increase was effectively eliminated by a corresponding increase in Medicare cap liability in those markets. In addition, disruption in Medicare admissions and these…

Thanks, Dave. Before I discuss our second quarter metrics, I want to reiterate Kevin's earlier comment and thank all of our VITAS team members for their continued perseverance throughout this pandemic. The interdisciplinary team approach that is the foundation of the hospice benefit has never been more evident for our organization across the country, then through this entire pandemic. Coordination of our entire team from our sales team providing pandemic relevant education to our disrupted healthcare partner through our admissions teams responding to referrals, enabling our clinical care teams to provide care around the clock with the support of our care coordination centers, home medical equipment division and back office support has been remarkable. All of this enabled us to care for 19,185 patients each day within the quarter, while bringing on the service 16,822 patients who needed high quality hospice care during this pandemic. We lived our internal model that we've been sharing during the pandemic, which is, yes, we can, and together we will. Now let's discuss our second quarter 2020 operating metrics. As I mentioned in the second quarter, our average daily census was 19,195 patients, an increase of 2.8% over the prior year. Total admissions in the quarter were 16,822. This is a 3.8% decline in admissions when compared to the second quarter of 2019. Admissions performance in the quarter was primarily impacted by the level of disruption, which occurred at each of our referring partners across the healthcare continuum. For example, admissions from hospitals were pressured due to the reduction in available bed capacity and elective procedures, resulting in fewer patients accessing and subsequently being discharged from hospitals. Admissions from physician offices, whom were disrupted but were able to remain operational through telehealth interactions saw an increase due to the number of patients choosing to…

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

[Operator Instructions] Our first question comes from Kevin Fischbeck of Bank of America. Your line is open.

You actually you have Brad Bowers on for Kevin today. So I appreciate you guys offering guidance. And the guidance kind of implies that Q2 margins are not really sustainable. And the way, I understand it is, VITAS would be doing less routine care and Roto-Rooter would be doing more commercial. Is there anything else that you would highlight on that?

Well, let me just start by saying, I don't know that our guidance suggests that the margins won't be sustainable. I'll say that historically high levels, I mean, when you look at VITAS was some of the issues that as we referred to that were accommodations the hospice industry started with telehealth, the sequestration relax during the period. Coverage for any unforeseen COVID-related expense for the CARES Act. I don't think there's anything to suggest that the margin for VITAS for the second quarter were unusual or unsustainable. Regards to Roto-Rooter, the suggestions made it. I don't know how high is up. It's one thing that seems to be very clear with Roto-Rooter as we keep a full unfurloughed staff at the ready and spend very aggressively on the Google paid search. One month just keeps getting better than next. So we've made our guidance not with the idea that any element of our current performance is unsustainable, but with the idea that in this type of environment, it's like every time, I'll paraphrase every time a company plans got lapse. I mean to the extent that we want to get too specific about the coming months. We are reluctant to do that. We reinstated guidance, but there is no element of our guidance, that we think is reflective of a slowdown in our business. Anything to add there, Dave?

Yes. The only thing I would add Brad is, it's very easy to do a carve out example for increased PPE I'd say Roto-Rooter. And then we're going to carve that out for our adjusted earnings per share. However, then you start getting -- when you start getting granular in terms of excess staffing, whether it's in our call center or infrastructure or anything else related to volatile demand and revenue coming in, we can't carve that out cleanly intellectually honest. So when you look at our full year guidance in terms of margins. Yes, that is actually a little below what we did in the second quarter because we're thinking we're being intelligently conservative, that we can turn around and take just increased staffing, increased expenses that can't be cleanly carved out related to the pandemic and still achieve our guidance. As well as we're prepared to have mix shift within say Roto-Rooter where we did quite well with excavation and water restoration, which has a fixed cost component, so when you have increased revenue in that regard, a lot of it drops to the EBITDA line. We could have a negative mix shift within Roto-Rooter still achieve our forecasted revenue, but margins might be a hair lower. So we're very comfortable with our guidance. If you wanted to say, do you think it's more likely that you'll fall below the bottom end or achieve the high-end would probably say achieve the high end, but we are dealing in an environment where we've never dealt with before. We don't know what California is going to do with their current state of economic lockdown and critical commercial businesses for us. We can take the hit. It's in our guidance, but we don't know. But we have a great degree of confidence on our overall free cash flow. We have a great degree of confidence on the sustainability and we're probably somewhat conservative in the second half of the year as the average revenue growth, the average margins are projecting, but we think we're being very, very prudent given -- even giving guidance in these uncertain times that also explains why we had a 3-minute caveat and how we developed our guidance for you guys to gauge the risk. But we're very comfortable for both VITAS and for Roto-Rooter on excellent performance in the second half of the year. And more importantly, we think we're better position than the vast majority of our competitors in hospice and in industrial services in 2021. So I don't think we could be better positioned for the worst black swan any of us have seen in our careers.

Yes. That color is very helpful. And again, appreciate you guys putting guidance back out, amidst all the uncertainty. So then I guess on the cash in the quarter, so cash is really strong. So I was kind of -- just asking to see if there were any advance payments baked into that and then how we should think of cash for 2020? And then 2021, is there anything you go back, such as like payroll taxes, etc., that you could maybe quantify and then the uses of the cash there? Thank you.

That's right. So, if you look at our -- the first-six months of this year, our cash from operations was just a hair under $278 million. So whenever you do a quarter of $1 billion of free -- cash flow from operations in this environment. You kind of know it's been boost. And it was about $109 million of cash related to CARES Act issues or pandemic issues. For example, we got $80 million from the CARES Act. We've had hard cost expenditures out to outside vendors of $4 million. So we picked up $76 million from the CARES Act funding. We also turn around to have about $11 million of payroll tax deferral on our balance sheet as of today. We have about $19 million of federal income tax deferrals that we normally would have paid. And we have another about $3 million of state tax deferrals. So differently, $109 million of excess cash from operations, so that $278 million would really dropped more than $168 million, which is still phenomenal. And then if you back out the $32 million of CapEx expenditures for the first six months of the year. We're still sitting on. We generated $130 million roughly in free cash flow for the first-six months of the year, excluding the positive cash flow impact from the pandemic, so exceptionally strong. And what do we anticipate doing with that cash. We're certainly always looking for strategic opportunities and acquisitions, but we anticipate using the Roto-Rooter free cash flow probably to continue our share repurchasing program. And the cash flow generator from VITAS will continue to pile up on our balance sheet and be prepared to take whatever steps necessary to keep our employees safe and maintain our operating capacity for terminally ill patients.

Got it. That's incredibly helpful a lot. Good quarter. Thank you.

Thank you. Our next question comes from Frank Morgan of RBC Capital Markets. Your line is open.

Good morning. So I was hoping we could get a little color. Obviously, you highlighted the sequential improvement across the second quarter by month. But I'm wondering if you can maybe give us some color about how those trends extended into the current quarter? And I guess starting out with just on the hospice side, maybe trends around admissions or a return to normally and either hospital based referrals or high acuity days or sniff days? That's my first question.

I'll turn this over to Nick to answer specific questions, but it's overall guided. Obviously, we don't -- it's early in the quarter, anything we say is, not that we make too many projections of this. But we wouldn't mentioned the sequential improvement. If we thought it was short-lived. Okay. I mean, we think that yes, things -- the trends we highlighted in this report, we just read to you. We see as real and solid and something at least for the near future to be a trend rather than a straight data point. But Nick, as far as who has specific effects just for the questions, what is fair admissions [ph].

So just to build upon that Frank that trend Kevin alluded to by breaking down the months, we continue to see in July and related to some of the hospital or skilled nursing flow, obviously much of that is specific to the community and where that community is not only in reopening but also whether it's having an outsized pickup in positive patients. The one thing that we're continuing to see and it's anecdotal is because we continue to operate and care for and educate all these partners both COVID and non-COVID patients. We're seeing scenarios of partnerships that we historically had not been receiving many referrals from, reaching -- sorry about that, because other members of the community are choosing not to service those patients or the partner as successfully as they used to and so we're able to establish new relationships pick up share, and if history tells us anything once we established a new relationship, we do a pretty good job of continuing to maintain that relationship because of our ability to differentiate not only from a response, but in overall quality and resulting in an elevated outcome for those patients and families. So we're seeing pockets where we're really able to be picking up new business and we're hoping to continue to maintain that business for the foreseeable future. I hope that answers your question.

Okay. And then, you referenced that use of telemedicine. I mean there was a lot of labor management, productivity management, but also the use of telemedicine. Can you may be elaborate on that a little bit more and talk about what has become a more permanent part of your clinical practice?

Yes. So from an overall visit perspective that we always look at on a day-to-day, week-to-week basis telemedicine definitely has played a role in it. We are appreciative of the CMS' recognition of how that can add additional incremental value. I think the one thing to highlight, so it's not overstated is our total visit frequency and plan of care while we moderated it down accordingly earlier in the pandemic is coming back towards pre-pandemic levels meaning, we're able to be out servicing our patients and their families. They want a face-to-face interaction for the most part. And when there is some scenario or that's not allowed. We're either replacing that with a telehealth visit or adding complementary telehealth visits to that in person interacting -- interaction, just because of the value of communication support and dialog right now through the pandemic. So, well, it is a complementary value-added service. It's not one of the main drivers from an efficiency perspective at all.

Good. And then, I guess...

Related to head count management supporting our people and like, Roto-Rooter, we have not furloughed or laid off a single employee throughout this pandemic. And it's really helped to build morale and rally everyone that's what I was alluding to it couldn't be any more proud of the entire team since March for what we've been able to accomplish.

That's very helpful. And then, I guess on the Roto-Rooter side, certainly they appreciate your commentary around the free cash flow, net of CARES impact in the mention for buybacks. But as you think about, I think you made some really a little more about potential -- potentially seeing some of your competitors not really re-enter the market. And so when you think about opportunities there, do you think do you rely more just on trying to just continue to gain market share from some of these weaker competitors some that disappear, or do you think it presents any opportunities for acquisitions on the road for the Roto-Rooter business?

I think more of the market -- gaining market share. I mean there are few franchisee locations that are would be considered plums, but that's not our focus. The decision to buy those is not -- I mean we're almost always have an appetite for those, but the rationale used by the sellers are more tied to somebody retiring or dying, they're not financial considerations. So we had to plan for those. But no, frank, to answer your question, we're piling up all this cash, particularly when you look at our stock price even presently how far below it is from various analysts 52-week targets. We think it's a real buy; it's good use of our capital, both -- which is a program that we started when the stock was $33 a share and we'll continue it.

Frank, if you think about it, on the Roto-Rooter side, we now operate with the acquisition of Oakland and HSW [indiscernible] call centers. Having those call centers available live people to take concern, our customers' calls as well as maintaining our employee base, our plumbers and drain cleaning technicians has given us an awesome some competitive advantage against the mom-and-pops in all of our local markets. So it's not a debate whether we're picking up share we are, the debate is how sustainable is that and how much will we keep once the pandemic ends and we suspect it's going to be significant, but it's really, really hard to measure. But I think between the great recession of 2009, coupled with the pandemic today and how well Roto-Rooter has performed in both of those very difficult operating cycles really, really shows the sustainability of our industrial business, as long as water and raw sewage is going someplace it shouldn't go, our customers want to talk to a live person to find out where the technician is and when they will get to their residential business to fix it. And the infrastructure we've developed really can't be touched by mom-and-pop competitors. So we're very, very comfortable with the sustainability of Roto-Rooter as of today.

Okay. Thank you very much.

Thank you. And I have a follow-up with Kevin Fischbeck with Bank of America. Your line is open.

Hi, guys. One more question. You guys touched on this a little bit, but other companies kind of called out miss nurse visits is helping the margin hospice, I was kind of curious if that was the case in the quarter here and also where visits currently sit and whether -- what kind of improvement you see there? Thank you.

So, Kevin and enough your had opportunity to hear the response to Frank. It was diluted inside of there. Our overall visit frequency is still just slightly down from our pre-pandemic levels. It's been picking back up. And when I referenced that it's the combination both of in-person visits, as well as telehealth in the combination accordingly. What we're seeing and experiencing and able to successfully still manage through our patients and families continuing to strongly desire in-person visits with a complement of telehealth due to the fact that they are comfortable and continue to be comfortable with the safety measures, our staff continue to take not only for themselves, but for all the patients and families. And so, while there was an impact in the second quarter with a reduction in physical visits. When you think about the overall fat we had did not furlough or lay off any staff. It really goes into some of our flexible variable labor models related to per DM employees and part-time employee utilization. So said differently, we are deploying the labor needs that are appropriate for those patients and families, whether it's in-person visits, whether it's telehealth visits, whether it's complementing in-person visits with telehealth to make sure we're continuing to prioritize patients and families needs and by evidence with our performance in the second quarter, we're able to do it. Have a little bit more efficiency with it from a marginal perspective and we'll continue to navigate that depending on the local circumstance.

Okay, that's very helpful. That's all from me. Thank you very much.

Thank you. And I'm currently showing no further questions, I'd like to hand the call back over to Mr. McNamara for closing remarks.

All right. My remarks will be brief. Just to summarize, we were very happy with the quarter obviously, at least early out very difficult operating conditions, but our two business did well. And I want to thank everyone for their kind attention and we'll try this again in about three months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.