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Good day ladies and gentlemen and welcome to the Q1 2018 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.
I would now like to turn the call over to Ms. Sherri Warner with Investor Relations. Ma'am, you may begin.
Good morning. Our conference call this morning will review the financial results for the first quarter of 2018 ended March 31, 2018.
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 19 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 April 19, 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, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.
I will now turn the call over to Kevin McNamara.
Thank you, Sherri. Good morning. Welcome to Chemed Corporation's first quarter 2018 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.
What a great start to the year. Our first quarter of 2018 had excellent operational performance, margin improvement and overall financial results in both of our operating segments. In the quarter, Chemed generated $439 million of revenue, an increase of 8.2%. Our consolidated net income in the quarter excluded certain discrete items generated adjusted earnings per diluted share of $2.72, an increase of 49.5%. Both, VITAS and Roto-Rooter performed well exceeding the high-end of our key operational and financial estimates. VITAS admissions excluded the Obama site closure in 2017, increased 4.7% in the quarter, and on average daily census expanded 6.6%, and our adjusted EBITDA excluded the benefit from Medicare cap increased 11.6%.
Roto-Rooter continues to show excellent results in our core plumbing and drain fitting service segments, as well as strong growth in water restoration. This resulted in Roto-Rooter having record first quarter 2018 revenue and profitability.
With that I'd like to turn this teleconference over to David Williams, our Chief Financial Officer.
Thanks, Kevin. I first need to take care of some housekeeping matters. As most of you are aware, effective January 1, 2018, the Financial Accounting Standards Board or FASB mandated certain changes in revenue recognition under Generally Accepted Accounting Principles, otherwise referred to as GAAP. For Chemed, this accounting standard mandates the reclassification of certain costs within the 2018 income statement when compared to prior-year formats. These reclassifications have zero impact on EBITDA, adjusted EBITDA, pretax income or net income; these reclassified expenses do impact comparative analysis between years on certain metrics such as gross margin since this accounting standard was adopted on a modified retrospective basis.
Our 2017 operating results were not restated and are reported using historical revenue recognition accounting standards. This resulted in the reclassification of net room and board expenses associated with certain Medicaid patients residing in nursing homes to be reclassified from cost of services to revenue, effectively reducing VITAS revenue and cost of sales by approximately $2.6 million in 2018. In addition, uncollectable accounts receivable, commonly referred to as bad debt expense has historically been included in selling, general and administrative expenses for both VITAS and Roto-Rooter, and these are now netted in service revenue and sales or a contract revenue account. This reduced revenue in selling, general and administrative expenses by approximately $4.6 million in the quarter.
The discussion and analysis of operating results on this conference call, as well as in our first quarter 2018 earnings release narrative does reclassify net 2017 room and board and estimated uncollectable receivables to facilitate analysis of operating results in the format consistent with the 2018 revenue recognition accounting standard. With that said, let's talk about the quarter.
In the first quarter of 2018, VITAS net revenue was $292 million, which is an increase of 5.5% when compared to the prior-year period. This revenue increase is comprised primarily of geographically weighted average Medicare reimbursement rate increase of approximately 0.7%, a 6.1% increase in average daily census, and a reduction in Medicare Cap that increased revenue 0.6%. This growth is partially offset by acuity mix shift that negatively impacted revenue growth by 1.8 percentage points when compared to the prior-year period. In the first quarter of 2018, VITAS reversed $1.8 million in Medicare Cap billing limitations recorded in the fourth quarter of 2017 all of which relates to the 2018 Medicare Cap billing period.
At March 31, 2018, VITAS had 30 Medicare provider numbers, two of which have a current estimated 2018 Medicare Cap billing limitation of approximately $616,000. Of VITAS's 30 unique Medicare provider numbers, 27 of these provider numbers have a Medicare Cap cushion of 10% or greater, one provider number has a cap cushion between 5% and 10% of revenue, and two provider numbers have a Medicare Cap billing limitations for the 2018 Medicare Cap period. VITAS's average revenue per patient per day in the quarter was $189.76, which is 1.2% below the prior-year period. Our routine home care reimbursement and high acuity care averaged $163.53 and $706.24 respectively. During the quarter, high acuity days of care were 4.8% of total days of care, and this is a 60 basis points reduction when you look at the prior year quarter.
The first quarter of 2018 gross margin, excluding Medicare Cap was 21.7%, which is a 97 basis point improvement when compared to the first quarter of 2017. In our routine home care direct patient care, gross margin was 52.1% in the quarter which is an increase of 80 basis points when compared to the first quarter of 2017. Direct inpatient margin in the quarter was 7.5% and compared to a margin of 5.9% in the prior year. Occupancy of our 28 dedicated inpatient units averaged 72.2% in the quarter and compares to 71.4% occupancy in the first quarter of 2017. Continuous Care had a direct gross margin of 17.7%, an increase of 210 basis points when compared to the prior year. Average hours billed for a day of continuous care was 17.2 in the quarter which is a slight decrease compared to the 17.7 average hours billed for a day of continuous care in the first quarter of 2017.
Now let's take a look at the Roto-Rooter segment. Roto-Rooter's plumbing and drain cleaning business generated sales of $147 million for the first quarter of 2018, an increase of $24.7 million or 20.2% over the prior year. Revenue from water restoration totaled $27.7 million, which is an increase of $9.6 million, or 53.3% compared to the prior year. Commercial drain clean revenue increased 7.7%, commercial plumbing and excavation increased 15.3%, and commercial water restoration grew 40.7%. And overall, our commercial revenue increased 13.4%. Residential drain cleaning increased 13.6%, plumbing and excavation increased 22.7%, and residential water restoration expanded 55.5%. Overall, aggregate residential sales increased 26.3%.
Our first quarter 2018 operating results did outperform our internal projections. However, we are reiterating our earnings guidance issued in February 2018 and we'll provide an updated guidance when we report our second quarter 2018 operating results.
I'll now turn this call over to Nick Westfall, Chief Executive Officer of VITAS.
Thanks David. VITAS continued our solid performance in the first quarter, both financially and operationally. Our average daily census in the first quarter of 2018 was 17,209 patients, an increase of 6.6% excluding Alabama over the prior year. Total admissions in the quarter excluding Alabama were 18,279, an increase of 4.7% when compared to the first quarter of 2017.
During the quarter, admissions generated from hospitals which typically represent roughly 50% of our admissions increased 0.7%. Home-based admissions increased 11.3%; nursing home admissions increased 2.9%; and assisted living facility admissions increased 3.6% in the quarter. Our per patient per day ancillary costs which includes durable medical equipment, supplies and pharmaceutical costs averaged $14.47 and are 4.4% favorable when compared to the $15.14 -- we had put a cost of these items in the prior year quarter.
At the end of the first quarter, our inpatient care consists of 26 active 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. We currently have a few new units in development, as well as a few new contract bed arrangements where we plan on be servicing patients in 2018. As Dave mentioned, we were able to continue our general inpatient margin performance in the quarter with 160 basis point improvement over the prior year.
Within continuous care, we continue to 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 210 basis points when compared to the first quarter of 2017. VITAS's average length of stay in the quarter was 87.9 days in comparison to 88.7 days in the first quarter of 2017. Median length of stay was 15 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.
[Operator Instructions] Our first question comes from the line of Frank Morgan from RBC Capital Markets. Your line is open.
Good morning. Obviously, a big beat relative to where our three estimates were, I think you made reference to the fact that you're -- you beat your own internal expectation. So I'm just curious in terms of magnitude relative to your expectation, whether it's large as what -- the consensus numbers where or did the street just had it that much all?
It exceeded our expectations. I think the street was a little live overall, I mean when we gave our guidance for 2018 in February I think everyone -- most of the analyst moved up their numbers but probably not enough. And then from our standpoint we really hit it out of the park operationally in terms of the metrics, in terms of our call volume at Roto-Rooter, job count increase across commercial residential, plumbing and drain cleaning. So yes, that was strong across the board and VITAS just did a phenomenal job of both rolling census more than we thought they could, admissions more than we thought they could, and a great cost control quarter.
Got you. And in terms of relative to your internal budgets, not street consensus but relative to your internal view; would you attribute more of -- was VITAS more of the source of the beat or I should say more of a surprise. The magnitude obviously of VITAS is a lot more but just the relative surprise between the two businesses?
It was actually equally spread but for us the proper canvas; there were no misses in the quarter, everything showed strong sustainable growth on the areas that we care about that exceeded our high end of the expectation.
And in terms of what you're watching in terms of readjusting your guidance or updating your guidance, any particular metric that you're most focused on that will lead you to perhaps revise that upward?
Kevin is going to have a few thoughts on this but what I would say is, water restoration continues to show strength as we continue to higher feet on the street to respond almost on a triage basis when there is a water problem in our customer's home and that's giving us continued outsized growth as we convert plumbing and drain cleaning jobs into additional water restoration work. At some point there has to be a subpercepitous [ph] drop in that growth rate but right now we don't see it.
Frank, what I would say, one way of what Dave's saying is, because of the fast growth rate through last year at water restoration; almost by definition, our budget was a little frontloaded, pretty on Roto-Rooter, if you just do the math on a country that grew as fast as water restoration did last year. But to answer your point, it's hard to say, at the end of the second quarter what we use is trend analysis and if the current trends obtain it will be certainly a number north of 11, let's put it that way, and -- $11 a share that is. But you know, until we get there we like to be accurate with our -- with last 3 years or I think 4 years we've revised guidance be in the second quarter, and that's allowed us to come within much narrower parameters. So that's what -- that's the answer I would suggest.
In terms of admission growth, obviously a strong number in the quarter followed by strong number last -- growth rate last quarter, but it has been sort of erratic over the past 6 or 8 quarters, is there something that you're seeing out in the market, the same thing to have make you think that there is more -- there will be more consistent being in this 3% to 4% admission growth range that we should be thinking about? Thank you.
No problem, this is Nick, I'll take that one. I would say there isn't anything we're necessarily seeing out in the market itself. I think some of our methodical approaches towards improving not only our admission processes but also some of our sales and marketing processes; and really, the education and messaging, we're starting to see and read some of the results associated with that. We've talked about in a few quarters occasionally, admissions is a parameter related to the business that sometimes receives to a certain extent an unnecessary amount of attention. One of the things we want to continue to look at is continued census growth corresponding with some of those admissions because as you're aware, many of those patients that come on could have a very large range of discrepancy regarding total length of stay for those types of patients. So we feel comfortable with that continuing performance, it's result of a methodical approach for continued improvement, and would expect a degree of consistency inside of this range consistent with our guidance.
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Kevin McNamara for closing remarks.
Thank you all for your attention and we're excited here after a good quarter like that and we'll expect another similar call 3 months from now. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.