Good day ladies and gentlemen, welcome to the Chemed Corporation Second Quarter 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Sherri Warner Chemed Investor Relations. Ms. Warner, you may begin.

Good morning, our conference call this morning will review the financial results for the second quarter of 2016 ended June 30, 2016. 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 the 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 25 and in the 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 companies press release dated July 25 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 Mick Westfall, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Good morning. Welcome to Chemed Corporation's second quarter 2016 conference call. I will begin with some of the highlights for the quarter, and David and Mick will follow up with some additional operating detail. I will then open up the call for questions. In the quarter, Chemed generated $390 million of revenue, an increase of 2.2%. Consolidated net income in the quarter excluding certain discreet items increased 1.7% to $30.2 million. This equated to adjusted earnings per diluted share of $1.80, an increase of 5.3%. As most of you are aware, on January 1, 2016, CMS implemented certain changes to the Medicare Hospice reimbursement per diem. This rebasing eliminated the single tier per diem for routine health care and replaced it with a two tiered rate with a higher rate for the first 60 days of a hospice patient's care and a lower rate for days 61 and thereafter. In addition, CMS provided for a service intensity add-on payment which provides for reimbursement of care provided by a registered nurse or social worker, for routine homecare patients within seven days prior to death. Rebasing is revenue neutral for routine homecare billings if 37.6% of the total routine days of care is provided to patients in their first 60 days of admission, and 62.4% of total routine homecare days and care provided to patients after the 60 days. Basically, this is a 38% to 62% ratio. This change in reimbursement has reduced our revenue growth by roughly $11 million in the first half of 2016, and the full year impact will be roughly $22 million. We anticipate a portion of this estimated reduction in revenue growth will be offset by increased efficiencies in 2017 in the areas of non-bedside field operations and general administration. With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thanks, Kevin. VITAS's revenue up $279 million in the second quarter of 2016, which is an increase of $2.3 million, or 8/10 of 1% when compared to the prior year period, this revenue is comprised by Medicare reimbursement rate increase of approximately 60 basis points, a 4.4% increase in average daily census offset by acuity mix shift which negatively impacted revenue 1.9%, and the Medicare rebasing which negatively impacted revenue by 2%. VITAS did not have any adjustments to revenue related to the Medicare cap billing limitation in the current or prior year quarter. At June 30, 2016, VITAS had 31 Medicare provider numbers, none of which has an estimated 2016 Medicare cap billing limitation. Of VITAS's 31 unique Medicare provider numbers, 27 provider numbers have a Medicare Cap cushion of 10% or greater for the 2016 Medicare cap period. Three provider numbers have a cap cushion between 5% and 10% and one provider has a Cap cushion between 0% and 5%. VITAS generated an aggregate Cap cushion of $266 million during the trailing 12 month period. Average revenue per patient per day in the quarter was $192.02 which is 3.4% below the prior year period. Routine homecare reimbursement and high acuity care averaged $160.41 and $702.58 respectively. During the quarter high acuity days of care were 5.8% of total days of care which is 66 basis points less than the prior year quarter. The second quarter of 2016 gross margin was 21.5% which is up 41 basis point decline when compared to the second quarter of 2015. Our routine homecare direct gross margin was 51.9% in the quarter, a decrease of 50 basis points when compared to the prior year quarter. Direct inpatient margin in the quarter were 4.6% which compares to 6% in the prior year quarter. Occupancy…

Thanks, David. Total average daily census in the second quarter of 2016 was 15,952, an increase of 4.4% over the prior year. If you exclude the three small programs we closed in the past year, our average daily census on a unit-per-unit basis increased 5.3%. Our overall admissions are also somewhat distorted by these small programs. Total admissions in the quarter were 16,180, a decline of 3%. On a unit-per-unit basis admissions declined 1.4%. This admissions decline is not spread evenly in the communities we serve. Florida, our largest market by state had overall admissions growth of 3%. However, within the state of Florida, individual communities had admissions which ranged from a decline of 7.2% to an increase of 32.8%. California, our second largest market by state had declining admissions of 6.8%. Within California, our established programs had admissions ranging from increase of 18.7% to a decline of 19.5%. This type of local emission volatility is not unusual. Admissions are generated locally and are subject to a fair amount of volatility depending on a number of factors some of which are within our sphere of control and some involved factors completely out of our short term control. With that thing said, admissions for the first half of 2016 have been below our expectations. We are reassessing and where applicable implementing revised marketing and education within certain communities. The mission of these plans is to continually educate our community partners regarding office benefits for their organizations as well the patients and families served. We are also emphasizing the strong VITAS infrastructure that allows for a timely response referrals in admission of appropriate patients 24 hours a day, 7 days a week. In addition we continue to stress that VITAS has the capability of providing all acuity levels of hospice care combined…

Thanks Tim. Now appropriate to consider any questions that listeners may have.

[Operator Instructions] Our first question comes from Jim Barrett. Your line is open.

Hi, this is Jim Barrett from CL King. Good morning everyone.

Good morning, Jim.

My first question is for either you Kevin or Mick. The rebasing change in reimbursement, can you generalize about your non-profit competitors, do they cater more to short term patients as opposed to longer term patients or maybe a better way to ask the question is what do you see as the impact of this reimbursement change on your competitive set broadly speaking?

Well, let me give you my perspective and I will let Mick give his perspective. But let me start by saying that the government based on their studies, we kind of looked at it ourselves with the help of an outside entity, but theoretically rebasing is supposed to be neutral okay? And, let me start by saying that if there is a group that operates hospice below water that is at a loss before charitable contributions, it's usually one of our major competitors and that would Hospices in major metropolitan cities have a very close if not exclusive relationship with healthcare provider hospitals, hospital group owner, either owned, either captive or affiliating and to the extent that they have all short sight patients and didn't have a variety of patients that rebasing would help them to the extent that Hospices with longer length of stays would tend to hurt those averages. So I think Jim one of your questions is who our direct competitors are? Clearly a direct competitor buyers in every market in which we operate is a large not for profit that has some strong affiliations with some of the healthcare networks so in some respects, it would tend to help that group with regards to almost everyone else in the Hospice sector. It will tend to hurt a little bit and to the extent you have Hospices with very long length of stay that don't necessarily have the cash problem because they are in the low reimbursement area. It's going to hurt them a lot but to the extent that they don't do high acuity and they might operate at very high margins, they tend to take a whack out of what was a very high margin still healthy given the fact that they weren't really a full-service hospital. Mick, anything you would like to add to that, since it is the first question he might have more.

Yes, I would echo Kevin's statements related to the macro picture. Jim the other aspect as we look at it isn't as much for profit than not for profit as much as it is the maturity and how long that hospice provider has been in business and so we are finding and definitely seeing on the market place that those less mature smaller hospices with the rebasing component associated with it and that other hospice companies some like ours, that have been around a longer time, are more mature, have a more comprehensive offering, are working our way through this transitional year and have a good footprint not only the delivery of the bed side but relationship of the referral sources to navigate those waters. So we are definitely seeing a host of our competitors out in the marketplace that are definitely struggling that is both through word of mouth as well as them reaching out and trying to understand and get a grasp on how to manage the business better but it is not as much for profit, not for profit as it is the maturation inside of the hospice provider.

And Jim, one thing, it is complicated also when you are talking about the effect of this rebasing. With regard to VITAS, the details for us more than we would like, to the extent that we do offer high acuity services, we do get more than half of our referrals from hospital discharge planners, right from the potential carry unit. We tend to have, in those first 60 days, we have a majority of our high intensity care which as you have seen from our numbers on a combined basis the market for that is about equal to what was normal for the home care market, to the extent that we burn up some of those 60 days of higher reimbursement and don't get it in the backend. That's an element that is specific hurt for us, and again as I said it's unusual for hospices that do provide, the numbers only 8% of hospices provide even a reasonable amount of continuous care, high-intensity care. It's hard to make too many broad statements unless you are talking about what type of hospice you are talking about.

And Jim, this is Dave Williams. So your question has a lot of depth to it, we can spend a lot of time on. But the final point is, the whole point of getting that additional money in the first 60 days is because of the complexity and expense in the setup cost of patients entering hospice. And had CMS included that in the revenue neutral basis that extra payment to all levels of care and not just routine homecare, this section would have neutral to slightly positive to VITAS. For whatever reason, CMS chose to actually penalize providers of high acuity care at the initial outset of hospice care, so to the extent that you're dependent upon getting very, very sick patients out of hospitals which we are just actually turn out to be a slight negative. With that said Chemed and VITAS is very much in support of the direction CMS is going with reimbursement because we think it creates a better correlation between reimbursement and the cost of appropriate care but just the way the roles were structured in ignoring high acuity care, that actually resulted in a slight negative to us but we view it as just a laughing issue. It's a one-time hit on our growth, and starting at January of '17, we start comping against this rebased revenue, our growth rate is going to return. So it bugs us a little bit but because it's so directionally correct that CMS put in place you kind of swallow it and move on.

And Jim, you've been following Chemed since before we purchased VITAS.

Correct.

We've said consistently all the time. We've always been in favor of the U-shape curve before it has been vaguely proposed with the theory that once you reduced the financial exposure for long-stay patients the government will probably be smart if they adopted what the private insurance industry has already done for hospice coverage for people under 65, and that is take every encouragement to get people in it and not worry about the exposure for long-stay patients because, number one, the savings that are associated with being in hospice from the fact that you've reduced reimbursement for those days after 60. So again as Dave said it's something we've been espousing basically from the time we made the VITAS purchase.

That's very helpful, thank you. And then my second and last question is for you, Dave. I did note what has changed in your guidance since Q1, but having raised the impact rebasing by $0.24 you then increased your guidance by $0.05 to $0.10. Can you delineate what the factors are in that decision?

Sure, it's a combination of factors, certainly better performance out of Roto-Rooter, as well as the fact for the first six months of 2016. We assume we're going to have $5 million of Medicare cap billing limitations. First half of the year we didn't have any, so we took that $5 million down to $2.5 million of Medicare cap, so that helps as well combined with a lower share count. And although we took a hit on rebasing for VITAS, expense management has gone phenomenally well. So you kind of roll all those factors in and we're able to actually, we cut basically a dime out of the low-end of our guidance and increased on the other side.

Great, okay.

And you also look at the, remember from the release discussion, as Dave said we reduce share count, and not only did we reduce share count we're able to do it very opportunistically at an average price of, but just in the quarter, of $131. So very opportunistic if you're looking at why is it better than originally projected, it's all those factors.

Perfect. Okay, thanks again everyone.

Well, I don't see any other questions in the queue. The only thing that I would suggest the discussion that, question that kind of leading with the negative areas. Obviously there was one thing in our discussion related with low expectation that was admission in VITAS. Those I would say is a bit, have the insight baseball aspect to this is there was a change on January 1 in reimbursement. Basically the government further incentivized hospices to take on short-stay patients by paying a higher reimbursement and had changed the, change I think a little bit how some on the margin, how some hospices react to getting a reference to a patient whose not to likely to leave more than a few days. In our case VITAS is always tried for variety of reasons because they're professional and want to have the best reputation. Management always, they've done their level best to get all those patients. I'm not sure if that's mirrored by all competitors. There was a change January 1 for speculating on how that goes through the market. But one thing Mick, but one thing I did notice Mick was, when you look at our referrals, generally speaking they're much closer to our level of expectations. It's kind of the throughput difference that we're seeing. I mean any comments for this assembled multitude you like to make in that regard.

I think just -- into it is referral performance to date has been more aligned with our beginning of the year expectations in a positive range. We haven't seen a pull through totally from an admissions perspective. There's a lot of attributable factors. Most of them came in alluded to but as an organization and going forward, we're very comfortable and confident with our performance because we're continuing to focus on being nimble and adapted to our referral source needs and the needs of the patients and families, and our focus will and is and will continue to be speed and quality of response at the most critical time for patients and family. And while it ultimately gets executed at a local level, at a macro level as well we're always continuing improving our admission processes, implementing technology to support those processes and adding metric-driven transparency for better management and accountability. So that three-pronged approach has proven to be very successful for us in the past and we'll continue to be as it relates to referral and admission, very comfortable with it.

Thank you, Mick. Well with that we'll conclude our call for the second quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.