Chemed Corp

NYSE:CHE

Earnings Call Transcript 2022-Q2

[Operator]

Good day and welcome to the Chemed Corporation Second Quarter 2022 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call is being recorded.

I’d now like to turn the call over to Holley Schmidt, you may begin.

[Holley Schmidt, Assistant Controller]

Good morning. Our conference call this morning will review the financial results for the second quarter of 2022 ended June 30, 2022. 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 27 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 27, 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 VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

[Kevin McNamara, President and Chief Executive Officer]

Thank you, Holley. Good morning. Welcome to Chemed Corporation's second quarter 2022 conference call. I will begin with the highlights for the quarter and Dave and Nick will follow-up with additional operating detail. I will then open the call for questions.

Our second quarter 2022 operating results released last night reflect good earnings performance for VITAS and Roto-Rooter. Both operating segments’ financial results exceeded our internal estimates, despite the continued disruption from the pandemic. For VITAS, this disruption is primarily concentrated on the hiring and retention of licensed health care professionals. I believe this industry-wide shortage of licensed health-care workers will persist for the foreseeable future.

Accordingly, VITAS has implemented a targeted hiring and retention bonus program effective July 1, 2022. This program is focused substantially on licensed nurses, nurse managers, home health care aides, and social workers. These one-time retention bonuses range from $2,000 upwards to $15,000 per licensed health care professional. The total estimated 12-months forward-looking cost of this program including payroll taxes and government-mandated over time calculations, will be approximately $37 million. All retention bonus payments are individually cliff vested after the employee has successfully completed 12-months of continuous employment.

The second pandemic triggered challenge for VITAS is the disruption to senior housing occupancy and related hospice referrals. Our recent admission data continues to reflect the steady recovery in senior housing based patients. Pre-pandemic, nursing home-based patients represented 18% of our total average daily census or ADC. The nursing home ADC ratio hit a low of 14.3% during the pandemic.

By the fourth quarter of 2021, our nursing home-based patients increased to 15.6% of total ADC. This increased an additional 80 basis points to 16.4% in the second quarter of 2022. Our 2022 guidance anticipates continued improvement in senior housing base census.

For Roto-Rooter, our most significant challenge has been to increase manpower. Technician manpower on June 30, 2022 expanded 4.3%, when compared to the average Q2, 2021 headcount. Based upon current service demand levels, Roto-Rooter continues to be understaffed for skilled technicians in many of our markets. Roto-Rooter is well positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time, 24/7 call centers and Internet presence.

With that, I would like to turn the teleconference over to Dave.

[Dave Williams]

Thanks, Kevin. VITAS's net revenue was $298 million in the second quarter of 2022, which is a decline of 4.5%, when we compare it to the prior year period. This revenue variance is comprised primarily of a 3.8% decline in days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase of approximately 0.8%.

Acuity mix shift had a net impact of reducing revenue approximately $5.2 million or 1.6% in the quarter, when compared to the prior-year revenue and level of care mix. The combination of Medicare Cap and other contra-revenue changes reduced the revenue decline by approximately 10 basis points.

In the second quarter of 2022, VITAS accrued $2 million in Medicare Cap billing limitations, which is equal to the accrual in the prior year. Of VITAS’s 30 Medicare provider numbers, 27 of these provider numbers have a Medicare Cap cushion of 10% or greater. One of our provider numbers has a cushion between 5% and 10% and two provider numbers have an estimated fiscal 2022 Medicare Cap billing limitation liability.

Roto-Rooter generated quarterly revenue of $233 million in the second quarter of 2022, which is an increase of $13.2 million or 6%, when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $54.8 million, which is an increase of $3.8 million or 7.5% over the prior year. This aggregate commercial revenue growth consisted of drain cleaning increasing 8.4%, plumbing expanding 10.4%, water restoration increasing 4.1% and excavation increasing 4.2%.

Roto-Rooter branch residential revenue in the quarter totaled to $159 million, which is an increase of $7.6 million or 5% over the prior year period. The aggregate residential revenue growth consisted of drain cleaning remaining essentially equal to the prior year quarter, plumbing expanding 9.3%, excavation declining 0.1% and water restoration increasing 14%.

Now, let's turn to Chemed on a consolidated basis. In June 2022, Chemed entered into a five-year $550 million Amended and Restated Credit Agreement. This Agreement consists of $100 million amortizable term loan and a $450 million revolving credit facility. The interest rate on this credit facility has a floating rate that is currently SOFR plus 100 basis points. As of June 30, 2022, the Company had approximately $387 million of undrawn borrowing capacity under this credit facility agreement.

During the quarter, Chemed repurchased 100,000 shares of Chemed stock for $49.9 million, which equates to a cost per share of $498.61. As of June 30, 2022, there was approximately $125 million of remaining share repurchase authorization under this plan.

Now let's turn to our updated 2022 earnings guidance. Historically, Chemed's earnings guidance has been developed using previous period's key operating metrics, which are then modeled and projected out for future periods. Critical within our projections is the understanding of traditional pattern correlations among key operating metrics. This modeling exercise also takes into consideration, anticipated industry and macroeconomic issues outside of management's control, but are somewhat predictable in terms of timing and impact on our business segments' operating results.

The ongoing COVID-19 pandemic, uncertainty regarding forward-looking inflation and increased risk of an economic recession has made accurate financial modeling more challenging than historically. The forward-looking guidance, I am about to discuss, should be taken with the recognition these macro issues could materially impact the company's ability to achieve this guidance.

With that said, VITAS’s 2022 revenue prior to Medicare Cap, in 2022 is estimated to decline between 4.5% and 5%, when compared to the prior year. Acuity mix shift contributes an estimated 150 basis points of this revenue decline. In addition, the phase out of sequestration relief over the first half of 2022 is estimated to contribute an additional 120 basis points of our full-year 2022 revenue decline. ADC is estimated to decline 3.5% for the full-year.

VITAS's full-year adjusted EBITDA margin prior to Medicare Cap is now estimated to be in the range of 17% to 17.2%. And we're currently estimating $10 million of Medicare Cap billing limitations in calendar year 2022. Roto-Rooter is forecasted to achieve full-year 2022 revenue growth of between 5.5% and 5.7% with an adjusted EBITDA margin in the range of 29.2% to 29.5%.

Based upon these metrics for the operating segments, Chemed's full-year 2022 earnings per diluted share excluding non-cash expense for stock options, tax benefits from stock option exercises, costs related to litigation, as well as the VITAS employee hiring and retention program Kevin noted earlier and other discrete items is estimated to be in the range of $19.30 to $19.50. This compares to our previous 2022 adjusted earnings per share guidance of $19.10 to $19.50.

Current 2022 guidance assumes an effective corporate income tax rate on adjusted earnings of 25.1% and a diluted share count of 15.12 million shares. Chemed's 2021 reported adjusted earnings per diluted share was $19.33.

I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.

[Nick Westfall]

Thanks, Dave. In the second quarter, our average daily census was 17,315 patients, a decline of 3.8% over the prior year, and essentially equal to our first quarter 2022 census. We were encouraged to see signs of stabilization and slight sequential build of our average daily census within the second quarter.

In the second quarter of 2022, total VITAS admissions were 14,735 patients. This is a 12.5% decline, when compared to the second quarter of 2021. The vast majority of this admissions decline is attributed to the reduction of labor intensive acute hospital referrals. This decline was anticipated due to our ongoing community access initiative focus, which continues to be successfully executed by our teams.

To illustrate, in the second quarter, our hospital directed admissions declined 20.5%, when compared to the prior year period. This decline in hospital pre-admit admissions was significantly offset by our nursing home admissions, increasing 5.3%, assisted living facility admissions increasing 5.6% and home-based pre-admit admissions expanding 0.2%.

Our average length of stay in the quarter was 103.7 days. This compares to 94.5 days in the second quarter of 2021, and 104.8 days in the first quarter of 2022. Our median length of stay was 17 days in the quarter and compares to 14 days in both the second quarter of 2021, as well as the first quarter of 2022. This sequential growth in our median length of stay is attributed to the successful execution of our community access initiative I referenced earlier in my prepared remarks.

Overall, I'm very pleased with the execution of our entire VITAS team regarding how we continue to serve our communities, as well as our renewed focus on recruitment and retention of our workforce.

With that I'd like to turn the call back over to Kevin.

[Kevin McNamara, President and Chief Executive Officer]

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

[Operator]

[Operator Instructions] Our first question comes from Joanna Gajuk with Bank of America. Your line is open.

[Kevin Fischbeck, Bank of America]

Hey, great, thanks. This is actually Kevin Fischbeck filling in for, Joanna.

[Kevin McNamara, President and Chief Executive Officer]

Hey, Kevin.

[Kevin Fischbeck, Bank of America]

Hey, yes, it has been about 14-years since I have been on the call, so good to be back. But I guess a couple of questions here. First, I guess, obviously you guys had a strong Q1 and Q2. The guidance raise that was less than the beat you had so far this year. Is there anything we should be thinking about as offsets to that upside so far?

[Kevin McNamara, President and Chief Executive Officer]

Yes. From a macro perspective, we basically have stronger revenues certainly running -- stronger margins on the VITAS side. But without a doubt, we did see a little bit softening on the Roto-Rooter side in terms of revenue growth. So that obviously, kind of, pull things back a bit, but good tight expense management. We continue to outperform on margin, but I would say it's really just a more realistic second half of the year outlook given the fact that there is very much potential, consumer spending pressure. And we have seen most of our business, the vast majority of our business is really non-discretionary. But we have seen a little bit of softness on discretionary jobs, that's just giving us a little cause for pause.

[Kevin Fischbeck, Bank of America]

All right, great. And I guess you've seen a few companies actually show improvement margins in Q2, when volumes have been weak. I mean, how much of the labor improvement is because the volume is going to came in a little bit light, making it easier to staff versus kind of actual kind of improvement that you can see as far as hiring, reduced temp labor, reduced over time, things like that?

[Kevin McNamara, President and Chief Executive Officer]

Well, I'll go macro and then flip it to Nick, who actually has a hard job of actually managing this. But frankly, dialed into our guidance was our ability to grow manpower in anticipation of future census growth and we haven't grown manpower incrementally like we had hoped. So some of that margin positive comparison from our guidance for the first half of the year was due to our inability to expand licensed health-care workers.

[Dave Williams]

Overly lean staffing. We will be more comfortable if we were able to hold on and hire more workers and to build it and they will come to the area -- we certainly have examples of that where we cannot -- let's say, we don't -- our admissions are down 12% largely driven by hospital based admissions and we have a scarce resource labor and as we expand that -- the number of licensed health care professionals, we have those that admissions will first flatten out and then we think show growth.

[Nick Westfall]

I mean, just Kevin, to expand a little bit further from of VITAS standpoint, it's exactly what Dave was alluding to, as we were building the guidance at the end of last year and trying to project the pace in which we look to grow our net clinical resources over time. We spoken about those at using adjectives as we did in the last quarter, but it's baked into the second half of the year's guidance. I commented about it briefly as it related to the prepared remarks in terms of really encouraged by what the management team has continue to do in terms of our renewed focus on both recruitment and retention of skilled clinical workforce.

And what Kevin alluded to as well in terms of the enactment of a new program that's targeted for recruitment and retention that launched here in July. We're optimistic around the results of that, also, hopefully help to produce as we finish this calendar year and launched with momentum into 2023.

[Dave Williams]

Yes, Kevin, from our standpoint, we have an exceptionally strong balance sheet, obviously almost no debt or what $85 million as of this morning, net debt. We have phenomenal cash flow from both of our segments and frankly, we're being proactive and aggressive in terms of the hiring and retention bonuses to acquire phenomenal talent from other competitor programs contiguous to our operations. So, we view this frankly as an opportunity to really expand the quality of our overall staff in hiring to augment people, who've been working pretty darn hard for the last two years and our existing base of employees. So, we're putting our balance sheet and cash flow to work.

And as Kevin pointed out to me the other day, part of the CARES Act money we received at the beginning of the pandemic, of the $80.2 million, we ended up using $44 million under the government's definition of lost revenue. Well, that was basically cash flow that's still in our balance sheet today. We're putting to work that $44 million of lost revenue, non-cash flow, CARES Act money into this retention programs, if you want to look at it from an economic standpoint. So, we view this as an opportunity to really take our great base of employees now and augment them with additional staffing that we think will give us legs in 2023 and 2024 in terms of sustainable growth.

[Kevin McNamara, President and Chief Executive Officer]

Last comment is the businesses there from the demand overall hospice in all the communities in which we continue to operate. So we're just continuing to proactively prepare to fulfill that ever growing increased demand.

[Kevin Fischbeck, Bank of America]

And so the mix shift that you mentioned a few times, is that in response to a constraint on labor, saying when labor is constrained, I'd rather be growing nursing home and AL admissions and that if you get that incremental nurse, you still want to be growing that or is it just the way that is going to happen and when you get that incremental nurse, to get everything?

[Kevin McNamara, President and Chief Executive Officer]

The short answer is yes. And it's very intentional that we've tried to evolve over the last few years, particularly inside of the pandemic, on that we're trying to highlight here community access initiative that I referenced earlier. If you think about it, it's been our ongoing mission for over a decade we've just been very laser focused on over the last two years to help educate the community for earlier appropriate identification of hospice patients and what we're really talking about here is, we're identifying the partners being an independent hospice provider and all the communities we operate that are continuing to do a good job to do that and are looking for ways to refer patients earlier in their disease trajectory to us so that we can care for them and their families for a much longer time period. And that's reflective in our median length of stay numbers as well.

[Nick Westfall]

But then, let me reiterate one point and that is, our long-term plan hasn't changed. I mean we -- if we didn't have a scarce -- varies scarce resource labor, we would -- there wouldn't be quite this imbalance in effort as far as recruitment. It would be broader. We think that's good for the patients, good for the community, good for the long-range prospects of the company. We don't have the luxury at this point of being quite to broaden our approach, because of the scarce resource of licensed health care professionals, but our long-term view has not changed.

[Kevin McNamara, President and Chief Executive Officer]

Think about what Nick and his team is doing though, Kevin, is if he has one nurse for eight hours for a continuous care patient, that's just a one-to-one ratio, but we're getting less of those high acuity patients on the hospital referral, so now that one nurse can manage a pool of what, half a dozen patients, Nick. We have great -- we have a -- and a scarce resource, we're having more days of care related to hospice, end of life care, than we would otherwise. Quite frankly, it's good for the system and it's good across the board in terms of maximizing the utilization of scarce nurses.

[Nick Westfall]

And then the last people to really benefit from it are our clinical teams at the end of the day, because we're really trying to manage through and help support them from a burn out standpoint. And so, the longer patients are able to appropriately be on service with us, we're hoping that also improves their overall quality and employment experience with us.

[Dave Williams]

And the proof is on the pudding, Nick, I mean, three months of not a fairly significant, but actual growth in ADC as opposed to the previous year and a half where we were just fighting a battle with the effects of the pandemic and having reduction.

[Nick Westfall]

That's exactly right. Very encouraged by some of the activity inside of this quarter.

[Kevin Fischbeck, Bank of America]

Great. And then I guess just to clarify the guidance you provided it at the same night that the reg came out. So, does your guidance, kind of, assume the proposal and that the final rule maybe came in a little better and potentially upside to that guidance or how should we think about?

[Kevin McNamara, President and Chief Executive Officer]

Exactly. So we would pick it up in the fourth quarter. So that would work out to be a hair over $3 million, maybe as high as $3.1 million ex some of the private pay. And that would equate to $0.15 a share, all things else held constant.

[Kevin Fischbeck, Bank of America]

And then maybe last question here. Maybe on the Roto-Rooter side. Obviously, you mentioned that the revenue guidance is down, I mean, how should we think about that business and the run rate as we enter into 2023?

[Kevin McNamara, President and Chief Executive Officer]

Well, without a doubt, we've always been guiding to what I'd say is coming down to more sustainable levels as we picked up share. My gut feel now is our competitors are going to be more strained than we are. So, without a doubt, it's going to soften our revenue outlook than we had say when we developed our business plan in September or October of last year for 2022. But I view it as, we'll continue to have growth, profit and margin will be strong, but I think we're going to again consolidate more additional market share. And I expect in ‘23 and ‘24, to even be more robust than it would have anticipated, because every time we encounter these economic turbulence, think of it as a ‘08 and ’09, we emerged from it stronger.

So without a doubt, we're going to take a little bit of hair off of the growth rate we're anticipating and it could result in even stronger ‘23 and ‘24 growth for Roto-Rooter because our competition generally doesn't do well in these economic disruptions.

[Dave Williams]

And Kevin, one thing I would add is a limiting factor for Roto-Rooter is the workforce. In the last year and a half, they've have been extremely busy, more business than they can handle. So you can -- as you lap that, the way you show revenue growth is the inflation, what your price increase is, the people who have already fully occupied. So, the growth is inflation plus the ability to add manpower. And obviously in this environment, it's been -- Roto-Rooter has done it, but has done it at a low single-digit rate of increase, which we’ve -- these are proabably have done a bang-up job, but that's just life in the United States on the hiring front. So, very healthy business, I mean Roto-Rooter is not a sustainable 15%, 18% profit increase type company, year-after-year. But again, we're very bullish on the Roto-Rooter approach to the market.

[Kevin McNamara, President and Chief Executive Officer]

This turns out to be a recession that somewhat meaningful. It generally spells good news for Roto-Rooter when we come out of it in terms of market share front.

[Dave Williams]

As I said, that's a key element. Roto-Rooter have both, they have to have the demand and the marketing department has been providing that. But they also have to have the manpower to complete the jobs.

[Kevin McNamara, President and Chief Executive Officer]

I love the call for Roto-Rooter, one of my favorite ones Kevin as fortune favors the prepared and I'd say Roto-Rooter is prepared.

[Kevin Fischbeck, Bank of America]

Great. Thank you.

[Operator]

[Operator Instructions] Our next question comes from Michael Murray with RBC Capital Markets. Your line is open.

[Ben Hendrix, RBC Capital Markets]

Hey, thank you. This has Ben Hendrix along with Michael Murray, just at RBC here. I was just -- I think you've really answered all my questions, really. But the main one being about the long-term outlook for the community access initiative, but I know that your strategy hasn't really changed. But do you think that there is anything structurally among your referral sources that might be permanently shifted that might, kind of, change your median length of stay outlook long term as the staffing backdrop normalizes and as we get back to normal admission declines from admission patterns from referral services?

[Nick Westfall]

Yes. I think, overall structural and this is Nick. The only piece, if there is a silver lining from the pandemic, the piece that really helps to continue to resonate, it's not a surprise, is the overall country's awareness around the value of providing care at home. And so, I think if we think about any structural change, it may just be the recognition that can be provided and that should have a positive impact over a multi-year basis on the ability of appropriate hospice patients to access the benefit earlier. So, as Kevin alluded to, our long-term strategy hasn't necessarily change, but hopefully that provide some tailwinds to the industry, as well as frankly to all what is primarily Medicare beneficiaries across the country over the next five, 10-years.

[Ben Hendrix, RBC Capital Markets]

But nothing structurally that would impact it negatively?

[Kevin McNamara, President and Chief Executive Officer]

Once we have full staffing and we start taking in more of those hospitals as pre-admit locations, the median will come down a bit. The average length of stay will come down a bit. So I don't view -- I view this -- both of those numbers are somewhat higher based on our traditional metrics just because of the shift we had to make in terms of scarce resources and staffing.

[Nick Westfall]

But 17 would have still been a day or two shy of our pre-pandemic run rate.

[Ben Hendrix, RBC Capital Markets]

Got you. Thank you very much. Just a quick question on the Roto-Rooter side. I noticed that the branch residential revenue, the water restoration component continues to be a very strong growth area and pretty much, it seems like it has since you guys -- sure inception into that business. I just wanted to see, kind of, how much room to run there is on water restoration and what's driving that continued strong growth?

[Kevin McNamara, President and Chief Executive Officer]

Water restoration is the least discretionary of all of our segments. So from that standpoint, we expect that in any environment will hold up the best. But the water restoration that business is 100% self referred from sewer and drain work where we found the majority of it is from sewer and drain work from back up main lines. So, that's a long way of saying is, we can't get additional water restoration unless we continue to do to the core services. So it's going to come down to more match that the growth rate in core services broken pipes and again backed up main lines.

We built out all of our branches substantially in terms of their water restoration capability. Independent contractors there are still building out their water restoration capability, but that will come through a water restoration segment just independent contractors. So, that's a long-winded way of saying, that is going to level off just like our overall core growth.

[Dave Williams]

Right. And I would say it's mature. It's something that we've seen. It is a good sign over from day one till now, is most of the water restoration work is covered by insurance. So, we have the service people onsite saying that we can do it. And day one, Roto-Rooter is a new kid on the block, but if we had to get the insurance company to agree to pay for it, and they better heard -- never heard of Roto-Rooter as a provider. Increasingly, they're being viewed as a very, very responsible provider, very easy to work with compared to many other competition that we run into.

So, the maturation level of that business will continue as we get -- we drive compliance with that they said, we get all our referrals from our own jobs and to the extent that we can approach a 100% match up from where there is a need for water restoration with our jobs, then it will be completely mature, but there is still some room there, but we don't want to change the characterization that it is a mature service offering at this point.

[Ben Hendrix, RBC Capital Markets]

Thank you very much.

[Operator]

There are no further questions. I'd like to turn the call back over to Kevin McNamara for any closing remarks.

[Kevin McNamara, President and Chief Executive Officer]

Thank you. I would just like to say that we were gratified from what we thought was a very solid performance by both of the operating units. And I think, we have some, in these uncertain times, some good strategies to deal with both the inflationary environment and the continuation of the pandemic. And just want to thank everyone for their attention and talk to you in about three months. Thank you.

[Operator]

This concludes the program. You may now disconnect. Everyone, have a great day.