Chemed Corp

NYSE:CHE

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Chemed Corporation's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Holley Schmidt. Please go ahead.

[Holley Schmidt, Assistant Controller]

Good morning. Our conference call this morning will review the financial results for the third quarter of 2022 ended September 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 October 31 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 31, 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.

[Kevin McNamara, President and CEO]

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

Our third quarter 2022 operating results released last night reflect good earnings performance for VITAS and Roto-Rooter. Both operating segments financial results continue to exceed our internal estimates despite continued disruption from the pandemic. For VITAS, this disruption remains 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 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 aids and social workers.

These onetime retention bonuses range from $2,000 to $15,000 per licensed health care professional. The total estimated 12-month forward-looking costs in this program, including payroll taxes and government-mandated overtime calculations, will be approximately $38 million.

All retention bonus payments are individually cliff vested after the employee has successfully completed 12 additional months of continuous employment. During the quarter, VITAS expanded our licensed health care professional staff by 172 employees, the majority consisting of licensed nurses.

This is the first significant expansion of our clinical workforce and related patient capacity since the pandemic began in early 2020. We continue to see disruption to senior housing occupancy and related hospice referrals. Our recent admission data continues to reflect a 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 110 basis points to 16.7% in the third quarter of 2022. Our 2022 updated guidance anticipates continued improvement in the senior housing-based census.

For Roto-Rooter, our most significant challenge has been to increase manpower. Technician manpower on September 30, 2022, expanded 1.8% when compared to the average Q3 2021 headcount.

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 this teleconference over to David.

[Dave Williams, EVP and CFO]

Thanks, Kevin.

VITAS' net revenue was $297 million in the third quarter of 2022, which is the decline of 6.6% when compared to the prior year period. This revenue decline is comprised primarily of a 4.4% reduction in days of care in a geographically weighted average Medicare reimbursement rate decrease of approximately 0.2%.

Reimbursement rates in the quarter were negatively impacted by 200 basis points as a result of CMS reimplementing the 2% sequestration cut that was suspended at the start of the pandemic.

Acuity mix shift had a net impact of reducing revenue of approximately $5.3 million or 1.7% 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 negatively impacted revenue growth by 30 basis points.

In the third quarter of 2022, VITAS accrued $600,000 in Medicare Cap billing limitations. This compares to $100,000 of Medicare Cap billing limitations in the third quarter of 2021. Of our 30 Medicare provider numbers, 25 of these provider numbers have a Medicare Cap cushion of 10% or greater, two of our provider numbers have a cushion between 5% and 10%.

One provider number has a cushion between 0% and 5% and two of our provider numbers have an estimated fiscal 2022 Medicare Cap billing limitation liability. The third quarter 2022 gross margin for VITAS, excluding Medicare Cap, related to - and expenses related to VITAS's 12-month hiring and retention program and other increased costs directly related to operating during the pandemic was 22.5%. This is a 323 basis point margin decline when compared to the third quarter of 2021. However, approximately 200 basis points of this decline is from Medicare reimplementing the sequestration effective July 1, 2022.

An additional 70 basis points of this margin decline is also attributed to our increased staffing and patient capacity from VITAS' hiring and retention program. Adjusted EBITDA, excluding Medicare Cap, totaled $45.4 million in the quarter, which is a decrease of 24.9%. Our adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 15.3%, which is 375 basis points below the prior year period.

However, as I mentioned earlier, the adjusted EBITDA margin was also negatively impacted by the 200 basis point cut in reimbursement from sequestration and approximately 70 basis points of the decline in EBITDA margin is also due to our success in expanding staffing and patient capacity from our retention program.

Roto-Rooter generated revenue of $230 million in the third quarter of 2022, which is an increase of 3.9% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $55.9 million, which is an increase of 6.9% over the prior year.

This aggregate commercial revenue growth consisted of drain cleaning revenue increasing 2.9%, plumbing increasing 11.6%, excavation expanding 9.8%, and water restoration growing 6.7%. Roto-Rooter branch residential revenue in the quarter totaled $155 million, which is an increase of 2.5% over the prior year.

This aggregate residential revenue growth consisted of drain cleaning increasing 2.9%, plumbing expanding 5.9%, excavation increasing 0.9% and our water restoration increasing 7.6%. Roto-Rooter's gross margin in the quarter was 53.4%, a 37 basis point increase when compared to the third quarter of 2021. Adjusted EBITDA in the third quarter totaled $69.5 million, an increase of 5.7%, and the adjusted EBITDA margin in the quarter was 30.2%, which is 50 basis points higher than the prior year period. Now let's talk about Chemed on a consolidated basis.

During the quarter, the company purchased 50,000 shares of Chemed stock for $23.9 million, which equates to a cost per share of $477.68. As of September 30, 2022, there was approximately $101 million of remaining share repurchase authorization under its plan. Now let's turn to our guidance. The COVID-19 pandemic, the uncertainty regarding forward-looking inflation and potential economic recession has made accurate modeling and providing meaningful earnings guidance exceptionally challenging.

Since the start of the pandemic, Chemed has been able to successfully navigate within this rapidly changing environment and produce operating results that we believe provide us with the ability to issue earnings guidance for the remainder of 2022 calendar year. However, this guidance should be taken with the recognition the above macro issues could materially impact our ability to achieve this guidance. Based upon the above discussion, VITAS' 2022 revenue prior to Medicare Cap is estimated to decline between 4.5% and 5% compared to the prior year.

A portion of the estimated revenue decline approximately $15 million or 118 basis points is the result of the phase out of sequestration relief over the first half of 2022 compared to a full year of sequestration in 2021.

Our Average Daily Census is estimated to decline 3.4%, but our full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 17.1% to 17.2%. And we are currently estimating an $8.1 million Medicare Cap billing limitation liability for calendar year 2022. Roto-Rooter is forecast to achieve full year 2022 revenue growth of between 6.2% and 6.5%.

And Roto-Rooter's adjusted EBITDA margin for 2022 is expected to be between 29.5% and 29.7%. Based upon the above, full year 2022 earnings per diluted share, excluding noncash expense for stock options, tax benefits from stock option exercises, costs related to litigation and the retention program for licensed health care employees or other discrete items, is estimated to be in the range of $19.60 to $19.70. This compares to our previous 2022 adjusted earnings per share guidance of $19.30 to $19.50.

Our current 2022 guidance does assume an effective corporate tax rate on adjusted earnings of 25.1% and a diluted share count of 15.1 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 Healthcare subsidiary.

[Nick Westfall]

Thanks, Dave.

In the third quarter, our Average Daily Census was 17,242 patients, a decline of 4.4% over the prior years. Our admissions strengthened and outpaced our discharges throughout the second half of the third quarter. This intra-quarter admission improvement generated weekly Average Daily Census growth, which we haven't experienced since the start of the pandemic. Directionally, this is encouraging as we proactively expand our clinical staffing and increase our clinical capacity.

This is the most encouraging set of emerging green shoot growth metrics we've seen since the start of the pandemic. In the third quarter of 2022, total VITAS admissions were 14,680. This is a 16.6% decline when compared to the third quarter of 2021. Most of this admissions decline is attributed to a reduction in labor-intensive acute hospital admissions. This decline was anticipated due to our ongoing community access initiative. To illustrate, in the third quarter, our hospital-directed admissions declined 23.4% when compared to the prior year period.

This decline in hospital pre admissions was partially offset by our nursing home admissions increasing 6.2%. Home-based admissions declined 6.6% in the quarter, and assisted facility-based patients declined 7%.

Comparing the third quarter of 2022 to our second quarter is also encouraging. In the third quarter, our admissions were essentially equivalent to our admissions in the second quarter. Preadmit location of our third quarter admissions also compare positively with the second quarter.

Nonhospital community-based admissions were flat, and the long-term care segment of community-based admits were up 3% sequentially. The short-stay hospital preferred admissions were down 1.5% when compared to the second quarter.

This sequential performance illustrates the consistency with which our community-based access initiative is performing as we continue to be focused on incrementally admitting more appropriate patients each day across all preadmit settings.

Our average length of stay in the quarter was 106.2 days. This compares to 96 days in the third quarter of 2021 and 103.7 days in the second quarter of 2022. Our median length of stay was 17 days in the quarter and compares to 13 days in the third quarter of 2021, and 17 days in the second quarter of 2022.

This growth in our median length of stay is attributed to the successful execution of our community access initiative I referenced earlier. Overall, I'm very pleased with the execution of our entire VITAS team regarding how we continue to serve our communities as well as produce positive results within our renewed focus on recruitment and retention of our workforce.

Before I turn the call back over to Kevin, I would like to thank our Florida team members who supported one another as well as our patients impacted by Hurricane Ian. Your dedication and response was truly inspiring and appreciated within the communities we serve. This is even more impressive when you consider our Florida staff also successfully opened the Fort Myers hospice program in September as we prepared for the hurricane.

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

[Kevin McNamara, President and CEO]

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

[Operator]

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

[Joanna Gajuk, Bank of America]

Yes. Hi, good morning. Can you hear me?

[Kevin McNamara, President and CEO]

Yes. Hi, Joanna.

[Joanna Gajuk, Bank of America]

Perfect. Okay. Hi, how are you? Thanks. So just a couple of questions here, specifically good to see traction on the new hires. So this retention program is working, so that's good. But I just wonder -- I assume it's probably too early to see increased updates on these new hires, so when would you expect to see kind of some benefits from this activity?

[Nick Westfall]

So Joanna, I just want to make sure I clearly understood the question. You're saying, as we continue to onboard and retain more clinical staff, when would we start to see the incremental benefits both from an admissions and a days of care standpoint?

[Joanna Gajuk, Bank of America]

Yes.

[Nick Westfall]

Okay. Obviously, there's a - got you. There's an embedded tail, not to state the obvious, of that as we onboard, bring clinicians up to speed. And some of that speed is dependent on whether they're coming to us with hospice experience or from a different health care setting. But usually, that may be a four to eight week time window as get comfortable, they're out caring for patients on their own or responding to referrals accordingly.

The corresponding admissions and days of care distribution would follow our normal trends, and that's what I was trying to allude to inside of some of the commentary with median length of stay, returning and continuing around 17 to 18 days. And the community access initiative, we'd hope that all incremental admissions will begin to continue to positively contribute to days of care growth on a sequential basis going forward.

[Kevin McNamara, President and CEO]

And what I would say, it's clear. There's no the direct reason they'll directly dovetail the increase in those two. But adding the staff at this point was a prerequisite. No question.

[Nick Westfall]

That's right.

[Joanna Gajuk, Bank of America]

Yes. definite. I guess a follow-up on that first. In terms of where these individuals is the clinical stuff is coming from, are you seeing changes to where you're like attracting more of these nurses Humana settings? Or are they just coming from other hospice providers. Can you give us a little flavor on that?

[Nick Westfall]

It's very much market specific. But we can definitively say is we are seeing more applicants across the board than we have. The other aspect to it is the teams have done a fantastic job of continuing to improve our retention of not only new staff, but our existing clinical team members and the combination of those two things are really adding to that build of clinical capacity. But it's being unfair to generalize where the different candidates are coming from. But universally, we're seeing more people apply, which is a very encouraging sign as well.

[Kevin McNamara, President and CEO]

But to reiterate your point, Nick, obviously, the best of all worlds is to retain them, not lose four and hire five. We want to retain five.

[Nick Westfall]

That's why my commentary on the retention is so critical. So we're really hitting on both cylinders right now.

[Joanna Gajuk, Bank of America]

And I guess to that end, with this retention bonus payment program, would you need to continue this next year? I know you just started as you just accruing these costs that you start paying them out next year. But I don't know - I guess - and how do you look at this retention program versus your base wage increases? And can you give us some sense of what you expected which increases to be next year?

[Nick Westfall]

So let me answer the first component with it. We would not anticipate continuing the program after the 12-month stated period that we've released to the Street. Part of that rationale is we think we're continuing to do a good job, and we're an attractive place to work as more clinicians appear to be coming back to the workforce.

As it relates to how we view that program as compared to our normal wage, whether it's merit or whether it's hiring cycle, those two things are mutually exclusive. And so while we don't necessarily release our merit targets, what I can say is that it has been in line and something we've managed that's pretty relatively consistent with some of the price increasing that we hope continues to accelerate from a statutory requirement. October 1 of next year, but obviously, we've just got a rate increase October 1, 32 days ago at this point.

[Kevin McNamara, President and CEO]

Right. And Joanna, I know you have some questions, it's a related answer. During the pandemic, the government gave us $80.2 million. Question is what - we didn't report that in income. What did we do with that money?

Number one, the additional protective equipment that we purchased and supplied, and we attributed to that money from the government. Virtually all of the rest of it, we have returned to employees in two forms, extra vacation in the first year, we gave 10 extra days of vacation. And the following year seven - five extra days of vacation.

And all this is - instead of giving more vacation, we decided we can just put a different form, little stickier as I would call it, a bridge to normalcy, which is just basically take the remainder of the money and say, look, if you stay 12 months, you get to - rather to me, it's 6.5 or the other, whether it's additional vacation or it's a stay bonus.

But to your point and Nick's answer, we view it as a bridge to a return to normalcy. If we thought it was something that continued, we treat it like it was increased salary or pay but we don't. So that's why we don't take that treatment of it.

[Dave Williams, EVP and CFO]

But Kevin, you bring up a great point. We're paying - prevailing market wages for our nurses, home health aid social workers. The retention is above and beyond that. It's not a substitute for an anemic-based wage.

[Nick Westfall]

But we feel confident, Joanna in terms of our ability...

[Joanna Gajuk, Bank of America]

Okay. Great.

[Nick Westfall]

Go ahead. I was going to mention, we feel confident in our ability to continue to manage the business inside of the stated and guided marginal ranges were - through the rest of the year and what we'll obviously guide for 2023.

[Joanna Gajuk, Bank of America]

Yes, But Nick, I was trying to understand how we should think about next year because some of the health care providers start talking about next year kind of wage inflation would expected and it kind of seems to be oscillate around 4%, 5%. So is this reasonable to you? Or you expect deceleration or you saying more like a high single-digit wage growth? So any color on that expectation into next year will be helpful, too.

[Nick Westfall]

It's a reasonable range. We don't provide that degree of granular guidance because while we'll target at every individual decision is made with guidance down to the leadership level. So that's a realistic range for what we're talking about, but something we feel comfortable with. And we'll obviously discuss once we release 2023 guidance.

[Kevin McNamara, President and CEO]

It's a requirement. I mean, if our - if the reimbursement is going up 3.8%, that's our - we can't - we have to start with that position, and I can't say we can - we're free to deviate from that in any significant way.

[Dave Williams, EVP and CFO]

But at the end of the day, wages are decided certainly for licensed health care workers on a market-by-market basis. And we had - if we're not paying the going rate for qualified nurses and other health care professionals, it will be self-defeating. So at the end of the day, we will engineer at such whatever it takes to attract and retain talent at market rates, that's what we're going to pay, and we'll adjust other costs accordingly.

[Joanna Gajuk, Bank of America]

Okay. It makes sense. I guess before I ask on Roto-Rooter, just last question on VITAS. Any comments there on the intra-quarter trends, which is here from one of the hospice is much smaller, but they talk about like discharge rate being high in August, but then other things started to improve late in the quarter. So I was just curious what you've seen in terms of either the sale or discharge rate kind of exiting the quarter?

[Nick Westfall]

Yes. Joanna, I don't know, you might have been able to - I mean to miss my remarks previously before we opened it up for questions. But I did comment that admissions outpaced discharges in the second half of the third quarter, which was a very encouraging sign and an emerging green shoot growth metric is what I had alluded to in my opening metrics that we haven't experienced since the start of the pandemic. So directionally, that's where the days of care performed on a week-by-week sequential basis throughout the quarter.

[Dave Williams, EVP and CFO]

And Joanna, the color I would provide in addition to what Nick and Kevin have given is, I would say this is the first quarter really since the start of the pandemic we saw some very, very encouraging signs in multiple areas, like Nick described in terms of admission and discharges, like our success in expanding our capacity, expanding our licensed health care professionals, specifically nurses.

It was extremely encouraging as we worked away July, August and September of the third quarter. But you guys also know our attitude, my attitude is we want at least two, if not three or more points to put together before we talk about sustainable trend lines, but the third quarter was very encouraging.

[Joanna Gajuk, Bank of America]

That's good to hear. I appreciate the color. So on Roto-Rooter, it sounds like things are actually tracking well as this is our model in terms of revenues but also margins better. So how did Roto-Rooter versus your internal expectations? I think I know the answer is the better because you raised the guidance. So I guess on that and kind of what's driving the outperformance and what's driving the margins as well as revenue outperformance?

[Dave Williams, EVP and CFO]

Yes. The primary thing - yes, we match our internal expectations for Roto-Rooter, not quite in the way we thought between residential and commercial, but close enough. The headline on Roto-Rooter would be, yes, we see a little softness on what could be arguably some discretionary jobs, but not much.

But cost controls and still increasing revenue resulted in the record EBITDA margin for the quarter, busting through the 30% level. So I guess the headline would be still good strong sustainable demand, not as high as it was, say, in the depths of the pandemic, but pretty darn good.

Very good cost control, good compensation for our employees. So Roto-Rooter, it's about cost control, manpower and being the first one to the customer's residents when demand comes in. And that's really what made the third quarter happen as well as the third quarter for Roto-Rooter is typically the most difficult quarter. People are on holiday, drier months. So the seasonality that's in our business, Q3 is typically the lowest.

And then when we go to the Q4, we typically see sequential seasonality, holidays, entertaining and things like that, anyone from about 3% to 8% sequential growth. And we saw strong indications in the month of September that sequential seasonality is happening. So again, part of our sharpening of our pencil, increasing margin for Roto-Rooter as well as anticipating more traditional seasonality and uplift in the fourth quarter, which we feel reasonably confident about.

[Kevin McNamara, President and CEO]

And Dave, the other comment I'd make on - we've got Roto-Rooter. We have observed once again the pricing power of Roto-Rooter. I mean we're in a difficult inflationary environment. And one of the most difficult things to do is get necessary pricing increases through. And clearly, when you look at the demand issues as they come out of the pandemic and then our results, clearly, Roto-Rooter has been successful in getting those.

[Joanna Gajuk, Bank of America]

Appreciate the comment. Okay, so, I'll get back to the queue. Thank you.

[Operator]

Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is now open.

[Ben Hendrix, RBC Capital Markets]

Thank you very much. Just a very quick follow-up on the bonus initiative. Have you seen any material responses in any of your markets from competitors who are maybe looking to counter your hiring efforts with their own bonus programs? Just wanted to see if there's any pockets where the program is not working as well or is creating any kind of prolonged inflationary pressure in certain markets.

[Nick Westfall]

Ben, the short answer is no. We're not seeing anything where there'll be a material response. Some - many organizations, not only in home care, but other health care verticals have continue to structure a whole bunch of higher bonuses, not as much on the retention side of it, but the sign-on component that gets coupled with it.

And the good news is those things have existed out in the market for the last 2.5 years. Our recruitment and retention program, which we deem the difference maker program, has really helped to offer a great talking point to those potential candidates so they understand the opportunity at VITAS as well as the reward in which they would receive once they've been with us for 12 months and hopefully are with us for 30 years.

[Ben Hendrix, RBC Capital Markets]

Thank you.

[Operator]

[Operator Instructions] I'm showing no further comments at this time. Please Kevin McNamara, you may proceed with your closing comments.

[Kevin McNamara, President and CEO]

Closing comments will be brief. I want to thank everyone for their attention. And of course, thank the - thank everyone, all the employees for a good solid quarter in what they have continued to be difficult operating conditions. Thank you very much. And I guess, we'll return to this forum in mid-February with the results of our fourth quarter and year-end results. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's program. You may now disconnect. Have a great day.