Chemed Corp

NYSE:CHE

Earnings Call Analysis

VITAS Grows, Roto-Rooter Faces Headwinds

Moving forward from the fourth quarter of 2023, VITAS Healthcare shows robust operational improvement with a 7% increase in admissions and an 11% growth in the average daily census, surpassing pre-pandemic highs and driving a 13.6% revenue increase to $350 million. Its adjusted EBITDA surged by 61.6% to $83.3 million with a margin improvement of 705 basis points to 23.7%. Since ending a 12-month retention program, VITAS' guidance for 2024 expects its ADC to grow by 6.5% to 7%, revenue expansion by 9% to 9.8%, with an EBITDA margin between 17.8% to 18.3%. In contrast, Roto-Rooter confronts consumer spending challenges that led to an 18.7% decrease in call volume and a 7.9% decrease in commercial revenue. Its full-year 2024 revenue growth forecast is set at 3.5% to 4%, with a projected adjusted EBITDA margin between 28.7% and 29.1%. Full-year 2024 earnings per share are estimated to range from $23.30 to $23.70.

Chemed Corporation's Steadfast Q4 Performance and Optimism for 2024

Chemed Corporation, in its Fourth Quarter 2023 earnings call, presented a reassuring picture of progress and stability, with substantial growth in its VITAS Healthcare subsidiaries and a strategic outlook for its Roto-Rooter segment. Sailing through the fourth quarter, VITAS displayed strong operational metrics with admissions climbing by 7% and the average daily census (ADC) expanding by 11%, outperforming the prior year, thanks to effective hiring and retention programs. Despite headwinds, Roto-Rooter offset declines in call volume through improved close rates and operational efficiencies. Looking ahead, the company has laid out guidance for robust ADC growth, revenue increase, and sustained profitability for 2024, indicating confidence in the direction of both divisions.

Financial Highlights and Future Guidance

Analyzing the numbers, VITAS generated $350 million in net revenue for Q4, marking an impressive 13.6% increase year-over-year, bolstered by higher days of care and a 2.3% boost in Medicare reimbursement rates. Roto-Rooter, however, saw a slight dip in revenues by 1.1%. Margin enhancements in VITAS were notable, with adjusted EBITDA margins jumping significantly. Chemed anticipates positive trends: a 9% to 9.8% revenue growth for VITAS and 3.5% to 4% for Roto-Rooter in 2024. Earnings are projected within $23.30 to $23.70 per diluted share, exuding optimism for investors eyeing the forthcoming year .

Strategic Outlook on Margins and Market Position

The executive team conveyed a keen strategic focus on balancing growth with sustainability. They appeared confident about not encountering imminent issues with the Medicare Cap, particularly due to a high level of hospital-based admissions. For VITAS, margin forecasts range between 17.8% to 18.3% indicating a cautious optimism about overcoming wage compression and other operational challenges. Conversely, Roto-Rooter's potential is seen in its service diversity and market positioning, fostering growth and stability with anticipated revenue growth of 4% to 6%, reinforcing the company's resilience and adaptability in face of market dynamics.

Earnings Call Transcript 2023-Q4

[Unknown Executive]

[abrupt start] The financial results for the Fourth Quarter of 2023 ended December 31, 2023. 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 February 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 February 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; Mike Witzeman, Chief Financial Officer of Chemed; and Nick Westfall, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiaries. I will now turn the call over to Kevin McNamara.

[Kevin McNamara, executive]

Thank you, Holly. Good morning. Welcome to Chemed Corporation's Fourth Quarter 2023 Conference Call. I will begin with the highlights for the quarter, and Mike and Nick will follow up with additional operating details. I will then open up the call to questions. Our fourth quarter 2023 operating results released last night reflect continued improvement in our VITAS' operational metrics. In the quarter, our admissions increased 7% over the prior year period. These strengthening admissions continue to drive higher patient census.

In the fourth quarter, our average daily census or ADC, expanded 1,918, an increase of 11% when compared to the prior year quarter and 2.6% when compared to the third quarter of 2023. During the fourth quarter, we surpassed our pre-pandemic ADC all-time high. VITAS' continued improvement in operating metrics is result of our 12-month retention and hiring program launched in July of 2022. This program was designed to stabilize turnover in our tenured staff and expand clinical workforce capacity. This 12-month retention program generated an aggregate increase of 784 licensed health care professionals, the majority of which are licensed nurses.

The retention bonus program ended in the second quarter of 2023. However, in the second half of 2023, we continued to expand our license staff and related patient service capacity. VITAS' net bedside head count increased by 157 licensed professionals in the third quarter and 84 in the fourth quarter. The fourth quarter increase was below our internal targets, but the lower number was not wholly unexpected as hiring around the holidays is more challenging due to individual schedules and vacation plans.

Our 2024 VITAS guidance assumes strong ADC growth driven by continued successful hiring and retention of licensed staff. Now let's turn to Roto-Rooter. As discussed over the past few quarters, Roto-Rooter continues to manage through what can only be described as ongoing headwinds in the consumer sentiment and consumer spending within our sector of the economy. Overall, our call volume was down 18.7% when compared to the prior-year quarter. The last week in the fourth quarter of 2022 was significantly impacted by a nationwide deep freeze, excluding that 1 week, in 2022, call volume was down 13% during the fourth quarter of 2023 compared to the same period as 2022.

This decline is comparable to the call volume declines we have been experienced in the second and third quarters of 2023. Roto-Rooter has offset a significant portion of the softening demand with improvements in close rates. Our call centers conversion rate, the rate at which a call is converted into a technician scheduled ticket has improved 5.4%. Our ticket void rate, which is the rate of canceled jobs before our technician can be dispatched improved to 1.8%. Our technician conversion rate the percentage of time a tech arrives at home or business and converts the schedule ticketed the billable work improved 1.3%.

Commercial revenue at Roto-Rooter declined 7.9% in the fourth quarter of 2023 compared with the same period of 2022. We've noticed that some of the same demand issues with our commercial business as we have experienced with our residential business. For example, as our large big box commercial customers have struggled with demand issues, we have been approached with a request for significant decreases in prices. We've walked away from this type of business. It is our belief that when manned issues abate, this type of customer will return to Roto-Rooter for it's consistent, high-quality, reliable service.

We continue to see overall stabilization of demand in our weekly revenue. Our guidance assumes improving demand trends starting in the second quarter of 2024. To summarize, I'm pleased with the accelerated improvement in VITAS post pandemic. Our increased growth in licensed health care professionals, strong admissions and corresponding growth in patient census have returned VITAS to normalized operating conditions.

Roto-Rooter is well positioned in spite of economic headwinds on the consumer spending in our sector. We anticipate continued expansion of market share by pressing Roto-Rooter core competitive advantages in terms of excellent brand awareness, customer response time, 24/7 call centers and aggressive Internet presence. With that, I would like to turn the teleconference over to Mike.

[Michael Witzeman, executive]

Thanks, Kevin. VITAS' net revenue was $350 million in the fourth quarter of 2023, which is an increase of 13.6% when compared to the prior-year period. This revenue increase is comprised primarily of an 11.0% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.3%. The acuity mix shift negatively impacted revenue growth, 38 basis points 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, increased revenue growth by approximately 61 basis points.

Average revenue per patient day in the fourth quarter of 2023 was $201.33, which is 200 basis points above the prior-year period. Reimbursement for routine home care and high acuity care averaged $177.62 and $1,058.60, respectively. During the quarter, high acuity days of care were 2.70% of total days of care, a decline of 6 basis points, when compared to the prior-year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $83.3 million in the quarter an increase of 61.6%. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 23.7%, which is 705 basis points above the prior-year period.

The fourth quarter adjusted EBITDA margin comparison was positively impacted by a number of items. The expense attributable to the retention bonus program in 2022 resulted in a 406 basis point improvement in the 2023 margin. As Nick will discuss further, VITAS reverted back to its pre-pandemic vacation policy which resulted in an estimated 135 basis point improvement.

Finally, the lower-than-anticipated hiring rate in the fourth quarter, previously discussed by Kevin, provided less drag on the adjusted EBITDA margin from onboarding and training costs.

Now let's turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $235.9 million in the fourth quarter of 2023, a decrease of 1.1% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $56.8 million, a decrease of 7.9% over the prior year.

Roto-Rooter branch residential revenue in the quarter totaled $162.5 million, an increase of 2% over the prior year. Adjusted EBITDA in the fourth quarter of 2023 totaled $64.9 million, a decrease of 6.4% compared to the prior-year quarter. The adjusted EBITDA margin in the quarter was 27.5%, which is 154 basis points below the prior-year period, largely driven by an increase in Internet marketing costs.

Now let's discuss our 2024 guidance. VITAS' 2024 revenue prior to Medicare Cap is estimated to increase 9% to 9.8% when compared to 2023. ADC is estimated to increase 6.5% to 7%. Full year EBITDA margin prior to Medicare Cap is estimated to be 17.8% to 18.3%. This compares to the 2019 full year adjusted EBITDA margin prior to Medicare cap of 17.7%. As discussed previously, we believe that a return to pre-pandemic margin was likely once the industry stabilized.

The 2024 guidance assumes we are able to successfully offset continued marginal compression headwinds and caused by above-average hiring and retention levels, along with wage increases outpacing our reimbursement in 2024. We are currently estimating $9.5 million for Medicare Cap billing limitations in calendar year 2024. Roto-Rooter is forecasted to achieve full year 2024 revenue growth of 3.5% to 4%. Roto-Rooter's adjusted EBITDA margin for 2024 is expected to be 28.7% to 29.1%. Due to the nationwide decrease in early '23, we believe that the first quarter of 2024 will be a difficult comparison for Roto-Rooter, resulting in slight declines in revenue and profitability.

Our guidance then anticipates modest demand growth for the remaining 3 quarters of 2024. The January 1, 2024 price increase implemented by Roto-Rooter averaged approximately 3.5%. Based upon the above, full year 2024 earnings per diluted share, excluding noncash expense for stock options, tax benefits from stock option exercises costs related to litigation and other discrete items, is estimated to be in the range of $23.30 to $23.70.

This 2024 guidance assumes an effective corporate tax rate on adjusted earnings of 24.2% and a diluted share count of 15.2 million shares. Chemed's 2023 adjusted earnings per diluted share was $20.30 and including $1.04 per share for costs associated with the 2023 portion of the retention program. I will now turn this call over to Nick Westfall, Chief Executive Officer of our VITAS Healthcare business segment.

[Nicholas Westfall, executive]

Thanks, Mike. As previously discussed, our 12-month retention and hiring bonus ended on June 30, 2023. This program was very effective in stabilizing and expanding our patient capacity. I'm also very pleased that we've continued to expand our workforce and patient capacity in the second half of 2023 without this retention program.

While the fourth quarter net head count addition was below our internal expectations, we are confident that was caused by the circumstances of the holiday season and not any issue related to our ability to hire and retain the appropriate level of licensed bedside employees. While it's only 2 months into the new year to further reinforce this confidence, we have seen a return to hiring and retention levels we anticipate for 2024.

In the fourth quarter of 2023, our average daily census was 19,352 patients, an increase of 11% when compared to the prior year. And an increase of 493 or 2.6% sequentially. VITAS has generated sequential ADC growth over the last 5 quarters. Kevin mentioned in his opening remarks, we also achieved a milestone when we surpassed our prepandemic all-time ADC high during the fourth quarter of '23.

I'm particularly proud of the team for this achievement as it was accomplished faster than we originally forecasted when we began 2023. In the fourth quarter of '23, total VITAS admissions were 15,867. This is a 7% increase, when compared to the fourth quarter of '22. In the quarter, our nursing home admissions increased 1.7%. Assisted facility admissions expanded 16.4%. Hospital directed admissions increased 0.5% and our home-based patient admissions expanded 15.2% when compared to the prior-year period. Our balanced community-based strategy continues to be successfully executed by our team as illustrated by the consolidated 13.9% admissions increase in those segments during the fourth quarter.

Our average length of stay in the quarter was 105.9 days. This compares to 103.9 days in the fourth quarter of '22 and 103.1 days in the third quarter of '23. Our median length of stay was 17 days in the quarter and compares to 16 days in the fourth quarter of 2022 and 17 days in the third quarter of '23. As Mike previously mentioned, our fourth quarter '23 EBITDA margin was positively impacted by a number of factors. While we were slightly disappointed with our net head count additions in the fourth quarter, the positive side effect is that there were less unproductive labor onboarding and trading costs than anticipated.

Additionally, -- during the pandemic, we increased the amount of paid time off or PTO our employees could carry over from year-to-year from 40 hours to 80 hours. This was designed to allow for our workers to better manage burnout and be able to quarantine as was prescribed at that time without worrying about whether they would be paid for that time. In August of 23, we announced that the carryover policy was reverted back to the historical 40 hours at the end of the year. As a result, we experienced higher levels of PTO taken in the fourth quarter than normal.

Additionally, the amount of forfeited PTO at the end of the year was higher than historical levels. We anticipated -- we estimate that this onetime PTO change added approximately 135 basis points to the fourth quarter EBITDA margin. To recap what our team has accomplished, we've now generated 6 quarters of sequential net growth in licensed health care workers and 5 quarters of sequential growth in ADC. We now have a sustainable and predictable approach to continue methodically building our clinical capacity and patient base that has taken us past our pre-pandemic levels and catapulted us forward into '24 and beyond.

I want to thank our entire team as these accomplishments over the past few years were a result of the unwavering commitment, dedication and focus each VITAS team member has towards fulfilling our mission in every community we serve. We got here together, and we are very excited for what 2024 and the future has in store for VITAS. With that, I'd like to turn the call back over to Kevin.

[Kevin McNamara, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Joanna Gajuk of Bank of America.

[Joanna Gajuk, analyst]

So I guess first on VITAS, it was the last topic, but the guidance, of course for VITAS revenue to grow 9% to 10% on census growing 7% again. So that's about, I guess, the kind of long-term growth outlook that you talked about in the past for the industry to grow like mid- to high-single-digits.

So I guess the 2-part question is, what gives you confidence you can grow volumes high-single-digits again? And I guess with that, what is the long-term outlook for revenue growth, I guess, in the segment? After '24, do you expect continuation of it? Is there something to be said about aging demographics or people accessing hospice earlier, any dynamics that maybe imply the growth, this accelerated growth is sustainable?

[Nicholas Westfall, executive]

Maybe just to take the 2 parts, Joanna, this is Nick. Short answer for '24 and beyond is, yes. We think the volume growth rate, combined with the pricing piece is sustainable beyond 2024. The other factors that you're referencing, whether it is aging demographics, people traditionally going into the age range, where they access the hospice benefit. That's very favorable from a tailwind standpoint.

I think the biggest unknown is, hopefully, and I think we will continue to see the momentum in the industry for people continuing to access the benefit earlier, which could drive overall days of care growth. And I realize there's a lot of things contributing to that. You could get to federal government overall understanding through things like the [ NORC ] study that earlier and longer access is beneficial to the Medicare Trust Fund as well as to patients and families.

And then you can take other pieces that are very favorable, like President Carter's continued journey on the benefit he reached his 1-year milestone on February 18. And me and everybody else in the industry can't provide enough praise to him and his family for the dialogue that has sparked across the country about what hospice is and what it can be. So I think there's a lot of favorable tailwinds about -- for '24 and beyond around overall understanding of the hospice benefit acceptance and the fact that it is a really sustainable and high-quality program for the country.

[Kevin McNamara, executive]

And Joanna, I think that, again for people building a model and referring to past periods for VITAS, you have to build in what Nick has described in various forms as a mix shift with community access. I mean when you have to -- when you look at our average length of stay going from high 90s or 105, that's basically driven by the fact that fewer of our referrals are coming from hospitals, which still a very substantial, it's one of the largest source, I mean don't get me wrong. But referrals from other sources tend to have a longer lived census. And so that mix shift makes some comparisons to past periods on less rolling.

[Nicholas Westfall, executive]

In the overall health care demographic of people seeking care outside more and more of acute [ 4-wall ] hospitals and facilities I think, helps to contribute to that for where we would see referrals coming to us.

[Joanna Gajuk, analyst]

So I guess if I may follow-up on the comment around the mix into the community access strategy and the increasing length of stay. How does it -- I guess, what's your, I guess, strategy there when it comes to dealing with Medicare Cap, when it comes to these lengthening space for some of these patients?

[Nicholas Westfall, executive]

No. The strategy itself doesn't change as it relates to it. We'll continue to manage it accordingly on a market-by-market basis. And we feel very comfortable that, that balanced approach, and I specifically use the word balanced in my opening remarks, is what's needed and necessary. And so while there is a broader expanded access, don't want to discount the importance of our hospital partners and how that's going to continue to be critical for us as an independent hospice provider in every community in which we operate.

[Michael Witzeman, executive]

And we still have a pretty high level of hospital-based admissions, which help with the Medicare Cap. We don't anticipate any real material Medicare Cap problems in the near term for sure.

[Kevin McNamara, executive]

We'll put this way. Our Medicare Cap issues that we talked about really plot against occur in California, and that's not driven by high average length of stay. It's driven by very high reimbursement with a static nationwide level of cap measurement. So suffice it to say, we're knocking on wood here, but in the short and midterm outlook cap, it was unlikely to wear its ugly head.

[Joanna Gajuk, analyst]

Okay. That's helpful color. If I may stay on VITAS, on the margin side. So clearly, you talked about some items that help to bring margins 23% versus kind of we talk about 3 months ago, that Q4 guidance, it was a little bit less than 22. So I guess you explained the benefits of that. But I guess also your guidance calls for margins expanding which is good. And there were some comments on the last call around like VITAS margins normalizing up 19%.

So I guess, you see still, to your point, the margin guidance for '24 going forward margins to be above 2019 levels. But should we still think about going forward that there's potential for more margin expansion towards this 19%, like you said, if you continue to grow top line, high single digits, is there opportunity for getting closer to '19?

[Nicholas Westfall, executive]

So the short story is the guidance in the range that we provided for 17.8% to 18.3%, we think, is very reasonable from a bottoms up budgeting standpoint. Forecasting around how much headwinds there is on marginal compression given pricing, lagging and never catching up to real cost of operating the business is impossible to forecast what that means out multiple years at this point.

But I think the 1 thing you'd say uniformly is we're -- our reference point up until the last call was coming back to margin levels that were pre-pandemic and then seeing how it shakes out as we get to a very sustainable and predictable growth rate as well as overall profit contribution rate, and we'll see what the marginal contribution then blends out to be. That we feel very confident in, and that comes out in that 17.8% to 18.3% range for '24.

[Michael Witzeman, executive]

Joanna, I think it's important that the components of how we got back to 2019 are a little bit important, as Nick mentioned. So we have seen a significant amount of wage compression and issues and issues with wages going out faster than our reimbursement. But we've been able to effectively keep a lot of the efficiencies that Nick and his team at VITAS were able to garner through the pandemic and telehealth and those sorts of things.

So we've offset some of those wage pressures with other efficiencies, I think -- we think there's some opportunity for future margin expansion, but it's not going to be any big bang kind of expansion. There's going to be incremental, methodical increases, call it, '25 and beyond.

[Nicholas Westfall, executive]

And everything we're going to do is focused on continued sustainability of the business, not maximizing short-term near 1 quarter marginal contribution.

[Joanna Gajuk, analyst]

No, I appreciate that. And I guess a similar question on the Roto-Rooter. Why it's so -- it sounds like for '24, your guidance cost for, I guess, maybe a little bit less than what you described in prior calls, when it comes to like long-term growth.

So I guess a similar 2-part question. What gives you confidence you can grow faster, I guess, '24 versus '23? I mean, it sounds like pricing, I guess, is the driver there. But then how do we think about growth after that? Like is it fair to assume that kind of 4% growth is sustainable growth? Or should it kind of snap back to something a little bit higher in years after when the economy, I guess, is in different spot?

[Kevin McNamara, executive]

Well, I'll just make a couple of comments about Roto-Rooter. I mean, it's tough. I mean we really never had a period where the telephone has stopped ringing so suddenly. We think there's reasons for that. I mean basically, if you said, what I really think the reason is driving it is that we had a sustained period, where inflation was far above wage gains in the country.

And that environment has shifted, it's going to take some time to recover from that. But that's macroeconomics. I mean we're a small company in Cincinnati. I mean -- so that's for the economists of the University of Chicago that flesh out. What our belief is that it's a tough patch. I mean the good thing about that is when we say that we're seeing this throughout the industry, certainly our system with regard to franchisees and contractors or what not.

The good news is, I think it's going to give us an opportunity to buy some franchises, to be honest with you, because that's the time, when they become available. So that's the silver lining. Now with regard to looking after the future. I think that when all the dust continues to settle, I'm Google marketing, which is -- which is a problem now because in this tough sales environment, we're spending a lot more on Google marketing than we were a year ago.

But when the dust settles, we have such a competitive advantage and that is each call for service in this industry because we have a broad service line that is plumbing, drain-cleaning, excavation, water restoration. Each call is more valuable to us, and we will be able to afford to pay more for those leads. And I guess, when the dust settles and there's a proper price setting mechanism for that, we're going to have a huge comparative advantage.

So we feel very good when you talk about -- so I mean our rollout positioned very good in the industry as it improves. Now the question of how high is up for the industry. We got a number that, if we provide services to houses and apartments and small businesses generally. So the question is what's -- what are the formation rates for those 3 sectors. They're not 10%, they're less than that. So we have -- we'll be providing services to a fairly stable patient a fairly solid customer base, and we'll just be hoping to take market share with the continued aging of the blue-collar workforce.

So steady as she goes at Roto-Rooter, but very -- continues to be a very solid business with the first quarter of last year was through the roof largely from -- caused by very unusually. We don't like to talk about weather issues, but January of last year, December and January of last year were just very unusual weather events. And so we've mentioned it a lot just to warn everybody that it's going to be a tough comparison, certainly through December and January. But as we get through the rest of the year, it's a much easier comparison.

[Michael Witzeman, executive]

Joanna, I think from a 2024 perspective, we've -- the guidance we've given is pretty straight down the middle. I think we think it's achievable, but it definitely assumes a level of improved consumer sentiment and consumer demand sequentially as the year goes on. So we're thinking a little demand volume improvement in the second quarter, a little more in the third, a little more in the fourth.

So we have definitely assumed some improving economic indicators and economic performance towards the end of the year. And then as far as '25 and beyond, I would think somewhere in that 4% to 6% revenue range is probably a fairly sustainable path, when you think about price increases. And then as Kevin mentioned, some demand improvement given our positioning in the industry, in our positioning with Google advertising and those sorts of things.

[Joanna Gajuk, analyst]

And last question, just to tie all these things when it comes to the margin outlook for that segment for the Roto-Rooter. So the guidance implies some improvement year-over-year in '24 because I guess you assume top line is growing. So how should we think about margins going forward in the Roto-Rooter? If you grow, like you said, 4% to 6%. Is this enough to kind of drive margins higher over time?

[Michael Witzeman, executive]

I think it will drive margins higher. But again, if there's not going to be any big bang jump 200 or 300 basis points are going to be methodically improving as we obtain leverage on that top-line growth.

[Kevin McNamara, executive]

Keep in mind the Google marketing, I mean, we're spending $1 million a month more on that. I'd say when we say the dust settle on that, it does -- it's a short-term jolt to -- we think it's all accretive, but it's on a comparative basis, it's a little bit of a jolt to margin. And as the kind of the singles and doubles that Mike is talking about as far as the improvements that's first have to overcome that jolt.

[Operator]

[Operator Instructions] Our next question comes from the line of Ben Hendrix of RBC Capital Markets.

[Michael Murray, analyst]

This is Michael Murray on for Ben. Just double-clicking on Roto-Rooter. You saw a pretty sizable deceleration in commercial growth in 4Q. I wanted to see if you could expand on that. And what do you expect for commercial demand in 2024? And what's your expectations for residential growth as well?

[Kevin McNamara, executive]

Well, let me just start by saying our commercial sales in Roto-Rooter in the fourth quarter were below our expectation. And there were a couple of factors that we think are a couple of big commercial customers that we thought had an effect on it. But even generally, it's not where we want it to be. It's an area of renewed focus and emphasis that Roto-Rooter. And again, it's -- we think that there's no reason it won't mirror a lot of our experience on the residential side. But it didn't in the fourth quarter.

[Michael Witzeman, executive]

And the 3.5% to 4% growth that we're projecting for '24 comes fairly evenly across both segments and across each service offering within those segments. There's a little bit of variation, but we don't see a huge increase in commercial at the -- and the decline in residential or anything. It's fairly stable across both business segments.

[Michael Murray, analyst]

Okay. And just a follow-up. What gives you confidence that what you saw in 4Q commercial won't continue into 2024?

[Kevin McNamara, executive]

Well, what can give me confidence is I see and know the increased emphasis that Roto-Rooter is making with each of its branch managers. And so the confidence I have over the years is just saying that, that type of emphasis and effort usually in Roto-Rooter yields results.

[Nicholas Westfall, executive]

We've seen this before, maybe not quite to this magnitude, but there are from time to time, local area managers at some of these big retailers, for instance, that get the idea that they can manage their plumbing needs on a mom-and-pop basis on a store-by-store basis, and they quickly figure out that that's not very manageable, and they come back to us.

Not saying that's necessarily this case, but we have had many instances in the past, where we've lost that business for a small period of time, and they figure -- our customers figure out that managing it on a store-by-store basis is not very easy and then they come back to us. So there's no guarantee in this instance, but we think that there's probably a potential for that as well.

[Michael Murray, analyst]

Okay. That's really helpful. And switching to VITAS. So you're continuing to see solid ADC growth and you're expecting that to continue. Well, some of your peers have had softer ADC growth coming out of the pandemic. Obviously, you had your retention program, but is there anything else in your competitive strategy that may explain some of your outperformance compared to peers?

[Nicholas Westfall, executive]

Yes. So the thing we've been pretty rather consistent on probably over the last 1.5 years was, of course, the recruiting and retention program served as a catalyst that catalyst, though, had a lot of other tactful things, and I'll put it under the overall umbrella from a cultural standpoint. They really had a compounding effect around improvement of retention at each local each 1 of our programs. And that, combined with some very strong hiring continued to allow us to meet and not turn away any of the unwavering demand that we continue to see from our referral sources.

And when we have that on a market-by-market basis compared against some of our competitors, who would either not respond with the same degree of commitment to those referral sources or not be able to provide the full complement of services that they expected before the pandemic started. I think is really allowing us to -- and we can see it in our metrics, expand market share on an account-by-account basis.

But in the same regard, enter new relationships with certain accounts that may not have taken our call, but the circumstances have helped to reinforce that. So that's always -- that combination we feel very confident in as well as it helps provide confidence in our '24 guidance and beyond. So not to oversimplify it, but focusing on recruiting and retention as well as continuing to lean into all of our educational approaches out in the market are proving to be a very effective strategy for us.

[Michael Witzeman, executive]

And there's a bit of a waterfall effect, right? So if we have -- if we feel like in a program we're fully staffed from an admission nurse standpoint, right, we can get to the referrals, maybe faster than some of our competitors that don't have the staffing levels that we do. And that's 1 of the key factors in being able to admit the patient.

So it's sort of a waterfall not just with nurses providing the care, but it starts at the admission nurse level to begin with.

[Nicholas Westfall, executive]

And while we don't report them publicly, we continue to see very strong strength in referral growth, and that gives us great confidence that there's continues to be a share to be gained. And the only impediment would be staffing, which we feel very comfortable about continuing the methodically build.

[Michael Murray, analyst]

Okay. That's really helpful. Just the last one for me. Do you have any comments regarding cadence of earnings throughout the year? Anything that we should keep in mind? And do you expect VITAS margin to ramp through the year like you saw this year?

[Michael Witzeman, executive]

Yes. I think VITAS margin will -- it always spikes in the fourth quarter because we get our reimbursement rate on October 1 and essentially that increase falls to the bottom line in the fourth quarter because we haven't seen the inflation that goes along with that.

So we definitely think VITAS, particularly in the fourth quarter is going to ramp. There's definitely a ramping as well at Roto-Rooter, as we talked a little bit before is, sequentially, we think demand, hopefully, in our opinion, it's going to increase and improve as the year goes on. So there's a little bit of ramping at Roto-Rooter, but that's a little more stable. VITAS, certainly the fourth quarter will be the best quarter.

[Nicholas Westfall, executive]

And from a modeling standpoint, if you go back at the last full year that was uninterrupted by the pandemic, which will be 2019, that type of sequential building is probably the easiest one to look at on a quarter-by-quarter basis, because there's other things that go into play like at the end of the second quarter, we award and distribute our entire merit increase to our workforce.

Things like that are already forecasted in all of our modeling for the entire course of the year. But between that and the fourth quarter pricing are very predictable things that we have built into our earnings equation throughout the calendar year.

[Operator]

Thank you. I do not see any other questions from the queue at this point. I would now like to turn the conference back to Chemed President and CEO, Kevin McNamara for closing remarks.

[Kevin McNamara, executive]

I just want to thank everybody for their kind attention. We thought we had a good solid quarter. I think our guidance represents a solid blueprint for this year. I think it's -- obviously, we think it's achievable. And I guess for the more information for you and about three months and at this [ day ]. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.