Chemed Corp Q1 FY2021 Earnings Call

Good morning. Thank you for standing by, and welcome to the Chemed Corporation First Quarter 2021 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Sherri Warner with Investor Relations. Please go ahead, ma'am.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2021 ended March 31, 2021. Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of April 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 April 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's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning. Welcome to the Chemed Corporation’s first quarter 2021 conference call. I will begin with highlights for the quarter and Dave and Nick will follow up with some additional operating detail. I will then open up the call for questions. At the outset I would like to say although I am very gratified by the company’s results in the first quarter, comparisons to the pandemic year of 2020 are analytically difficult. The pandemic clearly disrupted the hospice industry. The U.S. Government stepped in to help with the relaxation of sequestration and several other operational modifications. The net effect of the pandemic and the government’s actions was to allow VITAS to report an increase in adjusted net income of 25.7% in 2020. VITAS had a patient base in which median length of stay fell to 11 days. The complexities still facing VITAS is the disruptive impact the pandemic has had on traditional hospice referral sources and low occupancy in senior housing. This disruption continues to impact our admissions and traditional patient census patterns. Fortunately, admissions in hospitals have largely normalized and some of our senior housing referral sources are beginning to show improvement in occupancy and related referrals. I firmly believe senior housing will recover. However, senior housing is in the early stages of recovery, and we do not have enough data points to accurately predict when senior housing referrals will return to pre-pandemic levels. With that said, VITAS is performing in line with our previous guidance. Roto-Rooter operating results continue to be exceptional. Strong residential plumbing and drain cleaning demand has been more than adequate to compensate for the slight weakness we continue to observe with our commercial accounts. We have now had three consecutive quarters of record demand for our Roto-Rooter residential services. Residential revenue totaled $144 million in the first quarter of 2021, an increase of 32% when compared to the prior year quarter, and a 7.2% sequential growth when compared to the fourth quarter of 2020. Commercial revenue totaled $46.9 million in the quarter, an 8.4% decline when compared with the first quarter of 2020. Although our commercial demand has not yet normalized to pre-pandemic levels, this decline has shown significant improvement when compared to the commercial unit per unit revenue declines of 29.1%, 11.6%, and 9.8% in the second, third and fourth quarters of 2020, respectively. Aggregate Roto-Rooter activity, which includes branch operations, independent contractors, as well as franchisees and product sales, Roto-Rooter generated consolidated first quarter 2021 revenue of $212 million, an increase of 18.9%. With that, I would like to turn this teleconference over to Dave.

Thanks, Kevin. Let's turn to the VITAS segment first. VITAS’ net revenue was $316 million in the first quarter of 2021, which is a decline of 6.5% when compared to the prior year period. This revenue decline is comprised primarily of a 7.1% decline in days-of-care. Our days-of-care was negatively impacted 111 basis points by the 2020 leap year. Our first quarter 2021 revenue included a geographically weighted average Medicare reimbursement rate increase, including the suspensions of sequestration on May 1, 2020, of approximately 2.8%. Offset by acuity mix shift which reduced revenue by approximately $9.1 million or 2.7% in the quarter when compared to the prior year revenue and level-of-care mix. In addition, the combination of a lower Medicare Cap and other contra revenue changes offset a portion of the revenue decline by approximately 50 basis points. Our average revenue per patient per day in the first quarter of 2021 was $198.95, which including acuity mix shift is basically equal to the prior-year period. Reimbursement for routine home care and high acuity care averaged $170.14 and $991.77, respectively. During the quarter, high acuity days-of-care were 3.5% of our total days of care, 71 basis points less than the prior-year quarter. In the first quarter of 2021, VITAS accrued $1.5 million in Medicare Cap billing limitations. This compares to a $2.5 million Medicare Cap billing limitation we recorded in the first quarter of 2020. Of VITAS’ 30 Medicare provider numbers, 27 of these provider numbers currently have a Medicare Cap cushion of 10% or greater, one provider number has a cap cushion between 5% and 10%, one provider number has a cap cushion between 0% and 5% and one provider number currently has a fiscal 2021 Medicare Cap billing limitation liability. This is based on actual Medicare revenue and admissions in the first six months of the Medicare Cap fiscal year. VITAS’ first quarter 2021 adjusted EBITDA, excluding Medicare Cap, totaled $58.3 million in the quarter, which is a decrease of 3.3%. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 18.4%, which is a 66 basis point improvement when compared to the prior-year period. Now let’s turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $212 million in the first quarter of 2021, an increase of $33.7 million, or 18.9%, over the prior-year quarter. As Kevin noted earlier, total Roto-Rooter branch commercial revenue totaled $46.9 million in the quarter, a decrease of 8.4% over the prior year. This aggregate commercial revenue decline consisted of drain cleaning revenue declining 5.8%, plumbing revenue declining 5% and excavation declining 19.5%. Water restoration for commercial increased 8.8%. Our total Roto-Rooter branch residential revenue in the quarter totaled $144 million, an increase of 32% over the prior year period. This aggregate residential revenue growth consisted of drain cleaning increasing 29.5%, plumbing expanding 34.9%, excavation increasing 35.8%, and water restoration increasing 28.7%. We anticipate providing updated 2021 earnings guidance in July of 2021 as part of our second quarter 2021 earnings press release. I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.

Thanks, Dave. In the first quarter, our average daily census was 18,050 patients, a decline of 6.1% over the prior year. As Kevin discussed earlier, this decline in average daily census is a direct result of the disruptions across the entire healthcare system that impacted traditional admission patterns in the hospice starting in March of 2020. Our hospital-generated admissions have largely normalized to pre-pandemic levels. However, referrals from senior housing, specifically nursing homes and assisted-living facilities, continue to be disrupted. As Kevin mentioned, we have seen stabilization and pockets of improvement in senior housing admissions. However, it remains too early to reasonably project the pace and timeline for senior housing admissions to return to pre-pandemic levels. In the first quarter of 2021, total admissions were 18,135. This is a 2.5% decline when compared to the first quarter of 2020; however, these 18,135 admissions in the first quarter of 2021 compare favorably to the sequential admissions of 16,822, 17,973 and 17,960 in the second, third and fourth quarters of 2020. In the first quarter, our home-based pre-admit admissions decreased 1.5%. Hospital-directed admissions expanded 2.4%. Nursing home admissions declined 26.2% and assisted-living facility admissions declined 13.1% when compared to the prior year quarter. Our average length of stay in the quarter was 94.4 days. This compares to 90.7 days in the first quarter of 2020 and 97.2 days in the fourth quarter of 2020. Our median length of stay was 12 days in the quarter, which is two days less than the 14-day median in both the first quarter of 2020 and the fourth quarter of 2020. Before I turn this call back over to Kevin, I wanted to again thank our VITAS team for their continued commitment and perseverance in providing high quality of care to over 90,000 patients and their families since the start of the pandemic. With that, I'd like to turn this call back over to Kevin.

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

Our first question will come from the line of Joanna Gajuk with Bank of America.

Thank you. Good morning. Thank you so much for taking the question. So I missed this last comment about the admission patterns from these different referral sources. So can you repeat that? And I guess also, can you talk about kind of how this progressed through the quarter. Just thinking about—because to your point, you're seeing some pockets of improvement when it comes to the referrals from senior housing and, I guess, normalization in hospitals. So can you talk about kind of how this trended over the quarter, say, January and then February and March? Just thinking about these referral sources.

Joanna, I'm going to turn it over to Nick in a minute here. But just to put it in general context: what we saw during the pandemic was senior housing was particularly affected. I'll focus on Florida for a minute as an example. In Florida, very specifically, nursing home activity fell because admissions into nursing homes for obvious reasons were down. Activities in nursing homes were curtailed. The access to the nursing homes by family and our caregivers was severely restricted, which also meant that it was difficult to speak to families of people in senior housing who were generally interested in hospice but had no face-to-face access with VITAS or hospice providers during that period. The net effect is that the hospice admissions we were getting were more than normal coming from hospital discharge planners, which have a shorter length of stay. The net effect is we saw our median length of stay fall during the period. That's the general context, which I know you understand. I'm going to turn it over to Nick to give you the numbers. We are observing that, but many of these things are outside of our control. We need senior housing occupancy and access to recover. With vaccination, those are coming in large measure, but the timing is outside our hands, and we do not make a precise projection of it.

Yes. So going into the first quarter specifics, the home-based pre-admit admissions were down 1.5%. Hospital admissions were up 2.4%. Nursing home admissions were down 26.2%. Assisted living admissions were down 13.1%. To piggyback on what Kevin was articulating, if you look at the non-nursing home senior housing segments and other subcomponents, throughout the quarter there was evidence in certain states and pockets of ongoing improvement. But it's very early in those trends, which is why we continue to analyze both internal and external information. We'll provide further granularity in our updates, as discussed when we give guidance at the end of the second quarter.

Right. So of the 13% declines for assisted living, is it fair to say that the exit rate in March was better than that?

Yes. There's progression throughout the course of the quarter, but with volatility. It's very market-specific. By market I mean local markets and state-level differences. Many factors influence it: the state of the pandemic, the comfort level of the community with safety, and the social components Kevin mentioned. Those factors influence occupancy and net new lives coming into those settings as opposed to leaving, and that affects how many new referrals we get from those settings as well as our ability to access existing patients in those settings to provide care.

So on this last point, is there an 'all clear,' or are there still markets where you are not allowed to go in?

At the federal level there is guidance, but adoption varies state by state and facility by facility. Sometimes the pandemic produced unique, localized restrictions. What we've been successful at is providing education and demonstrating to each facility that VITAS shows up with committed staff and appropriate personal protective equipment and safety protocols to protect their staff and residents. That has helped in many cases to restore access.

There are still restrictions. It varies, and there are different levels of restriction. In Florida, for example, is there any nursing home where we are prohibited from being on site? The answer is no at this point, but different facilities may impose limits.

And related to that, it goes hand-in-hand with the cost you mentioned earlier, in terms of how open communities are to attracting new residents. That social aspect is more relevant for senior housing. What are you seeing in assisted living? It sounds like you think assisted living will improve faster than nursing homes. Can you discuss any specific senior housing indications and how that compares with nursing homes in terms of occupancy and referrals to you?

I don't have much more to add beyond the macro level. It's unique on a community-by-community basis. We're hearing consistently that it's not only a safety and access issue, but also the evolution back toward new residents and the attractiveness and comfort level for families to place loved ones in those settings. That is going to take time to evolve. We're monitoring it and partnering with those communities to support them daily.

One element to your question: we do look at industry reporting, but there is often a lag between the actual situation and reported numbers. We don't have enough data points to be a reliable leading indicator. So while we watch the same reported numbers you might watch, the lag limits their immediate usefulness in forecasting.

But directionally, to reinforce Kevin's comment when he opened the call, we feel confident in the rebound. It's a matter of timing and trajectory.

And also, hospital referrals seem to be stabilizing as hospitals return to more normal activity. Are you pursuing strategies to go after new referral sources, like physicians, since many seniors who are not in senior housing may be at home? Is there a strategy to access and educate those patients where they are?

Yes. We pivoted that strategy in the early part of the pandemic. We proactively and reactively focus our educational efforts based on where patients are accessing the healthcare system. Physician offices became a key access point, so we've doubled and tripled down our efforts to grow those relationships. That will be an important factor going forward, and we hope there is stickiness in the relationships we've established and the confidence physician offices have in VITAS to provide high-quality care to eligible hospice patients.

Regarding guidance for the year, you said you don't have enough visibility on the VITAS side to update guidance. You also mentioned sequestration relief being about a $6 million per quarter benefit. Is that the right way to think about it for the remaining quarters this year?

Yes. That would be correct, as well as we anticipate lower cash than we have usually anticipated. But again, the key is the trend line of recovery of senior housing. We really do need three more months of data points to be able to give an accurate projection for the second half of 2021.

As company policy, we generally refrain from providing updated guidance until we've reported second quarter results, unless something dramatic has happened. We'll update guidance in July with our second quarter release.

On Roto-Rooter, that segment did much better than expected with revenue growth much greater than prior guidance. Can you explain the drivers and how sustainable the strength in Q1 was?

I appreciate the question, but at this point we'll address guidance on a go-forward basis in July. Certainly we saw strong momentum in Q1 across the board on residential in all four critical areas: plumbing, drain cleaning, water restoration and excavation. Momentum appears to have strengthened from the fourth quarter of 2020, and we'll discuss this in more detail in July after we release second quarter earnings.

So you're saying the unusual weather in parts of the country in March wasn't a big part of the strength?

I don't think it was a major factor. There were some weather-driven events, like in Texas with freezing temperatures, but overall this winter had less weather-related demand than some typical periods. We do know that many people being at home may have focused more on getting things fixed, and the phone is ringing off the hook. Our advertising through Google and the internet gives us a competitive advantage; sequential growth will also depend on adding skilled manpower, which is always a challenge. The success in the quarter indicates Roto-Rooter was able to grow its workforce. It's hard to give a single cause other than strong demand and our ability to answer calls with technicians.

All right, I'll go back to the queue. Thank you.

Our next question will come from Frank Morgan with RBC Capital Markets.

Good morning, I hopped on late so I apologize if this one was already asked. As I looked at your results, it looks like costs management was really extraordinary and nice margin expansion. I'm curious how much room is left in terms of productivity management or anything else you're doing on the cost side, or from here is it really more just a function of seeing a recovery in top-line growth? And then my second question: Humana announced they are pulling in the Kindred at Home piece and spinning off hospice as a separate company. Any commentary about what you think that means for the industry? How often do you see them in the marketplace? Do you think anything changes as a result of that?

I'll take the first question. It's always a combination: managing growth, prudent cost control, and utilization of clinical disciplines to provide care. As we bring on more patients and staff, we look for efficiencies while maintaining quality. The pandemic also accelerated telehealth provisions, and that's an opportunity to elevate engagement with families and patients while balancing physical and remote care needs. So it's an ongoing combination of growth and prudent utilization of resources.

Would you say there was some productivity improvement as well since labor was scarce and you got more efficient? Do you anticipate keeping those procedures in place?

That's right.

So that's what we're focused on.

On Humana, it's interesting. The hospice business they acquired historically came through a chain of acquisitions—Odyssey acquired Vistacare, Gentiva acquired Odyssey, then Kindred, and then Humana. I think it was easier for them to focus on home health. It's hard to discern their full logic, but I wouldn't be surprised if the home health focus was a strategic decision.

To add, and this is somewhat speculative, hospice patients coming from hospitals are more likely to be short-stay and tougher to manage profitably for a full-service hospice. So it doesn't surprise me that a hospital system might prefer to focus on home health elements or structure assets differently.

From a policy perspective, things like value-based insurance design and demonstration models can affect how home health and hospice interact with capitated models. There are clinical care considerations and incentives that shape how these benefits are delivered and integrated. Home health still has many fee-for-service elements even as models evolve.

Thank you.

Our next question is a follow-up from Joanna Gajuk with Bank of America.

Thanks. On admissions, you mentioned year-over-year comps were difficult but quarterly numbers have been improving the last couple of quarters. Can you similarly talk about progression through the quarter in terms of admission trends?

Are you asking about the month-to-month progression since January through March?

The median length of stay showed a steady increase from January to March, going from 11 to 13 days and averaging 12. Also, a 2.5% year-over-year decline in total admissions from hospital in Q1 2021 is actually a positive result given that in late March 2020 hospitals largely flushed patients; that abnormally increased hospitalized pre-admit referrals then. So the fact we had a modest decline or essentially stability is actually encouraging.

I don't typically focus on monthly granularity because it can get very noisy—days of the week, how many Fridays, etc. It's better to look at the quarter to avoid overinterpreting short-term fluctuations.

One additional point: right now we are hypervigilant about where admissions are coming from. In normal times total admissions might be our primary focus, but today the source of admissions matters more. For example, if senior housing admissions strengthen while hospital admissions contract slightly, that would be a favorable development. We will focus sales and operations accordingly.

You mentioned a leaner workforce and productivity improvements when labor was scarce. Can you flesh out what's happening there and the implications going forward as the pandemic evolves?

We learned many operational practices during the pandemic that we'll memorialize to be more efficient and to drive quality for patients and families. We also continue to focus on retaining our existing staff and bringing on new clinical disciplines as demand returns. Attracting and retaining clinical staff is competitive as many providers are competing for the same resources, and that will continue to be a focus.

How many hospice teams do you currently have in place?

We have over 317 hospice teams.

There are many granular operational changes that individually aren't material but cumulatively can impact productivity. We need to wait until after the pandemic to truly measure their full effect.

Clearly margins were impressive this quarter. One last question: the proposed regulation from CMS includes a new quality measure, the Hospice Care Index, and a hospice star rating similar to home health. How do you view your position with respect to these proposed changes at a high level?

We typically refrain from detailed commentary until proposed rules are finalized, but at a macro level we support transparency and continued efforts to define and report quality and value in hospice. The proposed 2.3% price increase indicates recognition of the value of the hospice benefit. We'll review and respond to the proposed rule in the comment process and adapt accordingly.

Great, thank you so much for the color.

I would now like to turn the call over to Kevin McNamara for his closing comments.

Well, I just want to thank everyone for their attention and their questions. As I mentioned earlier, we are gratified with the results in the first quarter. Conditions remain difficult, and I thank everyone for listening. We'll be back at the end of the current quarter. Thank you.

Once again, we'd like to thank you for participating in today's Chemed Corporation first quarter 2021 earnings conference call. You may now disconnect.