Chemed Corp Q2 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Chemed Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator instructions were given. I would now like to hand the conference over to your speaker today, Ms. Sherri Warner of Investor Relations. Thank you. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2021 ended June 30, 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 July 27 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated July 27, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you Sherri. Good morning. Welcome to Chemed Corporation's second quarter 2021 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 to questions. Operating two distinct business units during our global pandemic has been exceptionally challenging. Fortunately we have begun to return to normalcy. The pandemic had created unique problems, logistical hurdles and forced our operations to make significant changes in field and home office procedures. Many of these changes have been institutionalized and will become part of our normal operating procedures post-pandemic. I could not be prouder of our management team. Both VITAS and Roto-Rooter met these pandemic challenges head-on, produced excellent operating results and are well-positioned for growth in the coming years. In April 2020, the first full month of the pandemic, Roto-Rooter experienced an immediate and severe drop in demand for all plumbing and drain cleaning services. This drop was short-lived. Starting in May 2020 Roto-Rooter saw a spike in residential plumbing and drain cleaning demand. This increase in demand was sustained throughout 2020 and has continued unabated in the first six months of 2021. Commercial demand has also improved up from pandemic lows and has now normalized close to pre-pandemic levels. For the remainder of 2021, I anticipate Roto-Rooter's residential demand to remain at the current run rate coupled with increased commercial demand as the country returns to normalized pre-pandemic consumer behavior. David will provide more detailed guidance metrics later in this call. Over the past 20 years the country has faced 9/11, the Great Recession and now a global pandemic. In each of these crises Roto-Rooter remained operating and materially increased market share, revenue and operating margin. Just as important, Roto-Rooter has held on to the increases in revenue, market share and margins after past crises. 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 and 24/7 call centers and Internet presence. For VITAS, the most significant issue remaining from the pandemic is the disruption to senior housing occupancy and the related hospital referrals. Recent admissions data suggest senior housing has entered into the early stages of recovery and our updated guidance anticipates steady improvement in the senior housing referred hospice admissions in the second half of 2021 with a further acceleration in senior housing admissions anticipated in the fourth quarter. With that I would like to turn this teleconference over to David.

Thanks, Kevin. Let's turn to VITAS. VITAS' net revenue was $312 million in the second quarter of 2021, which is a decline of 4.7% when compared to the prior year period. This revenue decline is comprised primarily of a 6.3% reduction in our days of care, offset by a geographically weighted Medicare reimbursement rate increase of approximately 1.8%. Acuity mix shift did have a net impact of reducing revenues approximately $3.8 million in the quarter or 1.2%. The combination of a lower Medicare cap billing limitation and other contra-revenue charges offset a portion of the revenue decline by roughly 90 basis points. VITAS did accrue $2 million in Medicare cap billing limitations in the second quarter of 2021 and this compares to a $5.7 million Medicare cap billing limitation in the second quarter of 2020. Of our 30 Medicare provider numbers, right now 27 of these provider numbers have a Medicare cap cushion of 10% or greater. One of our provider numbers has a cap cushion between 0% and 5% and two of our provider numbers currently have a fiscal 2021 Medicare cap billing limitation liability. Let's take a look at Roto-Rooter. Roto-Rooter generated revenue of $220 million in the second quarter of 2021, which is an increase of $45.6 million or 26.1% over the prior year quarter. Total Roto-Rooter branch commercial revenue totaled $50.3 million in the quarter, an increase of 31.8% over the prior year. The aggregate commercial revenue growth consisted of our drain cleaning revenue increasing 39.8%, plumbing increasing 32.4% and excavation expanding 25.8%. Water restoration also increased 8.3% on the commercial side. On the residential side total residential revenue in the quarter totaled $149 million, an increase of 23.7% over the prior year period. The aggregate residential growth consisted of drain cleaning increasing 20.6%, plumbing expanding 30.7% and excavation increasing 22.4%. Water restoration also increased 23.1%. Basically increases across the board, all segments both commercial and residential. Now let's look at Chemed on a consolidated basis. During the quarter Chemed repurchased 250,000 shares of stock for roughly $122 million, which equates to a cost per share of $487.53. As of June 30, 2021 there was approximately $312 million of remaining share repurchase authorization under this plan. We've also updated our 2021 earnings guidance as follows: VITAS' full year 2021 revenue prior to Medicare cap is estimated to decline approximately 4.5% when compared to 2020. Our average daily census in 2021 is estimated to decline approximately 5%. This guidance anticipates senior housing occupancy will begin to normalize to pre-pandemic occupancy starting in the second half of calendar year 2021. VITAS' full year adjusted EBITDA margin prior to Medicare cap is forecasted to be 18.3% and we are currently estimating $7.5 million for Medicare cap billing limitations in calendar year 2021. That's an improvement from the initial $10 million of Medicare cap we estimated at the start of this year. Roto-Rooter is forecast to achieve full year 2021 revenue growth of 15% to 15.5%. Roto-Rooter's adjusted EBITDA margin for 2021 is estimated to be between 28% and 29%. So based upon this discussion our full year 2021 adjusted earnings per diluted share, excluding noncash expense or stock options, any tax benefits we receive from stock option exercises as well as costs related to litigation and other discrete items, is estimated to be in the range of $18.20 to $18.50. The revised guidance compares to our initial 2021 guidance of adjusted earnings per diluted share of $17 to $17.50. I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.

Thanks Dave. In the second quarter, our average daily census was 17,995 patients, a decline of 6.3% over the prior year. This decline in average daily census is a direct result of pandemic-related disruptions across the entire health care system. This negatively impacted traditional hospice admission patterns starting in March of 2020. Our hospital-generated admissions have largely normalized to pre-pandemic levels. Referrals from senior housing, specifically nursing home and assisted living facilities, continue to be disrupted. During the second quarter, we have seen admission stabilization and pockets of improvements in senior housing admissions. However, it remains too early to accurately project the pace and timeline for senior housing admissions to fully return to pre-pandemic levels. In the second quarter of 2021, total VITAS admissions were 16,840. This is a slight improvement when compared to the second quarter of 2020 admissions. More importantly, admissions in the second quarter of 2021 exceeded discharges by 315 patients. This is the first quarter since the pandemic began that our patient admissions have exceeded patient discharges. This is the strongest indication to date that we are now beginning the process of rebuilding census to pre-pandemic levels. In the second quarter, our hospital-directed admissions expanded 7.8% and emergency room admits decreased 9%. Total home-based pre-admit admissions decreased 9.3%, nursing home admits declined 9.9%, assisted living facility admissions declined 17.5% when compared to the prior year quarter. Our average length of stay in the quarter was 94.5 days. This compares to 90.9 days in the second quarter of 2020 and 94.4 days in the first quarter of 2021. Our median length of stay was 14 days in the quarter, which is equal to the second quarter of 2020 and is a two-day improvement when compared sequentially to the first quarter of 2021. I want to reiterate Kevin's comments and thank our VITAS team for their unwavering dedication over the last 17 months to deliver these results in the quarter as well as continue to provide high-quality care in every community we serve throughout the country. With that I'll turn the call back over to Kevin.

Thank you Nick. It's now time for us to consider any questions that come before the teleconference.

Yes, sir. Our first question comes from the line of Mr. Frank Morgan from RBC Capital Markets. Your line is now open.

Good morning. I was hoping maybe you could give us a little color. You talked about the recovery in the — where admissions are exceeding discharges. But how would you characterize that momentum across the months of the quarter? Would you generally say it got better as you went through the quarter? Any general color there. And I think you also commented about some pockets of improvement in referral patterns. Could you give us any additional color on where you're seeing most of that and I guess, I'm especially interested in the Florida market?

Yes. So Frank, to address your first question on pace inside of the quarter, we did see strengthening of the admit versus discharge differential inside of the quarter. And granted we're inside of summer months and going into the fall that has some monthly seasonality to it. But all-in-all, we felt good and comfortable with the momentum that appears to be building inside of the quarter and is included in our projections for the remainder of the year.

And just with regard to Florida, Nick would agree that admissions in Florida are stronger and have been stronger through the entire year as compared to the rest of the country. So our very important Florida market has remained rock solid.

That's right. And so Frank, that was the second point I wanted to reiterate. We're seeing strength throughout the entire State of Florida, but also regionally we're starting to see some momentum actually in the Midwest, Southwest, Northeast. California continues to ebb and flow in certain pockets because of some of the differences in local municipality actions and enactment throughout the community.

And Frank, just for an abundance of clarity, if you look at the quarter April, May and June, April we saw a slight negative where discharges slightly exceeded admissions in April. May was actually positive where admissions exceeded discharges. And so May improved over April. June improved over May, where we had a significant gap between admissions and discharges. So the momentum and the trajectory is going in the right direction. I don't expect it to be linear. But without a doubt, I'd say I'm exceptionally confident in saying this: we've met bottom and we're off of bottom and we're seeing recovery.

The last comment, Frank, to correlate it back to senior housing — when you look at just even small 1% and 2% incremental occupancy moves across the board throughout the country that helps to correlate some of that ongoing momentum specifically in the senior housing sector.

Got you. And as I look at — we get asked a lot about the labor markets and availability of labor. So I'm just curious, what is your strategy through this period? I mean, clearly, census has been pressured through the pandemic. But what is your philosophy relative to labor? Are you willing to sacrifice margin in the near term to keep the labor? Or how much of an issue is getting labor for you in your key markets?

So that's sort of two questions built inside of there. Our approach throughout the pandemic and we continue to execute upon it in the second quarter was we recognized in certain select markets we had certain skill disciplines where maybe we were slightly overstaffed relative to what we would have been with an expectation of that return towards normalcy. We had a real focus on retention of high-quality employees throughout the pandemic, with extreme focus here in 2021. I'm happy to say in the quarter we've continued to see success with that intentional effort and we think it positions us well going forward. That being said, there are specific markets and specific disciplines that we're very aggressively continuing to recruit for, not only for our existing care needs, but for our anticipated future care needs. We've had noticeable success with some of the internal metrics in the way in which we garner that, but recognize the same commentary coming from the entire market. It is a very competitive market and we have tried to take some unique approaches for articulating what the value proposition to the candidate base is to join VITAS as opposed to some of the other providers in the space.

Frank, these competitors Nick is talking about are paying substantial signing bonuses to recruit certain disciplines. It's been a struggle, but it's not getting worse. It has been consistently tough.

But the other component, Frank — as we sit today across the board, there may be some market nuances, but we don't see staffing as an impediment today that's impeding our ability to grow on a go-forward basis.

Got you. Maybe one — just last one on VITAS. Obviously with the recent surge we're seeing from this variant. I'm just curious, how would it be different this time versus the past with the past surges? Obviously most of the nursing home population now is vaccinated. But how do you think your business would react if this variant hangs around for a while?

I think there's a host of differences as we sit here today compared to when we entered the pandemic. The first is our internal knowledge and comfort, not only knowing the vaccination rates and continuing to educate our team members to be fully vaccinated, which I think you understand the nuances with the second wave being highly concentrated on the unvaccinated population. That helps to provide a degree of comfort to staff to be out in the community to provide care. For unvaccinated staff or testing requirements, we also have the testing capacity to execute and conform to those rules. Between the combination of those two things along with sufficient PPE, we should be able to successfully navigate any access restrictions or potential patient, family and health care partner concerns and be present in the marketplace in a safe way to respond to ongoing needs. Said differently, we're better equipped with information to react nimbly as well as with materials and protective supplies to do so without pause.

Frank, I personally think the most disruptive potential element of the Delta variant would be if a state were to require all service providers to have only vaccinated employees. That would be disruptive because VITAS, like many companies, has employees who do not want to be vaccinated. To the extent we were dealing with that, it would be disruptive. We're not likely to see widespread mandates. If you look at various states, Florida is probably the last state that would do that. So I don't anticipate that happening. To the extent it did, it's less likely in Florida, which is our biggest market. We're watching it carefully. As the Delta variant persists, the real issue is we have been through this once as a country and we know that there were certain overreactions and under-reactions. There's a better chance of getting it right this time. From a commercial standpoint, we're less concerned now than previously.

Got you. One maybe a Roto-Rooter question, I'll hop back in the queue. But, I was interested in your comments you made about the commercial side of the business having resumed back close to baseline. I'm just curious have there been any changes in the mix of business on the commercial side? And then, on the residential side, the sustainability of this really incredible performance — it sounds like you're pretty confident that that will continue. Any data points there would be appreciated. And I'll hop in the queue. Thanks.

Yes. So without a doubt commercial is coming back close to pre-pandemic levels, not there and certainly not there in all markets. We now have three weeks reported in the month of July and I think one of those three was another record week. So yes, we have a high degree of confidence that the momentum is going to continue. As long as that momentum continues, that's where Kevin and I are getting our confidence we will hang on to this year. That's why he pointed out the last two times we had disruption — 9/11 and the Great Recession — we did keep all of the share growth we obtained during the crisis. The fact that this continues now and the momentum has continued on Roto-Rooter is where we're getting our confidence we'll maintain this share post-pandemic. But we're watching it very, very carefully. The great story frankly is the margin — to have a 29% EBITDA margin for Roto-Rooter in Q2 is unheard of. We're trying to be somewhat conservative, but recognize we're dealing with significant demand momentum. We're watching Roto-Rooter very, very carefully, but we think we're in great shape in terms of demand, cost structure and our positioning.

Basically what we look at is the strong growth in ancillary services — excavation and water restoration — which feed off strong growth in the core businesses and that's what we're getting. That gives us a lot of confidence. It starts with the core business growth, and then it's getting the throughput for the other services.

Thank you.

Our next question comes from the line of Joanna Gajuk from Bank of America.

Good morning. Thanks for taking questions here. So, first if we can come back to VITAS. I guess a question about margins for the segment. For the year, you reduced the guidance versus your initial expectation for the margins for VITAS, despite the fact that the sequestration lift was extended and that wasn't initially anticipated. So what is driving this dynamic?

Yes. There are a couple of levers that changed from when we provided initial guidance and what we've now been able to observe from a trend perspective. Two of the primary pieces, which have always been the largest cost drivers, are salary, wage and fringe spread across days of care and ongoing ancillary costs, particularly medical supplies. We're able to take targeted actions to continue to maintain and improve those things in the second half. But we have much more experience now, five or six months into the year, and we updated our cost drivers and are prudently managing them on a go-forward basis. Those are the two primary drivers along with high acuity and realistic expectations for the remainder of the year.

Joanna, from a management standpoint as we've looked at ourselves we said we had the administrative support in place for what we'd reasonably expected to be 20,000-plus patients. With a flip of a light switch that fell to the 17,000 number. We're in the middle of a pandemic — not a good time to be ripping employees and making changes in our overall capacity. But we've had a little more time to begin to chip away at that and right-size on the administrative side. To the extent margin has fallen, we now have some tools and levers to pull and Nick is doing a great job addressing that.

And as we alluded to in prior quarters, there were some components of margin that were one-time and not sustainable. We did a pretty good job of highlighting that when it came up. We feel like we have a pretty good handle on a go-forward basis at this point.

Okay. Because I thought last time we were talking about you getting some efficiencies in the business in terms of how you operate. You previously alluded to about an 18% margin after things normalize. Is that still how we should think about it? Despite the sequestration cut returning at some point, is the 18% margin still kind of the target for that business?

I think the prior commentary was that the target was around that 17.5% to 18% range, but that was in the context of a 2022 timeframe. We'll provide updated guidance when we get to 2022. There are efficiencies that can be garnered as median length of stay and other components begin to build back toward pre-pandemic levels, but that's really a second half of 2022 timeframe at this point.

Right. Because also you made some comment about acuity trends. So I guess you still assume this year acuities remain lower, is that correct?

It is.

Yes. In the quarter total acuity was 3.2% of total days of care compared to 3.5% in the first quarter of 2021. When you break that down further, there's stability inside of the general inpatient component but continuous care continues to be impacted. Keep in mind some of the continuous care impact is inside of senior housing. Until occupancy and admissions return to normalized levels in senior housing, it's hard to expect that continuous care would return to prior levels when a physician determines it's appropriate during a period of crisis.

Right. And just, we spent some time talking about the senior housing dynamics and you expect some improvement in the second half and more so in the fourth quarter specifically. But can you talk about your business outside of that referral setting? Are you growing referrals from other settings? Are you getting traction to get new referrals from physician offices or other referral sources? Can you talk about that dynamic?

Yes. The short answer is yes. Hospital business has returned to pre-pandemic levels and frankly is above pre-pandemic levels, symptomatic of patient flow through the hospital system. Our dedicated focus over the last few quarters has been on the home-based channel, primarily physician office settings, because as the pandemic evolved patients reaccessed the health care system through those markets. It takes a distributed education approach to prioritize our time, but that's been our focus. We have more accounts than we can service in any given market and we're focusing our time on those that understand the hospice benefit and want to help provide appropriate access to patients when the need is presented.

Right. And I guess shortly just last question on VITAS. The hospice carve-in demonstration with Medicare Advantage — any update there? Are you participating? Last time we spoke it sounded like no. Any color on what you're seeing in the market and how that is going?

No, we're not participating in year one. The participants that chose to join year one — seven of the nine are insurance companies that own their own hospice company in the year one demonstration. As year two begins to unfold and participation in markets becomes publicly available in a few months, time will tell. We've continued to have concerns related to the design of the demonstration and would recommend CMMI consider delaying it and working with the provider community to work through some design concerns. Others feel the same way. Time will tell and we'll continue to navigate it. The appetite for participation from insurance plans in year two will help determine the market reaction.

I see. So we might hear more in the future from the participants, but is there some sort of cycle where you might hear back from CMMI on commentary from the industry?

Per their request, we've continued to be active participants in dialogue with them toward the intent of what the purpose is and what they're trying to achieve for the country. We'll continue to provide information as requested, as will trade associations and other providers. As it broadens to every geographic territory and more plans consider participating, time will tell how it gets implemented on a market-by-market basis. There are some design concerns about how the hospice benefit would be delivered on a localized basis if every insurance plan can redesign it.

So your request for CMMI is to change the ability for plans to create their own benefit design for hospice — that's the main pushback you have?

That's one of a few concerns. They're aware of our ongoing recommendations and concerns as well as those of other providers in the community.

All right. I'll stop here. One question on Roto-Rooter — exceptionally strong results, and you've raised your margin guidance for the year. Q2 was very strong margin. So essentially we're saying we see July being strong and assume residential outperformance will continue in the second half. You seem confident market share gains are sustainable. Is that how you think about it?

I'd say certainly for the second half of the year and on a go-forward basis. We're watching to see if there's any softening sequentially. We would have thought that several months ago and it has not happened. If anything it's slightly increased in momentum. That's where we're getting confidence that like the other crises Kevin mentioned, we're going to hang on to this uptick in share, revenue and margin. We're watching it closely.

We certainly expect the margins to be in the same range, but we were a little surprised that it ticked up as high as it did in Q2.

To the 29% in Q2, yes. Typically the fourth quarter is our highest margin. I think we're appropriate on our guidance if not a tad conservative.

I see. Because if residential normalizes, margins would be lower, but the fact it's so strong suggests that business is remaining stronger. So even if you assumed at some point residential normalizes, what kind of target margins for the segment would you expect now?

Basically hanging around that 29%.

28.5% to 29.5% to give you that range.

Okay. And the last question on free cash flow priorities — any change in views around acquisitions or anything else you might be prioritizing the free cash flow use?

It's really going to remain the same. Acquisitions remain exceptionally pricey; it's hard to see true economic returns given current valuations. So it's going to be share repurchases and our dividend. As you saw, we purchased 250,000 shares in Q2 and 100,000 in Q1. So the first half of the year, 350,000 shares. We've dropped below 16 million shares outstanding on a primary basis; we have about 15.8 to 15.9 million shares outstanding. In the second half of the year, assuming nothing major changes, we would not be surprised to deploy another $200 million to $400 million in share repurchases. We'll watch everything carefully, but we feel very good about Chemed producing cash flow and continuing our share repurchase program. We definitely plan to put to work nine figures in the second half of 2021 in share repurchasing.

Great. I appreciate the comment. I'll hop back in the queue. Thanks.

There are no questions at this time. I will now hand the conference over to Mr. Kevin McNamara.

Well, I just want to say thanks — thank everybody for their attention. We thought we had a good quarter. Very happy with the results. And we'll be back approximately three months from today. Thank you.

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