Chemed Corp Q1 FY2022 Earnings Call

Good day and thank you for being here. Welcome to the Chemed Corporation First Quarter 2022 Earnings conference call. All participants are currently in a listen-only mode. After the presentation, there will be a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to our speaker, Holley Schmidt.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2022 ended March 31st, 2022. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning Management's expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's News Release of our April 26th 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 revive 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 26th, which is available on the company's website at chemed.com. I would like now to introduce our speakers for today. Kevin McNamara, President and Chief Executive Officer of Chemed Corporation, Dave Williams, Executive Vice President and Chief Financial Officer of Chemed, and Nick Westfall, President and Chief Executive Officer of Chemed VITAS Healthcare Corporation Subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's first quarter 2022 conference call. I will begin with highlights for the quarter, and Dave and Nick will follow up with additional operating details. I will then open up the call for questions. Our first quarter 2022 operating results released last night reflect very solid performance for both VITAS and Roto-Rooter. Both operating segments' financial results exceeded our internal estimates despite the continued disruption triggered by the pandemic. For VITAS, this disruption remains elevated regarding the hiring and retention of licensed health care professionals. U.S. News & World Report has estimated as many as 20% of licensed health care workers exited the labor market during the pandemic. This has impacted turnover within VITAS's licensed staff, and our turnover rate continues to be above our pre-pandemic rate in several of our professional classifications. Fortunately, we are beginning to see indications of normalization as we continue to expand resources focused on hiring and retention initiatives in our markets. Beyond managing staffing levels, we are absorbing increased pressure on salaries and wages. To date, we have managed these pressures with increased paid time off or PTO. We view it as inevitable that health care wages will permanently increase if we continue to have a nationwide and systemic imbalance in supply and demand for licensed health care professionals. The guidance we issued earlier this year anticipates significant increases in overall compensation for licensed health care professionals when compared to pre-pandemic annual compensation rates. Fortunately for VITAS and the hospice industry, there is a natural hedge against inflationary pressures on costs, specifically labor. The annual increase in Medicare and Medicaid hospice reimbursement rates is based primarily on inflation in the hospital wage index, as measured by the Federal Government's Bureau of Labor Statistics. Typically, the annual inflation measured as of March 31st is used to determine the following October 1st reimbursement increase. This should give the hospice industry reasonable long-term stability in operating margins in an inflationary environment, albeit with a six to 18-month lag from inflation measurement to the actual reimbursement increase. The second pandemic-triggered challenge for VITAS is the continued disruption to senior housing occupancy and related hospice referrals. Our recent admission data suggest senior housing is in the process of recovery. Pre-pandemic nursing home-based patients represented 18% of our total average daily census or ADC. The nursing home ADC ratio hit a low of 14.3% during the pandemic. In the fourth quarter of 2021, our nursing home-based patients represented 15.6% of our total ADC. This increased an additional 30 basis points to 15.9% in the first quarter of 2022. Our 2022 guidance anticipated sequential improvement in senior housing-based patients in the first quarter of 2022, with acceleration in senior housing admissions anticipated throughout 2022. For Roto-Rooter, our most significant challenge has been to increase manpower. We increased technician headcount by 8% in 2021, and our technician manpower in April 2022 is up 6.8% when compared to the average Q1 2021 headcount. The April 2022 headcount has expanded 3.3% when compared to our average manpower in the fourth quarter of 2021. Based on current service demand levels, Roto-Rooter continues to remain understaffed in many of our markets. Technician compensation plays a crucial role in recruiting new employees as well as retention of our existing base. Our average 2021 technician and field sales force compensation is over $81,000 per year. Most of our technicians are paid in a commission-based manner on revenue generated. As a result, pricing for our services is a critical component in increasing technician wages. We successfully implemented an inflation-based price increase at the beginning of 2022 and will carefully monitor key inflation metrics for consideration of additional price increases in the second half of 2022. Roto-Rooter is well positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time, 24/7 call centers, and Internet presence. With that, I would like to turn this teleconference over to Dave.

Thanks, Kevin. VITAS's net revenue was $299 million in the first quarter of 2022, representing a 5.3% decrease compared to the same period last year. This revenue drop was mainly due to a 4.1% reduction in our days of care, slightly balanced by a 1.3% increase in the geographically weighted average Medicare reimbursement rate. The shift in acuity mix led to a revenue reduction of about $7.1 million or 2.2% compared to the previous year's revenue and care level mix. Factors such as the Medicare cap and other contra-revenue changes mitigated some of this revenue decline by around 30 basis points. In the first quarter of 2022, VITAS accrued $2.5 million from Medicare Cap billing limitations, up from $1.5 million in the first quarter of 2021. Out of VITAS's 30 Medicare provider numbers, 28 had a Medicare Cap cushion of 10% or more, while only two had an estimated fiscal 2022 Medicare Cap billing limitation liability. Roto-Rooter earned $231 million in revenue for the first quarter of 2022, an increase of $19.8 million or 9.4% compared to the same quarter last year. Roto-Rooter branch commercial revenue reached $54.4 million, which is $6.9 million or 14.4% higher than the previous year. This overall commercial revenue growth included a 17% rise in drain cleaning revenue, a 17.1% increase in plumbing, an 8.6% rise in water restoration, and a 7.1% increase in excavation. Total branch revenue for Roto-Rooter was $157 million in the quarter, reflecting a $10.5 million or 7.2% increase from the previous year. The growth in aggregate residential revenue came from a 3.1% increase in dry cleaning, a 14.6% rise in plumbing, a 5.9% increase in excavation, and a 7.7% rise in water restoration. Now let's look at Chemed on a consolidated basis. During the quarter, Chemed repurchased 57,500 shares for $27.4 million, with a cost per share of $475.71. As of March 31st, 2022, there was about $175 million remaining for share repurchase under this plan. Chemed resumed its share repurchase program in 2007 and has since repurchased around 15.8 million shares for about $2 billion at an average cost of $126.42 per share. Including dividends, Chemed has returned approximately $2.2 billion to shareholders during this time. We plan to provide updated guidance for 2022 in our earnings press release on June 30th, 2022. I'll now turn the 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 17,313 patients, a decline of 4.1% over the prior year. This year-over-year decline in average daily census is a direct result of the pandemic-related disruptions across the entire health care system since March of 2020. In the first quarter of 2022, VITAS's admissions in total were 16,530. This is an 8.9% decline when compared to the first quarter of 2021 admissions, and a 1.7% sequential increase when compared to the fourth quarter of 2021. In the first quarter, on a year-over-year basis, our hospital-directed admissions declined 15.7%, total home-based admissions expanded 2.8%, nursing home admits increased 7.8%, and assisted living facility admissions declined 7.4%. Our average length of stay in the quarter was 104.8 days. This compares to 94.4 days in the first quarter of 2021, and 97.9 days in the fourth quarter of 2021. Our median length of stay was 14 days in the quarter and compares to 12 days in the first quarter of 2021, and 15 days in the fourth quarter of 2021. With that, I'd like to turn this call back over to Kevin.

Thank you, Nick. Now it's appropriate to consider any questions that come for the group.

Please stand by while we compile the Q&A roster. Our first question comes from Joanna Gajuk of Bank of America, please proceed.

Yes, good morning. Thank you so much for taking the questions. So I guess a couple of follow-ups for you. So you said that the quarter was better than internal expectations. So can you quantify the magnitude of how much better this was versus internal? And I guess what drove that, I mean, versus our model and the street estimates seems like margins were better, so can you kind of track to us any major drivers for that? And then are those sustainable?

Let me start just by I made that comment, and I just meant that we gave guidance in February and obviously we're a little ahead of that guidance and that we were gratified by that overall performance, but Dave did point out obviously our margins were a little bit higher than we anticipated.

That's right. It really comes down to the sequential acceleration of inflation. On average, we expect more inflation in the second, third, and fourth quarters compared to the first quarter, meaning we anticipate higher inflation cost escalations in the second quarter relative to the first, and we expect the third quarter to be more challenging regarding inflation than the second. All other things being equal, if we don't take measures to address some of the inflation pressures, we will face sequential pressure. Regarding VITAS, they exceeded our expectations on margin, coming in slightly below what we forecasted on revenue but with margins performing better by a couple of million dollars. We generally avoid discussing internal guidance for specific quarters, but VITAS's revenue was slightly better by roughly 100 basis points on margin, which we are pleased about. Roto-Rooter also performed well, beating our revenue projections and significantly exceeding on margin, though not to the extent of VITAS. In terms of our internal estimates for Roto-Rooter, we were very pleased for a few reasons. One key factor was the anticipated shift from residential to commercial as schools reopened and parents returned to work, which resulted in a more than 14 percent increase in revenue from commercial services that exceeded our internal estimates. Additionally, we saw solid growth in Roto-Rooter’s residential services, which grew by just over 7 percent. This shift to commercial services did not weaken our residential performance. Margins are stronger because we were cautious about inflationary pressures from the start of the first quarter, and it's clear that this will continue throughout the year. For VITAS, we are focusing on maintaining a strong labor presence to ensure quality care and adherence to care plans. On the Roto-Rooter side, we are managing a more dynamic balance of licensed healthcare workers. If inflationary pressures persist, we will continue to raise prices when appropriate. Pricing is a critical tool for us as it helps maintain our plumbing and drain cleaning services, making us an attractive option for potential recruits to the Roto-Rooter team. Overall, we have performed better than expected, slightly surpassing my high-end projections, but we do anticipate some pressure moving forward. Nonetheless, I feel very confident about our macro guidance.

That's great information, I appreciate the details. Regarding the labor pressure, you mentioned that your guidance assumes a significant increase in overall compensation. Can you quantify what you expect in terms of growth?

No, we don't give that granular detail and certainly within a quarter.

Okay. No, I wasn't talking about the quarter but talking about the full year.

No, we won't provide that level of detail either.

Okay, and then I guess on the flip side, where in the Medicare readout there the proposal came out calling for, call it roughly 3% rate update, so was this how you were expecting and modeling in terms of including it in the guidance, and I guess anything else in that proposal that you're looking at that we should be so focused on.

I'll comment on the proposed rate increase and I'll defer to Nick and Kevin on some of the other components in that proposed rule. Now actually, I was surprised at how low the number was and I was also a little surprised that they actually didn't give the underlying metrics to do the calculation. Historically, CMS has utilized the hospital wage index basket from April 1 to March 31, and that's the solid data from the BLS they use for the following October 1 increase. And with a slight rebasing that they did on October 1 of 2021, there was a little more shift to CPI, a little less emphasis on the hospital wage index basket. The way the ratio roughly works is 65% of the increase is a hospital wage index basket, 35% is based upon CPI or inflation. I was surprised when they came out in the second or third week of March before that data is finalized with the proposed rule, but more importantly, the headline number on CPI at March 31, 2022 was 8.5%. If you just take 35% of 8.5%, assuming the hospital wage index basket will be flat, no increases in that regard, you would come up with obviously a larger number than they're proposing even after you take out the 40 basis points of productivity factored that they included in. And of course most of that is supposed to relate to the hospital wage index basket, but I really want to see the underlying data and it does seem like CMS is building in more of a lag from the measurement of inflationary pressures and hospice and to the point where they passed it through to reimbursement on October 1.

They obviously didn't use the March numbers at the very least.

I think the CPI pressures, particularly the number from February, which was around 7.9, are important to analyze. We're eager to see the underlying data. Ultimately, there could be some lag created, but over time, the reimbursement factors will align with the total inflation, regardless of the time period we consider.

Yes. So as it relates to the other aspects of the rule in general, as well as guidance, we put a realistic estimate in inside of that last quarter, so it will materially impact our full-year guidance. We will be able to talk more specifically about it after the second quarter when we update guidance and we have more clarity as the final rule starts to come out. For the non-wage related aspects, which are almost equally important and some years more important than the rate itself, we were pleased to see it was consistent with our expectation, that we're not a lot of material regulatory changes which then in turn create process changes, additional administrative burdens, which over the past years, a lot of those things had been incorporated in. So pleasantly surprised but consistent with expectations, given everything else going on in the industry, that it was everything that was anticipated and will continue to have minimal disruption by implementing any minor items that would go final in August for the October 1 effective date.

Thank you. I appreciate your comment and appreciate the fact that there were no additional changes, is always good, especially with everything that's going on. But on that front, last question on VITAS. You talked about, where actually you gave us a great start in terms of increasing your workforce on the Roto side. So can you give us some stats on the VITAS side in terms of your net hiring? You mentioned that turnover was still high, but it sounds like you would still not be where you were expecting, or maybe not where it should be. So can you give us some of the pieces in terms of turnover improving in recent months, and also a net hiring or any kind of measurements you can provide on the headcount on the VITAS side? Thank you.

So consistent with how Dave and Kevin were talking about first quarter performance based upon adjectives from a description perspective, I'll do that as it relates to some of the hiring components since we don't release those aspects publicly. Overall, is our net hiring rate and turnover rate performing better than our 2019 levels pre-pandemic? No, it's not. That's what we alluded to inside of our commentary. However, there have been some encouraging signs from a trend perspective inside of the quarter as VITAS, no different than any other health care provider continues to double and triple down with an absolute focus on both recruiting and retention for, in particular our clinical workforce like we've been consistently talking about for the last few quarters. There's positive progress, but yet like everything in hospice, it is a market-specific impact, so there's some markets where we're seeing real positive progress. There's others where we're continuing to flip the proverbial pancake to continue to try to make headwinds. But at the end of the day, that will have the biggest impact on 2022, 2023. No different than it does for every other hospice provider out there in terms of our ability to continue to attract and retain high-quality clinicians.

Okay, so I guess so you seeing some improvements, and so the net headcount on the VITAS side is also improving?

We're seeing positive trends as it relates to it. And then it's a day-to-day battle not only amongst competing with others in the industry but also others outside of home care, and in the nursing home segment, and the hospital segment, and the travel nurse contract agency segment. We're all searching for similar resources. And like I said, it's day-to-day, but I'm happy with the level of effort and focus the team has put in. And I promise you we will continue to put in as we traverse the rest of '22.

Okay. Great. Thank you. And I guess my last question, I guess on the Roto-Rooter side, and I'll go back to the queue. So you mentioned the price increases, that it seems like I guess they worked, that you implemented early in the year and then you might consider additional price increases. So what would that regard, some are just inflationary data points, and so can you kind of give us a flavor of the magnitude of things in terms of these price increases that you consider doing? Thank you.

I want to begin by stating that we view Roto-Rooter as a premium-priced service. We analyze the market carefully for each region, ensuring that our pricing remains competitive but not excessively high. If inflation remains elevated, we will assess the situation in the second half of the year and will not hesitate to implement a price increase if necessary. David, do you have anything else to add on this?

No, part of the issue is the variability from Baltimore to Cincinnati. They are completely different increases that pass through. And then within each market, we would have a different rate increase for excavation versus say, drain cleaning and then water restoration, that price increase comes from as well. So the reality is, it's a hodgepodge and Baltimore was completely different than Cincinnati. On average though, we were actually based upon the headline number of 8.5% at the end of March, we got a little room to go for price increases still to catch up to inflation.

And it's supply and demand. We've said we have many more than several programs where we have more calls than we have people to service them. You can imagine the classic response to that is increased prices then bringing it to alignment, just supply and demand. So that's the thing, but I guess Dave's point is we are not limited to doing that once a year at the beginning of the year.

Normally we do it when on low inflation. It would be crazy to lag by 12 months. When inflation is already in our economic model, we patch through the price increases. Joanna, the reason we actually gave granular numbers on Roto-Rooter is because of the consistency of what I consider strong hiring and retention trends. We can actually use it to predict out how Roto-Rooter is performing. Nick is just reacting to an extremely volatile labor market where it's hard to discern any trend one way or the other, whether it's on our end nurse practitioners or home health aides. On the Roto-Rooter side, the reason we spent so much time talking about labor is, labor is a critical component of just driving commission revenue in their commissions. The fact that we were able to grow labor consistently throughout 2021, the year of the great recession, the fact that we continue to grow labor, both in the skilled and unskilled technician areas throughout the first four months of 2022, I think is just a good indicator of the strength of Roto-Rooter. And that's why we get so granular; it is a very predictable trend line at this point throughout the year. Momentum is with Roto-Rooter both in demand as well as in our ability to service that demand with a growing headcount.

Definitely the 8% and even the 3% numbers that you gave for Roto-Rooter were definitely good to hear as an indicator for where the business is going. I guess I'll go back to the queue. Thanks so much for answering all these questions.

Thank you.

Thank you. Our next question comes from Ben Hendrix of RBC Capital Markets. Please proceed.

Hey guys, thanks a lot. Just a quick question here. I noticed that about a 4% decline in days of care versus your ADC guidance of down 1%, then 1.5%, and you noted that decreased hospital admissions went down pretty significantly, and it looks like it shifted your days of care mix. How are you trying to get an idea for cadence through the year? How does that develop through the year in terms of top line impact? Then what pace would you expect labor inflation to impact costs over the course of the year? Just really just trying to get an idea of how you're thinking about cadence? Thanks.

From an ADC perspective, you are correct about the actual numbers. As we consider the full calendar year, we mentioned in our last quarter's comments that, while we don't provide quarterly guidance, we did give some directional guidance indicating that ADC growth is expected to accelerate in the latter half of the year. We are beginning to see some leading indicators for this growth. Our focus on the community-based segment, along with the broader segment, is evident, particularly when looking at the disparities in our admission figures. The non-hospital segment has shown positive year-over-year comparisons and even stronger sequential growth from Q4 of last year to Q1.

We are observing indicators that suggest ADC growth will accelerate in the second half of the year. Our focus on the community-based segment, along with the broader market, is starting to show results. You can see this reflected in the differences in our admission numbers, where the non-hospital segment has experienced positive year-over-year comparisons and even stronger improvements from Q4 of last year to Q1 of this year.

Internally, we no longer focus on overall admissions. Professors are accustomed to hearing information from hospice providers, but we now discuss admissions based solely on their source. From the fourth quarter of last year to the first quarter of this year, admissions in the non-hospital segment increased slightly over 5.5%. The Omicron variant in January did impact the total days of care for that quarter, but we view it as a potential positive starting point for the rest of the year, as many disruptions caused by the pandemic are behind us and we are experiencing a more regular referral flow. We are concentrating on deploying our admissions resources effectively to respond to the most relevant referrals, bringing in all appropriate and eligible patients. Regarding labor, salary, and wage pacing in relation to inflation, we are in line with our initial expectations from a wage and salary standpoint for the first quarter. We have several prudent programs, including an annual merit cycle occurring mid-year, which are factored into our guidance. The key aspect we monitor daily is the growth of our net headcount in terms of licensed clinical resources. We hope to bring in more full-time staff rather than part-time or per diem workers, as this adds complexity to labor management moving forward. Overall, we feel confident about our current position in alignment with our full-year guidance, but the next eight months will reveal more.

Thanks a lot, guys.

Thank you. At this time, I would like to turn it back to Kevin McNamara for closing remarks.

I will only reiterate the remark that we were gratified with our operating unit and we're certainly generally in line with what we expected when we gave guidance in February and a little above that, and thank everyone for their attention. We'll be back in three months for the discussion of the second quarter. Thank you.

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