Chemed Corp Q4 FY2023 Earnings Call

Financial Results for the Fourth Quarter of 2023 ended December 31, 2023. Before we begin, I want to remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During 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 due to various factors, including those identified in the company's news release of February 27 and in other filings with the SEC. You should be aware that any forward-looking statements reflect management's current view only, and the company has no obligation to revise or update such statements in the future. Additionally, management may 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. 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 subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's fourth quarter 2023 conference call. I will begin with highlights for the quarter, and Mike and Nick will follow up with additional operating details. I will then open up the call for 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 to 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 a 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 healthcare 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 licensed staff and related patient service capacity. VITAS' net bedside headcount increased by 157 licensed professionals in the third quarter and 84 in the fourth quarter. The fourth quarter increase was below our internal target, 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 assumed 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 consumer sentiment and consumer spending within our sector of the economy. Overall, our call volume is 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 one week in 2022, call volume is down 13% during the fourth quarter of 2023 compared to the same period in 2022. This decline is comparable to the call volume declines we have been experiencing in the second and third quarters of 2023. Roto-Rooter has offset a significant portion of this softening demand with improvements in close rates. Our call center's 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 a technician can be dispatched, improved 1.8%. Our technician conversion rate, the percentage of time a tech arrives at home or business and converts the scheduled ticket into billable work improved 1.3%. Commercial revenue at Roto-Rooter declined 7.9% in the fourth quarter of 2023 compared to 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 requests for significant decreases in prices. We've walked away from this type of business. There's our belief that when demand issues abate, this type of customer will return to Roto-Rooter for its 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 healthcare 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 consumer spending in our sector; we anticipate continued expansion of market share by pressing Roto-Rooter's 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.

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 by 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%. The 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 caused by above average hiring and retention levels along with wage increases outpacing our reimbursement in 2024. We are currently estimating $9.5 million from 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 deep freeze in early 2023, 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 three 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 non-cash 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, 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.

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 am 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 headcount 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 two 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 five quarters. Kevin mentioned in his opening remarks, we also achieved a milestone when we surpassed our pre-pandemic all-time ADC high during the fourth quarter of 2023. 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 2023, total VITAS admissions were 15,867. This is a 7% increase when compared to the fourth quarter of 2022. 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 2022 and 103.1 days in the third quarter of 2023. 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 2023. As Mike previously mentioned, our fourth quarter 2023 EBITDA margin was positively impacted by a number of factors. While we were slightly disappointed with our net headcount additions in the fourth quarter, the positive side effect is that there were less unproductive labor onboarding and training costs than anticipated. Additionally, during the pandemic, we increased the amount of paid time off or PTO our employees could carryover 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. In August of 2023, 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 estimate that this one-time PTO change added approximately 135 basis points to the fourth quarter EBITDA margin. To recap what our team has accomplished, we've now generated six quarters of sequential net growth in licensed healthcare workers and five 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 2024 and beyond. I want to thank our entire team as these accomplishments over the past few years were the 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.

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

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

Hi, good morning. Thanks for taking the question. So I guess first on VITAS, since this was the last topic, but the guidance calls for VITAS revenue to grow 9% to 10% on census, growing 7% again. So that's above, I guess, the kind of long-term growth outlook that you talk about in the past for the industry to grow mid to high single digits. So I guess the two-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 2024; 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? Thank you.

Maybe just to take the two parts, Joanna, this is Nick. Short answer for 2024 and beyond is yes. We think the volume growth rate combined with the pricing pieces 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 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 one-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 for 2024 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.

Joanna, for those building a model and looking at past periods for VITAS, it's important to incorporate what Nick has described as a mix shift with community access. Our average length of stay has increased from the high 90s to 105, primarily because a smaller proportion of our referrals are coming from hospitals, which is still a significant source. However, referrals from other sources tend to have a longer-living census. Therefore, this mix shift makes some comparisons to earlier periods less applicable.

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

I would like to follow up on the comment regarding the community access strategy and the increasing length of stay. What is your strategy for addressing the Medicare Cap in relation to the extended stays for some of these patients?

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 used 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.

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.

Let's put it this way, our Medicare Cap issues that we talk 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 mid-term outlook, cap is unlikely to rear its ugly head.

Okay, that's helpful information. Regarding VITAS and the margin side, you mentioned several factors that have brought margins to 23%, while the Q4 guidance suggests margins may be slightly lower than in 2022. It would be great to understand the reasoning behind that. Additionally, your guidance indicates margins will expand, which is encouraging. In the previous call, there were comments about VITAS margins normalizing at 19%. So, as you mentioned, the margin guidance for 2024 suggests margins will exceed 2019 levels. Should we expect potential for further margin expansion towards 19%? If top-line growth continues in the high single digits, is there a chance for us to approach 2019 margins? Thank you.

The guidance we provided, ranging from 17.8% to 18.3%, seems quite reasonable based on bottom-up budgeting. It’s challenging to predict the impact of headwinds related to marginal compression since pricing has been slow to catch up with actual operating costs. Historically, we’ve used pre-pandemic marginal levels as a reference point and are looking for a stable and predictable growth rate alongside overall profit contribution. We expect the marginal contribution to align with our confidence in the 17.8% to 18.3% range for 2024.

Joanna, I believe it's essential to discuss the elements that contributed to our return to 2019 levels as Nick mentioned. We have encountered significant wage compression and challenges related to wages increasing at a faster rate than our reimbursements. However, we have managed to maintain many efficiencies that Nick and his team at VITAS achieved during the pandemic through telehealth and similar initiatives. Consequently, we have mitigated some of the wage pressures with these efficiencies. We see potential for future margin expansion, but we expect it to be gradual and methodical, likely occurring from 2025 onward.

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

No, I appreciate that. Thank you. And I guess the similar question on the Roto-Rooter, so sounds like for 2024, your guidance calls for, I guess, maybe a little bit less than what you described in prior calls when it comes to long-term growth. So I guess a similar two-part question. What gives you confidence you can grow faster I guess 2024 versus 2023, and 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, sees in a different spot? Thank you.

I’d like to share some thoughts about Roto-Rooter. It's been a challenging period for us. We haven't experienced such a sudden drop in calls before. We believe this is largely due to a prolonged period where inflation outpaced wage growth in the country, and now that situation is changing. Recovery will take time, but that’s part of macroeconomics. As a small company based in Cincinnati, we leave the broader analysis to economists in Chicago. We believe this is just a tough phase. The good news is that we're seeing similar challenges across the industry, including our franchisees and contractors. This situation may create opportunities for us to acquire some franchises, as they tend to become available during such times. Looking ahead, we're currently spending significantly more on Google marketing compared to last year due to the difficult sales environment. However, once that situation stabilizes, we believe we will have a competitive advantage since each service call in our industry is valuable, and we offer a wide range of services including plumbing, drain cleaning, excavation, and water restoration. This will allow us to invest more in acquiring leads when the market normalizes. Our competitive position is strong within the industry, and while we must consider how much growth is realistic, we primarily serve households, apartments, and small businesses, which generally have stable demand. We expect to gain market share as the workforce continues to age. Overall, Roto-Rooter remains a solid business. The first quarter of last year was exceptionally high due to unusual weather patterns, especially in December and January, which we need to keep in mind as we face tough year-over-year comparisons during that time. However, we anticipate that the remainder of the year will offer much easier comparisons.

Joanna, I think from a 2024 perspective, 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 2025 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 and our positioning with Google Advertising and those sorts of things.

And the very last question, just to tie all these things out when it comes to the margin outlook for that segment, for the Rooter. So the guidance implies some improvement year-over-year in 2024 because I guess you assume top-line is growing. So how should you 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? Thank you.

I think it'll 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.

Keep on the Google marketing, I mean, we're spending $1 million a month more on that. I say when we say the dust settle on that, 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 the kind of singles and doubles that Mike is talking about as far as the improvements does first have to overcome that jolt.

Thank you so much for the questions.

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

Hi, 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 upon that. And what do you expect for commercial demand in 2024 and what's your expectations for residential growth as well?

Well, let me start by saying that our commercial sales in Roto-Rooter during the fourth quarter fell short of our expectations. There were a few factors, including some large commercial customers that affected this, but overall, it’s not at the level we desire. This is an area we are focusing on more at Roto-Rooter. We believe there is no reason it shouldn't reflect many of our experiences on the residential side, but that was not the case in the fourth quarter.

And the 3.5% to 4% growth that we're projecting for 2024 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 and a decline in residential or anything. It's fairly stable across both business segments.

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

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

We've encountered similar situations before, though perhaps not to this extent. Occasionally, local area managers at major retailers think they can handle their plumbing needs on a small scale, managing it store by store. They soon realize that this approach isn't very manageable. While I can't say this is the case here, there have been numerous times in the past when we've temporarily lost that business, and our customers recognize that managing it in that way is quite challenging, ultimately leading them to return to us. Therefore, while there's no certainty in this specific instance, we believe there is a potential for that to happen again.

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?

Yes. So the thing we've been pretty rather consistent on probably over the last year and a half 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, that really had a compounding effect around improvement of retention at each local, each one 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 helps provide confidence in our 2024 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 on the market are proving to be a very effective strategy for us.

There is a cascading effect involved. When we have our program fully staffed with admission nurses, we can handle referrals more quickly than some competitors who may not have the same staffing levels. This staffing is crucial for patient admissions. The process begins with the admission nurse, and it influences not only the care provided by nurses but also the overall admission process.

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 continues to be share to be gained, and the only impediment would be staffing, which we feel very comfortable about continuing to methodically build.

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?

Yes. I think VITAS margin, 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 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, is 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.

Yes. And from a modeling standpoint, if you go back to the last full year, that was uninterrupted by the pandemic, which would 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.

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.

I want to thank everyone for their attention. We believe we had a solid quarter, and our guidance serves as a strong plan for the year. We are confident it is achievable. I will have more information for you in about three months. Thank you.

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