Earnings Call Transcript - CHE Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Chemed Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sherri Warner with Investor Relations. Thank you. Please go ahead.

Sherri Warner, Investor Relations

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2020 ended December 31, 2020. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of February 23 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation, and amortization, or EBITDA, and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated February 23, 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.

Kevin McNamara, CEO

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's fourth quarter 2020 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 for questions. Operating during a pandemic has been exceptionally challenging for both of our business segments. Fortunately, VITAS and Roto-Rooter have shown incredible speed, flexibility, and focus to remain completely open and operate safely for the benefit of our patients, customers, and employees. I believe Chemed’s operational and financial performance this past year is a testament to the success of these efforts. Our VITAS Healthcare segment continues to be directly impacted by the pandemic. Fortunately, the federal government, specifically HHS and CMS, have been very supportive in terms of relaxing regulations, allowing the use of telehealth where appropriate, and providing pragmatic flexibility in caring for our entire patient census. The most complex issue facing VITAS over the past nine months has been the disruptive impact the pandemic has had on traditional hospice referral sources, which in turn has impacted our patient census patterns. Fortunately, certain portions of the healthcare continuum have normalized, and hospital referral admissions have significantly improved from the low admission rates experienced early in the pandemic. This is reflected in our second half of 2020 admission and census activity. Our third and fourth quarter 2020 admissions increased 4.7% and 2.8% respectively. Normally, two sequential quarters of solid admissions growth would result in an increase in average daily census. However, despite the admissions growth, our average daily census declined 2.8% in the fourth quarter. This decline in census is a direct result of disruption in senior housing, which includes nursing homes and assisted living facilities. Senior housing is an important part of the hospice industry given that over 90% of all hospice patients are over the age of 65. Senior housing has seen a severe reduction in occupancy levels and continues to struggle even as hospitals and other key hospice referral sources have significantly recovered. Hospice referred admissions typically account for 50% of VITAS’ total admissions, and a significant portion of these referrals have very short lengths of stay. VITAS hospital referrals are returning to pre-pandemic levels. This is reflected in hospital generated admissions increasing 6.2% and 7.4% in the third and fourth quarters, respectively. Nursing home hospice patients represented 14.7% of our fourth quarter 2020 census, a decline of 310 basis points compared to the prior year. VITAS nursing home admissions decreased 22.6% in the third quarter of 2020 and declined 19.3% in the fourth quarter when compared to the equivalent prior year quarter. Nursing home patients are typically referred to hospice earlier into a terminal prognosis and statistically have a much greater probability of being in hospice for more than 90 days. This decline in nursing home admissions is a direct result of continued disruption in senior housing occupancy. According to data provided by the National Investment Center for Seniors Housing & Care, COVID-19 continues to adversely affect senior housing occupancy, which reached another record low in October of 2020. Median length of stay in the fourth quarter of 2020 was 14 days, two days less than the prior year. This unusual decline in median length of stay is a result of a 7.4% increase in hospital referred admissions and a 19.3% decrease in nursing home admissions, the combination of which has had a material impact on our median length of stay. The guidance we will provide later in this call reflects this continued weakness in senior housing occupancy for the first half of 2021. We anticipate improvement in senior housing admissions in the second half of 2021 as senior housing patient mix and aggregate occupancy returns to pre-pandemic levels. Roto-Rooter operating results have been nothing short of exceptional during the pandemic. Strong residential plumbing and drain cleaning demand has been more than adequate to compensate for weakness from our commercial customers. The fourth quarter branch residential demand set all-time records. Unit-for-unit residential revenue totaled $123 million in the quarter, an increase of 20.8% when compared to the prior year quarter. Fourth quarter 2020 unit-for-unit branch commercial demand did decline to 9.8% when compared with the fourth quarter of 2019. This is a significant improvement compared to the second quarter of 2020, which had commercial demand declining 29.1%, and the third quarter of 2020 with a commercial revenue decline of 11.6% when compared to the prior year. Roto-Rooter generated fourth quarter 2020 revenue of $201 million, an increase of 10.2%. Consolidated revenue, in addition to Roto-Rooter branch operations, includes independent contractors, franchisees, and product sales, as well as the Oakland acquisition completed in July of 2019 and the HSW acquisition completed in September of 2019. With that, I would like to turn this teleconference over to David.

Dave Williams, CFO

Thanks, Kevin. VITAS net revenue was $332 million in the fourth quarter of 2020, which is a decline of 2.3% when compared to the prior year period. This revenue variance is comprised primarily of a 2.8% decline in days-of-care, a geographically weighted average Medicare reimbursement rate increase of approximately 2.4%, and acuity mix shift which has then reduced the blended average Medicare rate increase approximately 255 basis points. The combination of lower Medicare Cap and a decrease in Medicaid net room and board pass-through increased revenue growth an additional 64 basis points in the quarter. Our average revenue per patient per day in the fourth quarter of 2020 was $198.33, which, including acuity mix shift, is 7 basis points below the prior year period. Reimbursement for routine home care and high acuity care averaged $169.83 and $997.37, respectively. During the quarter, high acuity days-of-care were 3.4% of our total days-of-care, which is 62 basis points less than the prior year quarter. In the fourth quarter of 2020, VITAS accrued $2.5 million in Medicare Cap billing limitations. This compares to a $4.5 million Medicare Cap billing limitation in the fourth quarter of 2019. Of VITAS' 30 Medicare provider numbers, 23 of these provider numbers currently have a Medicare Cap cushion of 10% or greater, four provider numbers have a cap cushion between 5% and 10%, one provider number has a cap cushion between 0% and 5%, and two of our provider numbers currently have a fiscal 2021 Medicare Cap billing limitation liability. VITAS’s fourth quarter 2020 adjusted EBITDA, excluding Medicare Cap, totaled $78.7 million, which is an increase of 11.7%. VITAS’ adjusted EBITDA margin excluding Medicare Cap was 23.5% in the quarter, which is a 306 basis point improvement when compared to the prior year period. For Roto-Rooter, Roto-Rooter generated quarterly revenue of $201 million in the fourth quarter of 2020, an increase of $18.7 million or 10.2% over the prior year quarter. On a unit-for-unit basis, which excludes the Oakland and HSW acquisitions completed in July of 2019 and September of 2019 respectively, Roto-Rooter generated quarterly revenue of $183 million in the fourth quarter of 2020, which is an increase of 12.8% over the prior year quarter. Total branch commercial revenue in the quarter, excluding acquisitions, decreased 9.8%. This aggregate commercial revenue decline consisted of drain cleaning revenue declining 11.6%, commercial plumbing and excavation declining 8.9%, and commercial water restoration increasing 1%. Total branch residential revenue, excluding acquisitions, increased 20.8%. And this aggregate residential revenue growth consisted of residential drain cleaning increasing 17.1%, residential plumbing and excavation expanding 25.5%, and residential water restoration increasing 16.8%. Now let's turn to Chemed’s full year of 2021 guidance. Historically Chemed earning guidance has been developed using previous years’ key operating metrics, which are then modeled and projected out for the calendar year. Critical within these projections is the understanding of traditional patterned correlations among key operating metrics. Once we complete this phase of our projected operating results, we would then modify the projections for the timing of price increases, changes in commission structure, wages, marketing programs, and a variety of continuous improvement initiatives that our business segments plan on executing over the year. This modeling exercise also takes into consideration anticipated industry and macro-economic issues outside of management’s control, but are somewhat predictable in terms of timing and impact on our business segments’ operating results. With that said, our 2021 guidance should be taken with a recognition that the pandemic will continue to materially disrupt all aspects of our healthcare system and general economy to such an extent that future rules, regulations, and government mandates could materially impact our ability to achieve this guidance. Statistically, our VITAS patients residing in senior housing are identified as hospice appropriate earlier into their terminal prognosis and have a much greater probability of having a length of stay in excess of 90 days. Hospice patients referred from hospitals, oncology practices, and similar referral sources are generally more acute and they have a significantly lower probability of lengths-of-stay exceeding 90 days. According to data released by the National Investment Center for Seniors Housing & Care, COVID-19 continues to adversely affect senior housing occupancy, which as Kevin mentioned earlier, had another record low in October of 2020. This reduced occupancy in senior housing has had a corresponding reduction in VITAS nursing home admissions. Nursing home patients represented 14.7% of the VITAS fourth quarter 2020 patient census, which is a 310-basis point reduction compared to the prior year quarter. VITAS anticipates continued weak occupancy and corresponding weak referrals from senior housing for the first half of 2021. This guidance anticipates senior housing will begin to normalize to pre-pandemic occupancy starting in the second half of calendar year 2021. Based upon the above discussion, VITAS' 2021 revenue, prior to Medicare Cap, is estimated to decline approximately 4% when compared to the prior year. VITAS' Average Daily Census in 2021 is estimated to decline approximately 5%. And full year Adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 19.4%. We are currently estimating $10 million for Medicare Cap billing limitations in calendar year 2021. Roto-Rooter is forecasted to achieve 2021 revenue growth of approximately 5% to 6%, and Roto-Rooter’s adjusted EBITDA margin for 2021 is estimated to be 26%. Based upon this discussion, the full-year 2021 adjusted 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 $17 to $17.50. This 2021 guidance assumes an effective corporate tax rate on adjusted earnings of 24.7%. This compares to Chemed’s 2020 reported adjusted earnings per diluted shares of $18.08.

Nick Westfall, CEO, VITAS Healthcare

Thanks, Dave. In the fourth quarter, our average daily census was 18,718 patients, a decline of 2.8% 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 since March. While certain healthcare sectors have shown improvement in the admission patterns, referrals from senior housing, specifically nursing homes and assisted living facilities, continue to be negatively impacted. It is important to note, in the fourth quarter, we saw the sequential decline of senior housing segments, specifically nursing homes and ALFs, moderate to actually show a slight improvement as compared to the 2020 third quarter total admissions for the senior housing segment. ADC growth is expected to normalize in the second half of 2021 as we return to pre-pandemic referral patterns across all sectors of the healthcare industry. In the fourth quarter of 2020, total admissions were 17,960, this is a 2.8% increase when compared to the fourth quarter of 2019. In the fourth quarter, our home-based pre-admit admissions increased 9.2%, hospital-directed admissions expanded 7.4%, nursing home admissions declined 19.3%, assisted living facility admissions declined 14.7% when compared to the prior year quarter. Average length of stay in the quarter was 97.2 days, this compares to 95.2 days in the fourth quarter of 2019, and 97.1 days in the third quarter of 2020. Our median length of stay was 14 days in the quarter, which is two days less than the 16-day median in the fourth quarter of 2019 and equal to the third quarter of 2020. Before I turn this call back over to Kevin, I wanted to, again, thank our entire VITAS team for their continued commitment, perseverance to provide high-quality care in every community we serve across the country. Needless to say, 2020 was an unprecedented year where our organizational flexibility, leadership, and commitment to our patients, their families, our referring healthcare partners, and one another were tested beyond anything we've ever experienced. I couldn't be more proud of every VITAS team member who stepped up to these challenges to help provide access and incredible care while producing these results for our shareholders. Our entire team will continue to be out in the communities we serve, collaborating safely with our local healthcare partners to successfully identify and navigate patients and their families onto the hospice benefit during this unprecedented time. With that, I'd like to turn this call back over to Kevin.

Kevin McNamara, CEO

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

Operator, Operator

Your first question is from Frank Morgan with RBC Capital Markets.

Frank Morgan, Analyst

Good morning. I guess I want to start on the guidance here, some of the puts and takes in the guidance. And I'm curious when you talk about recovery in the second half of the year. Are you saying that the admission patterns, the turn in admission pattern starts to turn positive? But from an ADC standpoint, I guess I'm trying to figure out how long does it take you to recover to fill the hole, assuming admission patterns normalize in the second half of the year? That’s my first question?

Dave Williams, CFO

Yes, Frank, and this is Dave. That is the wildcard. It's not just when the improvement starts, it’s the pace of the improvement and when we get to what we’d call pre-pandemic occupancy and mix levels. So we had anticipated starting in the second half of 2021. By the end of the year, we think it should substantially improve and normalize, but it could drift into 2022 slightly. The reality is when we take in a nursing home patient today, the majority of those people will still pass away pretty quickly. It really takes two or three quarters before you get to a statistical outlier. So that's just a long way of saying you're right, it'll develop through the second half of 2021 normalizing. We anticipate a substantial portion of 2022 to return to pre-pandemic mix levels.

Kevin McNamara, CEO

Frank, another way of saying that it's premature for us at this point is one thing that we look at is the patients that are with you for 180 days or longer, that comes from the group of patients that have been with you 90 to 180 days. And that group is of course from the group that’s been with you longer than 60 days. Those are the things we're watching, and to the extent that each group is shored up largely by referrals – expanded referrals from the senior housing sector, that's when we'll have better visibility on it. I’ll be honest with you. And we won't be comfortable that we've returned to normal until our long-stay patient numbers are where we have been running. So it is a process that we’re going to be watching over the next couple of months, and if those lower elements of the days in the program of those groups have solidified, we’re fairly certain that then they will mature into a certain percentage that will have a salutary effect on ADC. So it's, at this point, it's a bit of a guess, but we're confident we'll have visibility into it as it is in fact happening.

Nick Westfall, CEO, VITAS Healthcare

Frank, one other quick comment embedded inside of the narrative is that as we continue to look at occupancy levels and become a good partner with, obviously, there are external factors whether it's vaccination rates, new resident or potential new residents, and their families' comfort and confidence with safety and vaccination rates inside of those facilities. What gives us confidence is while the pandemic has highlighted the benefit of the ability to when you can care for patients at their home, which is at the core of home care and at the core of hospice, there will continue to be a need and role for the senior housing industry, specifically nursing homes. There just aren't enough caregivers to deliver care at individuals' residential homes for a period. I'm optimistic that occupancy levels will return as the pandemic subsides.

Kevin McNamara, CEO

And Frank, the one thing I also want to say, if any comparison build to 2020 is payroll. At the beginning of 2020, we gave guidance that it was a range, but let's say $16.20 a share. We thought that was going to be a very solid year; of course, we didn't know the pandemic was coming. If that happens through a lot of the forces we made reference to, we reported $18.80, obviously a good portion of that was hard to talk about sustainability. We had the relaxation of sequestration for a longer period in 2020, as well as the temporary relaxation of various regulations by regulatory bodies. The way we look at it is smoothing and saying, yes, we liked the cash we got, our earnings are of course cash. Our earnings, we zigged when we had the zig and zag, when we had the zag and we had a kind of blowout year in 2020. We're very satisfied with the net effect of our company's operations during this unusual period.

Frank Morgan, Analyst

Got you. Maybe another one for Nick. You mentioned the vaccinations, have you seen any anecdotal evidence? Are you starting to see a change there?

Nick Westfall, CEO, VITAS Healthcare

Yes, I think as of right now, we are seeing encouraging signs related to vaccination. There are roughly 65 million doses that have been distributed across the United States, and many of those are in the targeted population you were referring to. We see signs of optimism, with every market and facility having different experiences with adoption rates. But all in all, the combination of vaccinations and our high-quality, safe protocols and education provided across certain state segments has hopefully helped to elevate our brand. I feel confident in us being a good partner with all of those institutions across the entire country in 2021 and beyond.

Dave Williams, CFO

Yes, Frank, I would say we'll declare the nursing homes returning to normal when all employees and residents are vaccinated, as well as when visitation returns to pre-pandemic rules. We think that will be the last obstacle to returning to normal occupancy.

Kevin McNamara, CEO

And another metric to look at is, our median length of stay. You’ll have a good sense that things will return to normal when that number goes back to 16 or 17; in parts of the third and fourth quarter, it was as low as 12. That is proof in the pudding.

Dave Williams, CFO

For specific months.

Frank Morgan, Analyst

Got you. One last one I'll hop back in the queue, another modeling, just to clarify no buybacks built into this guide. Any thoughts around buybacks going forward from here?

Dave Williams, CFO

We continue to think buybacks are an excellent use of our free cash flow. We anticipate pursuing that throughout 2021.

Kevin McNamara, CEO

Yes. And we have a lot of wherewithal to follow this off. Let's put it that way.

Operator, Operator

Thank you. Your next question comes from Joanna Gajuk with Bank of America.

Joanna Gajuk, Analyst

Yes. So first off a couple of follow-up questions. When you talk about the senior housing occupants, you said you expect this to begin to normalize starting in the second half. And, I guess you were talking about which sounded more like just admission patterns. How should we think about the actual census growing?

Kevin McNamara, CEO

So Joanna, as we were responding to Frank's original question related to the timing, pace, and philosophy, it is key to remember that the senior housing segment’s impact on days of care will have a degree of lag. While we don’t provide quarterly guidance, we built in timing assumptions in that segment that suggests that as it normalizes, we will see a backlogged growth potential later in the year. This will ultimately depend on how big of a lift we get from senior housing and how much the hospital and physician office referral business continues to pull through.

Dave Williams, CFO

Certainly, the leakage happens in the first half of the year in terms of census, and then we start recovering from there, Joanna.

Joanna Gajuk, Analyst

Okay. So that…

Nick Westfall, CEO, VITAS Healthcare

I don't know if we can speculate as to which one would do better or not. Senior housing has many segments, and as we interact with those segments, some have been impacted more than others. What we're focused on are nursing homes and assisted living communities. Vaccination rates may return residents to occupancy quicker in assisted living compared to nursing homes due to potential for more flexibility in visitation rules.

Kevin McNamara, CEO

In considering the factors, you may question why occupancy levels in these parts of senior housing are down. They are down due to a perceived sense of unsafety associated with them. As vaccination levels are reached, and visitation rules are relaxed, we expect referrals to improve. However, while nursing homes and assisted living care lost occupancy, their existence serves an essential function that we feel confident will return to some level of normalcy.

Joanna Gajuk, Analyst

Right. Because my other part of the question is something you've mentioned and I don't think you've quantified it. You said admissions from hospitals actually accelerated, up 7%. What was the community setting of physician kind admissions this quarter? What was their year-over-year growth rate?

Dave Williams, CFO

We lump it into the home-based setting. For this quarter, it was up 9.2%. For the third quarter, it was up 18.3%. The point is, as patients may not be accessing those facilities, they’re going to a specialty or primary care physician. We're there to support that referring segment depending on wherever the patients are in the healthcare system.

Kevin McNamara, CEO

It’s not surprising to us. If a patient is familiar with the hospice process while in a nursing home, they tend to enter hospice sooner than those who haven't been exposed. When those patients are at home and experience a turn for the worst, they tend to be rushed to the hospital rather than entering hospice at the right time. It's a scenario where we expect hospital-based admissions to increase under this condition.

Nick Westfall, CEO, VITAS Healthcare

To reinforce Kevin's point, we pursue multiple referral sources in every market. We have a goal to educate healthcare partners in identifying potentially hospice-eligible patients, focusing on improving care planning to aid patient and family decisions.

Joanna Gajuk, Analyst

One last question for you. On the hospice side, the revenue guidance implies a year-over-year revenue decline. Yet, the margin guidance looks better than expected, above 19%, significantly higher than pre-pandemic levels. How sustainable is that margin? Is this the right way to think about the 19% margin for that business?

Dave Williams, CFO

Part of that shift is we are doing more routine home care and less high acuity care. This leads to a better margin, and while current margins may be influenced by temporary factors, it remains above previous averages.

Nick Westfall, CEO, VITAS Healthcare

We will continue to balance our labor needs against our care needs moving forward. Our operating results in 2020 reflect that balance.

Joanna Gajuk, Analyst

Okay. That's helpful. And on Roto-Rooter side, is the margin outlook for 26% expected to step up year-over-year and how sustainable is that margin?

Kevin McNamara, CEO

Yes, we think so. The margin increase results from seven years of increased revenue and efficiency not incurring significant infrastructure costs. We expect that to continue while also managing healthcare costs prudently.

Joanna Gajuk, Analyst

How should we think about operating cash flow and CapEx for the year?

Dave Williams, CFO

Our cash flow in 2020 was artificially high, with one-time CARES Act payments contributing. Our free cash flow midpoints estimated between $17 and 17.50, reflecting earnings without those one-time impacts. We're set to maintain our strong cash position, intending to utilize it effectively for growth.

Joanna Gajuk, Analyst

Okay. Thank you so much for the color.

Operator, Operator

I'm not showing any further questions at this time. I would now like to turn the call back over to Kevin McNamara for any further closing remarks.

Kevin McNamara, CEO

In closing remarks, I just wanted to thank everyone for their kind attention. There was an unusual year in 2020, but we look forward to returning to business as usual as soon as possible. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.