Earnings Call Transcript - CHE Q4 2021

Operator, Operator

Thank you for standing by, and welcome to the Chemed Corporation Fourth Quarter 2021 Earnings Conference Call. Operator instructions given. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Smith. Please begin.

Holly Smith, Investor Relations Representative

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2021 ended December 31, 2021. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of February 24 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 24, 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 VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Kevin McNamara, President and Chief Executive Officer

Thank you, Holly. Good morning. Welcome to Chemed Corporation's fourth quarter 2021 conference call. I will begin with the highlights for the quarter, and Dave and Nick will follow up with additional operating detail. I will then open the call up for questions. Our fourth quarter 2021 operating results released last night reflect very solid performance particularly for Roto-Rooter. VITAS continues to manage effectively in a challenging environment. They continue to face significant headwinds, however, from pandemic-related issues, including health care labor shortages, disruption in senior housing and rising inflation. I would like to share with you some of the macro issues we are dealing with as we enter the third year of the pandemic. For VITAS, the most important issue we are managing is labor. Staffing of licensed professionals has been exceptionally challenging to ensure an adequate mix of licensed health care workers on a market-by-market basis. There has been an exodus of qualified workers industry-wide. VITAS has not been spared the effects of the labor market dynamics affecting the broader health services industry. Turnover within our licensed staff remains well above our pre-pandemic rates. VITAS continues to expand hiring and retention initiatives in all markets. The decline in supply of health care workers continues to increase pressure on salaries and wages. To date, we have managed these pressures with a combination of targeted increases in wage rates as well as increased paid time off or PTO. We view it as inevitable that health care wages will continue to be elevated for as long as there is a nationwide and systemic imbalance in supply and demand for licensed health care professionals. Fortunately for VITAS and the hospice industry, there is a natural hedge against inflationary pressures on costs, specifically labor. The annual increase in the Medicare and Medicaid hospice reimbursement rates is based on the hospital wage index basket as measured by the Federal Government's Bureau of Labor Statistics plus a measure of inflation for other goods generally PPI or CPI. Typically, the annual inflation measured as of March 31 is used to determine the following October 1 reimbursement increase. This normally gives the hospice industry reasonable stability in operating margins. However, the timing of our latest adjustment, which was calculated in March of 2021 for an October 1, 2021 effective date, was immediately prior to a historic rate of increase in inflation. Of course, we expect this to be partially remedied in future adjustments. But during high inflationary periods, this initial time lag causes temporary downward pressure on margins. The second critical challenge for VITAS is the continued disruption to senior housing occupancy and related hospice referrals. Our recent admission data suggests senior housing is in the process of stabilization and 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% in the first quarter of 2021. In the second quarter of 2021, nursing home-based patients increased 60 basis points to 14.9%. In both the third and fourth quarter of 2021, our nursing home-based patients represented 15.6% of our total ADC. Our updated 2022 guidance anticipates slow improvement in the first half of 2022 with an acceleration in senior housing admissions anticipated in the second half of 2022. For Roto-Rooter, the most significant challenge has been to increase the number of available productive technicians. We've expanded technician count by 7% in 2021. However, based upon current demand levels, we continue to remain understaffed in some of our markets. Technician compensation plays a crucial role in recruiting new employees as well as retention of our existing employee base. Our average 2021 technician and field sales force compensation is over $81,000 per year. Most of our technicians are paid commissions based on revenue generated. As a result, pricing for our services is a critical component in increasing technician wages. We passed through an initial round of price increases at the beginning of 2022 and will monitor inflation pressures on a market-by-market basis to determine that further increases are warranted during the year. Demand for plumbing, drain cleaning and excavation and water restoration services remain at record levels. I want to give additional color on the depth and breadth of this increase in demand. Let's compare Q4 2021 revenue to Q4 2019. HSW was acquired in September 2019. So this comparison includes HSW revenue for both periods. Residential services have experienced incredible growth. In aggregate, residential branch revenue increased 33.9% over this 2-year period. On a service segment basis, residential plumbing revenue increased 32.2%, drain cleaning expanded 29.1%, excavation increased 46.8% and water restoration increased 28.1%. Commercial revenue has experienced a significant recovery since the 40% decline in commercial demand noted in April 2020. Overall, commercial revenue declined 2.3% over this 2-year period. On an individual service segment basis, commercial plumbing service revenue declined 6.2%, drain cleaning declined 1.4%, excavation increased 3.4%, and water restoration increased 0.8%. We anticipate continued strengthening in commercial demand throughout 2022. 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, post-crisis, Roto-Rooter held on to these increases in revenue, market share and margins. 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 David.

Dave Williams, Executive Vice President and Chief Financial Officer

Thanks, Kevin. VITAS' net revenue was $316 million in the fourth quarter of 2021, which is a decline of 4.8% when compared to the prior year period. This revenue decline is primarily about a 4.2% decline in our days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase of approximately 1.1%. Acuity mix shift had a net impact of reducing revenue approximately $7.1 million or 2.1% in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare cap and other contract revenue changes did offset a portion of the revenue decline by approximately 40 basis points. VITAS accrued $3 million in Medicare cap billing limitations in the quarter. This compares to a $2.5 million Medicare cap currently. We have a Medicare cap cushion of 10% or greater for two of the provider numbers. Two provider numbers have a Medicare cap cushion between 5% and 10%. One provider has a Medicare cap cushion between 0% and 5% and two of our provider numbers currently have an estimated fiscal 2022 Medicare cap billing limitation liability. VITAS' fourth quarter gross margin, excluding Medicare cap and costs directly related to the pandemic, was 28.5%. This is a 109 basis point margin decline when we compare to the fourth quarter of 2020. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 21.7%, a decrease of 179 basis points compared to the fourth quarter of 2020. The declines in both gross margin and EBITDA margin were caused primarily by the impact of inflation and the reimbursement lag effect, as previously mentioned by Kevin. Additionally, our self-insured medical expenses for VITAS were approximately $3.8 million higher than anticipated in the fourth quarter of 2021. These higher costs were the result of inflation passed on by health care providers and insurance companies combined with higher employee health care utilization in the fourth quarter of 2021. We believe this higher utilization rate experience is mainly the result of employees delaying health care visits during the pandemic for as long as possible until the end of this plan year. We do not anticipate this spike to continue in 2022. Roto-Rooter generated quarterly revenue of $225 million in the fourth quarter of 2021, an increase of $23.8 million or 11.8% when compared to the prior year quarter. Roto-Rooter branch residential revenue in the quarter totaled $152 million, an increase of $15.3 million or 11.2% over the prior year period. This aggregate residential revenue growth consisted of drain cleaning increasing 10.6%, plumbing expanding 13.5%, excavation increasing 12%, and water restoration increasing 9.2%. Said directly, the residential growth Roto-Rooter experienced is across all service segments. Roto-Rooter branch commercial revenue in the quarter totaled $53.9 million, an increase of $6.9 million or 14.8% over the prior year period. This aggregate commercial revenue growth consisted of drain cleaning revenue increasing 17%, plumbing increasing 18% and excavation expanding 10.5%. Water restoration, which is very modest on the commercial sector, increased 4.5%. Roto-Rooter's gross margin in the quarter, excluding the impact from COVID, was 52.7%, which is a 77 basis point increase from the fourth quarter of 2020. Adjusted EBITDA margin for Roto-Rooter in the quarter was 27.7%, which is a 58 basis point improvement when compared to the prior year. Roto-Rooter also experienced higher-than-normal costs related to self-insured medical claims and casualty for similar reasons as mentioned for VITAS. These increased costs were approximately $1.9 million in the fourth quarter of 2021. In addition, there was approximately $1.2 million of increased costs due to e-marketing and accelerated repairs and maintenance and payroll fringes related to outstanding performance by Roto-Rooter for their bonus program that was incurred in the quarter and is not expected to recur. The most significant e-marketing is an initiative by Roto-Rooter to expand brand awareness to a younger audience through the placement of advertisements and content on various social media platforms, including Facebook, Instagram and YouTube. Combined, this spike in fourth quarter expenses negatively impacted Roto-Rooter's fourth quarter adjusted EBITDA margin by approximately 138 basis points. Now let's look at Chemed on a consolidated basis. During the quarter, the company purchased 495,529 shares of Chemed stock for $246 million. This equates to a cost per share of $496.65. As of December 31, 2021, there was approximately $202 million of remaining share repurchase authorization under this plan. As a reminder, Chemed restarted its share repurchase program in 2007. Since that time, Chemed has repurchased approximately 15.7 million shares aggregating approximately $2 billion at an average share cost of $125.14. Including dividends for this period, Chemed has returned approximately $2.2 billion to shareholders. Our full year 2022 earnings guidance is as follows: VITAS' 2022 revenue prior to Medicare Cap is estimated to decline 1.5% to 2.5% when compared to 2021. A portion of the estimated revenue reduction of approximately $15 million is the result of the phaseout of sequestration relief over the first half of 2022 compared to a full year of sequestration relief in 2021. Average daily census for VITAS is estimated to decline between 1% and 1.5%. And full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 15.5% to 16%. We are currently estimating $12 million for Medicare Cap billing limitations in calendar year 2022. Roto-Rooter is forecast to achieve full year 2022 revenue growth of between 8% and 9.5%. Roto-Rooter's adjusted EBITDA margin for 2022 is expected to be in the range of 28.5% to 29.5%. Based upon this discussion, our full year 2022 earnings per diluted share, excluding noncash 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 $19.10 to $19.50. This 2022 guidance assumes an effective corporate tax rate on adjusted earnings of 25.1% and a diluted share count of 15.25 million shares. Chemed's 2021 reported adjusted earnings per diluted share was $19.33. I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of VITAS.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

Thanks, Dave. In the fourth quarter, our average daily census was 17,935 patients, a decline of 4.2% over the prior year and a 50 basis point decline over the third quarter of 2021. The year-over-year decline in average daily census is a direct result of pandemic-related disruptions across the entire health care system since March of 2020. In the fourth quarter of 2021, VITAS total admissions were 16,250. This is a 9.5% decline when compared to the fourth quarter of 2020, and a 7.6% sequential decrease when compared to the third quarter of 2021. Admissions declined in all of our reported referral locations during the fourth quarter of 2021. The most evident admissions decline was 14.4% from hospitals. We experienced more moderate declines of 3.9% from home-based admissions, a 3.1% decline in nursing homes and a 14.1% decline in assisted living facilities compared to the same period of 2020. The surge in COVID cases experienced across the country due to the Omicron variant has once again disrupted the flow of patients throughout the entire health care system. Our estimate for 2022 contemplates continued disruption in the system during the first half of the year with improvement during the second half of the year. Our average length of stay in the quarter was 97.9 days. This compares to 97.2 days in the fourth quarter of 2020 and 96 days in the third quarter of 2021. Our median length of stay was 15 days in the quarter and compares favorably to both the 14-day median length of stay in the fourth quarter of 2020 and the 13-day median length of stay in the third quarter of 2021. We anticipate continued favorable growth of our median length of stay throughout 2022, with particular improvement in the second half with the senior housing recovery. Before I turn the call back over to Kevin, I want to thank our VITAS team members for their daily commitment to improving the two primary areas of focus Kevin mentioned in his opening remarks: increasing available clinical staff and navigating the disruption of the health care system across the country. With that, I'd like to turn this call back over to Kevin.

Kevin McNamara, President and Chief Executive Officer

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

Operator, Operator

Operator instructions given. Our first question comes from Joanna Gajuk of Bank of America. Your line is open.

Joanna Gajuk, Analyst, Bank of America

This is Joanna Gajuk here. So in terms of, I guess, let's discuss VITAS first. In terms of the admission decline that you just referred to and the impact of disruption in the health care system, do you also see limitations from just the labor shortages in the sense of are you able to take all the patients that are coming in? Are you saying that there's just fewer patients being discharged to hospice?

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

Joanna, I'd say — this is Nick. It's not a demand issue across the board. However, when you see health care system disruption, for example inside the Omicron surge, you see a significant shift toward more acute hospital discharges as compared to nonhospital discharges. With that, overall, it is an ongoing balance of ensuring we have available clinical staff to respond across the board on a market-by-market basis, and we continue to prioritize where we're deploying our available resources to respond to those referrals.

Kevin McNamara, President and Chief Executive Officer

And this is Kevin McNamara. I'll just give you a capsule comment. VITAS had a recent month where referrals were up 8% and admits were down 11%. You might say, well, that's encouraging on the referral standpoint. What's happened to admits in that month? Well, when you have clinical shortages and you don't have admitting nurses available, you can't send an admitting nurse out just because you have referrals. When licensed clinicians are scarce, the nurses we do have have to go out in the field to serve patients, which is the highest priority to us. It tells you that things are out of whack. From our perspective, we say it's when, not if, staffing will return. As I said, on the referral side of things, we've seen some good gradual developments which fortify our efforts. We're fighting it daily. As Nick has alluded earlier, there's two parts of that labor problem: continue to do a good job of hiring, and we've hired at a much faster rate than ever in the history of VITAS. We now have to do a much better job on retention, and that's what companies are facing. We're looking for gradual improvement; we've been stuck in the trough for many months, and we're just starting to see light at the end of the tunnel, I think. But Nick, anything? Would you agree with that?

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

Yes, just a couple of points. In terms of a follow-up or question you may ask, as Kevin alluded to, we are laser-focused on both the recruiting and retention aspects. Some of our peer group has commented publicly on recruiting metrics, and while we don't release those specific numbers, from a recruiting perspective we believe our performance is stronger than some peers'. We're bringing clinicians into the door, but we have to continue to improve our onboarding process and other aspects to get them integrated into the organization as well as manage their expectations and support them so they want to stay with the organization going forward.

Kevin McNamara, President and Chief Executive Officer

And it goes without saying, we're focusing on hiring and retention. We are a supplier that gets a price increase calculated in March of the previous year to go into effect October. During that lag period, inflation was up a solid amount that was not reflected in the increase. In my view, we're fighting that labor hiring and retention issue with one hand tied behind our back. The amorphous issue of when people will come back to work is also tied to catching up on reimbursement, which I think come October 1, we'll make some good strides in that regard unless something unforeseen happens.

Dave Williams, Executive Vice President and Chief Financial Officer

But I'd also add on a macro basis, you've heard Kevin and my response to our conservative balance sheet. When you're in health care, you can't be highly levered because inevitably major disruptions happen where the economics get out of hand before the reimbursement plays catch up. We think our strong balance sheet well positions us to ride this out and, frankly, to take advantage of other well-positioned hospices that may be under financial stress if we weren't as conservative in managing the balance sheet. So we think this is going to create opportunity, potentially to start adding additional licensed health care workers throughout this year. For the first time in a long time, you'll hear us talk about the potential to pick well-positioned hospices to acquire; that would be my optimistic hope. The margins may be poor because of the lag in reimbursement relative to increased inflationary costs of providing appropriate care, but we are well positioned to be opportunistic as these things are presented to us. So we have confidence that it is going to be a challenging ride in 2022 as health care right-sizes itself and the labor force right-sizes itself, but we are well positioned to take advantage of that.

Joanna Gajuk, Analyst, Bank of America

Yes. A lot of commentary — but if I can — before we talk about the last point or the first one. My follow-up question is whether you're willing to quantify the pace of your recruiting. Ideally talk about by how much percentage-wise you increased your entire labor force? Would you be able to quantify that for us?

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

We don't release those numbers. Just the directional commentary: on a percentage basis, from what peers have stated, we're outperforming in recruiting. But as you hear me reference, we need to continue to improve not only recruiting but also our ability to retain our workforce, which is joining the organization at record rates.

Joanna Gajuk, Analyst, Bank of America

Yes. And I guess to that point, in terms of retention, that implies a higher pace. Can you talk about what cost per inflation you experienced and what you assume for the year? How do you expect this to progress through the year? Most companies seem to be expecting the labor pressures would be worst in the first quarter and then moderate as the year goes on. Do you agree with that, and what do you assume in your guidance?

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

From a cost perspective, you have two drivers. First, with the pricing increase and merit cycle increases, you naturally have certain quarters where you have outsized comparables. Our merit increase for the full workforce goes in as of June 1, so VITAS creates comparatives against the prior year in the first two quarters of 2022. Regarding overall cost per visit and salary and wage perspective, it is built into our guidance. We have made and anticipate continued investments that allow us to continue to grow our net clinical staff, which will lift the tide as it relates to anticipated days of care trajectory growth in the second half as well as our ability to respond to admissions. So those investments are built into our guidance and we think they are achievable.

Dave Williams, Executive Vice President and Chief Financial Officer

Joanna, the question about inflation among our licensed health care workers is only relevant if all other things are held constant. We are paying our people more. We ended up passing through basically two wage increases in 2021 that will continue into next year. But our health care workers are covering more patients today than they were pre-pandemic, so we're getting more utilization out of the higher wage staff that we do have. It's the interplay between the two that we're dealing with.

Kevin McNamara, President and Chief Executive Officer

And Dave, something we've mentioned during the call: these workers got increased PTO and increases and the increased PTO was substantial. It was two weeks extra the first year, which is roughly a 4% impact.

Dave Williams, Executive Vice President and Chief Financial Officer

It was a $10 million impact to 2021. That's correct.

Kevin McNamara, President and Chief Executive Officer

That's correct.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

Joanna, another dynamic is the macro health care environment and the impact of travel nurse pricing and elevated contract staffing costs. Those extreme price points have a ripple effect through the rest of the health care system. We do anticipate that will slow down as the pandemic hopefully moves to the rearview, pending other variants. That will have a positive impact on people returning to the workforce as well as returning to organizations, as workers will prefer stability and knowing where they will live and work on a day-to-day basis. We anticipate that as a positive trend for all of health care throughout 2022.

Joanna Gajuk, Analyst, Bank of America

Yes. And I guess on the flip side, the Roto-Rooter business is doing pretty well. You mentioned you passed some price increases. Could you frame for us the magnitude of those increases? You also alluded you might expect to pass more price increases this year. Any color there would be helpful.

Dave Williams, Executive Vice President and Chief Financial Officer

We passed mid- to high single-digit increases in our pricing effective January 1. That appears to have stuck; we still have more demand than we have technicians to utilize. The January 1 price increase was really just playing catch-up to the inflation that's already occurred over the prior 12-month period. We fully anticipate looking at pricing throughout 2022, and I would be surprised if we don't have some interim price increases in a number of our markets, if not the majority of our markets, if inflation continues to persist nationally.

Kevin McNamara, President and Chief Executive Officer

And demand remains strong.

Dave Williams, Executive Vice President and Chief Financial Officer

Remember, our technicians are experiencing higher inflationary costs in their personal budgets every day. The primary way the majority of our technicians get an increase is by passing through price increases. We take pricing very seriously as a way to retain technicians and expand the technician workforce. The average compensation of our technician and field sales force was a little over $81,000 in 2021, and I fully expect that number to increase during 2022. Price increases are serious and necessary; in real dollars, they are frankly just keeping things roughly flat in purchasing power. The key to Roto-Rooter's growth long term is expanding our workforce. That expansion was 7% in 2021, and that is our focus throughout 2022. Price increases are a critical strategic component of expanding that workforce, so we're not going to be bashful about it.

Joanna Gajuk, Analyst, Bank of America

So I guess expanding the workforce — you mentioned these e-marketing campaigns. It sounds like that was also part of that strategy, trying to reach new potential candidates to attract them to the business.

Dave Williams, Executive Vice President and Chief Financial Officer

It was, and it was a bit of an experiment. We haven't fully measured results yet, but we're keeping an eye on it. When you're in this dynamic environment and you have the profitability Roto-Rooter does, you can experiment a bit with customer awareness. When you're advertising to customers, you're also advertising to potential future employees, and that was the focus. I don't want to give too much color on what's going on in 2022, but I can say with eight weeks of results for Roto-Rooter, we are encouraged that our guidance is reasonable based upon the revenue growth Roto-Rooter branches have experienced over the past eight weeks. It's a little above what we experienced in the fourth quarter of 2021 for Roto-Rooter. But eight weeks doesn't make a quarter or a year, and we do not see any abatement in demand for Roto-Rooter services across all regions and service segments.

Kevin McNamara, President and Chief Executive Officer

I would add a light-hearted comment: e-marketing and the iconic Roto-Rooter jingle continue to reach younger audiences, which is a positive development for long-term brand awareness.

Dave Williams, Executive Vice President and Chief Financial Officer

The aided and unaided brand awareness and the resiliency of the brand is encouraging.

Joanna Gajuk, Analyst, Bank of America

Yes. No, definitely, we've seen that growth continue to outperform. My last question: you talked about the price increases Roto-Rooter is pushing. On the VITAS side, there's a clear delay in Medicare rates reflecting the labor cost inflation hospices are experiencing. How long will it take for Medicare rates to reflect what's going on in the labor market and the inflationary environment?

Dave Williams, Executive Vice President and Chief Financial Officer

They substantially utilize information accumulated by the Bureau of Labor Statistics that runs from April 1 through March 31, and those results then get dialed into the reimbursement increase six months later on October 1. So from a measurement standpoint, you go 12 to 18 months of inflation before that finally plays catch up. If inflation is truly transitory and turns out to be one and done, it would be 12 to 18 months of depressed margins and then things would normalize. The real unknown is what's the go-forward inflation rate — are we going to go two or three years above average inflation and then continue with this lag? That's out of our wheelhouse to forecast, but that is the dynamic of the current reimbursement unless the government steps in and provides relief to labor-intensive health care players. This will be a drag on every post-acute health care provider that doesn't have a strong balance sheet. For us, it will mean depressed margins for a period of time, but it does create opportunity, whether that opportunity results in acquisitions or in attracting health care workers. Without a doubt, that is one of our strategic initiatives this year and probably next year.

Kevin McNamara, President and Chief Executive Officer

The one-time lag would not be ameliorated until you return to normal inflation levels. It's not an additional or cumulative amount; it's simply the timing. When inflation returns to historical norms, you'll see the catch-up. The timing of that depends on how long elevated inflation persists.

Joanna Gajuk, Analyst, Bank of America

I'll go back to the queue.

Dave Williams, Executive Vice President and Chief Financial Officer

Joanna, please keep going if you have another question.

Joanna Gajuk, Analyst, Bank of America

Sure. I wasn't quite sure if somebody else was waiting to ask a question; I don't want to dominate by any means. So when we talk about the Medicare rate update catching up with cost inflation, you mentioned it could create pressure for others. You also said you might be open to acquiring existing assets, which is a shift in tone from prior commentary. Is it a matter of lower multiples or finding the right assets that would make acquisitions attractive now?

Dave Williams, Executive Vice President and Chief Financial Officer

It's both lower multiples as well as some of these entities being sold in financially distressed situations; they may not have a choice.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

It's also about targeted strategic locations that fit well into our service delivery model, where we can go deep in a market as opposed to going wide and shallow. We prefer strategic, additive locations.

Dave Williams, Executive Vice President and Chief Financial Officer

I don't want to blue-sky it, but the last several years I stated the probability of acquisitions in health care was exceptionally low based upon valuations. That landscape is shifting rapidly and will create opportunity. Whether that results in acquisitions depends on the opportunities. The first time in a long time, it's realistic to say the potential is there. And if we don't acquire assets, we'll look to acquire people.

Joanna Gajuk, Analyst, Bank of America

Right, exactly. As you think about this mismatch before the Medicare rate update catches up with cost inflation: previously you talked about VITAS margins after the pandemic in a target range of 17.5% to 18%. Are those still achievable at some point, or is labor cost structurally higher going forward such that you might have to revisit that margin target?

Dave Williams, Executive Vice President and Chief Financial Officer

That target is contingent upon reimbursement finally catching up to higher wages. The 17.5% to 18% benchmark was based on the margin VITAS posted pre-pandemic when acuity and days of care were at prior levels. If this goes on long enough, we may have to revisit that because the landscape might change materially — either for the better or worse. But 17.5% to 18% is the last full-year margin we achieved pre-pandemic, so we're using that as a reference point.

Joanna Gajuk, Analyst, Bank of America

And those target margins, what do they assume for top-line growth or volume growth? For this year, you're talking about ADC declining. How do you think about industry long-term growth?

Dave Williams, Executive Vice President and Chief Financial Officer

I would default to pre-pandemic trends as the best benchmark because I don't have a better data point. The terminally ill and the need for hospice aren't going away, so we expect industry admissions and patients cared for to return to pre-pandemic levels. There will likely be a fair amount of catch-up over a year or two because we're seeing terminal patients trapped in curative care for a variety of reasons, including disruptions in senior housing and distractions among other health care providers. I fully expect roughly 4% to 5% census growth and realistically perhaps 7% overall revenue growth for the industry once things return to normal.

Kevin McNamara, President and Chief Executive Officer

On a macro basis, the percentage of patients who have at least one day with hospice prior to death — across all ages — is down about 5% to 6% since the start of the pandemic. That is a clear and observable decline relative to a 12-year upward trend. We are comfortable saying there are pandemic effects to the industry as seen by the number of patients who enter hospice, and we expect that to be ameliorated over time.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

One silver lining from the pandemic is that the country has recognized that high-quality care can be provided in the home, whether hospice or other home-based services, and the government has seen that total cost of care for those patients is reduced compared to alternative settings. Those are positive trends for post-acute home-based providers going forward.

Joanna Gajuk, Analyst, Bank of America

Definitely, we agree with that view. Clearly, we'll see it in a lot of different settings. It seems like everyone is having issues around labor shortages, but perhaps some nurses will come back to the workforce, which could help. Switching gears back to Roto-Rooter: top line continues to outperform and margins in your guidance call for improvement. How do you think about that margin outlook and what gives you confidence in achieving those margins going forward?

Dave Williams, Executive Vice President and Chief Financial Officer

We see an opportunity for margin increase, which we guided for. The margin expansion will be predicated on the success of passing through price increases to customers. Commissions for technicians are largely variable, but we do have fixed costs in the Roto-Rooter business. We expect margin expansion over the long term, and how it flows through in 2022 depends on how quickly we pass through price increases and how customers — particularly commercial customers — accept those increases. Because we have more demand than supply, we think we'll be successful. That should make our guided EBITDA margin for Roto-Rooter conservative, but we'll have to see. We're watching inflation in our actual costs, and price increases are the primary lever to keep technician compensation attractive and to expand the workforce.

Operator, Operator

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

Benjamin Hendrix, Analyst, RBC Capital Markets

I just wanted to see if you could provide any additional color or detail on quarterly cadence. You've already mentioned that you think senior housing referrals will start to normalize in the second half. Many peers have talked about Omicron headwinds impacting the first quarter. I imagine for your business mix, you may not see quite the same level of first-quarter impact, but I wanted your thoughts on the puts and takes of cadence throughout the year.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

A lot of the Omicron impact is market-by-market. On a macro level, from both referral and disruption perspectives, we had an elevated spike in mid-December through the first two to two-and-a-half weeks of January. Individuals and our employees were unexpectedly impacted and out of the workforce, which affected our ability to respond. That was a 4- to 5-week disruption similar to what others experienced. With our safety protocols and preparation, we've been able to respond and do not see that disruption continuing as we sit here today. But it was a real, short-term disruption in late December into January.

Kevin McNamara, President and Chief Executive Officer

We were prepared for the CMS vaccination mandate and related eligibility issues, and our preparation minimized disruption. We spent 12 to 18 months beforehand to educate and prepare employees to ensure availability and safety in the communities we serve.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

We successfully navigated the mandate with minimal disruption because of our advance preparation.

Dave Williams, Executive Vice President and Chief Financial Officer

We don't give quarterly guidance, but I'll comment that Roto-Rooter should strengthen margin and profitability throughout the year quarter-over-quarter, with the fourth quarter typically the best margin quarter for Roto-Rooter. VITAS is different: we expect inflation to nag at margins for the first three quarters as the reimbursement lag persists, but we fully expect to see a spike in profitability when the October 1 reimbursement increase takes full effect. So Roto-Rooter should be solid and strengthening; VITAS will experience some pressure until the reimbursement adjustment takes hold in the fourth quarter.

Benjamin Hendrix, Analyst, RBC Capital Markets

That's great color, guys. One final question: with senior housing referrals potentially normalizing in the second half and that included in your guidance, how close to normal will median length of stay be by the end of the year?

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

We think it should be completely normalized by the end of the year.

Operator, Operator

Our next question comes from an unidentified analyst. Your line is open.

Unidentified Analyst, Analyst (Unidentified)

A question for each of the two businesses. On Roto-Rooter, the 8% to 9.5% revenue guidance is similar to pre-pandemic growth rates. Do you expect the year to be relatively balanced between the commercial and residential businesses? And then on VITAS, the percent of clinicians who are on quarantine has dropped significantly from the end of January to today — does your margin guidance take this big improvement into consideration?

Kevin McNamara, President and Chief Executive Officer

I'll start with Roto-Rooter. Residential business has been very strong; when you compare it to commercial, that doesn't mean the commercial won't strengthen. Commercial has more room to return to pre-pandemic levels and then take advantage of marketing success seen on the residential side. When commercial customers are at full strength, which we're approaching, there's a lot of growth available as long as we have the service people to provide it. So residential may remain stronger for a few months, but it's easier to grow commercial from a lower base.

Dave Williams, Executive Vice President and Chief Financial Officer

We saw commercial strengthening in the fourth quarter of 2021, and excavation and large-ticket residential jobs played a role in growth. We're somewhat conservative in our guidance on Roto-Rooter growth because excavation and water restoration have pricing dynamics that can be partially outside our direct control, but we could be conservative and still see good results given current demand.

Nick Westfall, President and Chief Executive Officer, VITAS Healthcare

On the VITAS side, yes — the improvement in clinicians available and not quarantined is assumed in our guidance. It is embedded in our guidance that clinicians will be available and that we will continue to build our clinical capacity to meet demand and achieve growth trajectory, particularly in the second half of the year. Also, some peers that are more home health-focused face different dynamics with elevated contract staff where regulatory constraints limit use of contract staff in hospice. So elevated third-party utilization doesn't impact our model the same way.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn the call back over to Kevin McNamara for any closing remarks.

Kevin McNamara, President and Chief Executive Officer

Thank you. Before I close the chapter on 2021, I'd say we were very gratified with the operating companies. We increased our guidance twice during the year and ultimately exceeded it, which was gratifying. We've provided what I think is conservative guidance for next year, and we're prepared to hopefully deliver on that. Thank you very much.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.