Chemed Corporation (CHE) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Chemed Corporation Fourth Quarter 2019 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Ms. Sherri Warner with Investor Relations. Please go ahead, ma’am.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2019 ended December 31st, 2019. 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 18th, 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 18th, which is available on the company’s website at chemed.com. I would now like to introduce our speakers for today. Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall, President and Chief Executive Officer of Chemed’s VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning. Welcome to Chemed Corporation’s fourth quarter 2019 conference call. I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I will then open up the call for questions. Consistent with the first nine months of the year, our fourth quarter 2019 operating results were very solid and at the high end and in many cases exceeding – exceeded our internal expectations. In the quarter, Chemed generated revenue of $522 million, an increase of 14.2%. Our consolidated net income in the quarter, excluding certain discrete items was $4.22 per diluted share, an increase of 26%. VITAS’s admissions have continued to strengthen throughout the year. In the fourth quarter of 2019, we admitted 17,479 patients, which is 5.4% above the prior year and compares favorably to the second quarter 2019 admissions growth of 3.8% and our third quarter admissions growth of 4.4%. VITAS revenue increased almost 11% in the quarter, this was driven by a combination of our 6.1% growth in average daily census as well as our annual Medicare price increase that was effective October 1st, 2019. There’s 11% revenue growth resulted in a 26.8% increase in adjusted EBITDA. Roto-Rooter continues to show consistent growth in our core plumbing and drain cleaning service segments, with aggregate revenue increasing 21.2% in the quarter and adjusted EBITDA expanding 20.9%. While we posted excellent growth in adjusted EBITDA, our overall adjusted EBITDA margin of 24% was a slight decline over the prior year quarter. Normally, it was such a significant increase of revenue, the Roto-Rooter cost model that show an increase in EBITDA margin. However, our Roto-Rooter margin growth was held back as a direct result of our previously announced Roto-Rooter acquisitions that initially generate operating margins that are substantially below our Roto-Rooter operating metrics. As most of you are aware of the second quarter of 2019, we acquired the California franchise territories serving Alameda County and portions of southwestern San Joaquin County. These acquired territories had annual revenue of roughly a $11 million and serve a population of approximately 1.7 million. In September 2019, we completed the HSW acquisition which was our largest franchisee. HSW consisted of franchise territories in Metro Los Angeles, which includes Inland Empire, San Fernando Valley, San Gabriel County, Orange County as well as territories in San Diego, California; Dallas and El Paso, Texas; Phoenix, Tucson and Florence, Arizona; Salt Lake City, Ogden, Park City and Provo, Utah; and Portland and Salem, Oregon. Collectively, these HSW Roto-Rooter locations serve approximately 32 million people, with an aggregate revenue base of about $17 million. These acquisitions have been immediately accretive to earnings. However, we acquired these territories knowing their gross margins, EBITDA margins, pricing and mix of service offerings were significantly below the average of our existing Roto-Rooter operations. For example, in the fourth quarter of 2019, the HSW acquisition had gross margins that were 10 percentage points or 1000 basis points below the Roto-Rooter average. The HSW branch operating margins were 18.8 percentage points below our average Roto-Rooter branch operating margins. The operating performance of these newly acquired territories are slightly ahead of our initial projections. However, we are in the midst of a project to reengineer these branch operations to emulate our Roto-Rooter branches. I have strong confidence that every one of these acquired territories will have significant operational improvement in margins and overall profitability over the coming quarters. With that, I would like to turn this teleconference over to David.

Thanks, Kevin. The VITAS net revenue was $340 million in the fourth quarter of 2019, which is an increase of 10.7%, when compared to the prior year period. This revenue increase is comprised primarily of a geographically weighted average Medicare reimbursement rate increase of approximately 5.5%, a 6.1% increase in days-of-care and an increase in the Medicare Cap billing limitation that decreased revenue 0.3%. This growth was partially offset by acuity mix shift, fluctuations in net room and board and contractual adjustments, the combination of which negatively impacted revenue growth approximately 0.7%, when compared to the prior year period. Average revenue per patient per day in the fourth quarter of 2019 was $198.48, which is 5% above the prior year period. Reimbursement for routine home care and high acuity care average $164.62 and $996.82, respectively. During the quarter, high acuity days-of-care were 4.1% of total days-of-care, and 11 basis point decline over the prior year quarter. This 11 basis point mix shift in high acuity days-of-care reduced the average increase in revenue per patient per day from 5.5% to 5% in the quarter. In the fourth quarter of 2019 VITAS accrued $4.5 million in Medicare Cap billing limitations. This compares to the prior year Medicare Cap billing limitation accrual of $3.5 million. VITAS currently has 30 Medicare provider numbers. On a 12-month trailing basis, 23 of these provider numbers have a Medicare Cap cushion of 10% or greater, 3 provider numbers have a cap cushion between 0% and 5% and 4 provider numbers have a Medicare Cap billing limitation. The fourth 2019 gross margin excluding Medicare Cap was 26.3%, which is a 204 basis point margin improvement when compared to the fourth quarter of 2018. Selling, general and administrative expenses were $21.2 million in the fourth quarter of 2019, which – is an increase of 3.9% compared to the prior year quarter. VITAS adjusted EBITDA excluding Medicare Cap totaled $70.5 million in the quarter, an increase of 27%. Adjusted EBITDA margin, excluding Medicare Cap was 20.5% in the quarter, which is a 259 basis point margin improvement when compared to the prior year period. Now, let’s turn to the Roto-Rooter segment. The Roto-Rooter generated quarterly revenue of $182 million for the fourth quarter of 2019, an increase of $31.9 million or 21.2% over the prior year quarter. On a unit-for-unit basis, which excludes the Oakland and HSW acquisitions, Kevin mentioned earlier that were completed in July and September 2019, respectively. Roto-Rooter generated quarterly revenue of $162 million for the fourth quarter of 2019, an increase of 7.9% over the prior year quarter. Excluding the Oakland and HSW acquisitions, commercial Drain Cleaning revenue increased 7.1%, commercial Plumbing and Excavation declined one 0.1% and commercial Water Restoration declined 17.4%. Keep in mind, commercial Water Restoration represents only 10% of our total Water Restoration Service revenue. And overall, on a unit-for-unit basis, commercial revenue excluding these acquisitions increased 1.2%. On the residential side, excluding acquisitions, our residential Drain Cleaning increased 10.1%, Plumbing and Excavation increased 7.4% and residential Water Restoration increased 14.6%. Overall, residential sales excluding acquisitions increased 9.5%. As of December 31st, 2019, Chemed had total cash and cash equivalents of $6.2 million and long-term debt of $90 million. During the fourth quarter of 2019, the company repurchased 50,000 shares of Chemed stock for $20.7 million, which equates to a cost per share of $414.11. As of December 31st, 2019, there was approximately $104 million of remaining share repurchase authorization under this plan. Our guidance for calendar year 2020 is as follows. Revenue growth for VITAS prior to Medicare Cap is estimated to be in the range of 8.5% to 9.5%, both admissions and average daily census in 2020 are estimated to expand approximately 3.5% to 4.5%. In our high acuity days-of-care are estimated at 4.1% of total 2020 days-of-care. Full year adjusted EBITDA margin for VITAS prior to Medicare Cap is estimated to be 18.7% to 19%. And we are currently estimating $18 million for Medicare Cap billing limitations in calendar year 2020. Roto-Rooter is forecasted to achieve full year 2020 revenue growth of 13% to 14%. This revenue estimate is based upon unit-for-unit revenue growth of approximately 4% of 5% in our core Plumbing and Drain Cleaning Services continued, but slow in revenue growth from Water Restoration Services combined with 12 months of revenue from the Oakland and HSW acquisitions. Roto-Rooter’s adjusted EBITDA margin for 2020 is estimated to be in the range of 23% to 23.5%. Based upon the above, full year 2020 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock options, costs related to litigation, intangible amortization of reacquired franchise rights and other discrete items is estimated to be in the range of $16.20 to $16.50. This 2020 guidance assumes an effective corporate tax rate of 25.2%. For a comparison, Chemed’s 2019 reported adjusted earnings per diluted share was $13.96. I’ll now turn this call over to Nick Westfall, our President and Chief Executive Officer of VITAS.

Thanks, Dave. VITAS had an excellent fourth quarter, completing what was a solid 2019, where each employee came together to focus on execution throughout the entire year. I would like to thank each of our VITAS team members for their ongoing commitment and dedication to making these results a reality. In the fourth quarter, our average daily census was 19,258 patients, an increase of 6.1% over the prior year. Total admissions in the quarter were 17,479. This is a 5.4% increase in admissions when compared to the fourth quarter of 2018 and is our third sequential admissions growth rate increase, starting with the second quarter of 2019. This sequential performance continues to be a result of our collective organization striving to improve all aspects of our ability to differentiate VITAS and efficiently serve the patients’ families and referral sources and each of the communities in which we operate. During the quarter, admissions increased in all four of our pre-admit locations when compared to the fourth quarter of 2018. Hospitals which typically represent 50% of our admissions, increased 5.8%. Home-based admissions increased 1.5%, assisted living facilities increased admits by 9.4% and nursing home admissions expanded 0.2%. Our average length of stay in the quarter was 95.2 days, this comparison 92.6 days in both the third quarter of 2019 as well as the fourth quarter of 2018. Our median length of stay was 16 days in the current quarter, which is 1 day less than the 17 day median and the prior year quarter. On a year-to-date basis, median length of stay is 16. Median length of stain is a key indicator of our penetration into the high acuity sector of the market. With that, I’d like to turn this call back over to Kevin.

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

Thank you. [Operator Instructions] And our first question comes from Joanne Golek [sic - Joanna Gajuk] with Bank of America. Your line is open.

Thanks. This is Joanna Gajuk at Bank of America. Thank you. So in terms of first with VITAS. Operating margins were pretty good in that segment, obviously we know the rate are coming much better. And I guess even after you raised your view for the year, still you came much better than your updated guidance. So can you talk about the main areas of assets versus your internal expectations? What drove a better performance in Q4?

Yeah, Joanna I’ll – this is Dave Williams. I’ll comment first. So the – of course, we knew where we’re going to get a price increase, that was significantly higher than anyone anticipated when CMS announced it in July-August. And basically, they were taking a rough cut of 20 basis points out of routine home care. And then, general and patient care from a national rate was going to go up 35% and continuous homecare was going up almost just a hair under 40% nationally. But we had a lot of uncertainty regarding how that would actually impact our fourth quarter, as well as what we’re looking at going into 2020. And the big unknown would that be – that would be of course, geographic mix shift, which always moves around for VITAS. But the other side of it is, what our high acuity days-of-care turn out to be in the fourth quarter of 2019 as well as going forward in 2020. As an example, as you know, we mentioned that there was a slight decline in our days-of-care and continuous homecare and GIP combined, which is what we call high acuity, that declined 11 basis points in the quarter over the prior year, going from like 4.18% to 4.07%. That very modest 11 basis point decline actually shaved the full 50 basis points off of our price increase going from 5.5% to 5%. So, what we – when we gave our initial guidance, we were somewhat conservative, knowing that high acuity care of mix shift is going to have a significant impact on the pricing points we realized, but it looks like we stabilized around 4% to 4.1%. And that really what we ended up projecting into our guidance for 2020. So, we ended up with a net 5% price increase and that’s really the big driver in terms of the 125 basis point EBITDA margin increase for VITAS in 2020 over 2019 with of course, a bit of that growth actually have – some of that 5% growth, well some of the 5% price increase growth we had was translated in a higher margin in VITAS this fourth quarter 2019 EBITDA. But you bring up a great point, because we don’t have any control or driver relative to what high acuity care turns out to be in any given quarter or any given year. It’s the thousands of individual decisions made by our physicians based upon current patient needs. So we’re still keeping a close eye on what their ratio turns out to be, but it’s not a ratio we’re in any way of in control of. But I’ll turn that over to Nick to see if he has any additional color –

Yeah before I threw over to Nick, I just want to say there’s also another skewing factor within high acuity that is, whether it’s continuous care or inpatient care, and obviously, if, you know if – continuous care has a little bit higher margin, so you know that shifts that affects the relationship as well. But having said that, Nick, any other comments for the questions?

No other comments other than just to reinforce the last point, Joanna, which Dave made, the decision making related to whether patients experiencing a period of crisis and therefore warrants a higher level of care, whether it’s continuous care or GIP is very patient-specific and clinically driven by our physicians and our care teams. And so, while they’ll continue to make those decisions, we’re just you know – watching, you know, what that translates into from a total – percentage of total, you know, total days on a go-forward basis and modeling that into our guidance on a go-forward basis.

Right. So on that point, so you’re saying that your guidance for 23 assumes 4.1% total face of Kirby’s high acuity. So how does this compare year-over-year to –

So I’ll walk you back through each of the last few quarters, so that you can see the degree of compare with it. In Q2 of this year, it was 4.2%, which was flat against the prior year, Q3 was 4%, which was 70 – 7 basis points less than the prior year and then as we just reported, it was 4.1%, which was 11 basis points less than the prior year quarter, so that normalization around you know, 4.1% is what we felt comfortable with going into 2020 as we anticipate total days-of-care to continue to expand, but the ratio between routine homecare and high acuity to remain consistent with what we’re experiencing at the tail end of 2019.

So I’m sorry so you’re saying that – so I’m sorry, so year-over-year for the full year, you’re expecting the high acuity days-of-care as a percentage of total to actually increase or decrease slightly?

To remain relatively flat, which is at that 4.1%.

Yeah, but just – but the full year 2019, Joanna just so we’re clear, came up to 4.17% but everything we’re benchmarking is off of fourth quarter 2019 so that’s really what we think. And it does look like with things stabilized like remember Nick mentioned it was 4% even in the third quarter of 2019, 4.07% in the fourth quarter of ‘19. We really do think it’s stabilized but we have to emphasize, this is just an accumulation of physician-based decisions. And if we see a spike in referrals that come out of hospitals, that number could go up, if we drop a little bit in hospital-based referrals that result in admissions, the high acuity ratio could drop a little bit.

It’s based exclusively on patient need, which is very much a market specific dynamic.

Okay, understood. And then on that front in terms of the guidance for the margins in VITAS for the year, so that does imply sort of 120 basis points or so increase year-over-year obviously in Q4 alone, this – the margin increased much more dramatic. So I assume it’s the dynamic of Q4 of 2020 having a normalized revenue growth rate lapping the rebasing the higher rate is that a way to think about it that we should expect, you know, the first three quarters have, you know, a nice, well about like 100 basis points margin, expansion and then things will normalize at Q4 of 2020?

Certainly things will normalize in the fourth quarter of 2021. We see what our October 1st, 2020 increase is. And it would be probably a reasonable conservative to keep that in a range of 1% to 2%. But typical of our business model, when you get all of the price increase on the federal government on October 1st, well certainly October 1st inflation hasn’t eroded any of that price increase. So you expect more that to fall to your EBITDA line. But then as you go out throughout the quarter, and then you go into the following year, as people pass through pricing, wage increases, as inflation erodes that, you certainly all things held constant economically you would have to expect an erosion of that margin from the fourth quarter.

Okay that makes sense –

And that’s what we experience through – throughout the year. You know, if you look at the last 10 years, the only thing that can offset that in terms of inflation, eroding is the little bit of leverage we have in our fixed or semi-fixed costs in the form of Central support costs.

Right. And the other piece on the guidance on VITAS where you are guiding to, were those growing call you know 4% on admission growing for. But in terms of the average daily census, clearly 2019 came in much better it was, you know, 6% for the year that was above, you know, your guidance. So just some conservatism here or are you just kind of looking at a tough comps in second half of ’19 because the growth was so strong or can you just kind of frame to us how we should think about you know, ADCs and I guess would that – there was a comment made, how you’re trying to drive better experience for the patients or referral sources. So can you talk about that give us more specific examples of actions you’re taking that allows you to deliver a 6% ADC growth that you did in 2019?

Sounds good, Joanna. I’ll take a stab at answering both of those and I’m sure, you know, Dave and Kevin may have some additional color to add into it. But for the admission and the ADC range inside of 2020, it’s consistent with some of our historical approaches to, which is provided, you know, a conservative range on both of those operating metrics. And throughout the course of the year, we may modify that range as experience – as experienced comes in. And so, you know, admission growth and ADC growth, while there is a correlation to it, is also unique depending on the unknown of how long a patient is ultimately going to stay with you for all those appropriate patients that come on, on day one. So, you know, to your point, it is, I don’t know if we describe it as conservative, but it’s consistent with our historical guidance of a range for both that we’ll update throughout the course of the year.

And the only thing I wanted to add is, there’s what – there’s a factor that could affect these numbers and that is, you know, in areas like Florida, California, where, you know, we want more short-stay patients. And we actually want the average length of stay will go down, you know, the sales people they spend more time calling on hospital discharge planners and, you know, resources of patients that are more likely to be short-stay patients and as opposed to assisted living, you know, care organizations. So I mean, to the extent that what I would see as a success for 2020 would be some adjustment in that – those efforts, maybe even that’s outpace ADC and the benefit, you might tell while there’s you know, from a normal operating reporting situation that creates some challenges, but that should help you on the Medicare Cap, you know, and again, that we’re doing it, we think that there’s a 2:1 payoff or something like that, you know I mean, so you got to put it all together, but I personally – yeah VITAS is, when you look at their projections and their guidance, they’re in good position to deliver on them.

And to reiterate Kevin’s point, you know, as we look at 2020, we hopefully, you know, would see an admission growth rate continuing to grow like it has and mentioned sequentially. And our ADC growth rate will be what it is, depending on how long those patients stay with us. To answer your second question, Joanna related to the comments on what’s driving some of that sustainability and slight increases from an admission growth perspective, at a very high level, I think there’s probably, you know, three components that speak to that obviously is much more tactful at a localized level, but it’s a continuation off of our multiyear strategy that really focuses on a variety of things. I’ll comment on three of them. But being an independent hospice without any ownership or affiliation with upstream referral sources, it has always been critically important for VITAS to do these things. And the first one is, separating out the value proposition of hospice. So it’s a why hospice to those referral sources and why VITAS, and I think we’ve been very successful at being able to educate and explain both of those things. The second one is just ongoing improvements and consistency with our education and training, not only out to the patients’ families and referral sources, but internally with our team to focus on all those key factors that are really influencing our success in the admissions area. And then, you know, when we think about tactful feet on the Street, we’re always focusing and measuring our improvement on things such as speed of response to those referral sources when speed of response is critical, such as a hospital discharge planner. And so you know, we could probably spend the next hour and a half talking about some of those strategic execution pieces, but that’s what this team has been focused on. We’re going to continue to be focused on it with some new initiatives also rolling out in here inside of 2020. And we’re just going to continue to focus on the execution on a day-to-day level there and hopefully the results will continue to fall.

Okay. And the different topic on a thing on hospice. So there’s like a lot of different small proposals and things that would create some changes here. So can you kind of comment on some of those, I guess, any update on the proposal carving the hospice benefit into a main in terms of a, you know, you actively trying to position ahead of that, are you waiting to see what could come out from these earlier plans and also, I guess, some other proposals from that kind of get even the President’s budget had some other proposals to make some changes in hospice benefit. So can you just explain to us kind of how you think about the reimbursement output for hospice and may be comment on any of these proposals that are out there? Thank you.

Yeah –

I just want to start, Dave by saying, you know Nick and Dave power these potential changes very closely in both, you know, from an association standpoint and from, you know, political contact standpoint and the more you know, you don’t know, but let me just say before that I turn it over to them maybe they can talk about some specifics. We operate on a presumption that the status quo is not going to hold forever I mean we don’t anticipate anything happening that soon. But like a lot of things, you know, things change. I think the benefit of Roto-Rooter and the type of company of this with a national in scope, we will be you know, we should be the most adept at adjusting to these changes whatever they are and so I must say at the top level, I say, we’ll see what happens. I don’t expect that things last forever. But I’m very confident in how we’ll be able to do all the changes. Now, Dave anything to comment about specific potential changes that rejoice.

Yeah. Let’s – so your question we need to break out into two kind of, you know, government stakeholders. One is CMMI, Center for Medicaid and Medicare Innovation, basically creative different ways of billing to make the healthcare system more efficient. And the second one is I think you were basically referring to MedPAC recommendation. So let’s take the CMMI first. What CMMI is currently working with Medicare Advantage plans, and they’re trying to gauge their appetite, whether they want to offer within MA plans, a hospice option, and it’s still an unknown, we actually there is going to be another conference call with CMMI next week, basically getting a feel for what are the MA plans interested in? What will be the positive and the negative or the potential unintended consequences? As well as what will reimbursement be? But it’s all what we would call as a demonstration project, a very small scale project over the next several years to actually gauge what the impact would be on Medicare beneficiaries, efficiencies of a continuum of care. You know, are you keeping things at arm's length by these decisions made by the patient as opposed to an insurance company trying to save on curative care costs, but CMMI, the whole point of demonstration projects and modeling is trying to figure out the reaction to the healthcare system without disrupting the all of Medicare. So that’s going to be several years in the making. The second one is MedPAC, which is the Advisory Board on reimbursement to Congress. And what MedPAC does is, on a very broad base scale, they look at everything reimbursement from Medicare and they come up with various observations, some of them just at 30,000 fees, some of them in doubt. But at 30,000 fee, they made the thought should the Cap protection on Medicare billing aid the index for different reimbursements by different geography. For example, we – it’s about a $30,000 Medicare Cap protection per admission, but that $30,000 is the same in San Francisco with a $240 routine homecare reimbursement as Baton Rouge, Louisiana, which I think it’s below $140. So they’re talking about indexing the Cap, not having an increase in hospice, and then reducing Cap by 20%. And that’s a proposal that will get discussion, but I suspect even MedPAC doesn’t expect Congress to take that off. But I’ll also turn it to Nick to see if he has any other observations.

One other just very quick comment to add on to it when you take all of them, including the CMMI or you know what was inside the President’s budget. But at the CMMI level, to reinforce Kevin’s we’re actively engaged in the dialogue to be a stakeholder to provide any input to CMMI or any other governmental stakeholders that are really trying to achieve in the recognition of one thing, hospice when it was enacted on the Medicare benefit in ‘83 it was the first value-based full-capitated risk reimbursement. And it drives and down total cost of care inside of the system and improves quality for patients. And so what we’re trying to collectively figure out of the country is, how do we get more appropriate and greater access to patients? And we believe in that and that will be good for the industry and for the country. It’s a matter of how we get there and how the rules and/or demonstrations evolved. But we see that as a very positive thing, potentially for the industry in the future, as well as a positive thing for patients and families throughout the country.

But I think the takeaway is, how Kevin opened this and the status quo in healthcare will hold, you know, it’s – this is going to be dynamic, not static. And you’ll have to have a care in business model that’s prepared for changes in reimbursement, whether it’s going to be next year or three or four years down the road. And we have structured VITAS and our capital structure and our business models prepared for these type of changes.

So just to follow-up on the CMMI, this is a proposal and this is going to be a demo on these certain markets. But my question now, are you in discussion with MA plans already as well or are you first kind of trying to work with CMMI on how they’re going to structure because I guess the next that upon will be the rates where they will have a proposal first, I guess for the rates adjustments to include the hospice in those states. So I – MA plans already kind of looking to providers for input on that or that’s not really there yet?

So, Joanna, for the most part until the pricing and the actuarial piece comes out, which would - the first time would be scheduled for next week for some of those public awareness. At that point, the plans will have a well arguably enough information to begin to formulate their desire and whether they want to participate in individual markets or not. And at that point, you know, we already have relationships with some of those plans and we’ll just discuss whether it’s you know, mutually advantageous or not, but there are current gaps in the proposed design that still need to be addressed and ferreted out that are important details by CMMI.

You almost have to think about CMMI has done a great job of engaging all stakeholders which would include the hospice industry MA plans just to name a couple, as well as the Academy of Hospice and Palliative Care Physicians. But the reality is, CMMI has been directly engaged with MA plans with hospice industry providing thought process and input, both the CMMI and MA, but the active participants right now where CMMI and MA, and we’re kind of waiting in the wings to see how we can participate in that plan. Once we have clarity on what CMMI and the MA plans have reached an agreement on. That’s a big unknown stone.

Okay. I will leave the floor now, I’ll then go back to queue. But I appreciate your comments –

No, actually Joanna, you can finish there’s a light queue, so if you have more questions, please keep going.

Okay, yes. Thank you. So we talk about hospice, VITAS and I guess the road over the organic growth was pretty good when you talk about the 7.9%, excluding the deals in the quarter. That’s pretty robust, but seems like you kind of guiding to a further deceleration. So is it also similar to what you’re describing the VITAS output that you’re sort of more conservative there, because you’re talking about like a 4% to 5% you know, on the core side of things or there’s something missing piece here at the bridge from that number to 13% to 14% overall revenue [technical difficulty]?

No, we would consider, actually that the core base business had 4% to 5%, if you look at historical it was actually fairly robust. I think it’s a direct result of our more detailed and aggressive campaign on internet marketing and making sure we show up and pay the natural search. But I think you – some of the core business is getting, Water Restoration played an outsize role in our unit-for-unit growth over the past several years, that has improved and so really 4% to 5% given an industry that has almost no growth, we consider extremely positive. But then of course, we have the additional growth from having a full year of acquisition, revenue and profitability, even though it’s a low margin profitability still, relatively low, the acquisitions I’ve been taking it from that 4% to 5% to that 11%. So actually, the core growth for Roto-Rooter we consider actually robust, given an industry that really can’t expand much beyond household formation rates.

Yeah, the one thing that keep in mind is, when we bought, you know, over $70 million in sales, again I’m focusing at California that vary visit as we said that the HSW acquisition was a number you know, some in Texas, Arizona, Oregon, but generally speaking, there because of pricing, because of service offerings, because of mix between commercial and residential. That acquisition had sales of a little over $2 per pop, $2 per population, the average Roto-Rooter branch average is over $4. So, you know, obviously to answer your question really is, well, how quickly we have a big thought that we’re going to be very successful they’ve got a time to kind of get they’re going to be very successful in bringing these branches into the mainstream of Roto-Rooter, is it going to take you know, one quarter, six quarters, seven quarters, you know, they got a long way to go. But what makes us exciting again, we probably think as we’re going to see nice quarter-over-quarter growth coming from that major acquisition on top of what Dave just described as solid operating conditions for the base Roto-Rooter business.

All right. So to that point, obviously you got into margins slightly down year-over-year, right because the deals that you described came out significantly lower margins. So just putting them into the numbers driving it down, but and you mentioned the actions you’re taking or trying to decide what you will do inside these characters. So can you give us a little bit more details in terms of the different considerations or different factors you’re trying to take into consideration to what will be happening in these territories in terms of keeping them or not keeping them and pushing prices or not pushing prices or any other parts of the strategy that you taking and how I guess this would influence the margin improvement because to your point you know the expectation is that, you know, you bought them – you bring them in at lower margin, and then over time, you will improve it. So just trying to assess, you know, to your point about the speed of these changes, and whether there any actions that will make the margins move faster towards the average, you know, is there any way to kind of frame for us or what we should be looking for in terms of these changes and how that will drive margins?

Well, first I think you have to turn to our guidance we gave for Roto-Rooter for 2020 for the impact overall in terms of our margins. What you’re really asking for is the timing and sequencing of different things. And each location that we acquire is different. For example, the locations that have a large amount of commercial business that certainly is more price sensitive, where commercial accounts use you multiple times a year, a residential may only use once every few years. So it’s really the question of manpower in an individual location, the timing of price increases for commercial versus residential, as well as you don’t want to increase your residential internet marketing unless you make sure you have the manpower to deal with the business. So each one is unique and how we approach it. And it’s not like is a one size fits all. So I think in terms of the timing of the overall impact the acquisitions have on our margins, you have to just utilize the guidance we provided last night and during this call today, as you know, what will happen in 2020 overall.

Right. So that’s what I was getting on that, you expect margins to be down for the segment year-over-year. So that should be expected to sort of ramp up through the year as in the margins, you know, are more pressured to Q1 and on Q4 you exit, you know, closer you try to close the gap or you know, how quickly should we expect, you know, the gap to be you know, closing now a little bit?

I think you expect it to go into 2021 and some of the locations but we expected on margin improvement obviously in 2020. But we could even say with confidence, oh gosh, this is going to be an impact in May of 2020. And the other one is going to be September of 2020. Phoenix will have this – the sequencing is based upon manpower which has turnover, the sequence is based upon the commercial residential mix, as well as what we can pass through pricing as well as getting traction on our internet marketing for residential. There’s a lot of permutations. The only thing we can say confidently is, we haven’t had a failed acquired territory ever since we bought Roto-Rooter in the 1980s. The only question is, the timing and how quickly and robustly they start operating at. But we can point to one operation in Nevada, one operation in New York, it actually took us several years until we had the right combination of people, mix, pricing, commercial residential, before we were comfortable with their operating performances, others we fix in two quarters.

Let me give you an example, Joanna one of the plans where the Roto-Rooter is dealing with. The previous owners didn’t care that much about their internet reputation, okay. They dealt with that a lot of industrial and corporate clients. And so when we bought it, there was a number of things we want to do. First thing we want to do is, want to hold on to the technicians. I mean, without the technicians, we don’t want to train the whole new batch that started from scratch. So you know, the number of changes you can make or you know, you look at that both ways. But let me just give you an example. Okay, one of the most significant ways that to improve marketing, where you apply on the internet is customer reviews. Roto-Rooter generally spends a lot of that for getting, you know, customer reviews and anybody talked to Roto-Rooters kind of its high price, but they give great service. Well you know, it’s you know, it’s going to take some time to get to know and a lot of that to get those customer reviews to a Roto-Rooter level, let’s put it that way. And you might say, well, can’t they just push that loud, it’s like pushing a string. You know, you can’t you know, it’s – if you do a good job and you hope that 5% of them turn into a review. So I’m just using that as an example of despite their best efforts it’s going to take a while to be hitting on all cylinders on a very – that very important signpost. Okay, that was good. That no way to say yeah, we’re very hopeful. It’s very hard for us to give more guidance on that as how quickly it’s going to go. But you know, we – you know, all – you know, what we said in our presentation was, our overall metrics on these branches has slightly exceeded our expectations. I mean, we – when we do a Board memo of authorizing the purchase, we go into great detail, and we make all sorts of, you know operating metric predictions, we don’t release them all to the public, but we make all those and we say, okay, to the Board, if we want to buy this company, hold with to these metrics. And as I said earlier in the presentation, we’re exceeding those, but it was a reasonable range. And no idea, you know, as far as the speed of those other changes.

Great. I appreciate the color here. So there’s a I guess, a lot you’re trying to undertake the mix make changes in this market. So we should just I guess, expect more of a benefit that from this action in 2021. So thanks for that color here. Thank you.

Okay, we have another question there – I mean if we have another questionnaire and we’re ready to move on.

Yes. [Operator Instructions] Our next question comes from Frank Morgan with RBC. Your line is open.

I promise that I won’t be that long. I have another earnings call that’s coming in. Hey, I was just curious about you know, you talked about back to the hospice side of the business, the admission growth being so strong, and I know part of that you had easier comps, but you’re now several quarters into this, is there anything you’re seeing outside of what you’re specifically doing that you’re seeing in the marketplace is anything changing there that’s allowing this higher level of admit growth now in that 4% to 5% range? And then my second question is, and then I’ll hop off is related to just plans about the external growth any de novos and what are you seeing in M&A? Thanks.

So Frank, as it relates to the market what we’re continuing to see is, you know, the ongoing swell of appreciation and desire to understand once again, that value proposition of hospice, as you know, upstream healthcare entities more and more of their reimbursements gets folded into value-based and you know, total cost-based reimbursement as opposed to fee-for-service. There is that recognition around the desire and appetite to appropriately identify, you know, hospice appropriate patients and transition them, while providing right of choice to the best quality hospice that can keep them, you know, on the benefit as appropriate. And so, you know, that’s just sort of that ongoing trend. And it’s blending well into our internal improvements we’re making towards VITAS continuing to differentiate itself being, you know, an independent hospice provider across the nation.

But nothing on a number of – or I mean, consolidation of providers, shrinking of providers, nothing like that, you’re just saying it’s not a supply capacity it’s just more of pure demand.

It’s a pure demand. But you know, to your point, there is an ongoing consolidation of provider ownership right upstream, it’s not necessarily the number of providers. And so as those – as that consolidation occurs, there’s a recognition across those enterprises of a preference to have more of a single stop provider that can do everything, provide the full complement, provide all four levels of care, provide – basically do hospice the right way. And so we think you know VITAS is well positioned with our size and scale in order to do that. And we’re just, you know, continuing to manage and to ensure we have the right balance of resources. So we don’t become constrained from a capacity perspective, it can take on all that new business throughout 2020 and beyond.

And to your second question, Frank as we don’t expect de novos to be typically like the IRB or it’s not a big driver in terms of the overall census or revenue on any given year.

But if we got a pretty to open one in Florida or buy one in Florida, we’ll do it.

Absolutely. But it – really impacts, you know, revenue or overall profitability much.

But Frank as you see out in the marketplace, pricing and premiums on hospice businesses from acquisition still continue to trade at a very large premium, so absent an additional strategic alignment, you know, we’ll be, we are still evaluating all of them. But as you hear from everyone else pricing is very high and that’s why in certain markets de novo, if we want to enter that market may be the best market entry strategy.

Okay, thank you very much.

Thank you. And I’m showing no further questions at this time. I’d like to turn it back to Mr. Kevin McNamara for closing remarks.

Well, my remarks are limited to thanking everybody for their kind attention. I know it’s a busy day. And you know, thank you for the thoughtful questions, and we’ll be prepared to do the same thing in about three minutes. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect, everyone, have a great day.