Chemed Corporation (CHE) Q4 2020 Earnings Report, Transcript and Summary

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. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sherri Warner with Investor Relations. Thank you. Please go ahead, please.

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.

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, 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 and 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, the portions of the healthcare continuum have – certain portions have normalized and hospital referral admissions have significantly improved from 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 report on that work for the hospice industry given the fact 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 length of stays. 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 when 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 based patients are [Audio Dip] referred to hospice earlier into a terminal prognosis and statistically have a much greater probability of being in hospice 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 an 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 a fourth quarter of 2019. This is a significant improvement when 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.

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 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, changing 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 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 when compared 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%. And 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%. And this compares to Chemed’s 2020 reported adjusted earnings per diluted shares of $18.08. I’ll now turn this call over to Nick Westfall, President and Chief Executive Officer of 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 emission 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 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 was tested, unlike 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.

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

[Operator Instructions] Your first question is from Frank Morgan with RBC Capital Markets.

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 whole, assuming admission patterns was normalized in the second half of the year? And once again, just trying to figure out the cadence here and for the quarters of this year, and then also kind of what that means going into next year, that's my first question?

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

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 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 comes 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 stayed patient numbers are – where we have been running. And so, to the extent that we say it's a process that is really suggesting, that's what we're going to be watching over the next couple of months, and if those caught the 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 will mature at the next level. And that will have the salutatory effect on ADC. So it's something – at this point, it's a bit of a guess, but it's something that we do feel we'll have visibility into as it is in fact happening.

Frank, one other quick comment, it's embedded inside of the narrative is as we continue to look at occupancy levels and become a good partner with it, obviously there is – without stating the obvious there is 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. The reason why we're stating, we're also comfortable when it swings back and as Dave alluded to, it's just timing and velocity 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. The other thing that is that gives us confidence, there is always going to be a continued need and role for the senior housing industry, specifically nursing homes, as they're just flat out aren't enough caregivers to go out and deliver care at individual's residential homes for a period. And I think that's an important thing to note, as we feel confident that occupancy levels may moderate that they will continue to come back as the pandemic subsides.

And Frank, the one thing I also want to say, [indiscernible] if any comparison build to 2020 is payroll. I mean, at the beginning of 2020, we gave guidance of – that it was a range, but let's say $16.20 a share. I mean, we thought that was going to be a very solid year, of course, we didn't know the pandemic was coming. And what – if that happens through a lot of the forces we made reference to, we reported $18.80, okay, obviously a lot of that – I mean, a good portion of that was things that’s hard to talk about sustainability, we had relaxation of sequestration for a longer period, in 2020, we have relaxed – the temporary relaxation of various regulations by the regulatory bodies. But the way we look at it is in smoothing and saying, yes, we liked the cash we got, our earnings of course are cash, we had the earnings, we zigged when we had the zig and zag, when we had the zag and we had kind of blow out year in 2020. But what we really look at it in the businesses, we're in 13-96 adjusted basis in 2019, we were looking to earn 16-20, and the midpoint of our range for next year is 17-25. So we looked at – I mean Roto-Rooter and VITAS are two pretty basic predictable businesses. The problem is, the pandemic made VITAS less predictable in two respects. Positively and what the government did to keep hospices and business and negatively what happened to the nursing homes. I mean, you got to remember in nursing homes, not only were occupancy level is down, VITAS employees weren't allowed on-sites for weeks in Florida. So those things tend to have the lingering lagging effects, which we're dealing with, but overall it's – we've been very satisfied with the net effect of the – both our company's operations during this unusual period.

Got you. Maybe another one for Nick. You mentioned the vaccinations, have you seen any – at this point, is there any anecdotal evidence? Are you seeing any kind of changes in, I mean, presumably most nursing homes now have vaccinated their population and I'm assuming most of the assisted living as well. But have you seen any early signs that we're – you've got large vaccination rates or it's been completed that you're – are you starting to see a change there?

Yes, I think as of right now, and obviously there is – we're pulling it not only in a macro level from fact-based and sources, but also anecdotally on a market-by-market basis, we are seeing encouraging signs related to it. So I think as of this morning, there is roughly 65 million doses or so that have been distributed across the United States. And the many of those in the targeted population you were referring to. We do see signs of optimism, obviously every market, every facility, whether they're residents or whether they're employees in that facility are having different experiences with adoption rates. But, all in all the combination of vaccinations, as well as those nursing homes or ALFs, the pandemic has also highlighted a differentiation in hospice providers that I'm optimistic, we've been able to take advantage of. And hopefully, we will continue to pull that relationship through. And what I mean by that is, high quality, but also safe, so all of our infection disease protocols, the safety, the PPE that our folks are wearing and the education that we've even provided and are currently providing across certain state segments, I think has hopefully helped to elevate the brand. And so we’re – I feel confident in us being a good partner with all of those institutions across the entire country in 2021 and beyond.

Yes, Frank, I would say is we'll declare the nursing homes returning to normal, making sure all the nursing home employees that have vaccinated, as well as the residents, when visitation returns to pre-pandemic rules, when the entire family and grandchildren can visit their grandmother, who just went into a nursing home, when those visitations are allowed, we think that'll be the last obstacle to returning to normal occupancy. No, one's going to put their grandmother in a nursing home if visitor not allowed or extremely restricted. So we think that'll be the last hurdle for normality.

And another metric you can look at Frank, because we mentioned in passing, but it's a big number for us. Median length of stay, you'll have a pretty 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. So that's the proof that's in the pudding.

For specific months.

Got you. One last one I'll hop back in the queue, another modeling, just to clarify no buybacks built into this guide, and obviously the stock has been in the process of reacting is down another 3% a day, but maybe just any thoughts around buybacks going forward from here? Thanks.

When continued to think buybacks are an excellent use of our free cash flow. And we anticipate pursuing that throughout 2021.

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

Thank you.

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

Yes. So first off couple of follow-up questions. So when you talk about the senior housing occupants, you said you expect this to begin to normalize starting in second half. And I guess you were talking about, which sounded more like just admission patterns, well, how should we think about the actual census growing, because I can see your guidance for down 5% for the year, obviously it's worth in Q4. So I guess if you can just talk about the cadence here and kind of, should we expect kind of the census level itself to kind of be back to closer to normal by the end of this year?

So Joanna, as we were responding to Frank's original question related to it of timing pace and philosophy, particularly with that senior housing segment, it's going to impact days of care with a degree of lag to it, no different than it – no different than it has historically. So as we think about the year and obviously we don't provide quarterly guidance. We built in certain timing assumptions in that specific segment that, if they come through, we will see the traditional admission in ADC tag or ADC lag, the general mix of admissions, which I want to go back to at a macro level still is positive even with the declines in that senior housing segment returned to normal. What we'll see is, how big of a lift up we get from the senior housing footprint coming back and how much of the hospital, but also the physician office referral business, which has performed sequentially and on a year-over-year basis on a positive level, how much of that continues to pull through as well. So, it would be back to – the census component would be backloaded in terms of some of the growth potential for the latter half of 2021.

Okay. So that…

As we make reference to it in the guidance, as far as what we think for the year.

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

Right. So in your forecast, you have sort of your own kind of assumption in terms of progression of occupancy improvements on these other settings in terms of nursing homes and occupant –nursing homes and senior housing, and are you expecting one to do better than the other setting?

I don't know, if we can speculate as to which one would do better or not, it also gets to the definition, that the senior housing has a lot of other segments outside of just nursing home – that's inside of it. And as we're interacting with all those various segments with it, I think some had been impacted more than others, the nursing home ones, the one we're really focused on the assisted living communities, when you get to vaccination rates, one could theoretically make the argument they would have – would be earlier to recover, because by definition inside of there, it gets to the potential patient and their family member being comfortable with one another access, again, more than a nursing home, which is more restricted due to the higher acuity need and skilling need of those residents inside of that setting.

And Frank suggested one thing, there is a couple of elements. One element is you might say, what – why are occupancy levels for these different parts of senior housing down, they’re down for a couple of reasons; one, there was a presumed unsafety associated with them – think of a New York nursing homes that they were hotbeds of new coronavirus infection. As Frank suggested with vaccination levels, in many respects the outer elements of that should be alleviated, another very significant impact on us as Nick said, focused on was the rules and the fact that if you had someone who was – if you have a family member that was considering a nursing home option or assisted living care option. But knowing day one, when they moved in, there would be no visiting – visitation allowed. Since there was severe impediment to a new admin to the senior housing to the extent, those rules are being softened, there's still changes. I mean, the question is what is the new normal, there's still limitations on – not everyone's vaccinated, even the CDC’s rules with regard to behavior by groups of people, 100% of whom have been vaccinated are still different than they were before. So we're still talking about what the new normal is, but having said that, I mean, the key point is, there's a couple aspects of why our referrals are down from nursing homes and why nursing homes and assisted living care lost occupancy. There's a couple of factors. Those factors are being alleviated at different rates. But to the extent that what we all say internally is there's a reason for the existence of the nursing and assisted living care sector. It performs a very essential function and it's not to be ignored. And we're fairly confident that will return to, at least a new normal, and we'll take advantage of that. But it's very hard. Your question really goes to the timing and the predictability and predicting of it for modeling sense. I understand that. We're just saying, we don't have the visibility yet, but as I was suggesting to Frank Morgan, there are aspects of our business that are predictable. And we will be seeing elements of that. That is a good class example, to the extent that we see our median length of stay drifting up to the extent that we see that our percentage of patients who are in the 90 to 150 day group. To the extent, we see those numbers drifted up, it'll help us give you the modelers more visibility.

Right. So yes, understand the uncertainty, but the other part…

One clinical data point, it gets a sign of optimism. It was just released over the weekend. The CDC came out and they were reporting on vaccinations to long-term care residents, roughly a million residents vaccinated between mid-March and mid-January and talking about not only the safety, but the adoption component of it. That's all encouraging, not only for the country, not only for that segment, but also for us as we think about the consumption habits, as well as the elevation of safety. And that could be a leading indicator into certain things. But at this point, we're just continuing to be a good partner and being there to support those facilities and the residents inside of there as each one returns to whatever its new definition of normal is going to be. And that's heavily dependent state by state as well.

Right. Because my other part of the question is something you've mentioned and I don't think you've quantified it, so you said admissions from hospitals actually accelerated was up 7%. And I guess it was up from like 6% growth in third quarter, but what was the community setting of physician kind of admission pattern this quarter versus last quarter year-over-year growth rate?

Yes. We lump it into the home-based setting. And so for this quarter, it was up 9.2%. That setting was for the third quarter, I'll pull it out here in a second, but it was up as well. Third quarter, it was up 18.3%. So the point being is, as patients may not be accessing those facilities, they're going to a specialty physician or another primary care physician. We're there to continue to support that referring segment depending on wherever the patients are traversing the healthcare system.

And it's not surprising to us. Let me just tell you – give you one minute and say that, if a patient is in, let’s say in nursing home or in some setting, but I'm going to focus on nursing home for a minute where they're very familiar with the hospice and they see other people being provided that benefit on a daily basis. They're in the super elderly class, they've been told by their doctor that their situation is terminal. And [indiscernible] with 51% chance that they would be discharged on a terminal basis, the effect of that is the people tend to get in hospice earlier. And when you're in hospice earlier, the patient and the whole family realize that rushing somebody to the hospital when there's a turn for the worst is not what's indicated. Well, if you're not in a nursing home and your home, and you haven't been exposed to the benefits of hospice, and you'll have a turn for the worst, that same patient who had he been in a nursing home, might've been in the hospice, three months earlier and never rushed to a hospital at that point. Given the fact that those patients aren't in those settings, they're home, there's a turn for the worst, they're rushed to the hospital. There's nothing they could do. And that becomes a hospital admission – it becomes an admission, a hospital referred admission to us. The only problem is it's like three months later than we would have otherwise would have gotten it. So, yes, the patients, a good portion of it, if they're not in a nursing home, then being home, and then they end up with that, that hospital stay prior to coming to under our care, which is one of the reasons that hospice exists because to save the government money that could prevent that last – not helpful hospital visit that bills to be incurred. So yes, we expect – but a long way of saying is yes, we would expect hospital based admission to go up under this scenario.

So, Joanna, last comment to reinforce Kevin's is not only the hospice benefit, but the way in which we operate at VITAS, we're able to respond to whatever setting the patient presents themselves, whether it's a physician office, hospital, nursing home in a timely, quick manner. And if they're eligible for the hospice benefit, bring them on and care for them, whether it's in a nursing home, in ALF or at their house. And so that diversity flexibility that I referenced in my prescribed remarks is really what has allowed us to continue to navigate this pandemic successfully in our communities we serve.

Right. Makes sense. Because that's what I was getting at it, so I guess, there is some offsetting effect of more admissions from these other settings. Though, it sounds like they come with obviously – and potentially lower or shorter length of stay, but are you actively pursuing these other referral sources like the physicians primary care or specialists?

Absolutely. So we've always pursued educated, supported a diverse referral base in every market in which we operate for exactly that reason because every patient journey is slightly different depending on where they're presenting and our goal is to help educate all those referring healthcare partners as to how to help identify a potentially hospice eligible patient and where we can be there to help, from an education awareness, even advanced care planning, goals of care, et cetera, to prepare that patient and family for making the right decision for them.

Right. And I guess to just wrap it up on the hospice side, I have a question that got over, but on the hospice side. So we talk about obviously all these pressures and revenue guidance implies revenue decline this year-over-year but the margin guidance, it's better than what we were expecting. Above 19% is actually, much above the pre-pandemic levels. The margin back then was 18%, I guess, call it 2019. So kind of, can you talk about it, you know, how sustainable is that margin. Is this the way to think about it, the 19% margin for that business?

Well, part of that shift, Joanna is we're doing more routine home care and less high acuity care, which has a differential margin that helps significantly as well as they're still roughly about $6 million of relaxed sequestration in Q1 of 2021. So when you compare it to the 2019 margin, that's also improved, so those two factors that are contributing. Nick, anything more on that?

No, I mean, we referenced it in the last quarter’s conference call, no different than we have in every year – 2021 and every year from this point forward and for all historical years. From an operational standpoint, we will always continue to balance out our labor needs against our care needs. And the anticipated, increased not only in patient flow, but also patient days of care. And so that goes into it as well. And the group did a fantastic job of balancing that out throughout the pandemic, just to remind everyone we did not furlough, we did not lay off a single individual inside of the organization and we were able to achieve the operating results we posted for 2020.

Okay. That's helpful. And on Roto-Rooter side, a similar question, I guess, would this margin outlook for 26% essentially try to step up year-over-year and that's also much higher than the pre-pandemic levels. So what's that better margin – is that 26% kind of sustainable going forward?

The short answer is yes, we think so, which resulted in the margin increase, and you really started – you saw the margin increasing over seven years ago, primarily because of the increased revenue from water restoration. And what happens is we have – already have the branch infrastructure set up. So although, water restoration, all these other jobs have the same rough margin as everything else, since we don't have much in the way of increased infrastructure costs, more of the contribution margin for the incremental revenue drops to the EBITDA line. So it happened with water restoration and it's also happening just overall, the increased revenue we're enjoying doesn't come with any increased infrastructure cost. So again, more of the contribution margin for that increased revenue is dropping to the EBITDA line. And we expect that to continue. Some of the things that really helped 2021 in terms of increased margin that we're not anticipating continues would be for example, healthcare costs for both VITAS and Roto-Rooter are abnormally low as people avoided seeing the doctor during the pandemic that helped the margins a little bit and as well in 2020 and we didn't anticipate that continuing, but it all got dialed in higher revenues contributing to maintaining the margins.

All right. And the last question cash flow, as you mentioned a very strong cash flow. How should we think about the cash flow for this year and CapEx because it sounds like, you've been opening up a couple of de novos, any plan, more it sounds like in Florida, these in-patient units. So can you give us a sense of operating cash flow and then also CapEx, including growth CapEx outlook for the year. Thank you.

Yes, certainly what I would say in terms of the cash flow in 2020 for the calendar year is artificially high. One of the reasons, for example, there was 40 some odd million of the CARES Act money that we took as lost revenue that didn't have any costs attributed to it. So, on a pretax basis that was pure cash flow. In addition, we had about a little under $40 million of deferred payroll taxes for the Chemed consolidated. So we don't have to pay the employer portion of payroll taxes until half of that gets paid in December of 2021. The other half in December of 2022 so that's spike of cash flow, another $40 million say roughly. And then you had, of course, sequestration, which is real, but we don't expect that to continue that's by cash flow another $18 million. So really take away, call that by the $110 million or so out of the 2020 cash flow. I think it's safe to say our free cash is really our adjusted earnings per share. So if you take between 17 and 17.50, takes 17.25 as the mid point at 16.5 million shares, you're talking free cash flow in the neighborhood of just north of 300 million. We expect depreciation and amortization run between 58 million and 60 million in 2021. We expect CapEx to be running between 55 million and 60 million in 2021. So our free cash flow earning characteristics haven't changed. We don't have any net debt, as of this morning, we're seeing net cash of like $220 million. So I'd say, if you really want to say available, if you look at the cash on our balance sheet of 200 plus, the 300 plus of free cash flow, we have $500 million of cash flow to play with in terms of share repurchase and other investment opportunities. And we fully intend to put that to work if we're able to in 2021.

Okay. Thank you so much for the color.

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

Well, in closing remarks, I just wanted to thank everyone for their kind attention. And there's an unusual year in 2020, but we look forward to returning as soon as possible to the business as usual. Thank you.

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