Chemed Corporation (CHE) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Chemed Corporation Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] 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.

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 applied 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.

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 office 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 cess 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 anticipate 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 competition 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 increased -- 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, postcrisis, 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.

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 have a Medicare cap cushion of 10% or greater, two of the 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 2021. The declines in both gross margin and EBITDA margin were caused primarily by the impact of inflation in 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 be -- 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%, water restoration increasing 9.2% or said directly, the growth Roto-Rooter's experience on the residential side 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% and 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 in 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. and 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%. And 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%. And 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.

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 emissions 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 pre-event locations during the fourth quarter of 2021. The most evident admissions decline was 14.4% from hospitals. We experienced a more moderate declines of 3.9% from home-based admissions, 3.1% decline in nursing homes and a 14.1% decline in assisted living facilities compared to the same period of 2021. 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 days 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.

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

[Operator Instructions] Our first question comes from Joanna Gajuk of Bank of America. Your line is open.

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 speaking, do you also see limitations from just the labor shortages in a sense of are you able to take all the patients that are coming away? Are you saying that there's just fewer patients being discharged to hospice?

Joanna, I'd say -- this is Nick. It's not a demand issue across the board. However, you see health care system disruption, for example, inside the Omicron surge with it, you see a significant swift change of more acute hospital discharges as compared to nonhospital discharges with it. But 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 as we continue to prioritize where we're deploying our available resources to respond to those referrals.

And this is Kevin McNamara. I'll just give you a capsule comment. VITAS had a recent month where referrals were up 11% -- referrals were up 8% and admits were down 11%. And you might say, well, that's encouraging on the referral standpoint. What's happened to admits in that month? Well, when you have your -- you can't send an admitting nurse out just because you're down in admitting nurses and/or you've had clinical shortages, so the big nurses had 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. And from our perspective, we say it's when, not if, that staffing will return. And as I said, we've seen good -- on the referral side of things, we've seen some good developments, good gradual developments, which fortify our efforts, so let's put it that way. So we're just fighting it daily. And as Nick has alluded earlier, there's two parts of that labor problem. Continue to do a good job of hiring, and we hired at a much faster rate than ever in the history of VITAS. We now have to do a much better job retention. And that's what companies are facing. And we keep turning over the pancake on that issue. And we're just looking for gradual improvement, and it's been -- 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 be that as it may. But Nick, anything? Would you agree with that?

Yes, just a couple, I'm sure to a follow-up comment or a question that would come is as Kevin has alluded to, laser-focused on both the recruiting and retention aspect of it. Some of our peer group that came out and commented specifically to we don't release numbers on those metrics. But from a recruiting perspective, we can always make improvements in both regards. The recruiting performance for us is greater than some of what our peer group have referred to. So we're bringing clinicians into the door. So we have to continue to do a much better job of focused on the onboarding process, other aspects to get them into the organization as well as manage their expectations and support them to continue to want to be with the organization on a go-forward basis.

And it goes without saying, I know this has been discussed, but here it is, 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 in effect October. During that lag period, inflation was up a solid 5 percentage points just during that period that was not reflected in the increase. And so in our -- in my mind, it's -- we're fighting that labor hiring and retention issue with one hand tied behind our back, okay? So the amorphous issue of when will people come back to work, when will the health care workers feel it's safe to go back into the water. It's also tied to catching up on that reimbursement, which I think come October 1, we'll make some good strides in that regard unless something unforeseen happens.

But I'd also add on a macro basis, you guys have -- everyone has commented on our conservative balance sheet. And you've heard Kevin and my response to that is 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. And obviously, no one anticipated a pandemic. But quite frankly, we think our strong balance sheet well positions us to ride this out and bluntly take advantage of other maybe well-positioned hospices or financial stress, 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. As well as for the first time in a long time, you're going to hear us talking about there is a potential for us to pick well-positioned hospices to acquire them would be my optimistic hope that the margins may be poor because of the lag in reimbursement to the increased inflationary cost of providing appropriate care, but we are well positioned to be opportunistic as these things are presented to us. So we have absolute confidence that it's going to be a hell of a ride in 2022 as health care rightsizes itself as the labor force rightsizes itself, but we are well positioned to take advantage of this.

Yes. A lot of commentary -- but if I can -- before we talk about the last point or the first one. So I guess that was actually my follow-up question, whether you're willing to quantify the pace of your recruiting ideally talk about kind of by how much percentage-wise you increase your entire labor for? So would you be able to quantify that for us?

We don't release those numbers. Just the directional commentary on. The peer group stated recruiting component as a percentage basis, we're outperforming. But as you hear what I'm referencing, we need to continue to improve not only that aspect, but also our ability to continue to retain our workforce that with the organization and joining the organization at record rates.

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

So from a cost perspective, you have two drivers inside of that. I think the first one, just to state is with the pricing increase and merit cycle increases that come inside of it, you naturally have mechanisms in which you have certain quarters where you have outsized comparables. So our merit increase for the full workforce goes in. And as of June 1, VITAS creates comparatives against the prior year and the first two quarters of 2022. Getting to the meat of the question related to what we anticipate from an overall cost per visit and from a salary and wage perspective, it is built into our guidance for those investments in which we have made, anticipate the continued investment with it, which allows 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 the ability to respond to admissions. So it's built into our guidance. And I think it's very achievable and the team has proven, gosh, over the last 10 years since it took over operations, we will continue to respond and improve to all these dynamic challenges.

But Joanna, I'd have to say your question though would be, well, what's the inflation that we have, say, among our licensed health care workers, that's only relevant of all other things held constant. Quite frankly, 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. So it's the interplay between the two that we're dealing with.

And Dave, something we've mentioned during the call, these workers got increased PTO and increases and the increased PTO was substantial. I mean it was two weeks extra the first year, which is 4%.

It was a $10 million impact to '21. That's correct.

'21. That's correct.

Joanna, I think the other dynamic that built into your question, I think others have commented and I agree with that from a peer group perspective, is the macro health care environment that from a wage perspective, whether it's a hospital, whether it's a home care provider, et cetera, that gets dramatically impacted by travel nurse pricing and extreme price gouging that then has a ripple effect through the rest of the health care system. We do anticipate that slowing down as the pandemic hopefully gets in the rearview pending other variants. And that will have a positive impact on people returning to the workforce as well as returning to organizations from a stability of knowing you're going to work for a high-quality company and you know where you're going to live, what you're going to do on a day in, day out basis. So we anticipate that as a positive trend for all of health care throughout 2022.

Yes. And I guess on the flip side, the Roto business, obviously doing pretty well there. And you mentioned you passed some price increases. So could you frame for us kind of the magnitude of those increases? And you also alluded, you might actually expect to pass more price increases this year. So kind of any color you can give there would be helpful.

Yes. So we -- again, it's market by market, service segment, but we -- effective January 1, we passed mid- to high single-digit increases in our pricing. That by all appearances, has stick, we still have more demand than we have technicians to utilize. But frankly, the price increase we put January 1 was really just playing catch-up to the inflation that's already occurred over the 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 this inflation continues to nag through the United States.

And demand.

And demand as well. Remember, our technicians are experiencing this higher inflationary cost in their personal budgets every day, every week, every month. The only way the majority of our technicians get an increase is by passing through price increases. So we take it very seriously as a way to retain technicians and expand the technician workforce. Just on a lag basis, the average compensation of our technician and sales field sales force was a little over $81,000, and I fully expect that number to decline during 2022. So price increases are serious. They're necessary. And in real dollars, is frankly just keeping things roughly flat. But the key to Roto-Rooter's growth long term is expanding our workforce. And what was the expansion of the workforce?

7%.

7%. And we -- that is our focus for throughout 2022, and price increases a critical strategic component of expanding that workforce. So we're not going to be bashful about it.

So I guess on expanding the work force you mentioned this e-marketing campaigns. It sounds like that was also part of that strategy, right, trying to reach out to many new potential candidates to attract them to this business.

It was and it was a bit of a flyer that we haven't really measured results yet, but we're keeping an eye on it. But when you're in this dynamic environment, you have the profitability Roto-Rooter does. You can play with a little experimentation in terms of customer awareness. And frankly, when you're advertising to customers, you're also advertising to potential future employees, and that was the focus. It would be negligent. We don't want to give too much color on what's going on in 2022. But I can say with 8 weeks of results for Roto-Rooter. We certainly are encouraged that our guidance is exceptionally reasonable just based upon the revenue growth Road rooter branches have experienced over the past 8 weeks. Frankly, it's a little above what we experienced in the fourth quarter of 2021 for Roto-Rooter. But again, 8 weeks doesn't make a quarter or a year, but we do not see any abatement in the demand for Roto-Rooter services across all regions and across all service segments.

And the only thing I was going to add, Don, is, I mean, the name is Don Lemon during the latest issue about destroying documents saying the Roto-Rooter jingle. Now he was probably born after the last time we advertised that, but good to hear that that's e-marketing and whatnot is still reaching out to that next generation.

The aided and unaided brand awareness is and the resiliency of it is just amazing to me.

Yes. No, definitely, we've seen that the growth continue to outperform. So I guess the very last question, I guess, you're just talking about the price increases you're pushing and Roto-Rooter. I was also thinking when we're talking about VITAS, obviously, you mentioned that there is a clear delay in rates reflecting the -- Medicare rates reflecting the labor cost inflation you're experiencing, everybody is experiencing in the hospices. How long will it take really to reflect what's going on in the labor market and I guess, inflationary environment?

Well, if you think about it, they substantially utilize information and accumulated by the Bureau of Labor and Statistics that runs from April 1 through March 31. And then those results then get dialed into the reimbursement increase 6 months later on October 1. So just from a measurement standpoint, you go 12 to 18 months of inflation before that finally plays catch up. If it's a one and done, so inflation is truly turned out to be transitory, it would be 12 to 18 months of kind of depressed margins and everything is fixed. The real unknown, Joanna, is what's the go-forward inflation rate? Are we going to go two or three years above average inflation and then we'll continue with this lag. And then finally, you get a -- I'll make a

That would be I think is the onetime lag would not be ameliorated until you return to normal. But it's not an additional amount or it's not cumulative. It's just when you get the onetime lag back.

At some point, when inflation comes down to a reasonable level of historical rates of 2% and then you finally get that last 7.5% increase in reimbursement, you finally played catch up. Is that an 18-month time period? Is that a two years that three years? That's out of our wheelhouse of knowing what inflation will be in hospital wages, health care -- licensed health care workers, but that is just the dynamic of the current reimbursement unless the government steps in and provides relief to health care plays that are exceptionally labor-intensive with licensed health care workers. But this is going to be a drag on every post-acute health care provider that doesn't have a strong balance sheet. This is going to be problematic for those folks. And for us, it's going to be depressed margins for a period of time through because it's out of our control, but it does create opportunity, Joanna. Whether that opportunity realizes in acquisitions, we can't say or increased health care workers as we poach. But without a doubt, that is one of our strategic initiatives over this year and probably next year.

I'll go back to the queue.

Joanna, please keep going if you have another question.

Sure. Yes. I wasn't quite sure if either somebody waiting to ask question. I don't want to dominate by any means. But -- so we, I guess, start talking about the Medicare rate update at some point I'm going to it might take come and you mentioned it's going to create a bigger pressure for others. And so yes, because my thought process was that does it create also you had the opportunity for you to higher wages nurses, but I guess sounds like you actually might be open to acquire existing assets, which is change from prior kind of tone from the company. So is it a matter of just the multiples or finding the right assets that you would be now open to actually do acquisitions?

It's lower multiples as well as some of these entities are going to be sold financially distressed, they're probably not going to have a choice.

And it's also targeted strategic locations that we think fit very well into our service delivery model that we can go into markets and go deep as opposed to many of our competitors go into markets in the go wide and shallow, basically from a size perspective.

But Joanna, I don't want to blue sky this, but the last several years, you've heard me specifically state the probability that we do any acquisitions in the health care arena are exceptionally low based upon valuations. And now that landscape is shifting and shifting rapidly. And it will create opportunity. Again, whether that results in us doing any acquisitions is going to be depending on those opportunities. But the first time in a long time, I think it's realistic to say the potential is there. And if we don't acquire assets, we're going to look to acquire people.

Yes.

Right, exactly. And then as you as you think about this kind of mismatch, so to speak, right, before the Medicare rate update catch up with the cost inflation. The other question I was thinking about because previously, when we talk about the disruption that the COVID is creating and initially without sequestration going away. And I guess you previously talked about margins for VITAS, call it, after the pandemic to kind of be in the 17.5% to 18% range. So are those still achievable at some point? Or just the labor cost is structurally just higher going forward that might -- you might have to revisit that margin? Any thought on that?

So one, that's contingent upon reimbursement finally catching up to those higher wages, but the magic or the lack of a magic of that 17.5% to 18% was quite Frankly, that's what VITAS posted as overall margin running about 4% to 4.5% high acuity care or days of care. That was the last margin before the pandemic disrupted everything. So we're utilizing that as a benchmark to the last thing we did pre-pandemic. But frankly, if this goes on long enough, we'll have to revisit that because the landscape might change materially, either to the positive or the negative. But 17.5% to 18% was the margin we were enjoying before VITAS was disrupted from the pandemic.

And I guess to that end, those margins, let's call them, target margins, what does that assume for your, say, top line growth or volume growth? Because obviously, for this year, you're still talking about ADC is declining. So how do you think about this industry long term in terms of the opportunity for growth?

I would default to what it was pre-pandemic because I don't have any other data point to go to. But without a doubt, the terminally ill aren't going away, the need for hospice isn't going away. So we certainly would expect from admissions and patients cared for the industry to actually return to pre-pandemic levels. If anything, there will be a fair amount of catch-up over a year or two because without a doubt, we're seeing patients who are terminally ill are trapped in curative care right now for a variety of reasons, and one of which is they're not identified quickly enough, a loss of senior housing, distraction of other health care providers not identifying terminal patients. But I think we just have to just, at this point, pump that question and say, I fully expect to see a roughly 4% to 5% census growth and realistically, probably a 7% overall revenue growth for the industry once things return to normal.

And just as a very macro sense, I don't know if you've seen the numbers. But the percentage of patients that have at least one day with hospice prior to death. And this is all ages, is down about between 5% and 6%. So there's a lot of reasons for that. But that is, obviously, a clear -- it's an unbroken line with a slope upward over about a 12-year period. And then from the first month of the pandemic that immediately declined. That immediate decline is observable. So I mean, again, we're very comfortable in saying, yes, there are pandemic effects to the industry as seen by the number of patients who enter it, and that will be ameliorated in our mind, is just a matter of time.

Last macro comment, Joanna, related to the one silver lining from the pandemic that I think is absolute is the pandemic created an environment where the country recognized that high-quality care can be provided in the home period, whether that's hospice, whether that's home care and the government has also 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 on a go-forward basis.

Definitely, we agree with that view. Clearly, we'll be seeing it in a lot of different settings. It seems like everybody is having the issue around just the shortage of labor, but it seems like there's some expectation that maybe with the pandemic, like some of this will improve and maybe even some nurses will come back to the workforce that could help. But I guess switching gears back to Roto-Rooter as we talk about the VITAS margins because on the Roto-Rooter side, obviously, top line continues to outperform, but also margins given the guidance for next year improved -- calls for improvement? So kind of how do you think about that? And what gives you the confidence in achieving those margins? And how do you think about -- how should we think about the margin going forward for that business?

One, I think there's an opportunity for a margin increase, which, of course, we guided for. We are watching inflation in our actual costs, but it really is because I think the margin expansion will be predicated upon the success of our passing through price increases to our customers. And remember, the commissions for the technicians are largely a variable cost. But we do have a chunk of fixed cost in the Roto-Rooter business. So we do expect margin expansion over the long term, how it flows through in 2022 and is going to be contingent upon how quickly we pass through price increases and how our customers, specifically commercial customers except those increases. To the extent that we have more demand than supply, I think we'll be very successful. That should hopefully make our overall guided EBITDA margin for Roto-Rooter a tad conservative, but we have to wait and see. Again, like you've heard me say a couple of times, we're going to be so much smarter in the next pandemic, how this impacts our businesses.

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

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

Yes. So a lot of the Omicron impact becomes heavily dependent, of course, on a market-by-market basis. But on a macro level, not only from a referral and disruption perspective, but an elevated spike starting at the middle of December through the first 2, 2.5 weeks of January that others commented to in terms of individuals that were unexpectedly impacted and our employees, I mean, that were out of the workforce that impacted the ability to respond. That definitely was the case. It's no different than everybody else. What I will say with our safety protocols and everything else in which we've worked through, we've been able to immediately respond, and we do not see that disruption as we sit here today on a go-forward basis. But it very much was a 4- to 5-week disruption, no different than other providers and the rest of the country experience through the second half of December into the first half of January.

Had the vaccination eligibility Issue also to deal with.

That's right. And we've successfully converted as you guys would expect with conforming and compliance with CMS mandate, we were prepared, ready to go with that. And I'm happy to say, had minimal disruption because of our preparation in advance of being prepared to move forward and really minimizing our internal disruption towards our employee base. And that's based upon 12 to 18 months of activity prior of getting everybody educated, prepared, comfortable in ensuring we were fully safe and available workforce on the communities.

Yes. But then, we don't give quarterly guidance, and we're going to try to avoid that with a passion. Roto-Rooter, I really expect to see strengthening margin and profitability throughout the year quarter-over-quarter, fourth quarter being, again, typically the best margin quarter for Roto-Rooter. VITAS is a different animal. If you think about it, we're going to have inflation nagging at us a little bit in terms of our margins as we go out through -- for the first three quarters of 2021. But then we fully expect to see a spike in profitability as we get our October 1 reimbursement increase. So that kind of -- that's a long-winded way of saying I expect to see it be relatively flattish and certainly maybe even slightly down in Q3 as inflation arose and then a nice spike in profitability as we enjoy that full increase October 1. Roto-Rooter continued strength and strong performance quarter-over-quarter. VITAS is strained a little bit. Inflation nags us, we play catch-up on October 1.

That's great color, guys. Just one final one. With the -- with senior housing referrals potentially normalizing in the second half and that included in your guidance. How close to normal will that take median length of stay by the end of the year?

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

Our next question comes from of [indiscernible]. Your line is open.

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 in the 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?

Let me start by Roto-Rooter and say, I will talk in that the residential business has been so strong, it's -- when you compare it to the commercial business, it's not to say when that will flip. I think the residential business will continue very strong and has continued very strong. Just from a mathematical point of view, the commercial has more room to go to return first to where it was pre-pandemic. And then to take advantage of the, call it, the placement and success the Roto-Rooter marketing has shown on the residential side. So when the commercial customers are at full strength, which we're approaching, we see a lot of growth that's there for the taking as long as we have the service people to provide it. So I guess, I'm vaguely saying that at some point during the year, I mean the residential is so strong, it may be a few months before the commercial eclipse it. But a betting person would say it's easier to grow the commercial from a low base than it is for the residential from a high base.

And we saw that in the fourth quarter of 2021 in terms of that strengthening commercial. It doesn't show up at a 2-year look back yet, but we saw that strengthening. Frankly, what holds us a little bit back on our guidance for revenue growth on Roto-Rooter is really primarily in the excavation water restoration. Water restoration price is somewhat out of our control because that's actually kind of set by an industry standard called Xactimate. But excavation played a very nice role in the residential side of our growth. And we haven't seen any signs of that abating. But we're probably a tad conservative in that regard regarding those large big-ticket excavation jobs that run from about $4,000 to $8,000. We might turn out to be conservative on Roto-Rooter's growth, but we think it's very rational in this environment to come out with the guidance we did.

And Craig, this is Nick. On the VITAS side, to answer your question, the short answer is yes. it is assumed into our guidance with individuals or current clinicians able and available to work. embedded in the guidance as well as us continuing to build our clinical capacity to meet demand and achieve our growth trajectory, particularly in the second half of the year. The other comment, which maybe is slightly different than our peer group that is more heavily home health than hospice is some of those disruptions for them, elevated contract staff and workforce. And inside of the hospice benefit specifically, there's limitations around when contracted staff can be utilized. So elevated or marginal compression due to third-party utilization really doesn't impact our model on a macro basis.

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.

Thank you. Just my comments were that we were -- of course, everyone is looking forward to 2022, but before I close the chapter on 2021, I'd just say that we were very gratified with the operating companies. We increased our guidance twice during the year and ultimately exceeded it. So again, that was gratifying. We've made what I think is embracing conservative guidance for next year. And we're prepared to hopefully deliver on that, but I want to thank everyone for their attention and for us, I guess, it's back to the Thank you very much.

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