Chemed Corporation (CHE) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Chemed Corporation First Quarter 2022 Earnings conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to the speaker today, Holley Schmidt, please go ahead.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2022 ended March 31st, 2022. 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 result of a variety of factors, including those identified in the company's News Release of our April 26th 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 revive 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 April 26th, which is available on the company's website at chemed.com. I would like now 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 first quarter 2022 conference call. I will begin with highlights for the quarter, and Dave and Nick will follow up the additional operating detail. I will then open up the call for questions. Our first quarter 2022 operating results released last night reflect very solid performance for both VITAS and Roto-Rooter. Both operating segments, financial results exceeded our internal estimates despite the continued disruption triggered by the pandemic. For VITAS, this disruptions remains elevated with regard to the hiring and retention of licensed health care professionals. U.S. News & World Report has estimated as many as 20% of licensed health care workers exited the labor market during the pandemic. This has impacted turnover within VITAS's licensed staff and our turnover rate continues to be above our pre -pandemic rate in several of our professional classifications. Fortunately, we are beginning to see indications of normalization as we continue to expand resources focused on hiring and retention initiatives in our markets. Beyond managing staffing levels, we are absorbing increased pressure on salaries and wages. To date, we have managed these pressures with increased pay time off or PTO. We view it is inevitable that health care wages will permanently increase if we continue to have a nationwide and systemic imbalance in supply and demand for licensed health care professionals. The guidance we issued earlier this year anticipates significant increases in overall compensation for licensed health care professionals when compared to pre -pandemic annual compensation rates. Fortunately for VITAS and the hospice industry, there is a natural hedge against inflationary pressures on costs, specifically labor. The annual increase in Medicare and Medicaid hospice reimbursement rates is based primarily on inflation in the hospital wage index , as measured by the Federal Government's Bureau of Labor Statistics. Typically, the annual inflation measured as of March 31st, is used to determine the following October 1st reimbursement increase. This should give the hospice industry reasonable long term stability in operating margins in an inflationary environment. Albeit with a six to 18-month lag from inflation measurement to the actual reimbursement increase. The second pandemic triggered challenge for VITAS, is the continued disruption to senior housing occupancy and related hospice referrals. Our recent admission data suggest senior housing is in the process of recovery. Pre -pandemic nursing home-based patients represented 18% of our total average daily sentence or ADC. The nursing home ADC ratio hit a low of 14.3% during the pandemic. In the fourth quarter of 2021, our nursing home-based patients represented 15.6% of our total ADC. This increase in additional 30 basis points to 15.9% in the first quarter of 2022. Our 2022 Guidance anticipated sequential improvement in senior housing based patients in the first quarter of 2022 with an acceleration in senior housing admissions anticipated throughout 2022. For Roto-Rooter, our most significant challenge has been to increase manpower. We increased technician headcount by 8% in 2021, and our technician manpower in April 2022 as it's 6.8% when compared to the average Q1 2021 head count. The April 2022 headcount has expanded 3.3% when compared to our average manpower in the fourth quarter of 2021. Based on current service demand levels, Roto-Rooter continues to remain understaffed in many of our markets. Technician compensation plays a crucial role in recruiting new employees as well as retention of our existing base. Our average 2021 technician and field sales force compensation is over $81,000 per year. Most of our technicians are paid on a commission-based manner on revenue generated. As a result, pricing for our services is a critical component in increasing technician wages. We successfully implemented an inflation base price increase at the beginning of 2022 and will carefully monitor key inflation metrics for consideration of additional price increases in the second half of 2022. 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 Dave.

Thanks, Kevin. VITAS's net revenue was $299 million in our first quarter of 2022, which is a decline of 5.3% when compared to the prior year period. The revenue decline is comprised primarily of a 4.1% decrease in our days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase of approximately 1.3% Acuity mix shift had a net impact of reducing our revenue, approximately $7.1 million or 2.2% in the quarter, when compared to the prior year revenue and level of care mix. The combination of Medicare cap and other contra-revenue changes offset a portion of this revenue decline by approximately 30 basis points. In the first quarter of 2022, VITAS accrued $2.5 million in Medicare Cap billing limitations. This compares to $1.5 million of Medicare Cap billing limitations in the first quarter of 2021. Of VITAS's 30 Medicare provider numbers, 28 of these provider numbers have a Medicare Cap cushion of 10% or greater, and only two provider numbers have an estimated fiscal 2022 Medicare Cap billing limitation liability. Roto-Rooter generated revenue of $231 million in the first quarter of 2022, which is an increase of $19.8 million or 9.4% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $54.4 million, which is an increase of $6.9 million or 14.4% over the prior-year quarter. This aggregate commercial revenue growth consisted of drain cleaning revenue increasing 17%, plumbing increasing 17.1%, water restoration expanding 8.6%, and excavation increasing 7.1% Roto-Rooter branch revenue in the quarter totaled $157 million, which is an increase of $10.5 million or 7.2% over the prior year period. This aggregate residential revenue growth consisted of dry cleaning and increasing 3.1%, plumbing expanding 14.6%, and excavation increasing 5.9%, with water restoration increasing 7.7%. Now let's turn to -- let's look at Chemed on a consolidated basis. During the quarter, Chemed repurchased 57,500 shares of stock for $27.4 million, which equates to a cost per share of $475.71. As of March 31st 2022, there was approximately $175 million of remaining share repurchase authorization under this plan. Chemed restarted its share repurchase program in 2007. Since that time, Chemed has repurchased approximately 15.8 million shares, aggregating approximately $2 billion at an average share cost of $126.42 Including dividends over this period, Chemed has returned approximately $2.2 billion to our shareholders. We anticipate providing 2022 updated guidance as part of our June 30th, 2022 earnings press release. I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.

Thanks. Dave. In the first quarter, our average daily census was 17,313 patients, a decline of 4.1% over the prior year. This year-over-year decline in average daily census is a direct result of the pandemic-related disruptions across the entire health care system since March of 2020. In the first quarter of 2022, VITAS's admissions in total were 16,530. This is an 8.9% decline when compared to the first quarter of 2021 admissions, and a 1.7% sequential increase when compared to the fourth quarter of 2021. In the first quarter on a year-over-year basis, our hospital directed admissions declined 15.7%, total home-based admissions expanded 2.8%, nursing home admits increased 7.8%, and assisted living facility admissions declined 7.4%. Our average length of stay in the quarter was 104.8 days. This compares to 94.4 days in the first quarter of 2021, and 97.9 days in the fourth quarter of 2021. Our median length of stay was 14 days in the quarter, and compares to 12 days in the first quarter of 2021, and 15 days in the fourth quarter of 2021. With that, I'd like to turn this call back over to Kevin.

Thank you, Nick. Now it's appropriate to consider any questions that come for the group.

[Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from Joanna Gajuk of Bank of America, please proceed.

Yes, good morning. Thank you so much for taking the questions. So I guess a couple of follow-ups for you. So you said that the quarter was better than internal expectations. So can you quantify the magnitude of how much better was this versus internal? And I guess what drove that, I mean, versus our model and the street estimates seems like margins were better, so can you kind of track to us any major drivers for that? And then are those sustainable?

Let me start just by I made that comment, and I just meant that we gave guidance in February and obviously we're a little ahead of that guidance and that we were gratified by that overall performance, but Dave did point out obviously our margins were a little bit higher than we anticipated.

That's right. And so it really comes down to is what I'll just call the sequential acceleration of inflation. On average, we certainly expect more inflation in say Q2, 3, and 4 than Q1 or said differently, more inflation cost escalations in Q2 over Q1 and we expect Q3 to be a little more difficult with inflation than Q2. Sequential pressure, all other things held constant, assuming we don't do anything to remediate some of the inflation pressures. With that said Joanna, yeah, VITAS beat on margin, they were like what, Nick, roughly a fraction of 1% below what we thought on revenue Margins were a little stronger to the tune of call it a couple of million dollars. We try to avoid parsing things in terms of internal guidance on quarters, but VITAS basically came in our revenues stronger by slightly by 100ish basis point on margin that we're pleased with Roto-Rooter beat a little bit on revenue and definitely be beat on margin not to the magnitude of VITAS, but a pretty solid quarter as well. Relative to our internal estimates Joanna, again, I'll use adjectives not specific numbers, but underlying Roto-Rooter we were exceptionally pleased for a couple of reasons One of which was, we kept talking about what we expected was the pivot from residential to commercial as kids go back to bricks-and-mortar schools, parents start returning to a place of work at least for a few days a week, so we fully expected commercial to increase; restaurants, retail business, all of the above. And that happened at a 14 plus percent increase on the revenue. And on the commercial side that was a little higher than our internal estimates, but what we were super pleased at is we continue to have some really solid growth in Roto-Rooter residential, and that grew at a little over 7%. So from our internal estimates, we're seeing a great pivot to commercial without really what I'd consider any weakness on the residential side, margins are stronger because we were conservative on inflationary pressures starting right away in Q1, clearly it will kind of boil throughout the year. VITAS side, obviously, we're taking more effort to just maintain what I'd call a strong labor presence to maintain quality of care and plans of care. And we're -- just like I said, trying to manage the balance of licensed health care workers on the Roto-Rooter side, more dynamic. If we see inflationary pressures, we'll continue to raise prices if that's appropriate. And we have to look at pricing as a major tool because that maintains our plumbing and drain cleaners, and that's the enticement for people to come onboard to the Roto-Rooter team. So yes, we outperform internally. I'd still say modestly better than I would've realistically thought at the high end, but the reality is we are going to have a little bit of pressure going forward, but I feel exceptionally comfortable on our macro guidance

That's great color, I appreciate the details. I guess to this last point, you're talking about the labor pressure. So you said that your guidance over it ahead expect to where it assumed a significant increases in overall compensation, I guess in preparing remarks to this, made that statement. So can you quantify for us what exactly you assume in terms of a growth in --

No, we don't give that granular detail and certainly within a quarter.

Okay. No, I wasn't talking about the quarter but talking about the full year.

No, because -- no, we won't go into that kind of detail either.

Okay, and then I guess on the flip side where in the Medicare readout there the proposal came out calling for, call it roughly 3% rate update, so was this how you were expecting and modeling in terms of including it in the guidance, and I guess anything else in that proposal that you're looking at that we should be so focused on.

I'll comment on the proposed rate increase in I'll defer to Nick and Kevin on some of the other components in that proposed rule. Now actually, I was surprised at how low over the number was and I was also a little surprised that they actually didn't give the underlying metrics to do the calculation. Historically, CMS has utilized the hospital wage index basket from April 1 to March 31, and that's the solid data from the BLS they use for the following October 1 increase. And with a slight rebasing that they did in October 1 of 2021, there was a little it more shift to CPI, a little less emphasis on the hospital wage index basket The way the ratio roughly works is 65% of the increase is a hospital wage index basket, 35% is based upon CPI or inflation. I was surprised when they came out in the second or third week of March before that data is finalized with the proposed rule, but more importantly, the headline number on CPI at March 31, 2022 was 8.5%. If you just take 35% of 8.5%, assuming the hospital wage index basket will be flat, no increases in that regard, you would come up with obviously a larger number than they're proposing even after you take out the 40 bps of productivity factored that they included in. And of course most of that supposed to relate to the hospital wage index basket, but I really want to see the underlying data and it does seem like CMS is building in more of a lag from the measurement of inflationary pressures and hospice and to the point where they passed it through to reimbursement on October 1.

They obviously didn't use the March numbers at the very least.

Really but even still, I think the CPI pressures then -- what was the previous, what was the number 2 February, was 7.9 or something like that? So we're curious to see the underlying data. At the end of the day, they could create more of a lag but at some point the way the reimbursement factors work, reimbursement will catch up in totality to the total inflation over whatever time period we want to talk about.

Yes. So as it relates to the other aspects of the rule in general, as well as guidance. We put a realistic estimate in inside of that last quarter, so will materially impact our full-year guidance. We will be able to talk more specific about it after the second quarter when we update guidance and we have more clarity as the final rule starts to come out. For the non-wage related aspects, which are almost as equally important and some years more important than the rate itself, we were pleased to see it was consistent with our expectation, that we're not a lot of material regulatory changes which then in turn create process changes, additional administrative burdens, which over the past years, a lot of those things had been incorporated in. So pleasantly surprised but consistent with expectations, given everything else going on in the industry, that it was everything that was anticipated and will continue to have minimal disruption by implementing any minor items that would go final in August for the October 1 effective date.

Thank you. I appreciate your comment and appreciate the fact that there were no additional changes, is always good especially with everything that's going on. But on that front, last question on VITAS. You talked about , where actually you gave us a great start in terms of increasing your work force on the Roto side. So can you give us some stats on the VITAS side in terms of your net hiring? You mentioned that turnover was still high, but it sounds like you would still not be where you were expecting, or maybe not where it should be. So can you give us some of the pieces in terms of turnover improving in recent months, and also a net hiring or any kind of measurements you can provide on the headcount on the VITAS side? Thank you.

So consistent with how Dave and Kevin were talking about first quarter performance based upon adjectives from a description perspective, I'll do that as it relates to some of the hiring components since we don't release those aspects publicly. Overall, is our net hiring rate and turnover rate performing better than our 2019 levels pre -pandemic. No, it's not. That's what we alluded to inside of our commentary. However, there have been some encouraging signs from a trend perspective inside of the quarter as VITAS no different than any other health care provider continues to double and triple down with an absolute focus on both recruiting and retention for, in particular our clinical workforce like we've been consistently talking about for the last few quarters. There's positive progress, but yet like everything in hospice, it is a market specific impact, so there's some markets where we're seeing real positive progress. There's others where we're continuing to flip the proverbial pancake to continue to try to make headwinds. But at the end of the day, that will have the biggest impact on 2022, 2023. No different than it does for every other hospice provider out there in terms of our ability to continue to attract and retain high-quality clinicians.

Okay, so I guess so you seeing some improvements, and so there's the net headcount on the VITAS side is also improving?

We're seeing positive trends as it relates to it. And then it's a day-to-day battle not only amongst competing with others in the industry but others outside of home care, and in the nursing home segment, and the hospital segment, and the travel nurse contract agency segment. We're all searching for similar resources. And like I said, it's a day in day out, but I'm happy with the level of effort and focus the team has put in. And I promise you will continue to put in as we traverse the rest of '22.

Okay. Great. Thank you. And I guess my last question, I guess on the Roto-Rooter side, and I'll go back to the queue. So you mentioned the price increases, that it seems like I guess they stock, they worked, that you implemented early in the year and then you might consider additional price increases. So what would that regard, some are just inflationary data points, and so can you kind of give us a flavor of the magnitude of things in terms of these price increases that you consider doing? Thank you.

And I'll start and just say that we consider Roto-Rooter a premium priced service offering. And we look at that market-by-market very closely, being careful not to the premium price not overpriced and again, if inflation continues at its current elevated rates, I mean, we don't -- early in the second half of the year, we will make those calculations and not hesitate to make a price increase of its indicated David, any other color on that?

No, part of the issue is the variability compared Baltimore to Cincinnati. They are completely different increases that pass-through. And then within each market, we would have a different rate increase for excavation of versus say, drain cleaning and then water restoration, that price increase from comes from as well. So the reality is, it's a hodgepodge in Baltimore was completely different than Cincinnati on average though, we were actually based upon the headline number of 8.5% at the end of March, we got a little room to go for price increases still to catch up to inflation.

And it's supply and demand. We've said we have many more than several programs where we have more calls than we have people to service them. You can imagine the classic response to that is increased prices then bringing it to alignment, just supplying demand. So that's thing, but I guess Dave's point is we are not limited to doing that once a year at the beginning of the year.

Normally we do it when on low inflation. It would be crazy to lag by 12 months. When inflation is already in our economic model you patch through the price increases. Joanna, the reason we actually gave granular numbers on Roto-Rooter is because of the consistency of what I consider strong hiring and retention trends. We can actually use it to predict out how Roto-Rooter is performing. Nick is just reacting to an extremely volatile labor market where its hard to discern any trend one way or the other, whether it's on our end nurse practitioners or home-health aids. On the Roto-Rooter side, the reason we spent so much time talking about labor is, labor is a critical component of just driving commission revenue in their commissions. The fact that we were able to grow labor consistently throughout 2021, the year of the great recession, the fact that we continue to grow labor, both in the skilled and unskilled technician areas throughout the first four months of 2022, I think is just a good indicator of the strength of Roto-Rooter. And that's why we get so granular is we weren't -- it is a very predictable trend line at this point throughout the year. Momentum is with Roto-Rooter both in demand as well as in our ability to service that demand with a growing headcount.

Defiantly the 8% and even the 3% numbers that you gave for Roto-Rooter was defiantly good to hear as an indicator for where the business is going. I guess I'll go back to the queue. Thanks so much for answering all these questions.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Ben Hendrix of RBC Capital Markets. Please proceed.

Hey guys, thanks a lot. Just a quick question here. I noticed that about a 4% decline in days of care versus your ADC guidance of down 1%, then 1,5%, and you noted that decreased hospital admissions went down pretty significantly, and it looks like it shifted your days of care mix. How are you trying to get an idea for cadence through the year? How does that develop through the year in terms of top line impact? Then what pace would you expect labor inflation to impact costs over the course of the year? Just really just trying to get an idea of how you're thinking about cadence? Thanks.

So from an ADC perspective, you're spot on regarding the actual prints. But as we think about and we think about the entire calendar year, one of the other aspects we included in our comments last quarter for guidance is keep in mind, while we don't provide quarterly guidance. We did provide some directional guidance towards ADC growth accelerating in the second half of the year. And a lot of that we start to see some leading indicators of that. The execution out in the marketplace as we continue to focus on the community-based segment, as well as the broader segment, but you can pick up on that as it relates to the disparity in our admission numbers with the non-hospital segment of having positive both year-over-year comparisons and even more positive sequential Q4 of last year to Q1 as well. So --

[Indiscernible]

Internally now, we don't talk about overall admissions. I mean, in fact, other than the fact that professors are used to hearing that from hospice providers. Internally, we're talking only in terms of from whence they arrive. That’s right. That's exactly right. So from Q4 of last year to Q1 of this year, the non-hospital segment admissions sequentially increased a little over about 5.5%. And so from an ADC perspective, the Omicron variant in the first -- in January does have an impact to total days of care inside of the quarter, but we continue to see it as a good hopefully launching point for the remainder of the calendar year, as many of the disruption pieces inside of the pandemic are behind us and we're dealing with more of a regular referral flow and a continual shift of focus, as we look to ensure we are deploying our admissions resources to respond to the most appropriate referrals out there and go from there to bring on all appropriate and eligible patients that we respond to. So that's from an ADC perspective. Your other question, Ben, was pacing cadence as relates to labor, salary and wage, and from an inflationary perspective. And we are in line through the first quarter with where we anticipated it from a wage and salary standpoint, we have some prudent programs and course throughout the course of the year, including annual merit cycle that hits in the middle of the year and all that's incorporated into our guidance. The biggest parameter that we are looking at on a day in and day out basis is really growing our net headcount as it relates to our licensed clinical resources. And more and more hoping as we bring those resources in that they're coming in in a full-time capacity versus a part-time capacity or per diem capacity, which adds a degree of complexity towards some of that labor management on a go-forward basis. But feel good about where we are right now consistent with our full-year guidance, but time will tell over the next eight months from today.

Thanks a lot, guys.

Thank you. At this time, I would like to turn it back to Kevin McNamara for closing remarks.

I will only reiterate the remark that we were gratified with our operating unit and we're certainly generally in line with what we expected when we gave guidance in February and a little above that and thank everyone for their attention and we'll be back in three months for the discussion of the second quarter. Thank you.

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.