Chemed Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 7 speakers on the call.

Operator

Good morning. Our conference call this morning will review the financial results for the Q3 of 2023 ended September 30, 2023. 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 October 25 and in various other filings with the SEC.

Operator

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 October 25, 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 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.

Speaker 1

Thank you, Holly. Good morning. Welcome to Chemed Corporation's Q3 2023 conference call. I will begin with highlights for the quarter, and Dave and Nick will follow-up with additional operating details. I will then open up the call for questions.

Speaker 1

Our Q3 2023 operating results released last night reflect continued improvement in VITAS' operational metrics. In the quarter, our admissions increased 7.5% over the prior year period. These strengthening admissions continued to drive higher patient census. In the Q3, our average daily census, or ADC, expanded 16.17, an increase of 9.4% when compared with the prior year and 2.5% when compared with the Q2 of 2023. VITAS's improving operating metrics are a direct result of our retention and hiring program launched July 1 last year.

Speaker 1

This program was designed to stabilize turnover in our tenured staff and expand patient capacity. Since July 1, 2022, Our staffing has methodically increased on a sequential basis over this 12 month period. This increase in staffing and related patient capacity has been converted into increased admissions and census in roughly 60 to 90 days. This 12 month retention program generated an Increase of 784 licensed healthcare professionals, the majority of which are licensed nurses. This retention bonus program ended in the Q2 of 2023.

Speaker 1

However, in the Q3, we continued to expand our licensed staff and related patient capacity. VITAS net bedside headcount increased by 157 licensed professionals in the quarter. Our September 2023 was excuse me, In September 2023, our ADC was 19,047 patients. This compares to our September 2022 ADC of 17,325 for a net increase of 1722 patients. This raw ADC patient increase translates into $123,000,000 of increased annualized billable revenue.

Speaker 1

Our revised guidance assumes continued sequential ADC growth in the Q4 of 2023. Now let's turn to Roto Rooter. As I discussed last quarter, Roto Rooter continues to manage through what I can only describe as headwinds on consumer spending. Overall, our call volume was down approximately 13.6% when compared to the prior year quarter. Although call volume is a crude measurement, it does indicate consumers are moderating their behavior in terms of discretionary plumbing and drain cleaning services.

Speaker 1

Roto Rooter has offset a significant portion of this softening demand with a material increase in close rates. Our call center's conversion rate, the rate at which a call is converted into technician scheduled ticket, has improved 4.8%. Our ticket void rate, which is the rate of canceled jobs before a technician can be dispatched, improved 4.6%. Our technician conversion rate, the percentage of time a tech arrives at home or business and converts a scheduled ticket into billable work was essentially equal to the prior year. These improved conversion rates combined with price increases resulted And Roto Rooter increasing revenue 40 basis points when compared to the prior year.

Speaker 1

We continue to see stabilization of our demand in our weekly revenue. Our guidance assumes Roto Rooter will have modest 4th quarter sequential growth when compared to our Q3 of 2023. This conservative revenue guidance for Roto Root's 4th quarter seasonality demand assumes continued consumer spending headwinds for the remainder of the year. To summarize, I'm pleased with the accelerated improvement in VITAS post pandemic. Our increased growth in licensed healthcare professionals, strong admissions And corresponding growth in patient census have returned VITAS to normalized operating conditions.

Speaker 1

Roto Rooter is well positioned in spite of economic headwinds on consumer spending. We anticipate continued expansion Market share by pressing Roto Rooter's core competitive advantages in terms of excellent brand awareness, customer response time, 20 fourseven call centers An aggressive Internet presence. With that, I would like to turn this conference over to David.

Speaker 2

Thanks, Kevin. Eitas' net revenue was $334,000,000 in the Q3 of 2023, which is an increase of 12.5% when compared to the prior year period. This revenue increase is comprised primarily of a 9.4% increase in days of care And a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%. The acuity mix shift positively impacted revenue growth 24 basis points 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 increased revenue growth by approximately 20 basis points.

Speaker 2

Our average revenue per patient per day in the Q3 of 2023 was $196.43 which is 296 basis points above the prior year period. Reimbursement for reaching home care and high acuity care averaged $172.52 $1026.48 respectively. During the quarter, high acuity days of care were 2.8% of our total days of care, which is an increase of 5 basis points compared to the prior year quarter. Adjusted EBITDA, excluding Medicare cap, totaled $54,900,000 in the quarter, which is an increase of 53.4%. Adjusted EBITDA margin in the quarter, excluding Medicare GAAP, was 16.5%, which is 4 41 basis points above the prior year period.

Speaker 2

Now let's take a look at Roto Rooter. Roto Rooter generated quarterly revenue of $231,000,000 in the Q3 of 2023, an increase of 0.4% compared to the prior year quarter. Rudra branch commercial revenue in the quarter was $56,800,000 an increase of 1.5% over the prior year. The aggregate commercial revenue growth consisted of drain cleaning revenue declining 4.2%, plumbing increasing 1.8%, Excavation expanding 11.9 percent and water restoration increasing 2%. Roto Rooter Branch Residential revenue in the quarter totaled $155,000,000 an increase of 0.3% over the prior year period.

Speaker 2

This Aggregate residential revenue growth consisted of drain cleaning decreasing 6.7%, plumbing expanding 3 tenths of 1%, Excavation expanding 3.2 percent and water restoration increasing 4.3%. Adjusted EBITDA in the Q3 of 2023 totaled $66,900,000 a decrease of 3.7%. The adjusted EBITDA margin in the quarter was 29%, which is 124 basis points below the prior year period. Now let's take a look at our updated guidance. VITAS' 2023 revenue prior to Medicare cap is estimated to increase 9.3 percent to 9.5 percent when compared to 2022.

Speaker 2

Full year 2023 revenue growth It is negatively impacted by 75 basis points as a result of the sequestration relief in the first half of twenty twenty two compared to a full year of sequestration in 2023. Our average daily census or ADC is estimated to increase 7.3 percent to 7.5%. And full year adjusted EBITDA margin prior to Medicare cap is estimated to be 15.4% to 15.7%. The total pre tax cost of the retention program in 2023 is estimated at $23,800,000 This reduced our adjusted EBITDA margin guidance for 2023 by approximately 180 basis points. We are currently estimating $8,000,000 from Medicare cap billing limitations in calendar year 2023.

Speaker 2

Roto Rooter is forecasted to achieve the full year 2023 revenue growth of 1.6% to 2%. Reuters adjusted EBITDA margin for 2023 is guided to 28.4% to 28.6%. Based upon the above, full year 2023 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 $19.82 to $20.02 This guidance includes $1.18 per share of after tax costs related to the 2023 portion of the retention program. This revised 2023 guidance compares to previous guidance as recast to no longer exclude costs related to the retention program of $18.72 to $18.92 Current 2023 guidance assumes an effective corporate tax rate and adjusted earnings of 23.6 percent And a diluted share count of 15,200,000 shares. Chemed's 2022 adjusted earnings per diluted share was $18.78 that includes $0.97 per share for costs associated with the 2022 retention program.

Speaker 2

During the Q3, the company finalized the realignment of its state and local corporate tax structure. This realignment effective January 1, 2022 was based on the location of operating resources and profitability by business segment. This reduced state taxes for 20222023 And is estimated to result in a 24.3 percent effective tax rate starting in 2024. I will now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS Healthcare Business segment.

Speaker 3

Thanks, David. As Kevin discussed, our 12 month retention and hiring bonus ended on June 30, 2023. This program was very effective in stabilizing and expanding our patient capacity. All retention bonus payments are individually cliffvested And paid out after the employee has successfully completed 12 months of continuous employment. I'm also very pleased that we have continued to expand our workforce And patient capacity in the 3rd quarter without this retention program.

Speaker 3

In the quarter, VITAS increased net bedside headcount by 157 licensed professionals. Similarly, I'm pleased that we've continued to see strong retention of our team members whom received their retention bonus payment illustrating the sustainability of improvements in culture and morale at our locations. In the Q3 of 2023, our average daily census of 18,859 patients, an increase of 1617 or 9.4% when compared to the prior year and an increase of 467 or 2.5 percent sequentially. As Kevin mentioned, we crossed the 19,000 ADC mark in September of 2023 at 19,047 patients. This compares to our September 22 ADC of 17,325 for a net increase of 17,022 patients.

Speaker 3

VITAS has generated quarterly sequential ADC growth over the last four quarters. In the Q3 of 'twenty three, Total VITAS admissions were 15,774. This is a 7.5% increase when compared to the Q3 of 'twenty 2. In the quarter, our nursing home admissions increased 2.8%. Assisted living facility admissions expanded 17.1%.

Speaker 3

Hospital directed admissions increased 6.5% and our home based patient admissions expanded 9.2% when compared to the prior year period. Our average length of stay in the quarter was 103.1 days. This compares to 106.2 days in the Q3 of 'twenty two and 99.5 days in the Q2 of 2023. Our median length of stay was 17 days in the quarter and compares to 17 days in the Q3 of 'twenty two and 16 days in the Q2 of 'twenty 3. To recap what our team has accomplished, we've now generated 5 quarters of sequential growth in licensed healthcare workers and 4 quarters of sequential growth in ADC.

Speaker 3

We've developed what I believe is a very sustainable path to methodically build our clinical capacity and patient base to pre pandemic levels and beyond. These accomplishments were a result of the unwavering commitment, dedication and focus each VITAS team member has towards fulfilling our mission in every community we serve. I want to take this opportunity to thank our entire VITAS team for what we have done to get us here today, and I look forward to what we will accomplish going forward. With that, I'd like to turn this call back over to Ken. Thank you, Nick.

Speaker 1

It's now appropriate time to entertain any questions people might have.

Speaker 4

Okay. Thank you. At this time, we will conduct a Our first question comes from the line of Ben Hendricks of RBC Capital Markets. Your line is open.

Speaker 5

Hey, thank you very much. Just on the VITAS in terms of the new revised guidance, I wanted to get your thoughts on How you're factoring in the hiring that you saw in this quarter into your revised estimates? And could you remind us kind of what you're expecting in terms of pull through in 4Q From some of the new hires that you noted, I think you noted about 150 some odd new nurses. Thank you.

Speaker 3

Yes, sounds good. So in terms of forecasting for the Q4, it obviously takes we have previous 5 quarters of Experience around what we believe to be the translation from a census growth standpoint. So it's obviously factored into our Q4 guidance for This year and as alluded to in the comments, feel very good about our methodical approach while it was 157 Net bedside headcount expansion in the 3rd quarter, there's no reason to believe that can't continue and won't continue throughout the end of the year, which will launch us Into 2024 and we'll include that in our 2024 guidance when we discuss that in February of next year.

Speaker 2

And Ben, what you probably noticed, if you kind of do the math on the 3 quarters of actual to get to our full year guidance, we're anticipating a pretty big Sequential pop from Q3 to Q4 in our adjusted EBITDA margin ex cap, and that's primarily due to 3 factors, One of which is all of the price increase is going to drop down to our EBITDA line or really all of it. And geographically, we Came out, what, 20 basis points ahead of the national average?

Speaker 3

3.3% is where we anticipate.

Speaker 2

So we'll pick up about 3.3 points that way. And then the other issue we're looking at is Nick and his team are still actually monetizing, although they've done a substantial piece of it, the huge growth rate in labor in Q2, The $302,000,000 increase in bedside FTEs. As well as he's digesting the $157,000,000 And we are getting leverage on central support costs relative to the marginal revenue growth. So that's just a long way of saying is we are going to have a Very, very nice pop around to about 21% in 4th quarter adjusted EBITDA margin. But certainly, that is not the go forward margin for 2024.

Speaker 2

We're obviously working on a very good, very positive tailwind in terms of how we're monetizing this huge capacity increase As well as admission increases, which are expensive. But when we give 'twenty four guidance, it's going to moderate from the Q4, obviously.

Speaker 5

Thank you. That's very helpful. Moving quickly to Roto Rooter. Can you talk about the water restoration trends? It Looks like the revenue is a little softer than what we've seen in past quarters.

Speaker 5

Remind us of any seasonality that goes into that number and kind of how that business Disparring amid some of the broader consumer headwinds. Thanks.

Speaker 2

In terms of seasonality, there's not much, But rarely like we don't like to talk about weather. But for example, in the Q1 of this year, we had extremely cold weather that Contributed to frozen pipes. Frozen pipes tend to have a lot of water restoration work because they burst and there's water in certain parts of a structure. So from that standpoint, there could be a modest amount of seasonality. Beyond that, every water restoration job is largely bespoke.

Speaker 2

It's triggered from a small plumber to drain cleaning job, then that result in you want this water and humidity removed. So from that standpoint, it generally tracks plumbing and sewer and drain work. However, we are still doing a great job of Responding quickly to jobs that have a high probability of water restoration and capturing that business. So for right now, because of our speed of response, We're actually outperforming in water restoration, the growth in sewer and drain. But we eventually expect that to be totally correlated within a couple of years.

Speaker 5

Great. Thank you. Just one last question. Can you just talk about any changes and thoughts around your capital Employment priorities, kind of a mid to current interest rate environment and expectations for rates to stay higher for longer? Thanks.

Speaker 1

Dave, I was going to say, obviously, there's a Dave is going to talk about a little bit of a change given the overnight rate that We get on our money, but it's still we're still going to be buying in stock. Dave, why don't you give me?

Speaker 2

Yes. No, before, I mean, in past years, when we were getting what was only 18 months ago we were getting 20 basis points on overnight money. Kevin and I certainly felt a strong urge to put that to work quickly, and that was share repurchase primarily on dollar averaging. Now that we actually can get a good rate of 5.2%, which on an after tax basis about equals Our free cash flow yield per share, there isn't an economic cost if we try to time things. So from that standpoint, that's why you're seeing our Interest income increasing as we put that cash to work on an overnight basis, and then we'll be opportunistic when the stock corrects, Jumping on share repurchase.

Speaker 2

But that clearly will be a continued part of our way to return capital to shareholders until we can find some nice juicy acquisitions or other ways to risk adjusted increase our returns.

Speaker 5

Thank you.

Speaker 4

All right. Thank you. One moment for our next question. Our next question comes from the line of Joanne Gajuk Bank of America. Your line is open.

Speaker 6

Thank you. Good morning. Thanks for taking the question. So I guess if I can first follow-up On the discussion around VITAS margins, so you alluded the Q4 guidance implies pretty high margin Of 21%, that's not a good assumption for next year, obviously, because of the seasonality And how the Medicare rate update flows through. But is it fair to assume your, I guess, full year Margin guidance excluding the 180 basis points headwind from the retention program.

Speaker 6

So I guess When you do that math, because you're guiding now 15.4% to 15.7%, but excluding that headwind, I guess, it's 17.2% to 17.5 Our percent margin, so is that a good starting point for next year? Because also the other way, I guess, to look at things would be maybe second half, so combined Q4 and Q3, so

Speaker 1

that's like a 19% margin.

Speaker 6

So is it fair to kind of Same percent margin. So is it fair to kind of think about margins into next year in that kind of neighborhood?

Speaker 2

What I would say on margin, and you're asking an interesting question, we're going to be cagey but not only because we're looking we don't know How things are going to smooth out post pandemic. So before, as we're getting tail end of the pandemic, so even last year, I think Nick, Kevin and I were talking about VITAS' margins. There's no retention program or anything else. We said we'll return to that 17.5%, 18% adjusted EBITDA margin ex cap. That's what we've been saying as we're working away through the pandemic.

Speaker 2

Now as we look at the overall mix, we look at the efficiencies Nick and his team, out of necessity, created during the pandemic, Again, doing probably more high less high acuity care on a go forward basis than we're doing pre pandemic. All of that leads to I think our margins are going to be higher than that 17.5% to 18% that we posted in calendar year 2019. But whatever that margin turns out to be, maybe it turns out to be 19, maybe it turns out to be 19.5, but whatever it settles out at, once we normalize Our hospital admissions, length of stay, kind of the mix of where our patients come from, whatever margin we end up settling at probably in our 'twenty Our guidance, that's pretty much is going to be static. There'll be minimal opportunity to improve that margin. So again, whether it's 19%, 19.5%, 20%, whatever it settles out at for our go forward mix post pandemic, It's

Speaker 1

going to

Speaker 2

be then pretty flat, hard to grow that margin. So we're still kind of guessing when things settle out, But it's going to be sometime in 2024 is a high, high, high probability. We're going to be above our pre pandemic census early in the Q1 Of 'twenty four, if we don't post it in the Q4 of this year. But that's just a long winded way of saying, Joanna, Yes, we think we have a tailwind on pre pandemic margin increasing it, just not quite sure where it's going to settle out yet. But the Q4 isn't going to be representative of a go forward annual guidance.

Speaker 2

It might be representative of an annual 4th quarter guidance though.

Speaker 3

Okay. Which would be consistent with all pre pandemic 4th quarter marginal contribution prints at that That's exactly right.

Speaker 6

Right. Usually the highest margin. Right. No, I agree. And then I guess, to that end, In terms of you mentioned on census, you kind of reached that 2019 mark and the outlook was raised.

Speaker 6

It sounds like, yes, You're expecting Q4 to sequentially improve from Q3. So how should a similar question, I guess. So how should we think about next year? So for this year, I guess, you're Talking about revenues growing 9% this year, largely on that census grew really. So can you grow high single digits on top of that number Again, that creates a path for comp.

Speaker 6

I guess any framework for how we should think about things?

Speaker 3

So just from an operational standpoint, I think the sequential component that you're seeing illustrative and built in and baked into some of the My comments earlier, we feel very good about the sustainability of sequential ADC growth, Johanna, on a go forward basis. In terms of the overall rate, of course, we don't want to comment about what we think 2024 will be until we get into talking about 2024 guidance. But my comment is really just to reinforce the overall confidence we have in our ability to continue To methodically build clinical capacity that will continue to translate into admissions growth and ADC growth and it's a different way of The pandemic is behind us. We feel great around. We're hitting on all cylinders, including just as importantly, Everything we're investing from a human capital and cultural standpoint back at our individual locations and so we're We're on a good path and trajectory, but in terms of range of ADC and guidance, we'll talk about it when we get into 'twenty four.

Speaker 3

But Just from an overall confidence standpoint, we sit here very confident based upon the results we're printing and anticipate continuing to produce on a go forward basis.

Speaker 1

And Nick, the answer to your question also, Joanna, probably lies in a factor that's outside of our control. As Dave has indicated, It's kind of an unusual situation. As things were tough in the hospice arena, our competitors who are smaller, less well capitalized, Maybe less professionally managed, struggled more mightily than we did. And so A lot of our improvement was there's some of our improvement was based on taking business away from those struggling competitors. So to the extent that our ADC in the quarter was up 9.4%, that's a historically high number.

Speaker 1

To the extent that you talk about where is that going to settle in, some of that comes down to do our competitors, some of the competitors, especially in Florida, Come back to kind of a recovered rate of doing business. I mean, they were they've been struggling. We continue to see them struggle. But that so I guess what Dick's really saying is some of those factors Are certainly in the category of the unknown. But again, if you ask us from our as we sit here, we see them continue to struggle.

Speaker 1

So That's good news for us.

Speaker 6

Okay. Appreciate it. And before I guess I ask my real question, And the last thing on VITAS, so we know what the rate update is, which is Pretty good, I guess, and it sounds like you actually served a little bit higher than average rate. But there's also some provisions In the hospice rate, but also in the home health proposal around the hospice I think it's hospice oversight, right? There's the medical reviews of hospice stays that are longer than 90 days.

Speaker 6

There's the special focus program And I guess they talk about selecting some providers for that additional review. So Can you talk about what does it mean for your business in terms of any impact to how you operate or any impact to the Costs associated with just dealing with this increased oversight?

Speaker 3

Yes. So John, if we take your comments sort of breaking into 2 different parts, your comment around any potential desire to look at Patient records for any length of stay, I think it's something where as you might imagine, we constantly and have We're constantly able to successfully defend those things. And with research studies that I know many are aware of That are illustrating longer length of stays in the hospice benefit actually have a larger outsized return for the Medicare Trust Fund in terms of total Cost of care reduction, we'll see if the appetite to look at those things now aligns with the Best interest of the Medicare Trust Fund as well. Regarding the special focus program proposed rule and provisions, There will be some semblance of that will be finalized here over the next coming days. But the one item that it would point to regarding it Yes, when you look at comment letters that are all public from the 4 trade associations that are representative of large providers, small providers, for profit Providers, nonprofit providers as well as bipartisan letters from congressional leadership all those things point to and help to illustrate Some of the concerns of the construct of the special focus program embedded inside of the proposed rule along with recommendations that CMS Has been listening to and able to collaborate with for consideration of things they can and should do within the SFP to be able to achieve their goal which is identifying poor performing hospices in particular those that with the vast Explosion in the last 4 years of hospice licenses in California, Texas, Nevada and Arizona.

Speaker 3

So just as an illustration, some of those constructive comments are the need to Normalized for providers related to condition level deficiency. So they don't treat a provider with 45025 Exactly the same. They're also highlighting 40% of hospice provider numbers haven't had a survey in 3 years. Over half don't have a cap score. And so we think there's continual work to do and the industry and all the providers are rowing in the same direction to provide that insight so that the government can achieve what their objective is.

Speaker 3

But speculating around something that is proposed that Should have some either significant modifications or a pause to just be able to get it right and achieve that Objective that everybody believes in, I think is going to be key and critical and we'll see how that plays out over the next week or 2 and then over the coming years.

Speaker 6

No, in fact, I guess we have to see where it stands when it's finalized. But if I can, last question on the broader rate. So things tracking a little bit better. It sounds like you've conservative on Q4. But still, you raised your guidance, it sounds like maybe a little bit more than The Q3, so what gives you confidence, I guess, in the world doing better?

Speaker 6

And can you talk about maybe Exiting Q3 and so far in October?

Speaker 2

There's really not much to talk about. There's nothing that Stood out in October. Seasonality, Joanna, kicks in about mid November, really through the end of the year. It's too early to see what kind of seasonality we have. If you look at the exact change we did to the guidance That we issued at the end of Q2 versus the end of Q3 now.

Speaker 2

We really just tightened everything up to the higher end on Roto Rooter side effectively. So it's better margin improvement, which is also an example of expense control at the Roto Rooter level. And it's Those that are really kind of resulting in about a $3,000,000 pop in EBITDA for Roto Rooter In the second half of the year than we were first initially anticipating. So it's really coming down to margin performance and just slightly better revenue trend lines, but still not up to where we think it should be.

Speaker 6

And I guess that leads me to a small question I had on Vida, how to think about next Sure. Can you grow, I guess, continue to grow? I guess, I understand it's probably the answer depends on where they're calling you, Len. But any kind of Framework or things you would be looking at as the leading indicators for how to think about the next year in Roto?

Speaker 3

In Roto Rooter or VITAS, China or both?

Speaker 6

Roto Rooter, yes. But the Roto Rooter. Okay.

Speaker 1

Well, let's talk about Roto Rooter. I mean, The only thing I'll give you an example. Ferguson Supply, huge The supplier of a lot of devices, but including repair plumbing devices and pipes and what have you. 1st year they've broken it out, so we can track. The people who buy those are people like Roto Rooter go to a store and By the pipes and the plumbing materials, do it yourselfers, rival plumbing companies.

Speaker 1

They recently indicated their sales of those in that sector are down about 12% for the year today. Last year, they were up 22%. In other words, the point I'm making is, first of all, that's very broad. That's an indication that it's consumer Driven, it's not we're not losing the business to competitors. The point there is that it changed very quickly On the downward side.

Speaker 1

That suggests to me that it could improve very quickly on the positive side. As far as what causes consumers to put off these less than emergency jobs. And So that's an unknown. But I would say that I have some confidence that what we're looking at is a cyclical economic problem That has indications to me that it could improve as quickly as it devolved. When we make our those are the kind of issues when we go through the budget for Roto Rooter, We're going to try and analyze.

Speaker 1

It's a little bit unknowable, but you'll get a lot you'll get our best thinking when we give our guidance for In February for next year. But I wouldn't rule out some improvement, but I bet when you see our guidance, you're going to see a Unless something changes significantly between now and, let's say, the middle of January with regard to consumer demand, you're going to see Some conservatism, but at the same time some optimism because as I say, it looks like we've already Kind of hit bottom on that and have normalized.

Speaker 2

Yes. If you think about it, Joanna, we really want to see what the Q4 turns out to be To the impact on Roto Rooter from what I'd call softened consumer demand. To the extent that we really achieve a soft landing in 2024, I suspect Roto Rooter will have a very, very good year in 'twenty four. If consumer headwinds kind of nag Spending throughout next year, I think we're set up for an incredible 2025 because as Kevin keeps reminding people, These jobs that are not coming in for the industry as well as for us, they're not going away, they're getting deferred. These problems don't fix themselves.

Speaker 2

You might delay it. You might push some big clogs down the line, but all this work eventually has to be done and we're positioned for it. I have a fair amount of optimism on 2024, but it really just comes down to How much extra cash consumers have and how much longer they can defer some of these jobs. But we anticipate there will be growth next year.

Speaker 1

And with one caveat, David, Roadrunner is going to have a very difficult comparison to the Q1. Q1 was before the slowdown. So they had excellent and had good weather and had excellent Q1. These numbers we're talking about are for the year, Not in the Q1.

Speaker 2

Q1 will be challenging and I love the margin that we're pulling out right now. So Yes. Without a doubt, the hardest quarter to lap is going to be Q1 of 2023. After that, actually, I guess, the bar gets easier to hurdle.

Speaker 6

Thank you. That's a lot of details. But can you might just follow-up on that. So you mentioned the kind of that industry level trends Okay. And I was being sure.

Speaker 6

But also if we think about the 2 different businesses, so you talk about like the water restoration, and you gave us the job Countdown. But then I guess as we think about commercial versus residential, any difference in behavior there where it's, I guess, Similar. And I guess to that end, are you exposed to like the building activity slowing down? Or are you kind of your commercial business is more diverse And you don't rely, I guess, on new adds to housing stock? Thank you.

Speaker 2

The commercial business Tends to be, what I'd say, less discretionary because they're trying to keep things open. The number one commercial cohort we have is actually multifamily housing. Then the number 2 turns into restaurants. The restaurants are exactly volume driven. And if they're getting a lot of In restaurant dining, that's where our volume comes from, from there.

Speaker 2

So it's not really deferrable on the commercial side. It just Comes down to how often they're using their equipment and their drains and their plumbing systems that triggers our repairs. And actually commercial right now is what I would say is slightly outperforming residential.

Speaker 4

All right. Thank you for your questions. I'm showing no further questions at this time. I would now like to turn it back to Kevin McNamara for closing Comments.

Speaker 1

Well, the only comment I have is, we were gratified that We had what we thought was a great operating quarter. Really, it was gratifying to see the retention program bearing such fruit, the VITAS. Roto Rooter, Very happy that we've kind of normalized the activity. Very gratified that to the extent that we have Our close rates in Roto Rooter indicate and expense control indicate good field excellent Field level management and we look forward to a good close to the end of the year. But with that, I'd like to thank everyone for their attention.

Speaker 1

And I guess we'll have another one of these in February, at which time we report on the Q4 and our guidance for next year. Thank you.

Speaker 4

All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Chemed Q3 2023
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