Chemed Q1 2023 Earnings Call Transcript

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April 27, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the Chemed First Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Holly Schmidt, Assistant Controller. Ma'am, you may begin.

Speaker 1

Good morning. Our conference call this morning will review the financial results for the Q1 of 2023 ended March 31, 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, participants are in the company's news release of April 26 and in various other filings with the SEC.

Speaker 1

You are cautioned that any forward looking statements participants 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, but also includes tax depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non GAAP results is provided in the company's release press release dated April 26, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today. Participants are in the line with Kevin McNamara, President and Chief Executive Officer of Chemed Corporation Dave Williams, Executive Vice President and Chief Financial Officer of Chemed participants are in the line with us today and Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

Speaker 1

I will now turn the call over to Kevin McNamara.

Speaker 2

Thank you, Holly. Good morning. Welcome to Chemed Corporation's Q1 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 2

Our Q1 2023 operating results released last night continue to show a return to a more normalized growth and operating results post pandemic. For VITAS, normalization involves methodically increasing capacity by expanding our staff of licensed healthcare professionals. In the Q1 of 2023, VITAS added 200 licensed professionals, 60% of which participants are licensed nurses. Since we implemented our hiring and retention program in July 2022, VITAS expanded license

Speaker 3

but Staffing by 475 professionals.

Speaker 2

Nick will provide more detailed information on this issue later in the call. Although we continue to see disruption in our referral patterns when compared to pre pandemic admissions, these disruptions continue to dissipate Roto Rooter had a solid Q1, increasing revenue 7.9% over the prior year. Revenue in the Q1 of 2023 exceeded our internal estimates with January 2023 being exceptionally strong. March revenue was somewhat lighter than we participants are still within normal patterns. Overall, demand for key services in both commercial and residential segments continue at levels significantly above our pre pandemic demand.

Speaker 2

This is demonstrated with commercial revenue increasing 41% and residential revenue expanding 73% when compared to the Q1 of 2019. Roto Root continues to be well positioned and we anticipate continued expansion of market share by pressing our core competitive advantages With that, I'd like to turn this teleconference over to David.

Speaker 3

Thank you, Kevin. VITAS' net revenue was $310,000,000 but you can see that the Q1 of 2023, which is an increase of 3.8% when you compare to our prior year period. This revenue increase is comprised primarily of a 3% increase in days of care and a geographically weighted average Medicare reimbursement rate increase The 2% sequestration cut that was suspended at the start of the pandemic in 2020. Our acuity mix shift had minimal impact in the quarter when compared to the prior year revenue and level of care mix. Our combination of Medicare cap and other contra revenue changes negatively impacted growth by about buts are In the Q1 of 2023, VITAS accrued $2,750,000 in the Medicare cap billing limitations.

Speaker 3

This compares to a $2,500,000 Medicare cap billing limitation in the Q1 of 2022. Of our 30 Medicare provider numbers, 25 of these provider numbers have a trailing 6 month Medicare cap cushion of 10% or greater. One provider number has a cushion between 5% 10% and one provider has a cushion between 0% 5%. 3 of our provider numbers do have a trailing 6 month billing limitation liability. Our average revenue per participants are in the Q1 of 2023 was $198.86 which is 100 basis points above the prior year period.

Speaker 3

Reimbursement for routine home care and high acuity care averaged $173.39 $1042.06 Respectively, during the quarter, high acuity days of care was 2.9% of total days of care, essentially equal to the prior year quarter. The Q1 2023 gross margin, excluding Medicare cap and the hiring and retention bonus program, was 22.5%. This is a 220 point basis margin decline when compared to the Q1 of 2022. VITAS' adjusted EBITDA margin in the quarter, excluding Medicare cap, was 15.1%, which all Which is a 2 34 basis point below the prior year period. These margin declines are the result of CMS reimplementing sequestration, which reduced our gross margin and EBITDA margin 200 basis points.

Speaker 3

In addition, VITAS increased the licensed healthcare staff by 200 professionals in the Q1 of 'twenty three. The net increase of 200 professionals hired throughout the Q1 is estimated to have negatively impacted gross margins and adjusted EBITDA margin by 50 basis points. Roto Rooter generated quarterly revenue of $250,000,000 in the Q1 of 2023, which is an increase of 7.9% compared to the prior year period. Roto Rooter branch commercial revenue in the quarter totaled $59,900,000 which is an increase of 10.1% over the prior year. This aggregate commercial revenue growth consisted of drain cleaning increasing 4%, Plumbing expanding 10.7 percent, Excavation increasing 26.2 percent and Water Restoration expanding 7.4%.

Speaker 3

All Roadrunner branch residential revenue in the quarter was $169,000,000 an increase of 7.5% over the prior year period. The components of this is aggregate residential growth rate of drain cleaning decreasing 2.9%, plumbing expanding 3.6%, Excavation expanding 3.9 percent and water restoration increasing 27.4%. Rudder Rooter's gross margin in the quarter was 53.1%, which is a 37 basis point increase when compared to the Q1 of 2022. Adjusted EBITDA in the Q1 of 'twenty three totaled $71,800,000 which is an increase of 9%. And the adjusted EBITDA margin in the quarter was 28.8%, which is a 29 basis point expansion compared to the prior year.

Speaker 3

I will now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS Healthcare Business segment.

Speaker 4

Thanks, David. As we've mentioned in the past, we implemented a targeted hiring and retention bonus program at VITAS effective July 1, 2022. This program is focused on licensed nurses, nurse managers, home health aids and social workers. These onetime retention bonuses range from $2,000 to $15,000 per licensed health care professional. The total 12 month forward looking cost of this program, including payroll taxes and government mandated overtime calculations, is estimated at $40,000,000 All retention bonus payments are individually cliff vested and paid out after the employee has successfully completed 12 additional months of continuous employment.

Speaker 4

During the Q1, we expanded this licensed healthcare professional staff by 200 employees, Bringing total licensed healthcare staffing expansion attributed to this program to 475. It is important to note the majority of this increase in staffing is for licensed nurses, including admission nurses. In the Q1 of 2023, our average daily census was 17,830 patients, an increase of 5 17 or 3% when compared to the prior year and an increase of 396 or 2.3 percent sequentially. The sequential monthly ADC growth within the Q4 of 2022 and the Q1 of 2023 is very encouraging Given the timing lag of increased staffing following subsequent admissions and census expansion. In the Q1 of 2023, VITAS' total admissions were 16,179.

Speaker 4

This is a 2.1% decline when compared to the Q1 of 2022 And a 9.1% sequential improvement when compared to the Q4 of 2022. I'm very encouraged by the last two quarters of sequential growth in admissions. A primary driver for our admissions growth is a result of our increased capacity expansion derived from our hiring and retention program. In the Q1, our nursing home admissions increased 6.6% and assisted facility admissions increased 10.6%. Hospital directed admissions declined 4.9% and home based patient admissions declined 2.9% in the quarter.

Speaker 4

As compared to the Q4 of 2022, all pre admit segments improved with our nursing home admissions increasing 5.2%, assisted facility admissions expanding 13%, hospital directed admissions increasing 8% and home based patient admissions buttes are improving 10.4% in the quarter. Our average length of stay in the quarter was 99.9 days. This compares to 104.8 days in the Q1 of 'twenty 2 and 103.9 days in the Q4 of 'twenty 2. Our median length of stay was 15 days in the quarter and compares to 14 days in the Q1 of 'twenty 2 and 16 days in the Q4 of 'twenty 2. Participants are in the line with our team.

Speaker 4

To recap what our team has recently accomplished, we have now generated 3 quarters of sequential growth in licensed healthcare workers, but 2 quarters of sequential growth in both admissions as well as ADC. We have developed what I believe is a very sustainable path to building back our participants are in the same position to pre pandemic levels and beyond. With that, I'd like to turn this call back over to Kevin. Thank you, Nick.

Speaker 3

Are ready to take

Operator

questions. Our first question comes from Joanne Gajuk of Bank of America. Your line is open.

Speaker 5

Good morning. So first, I guess, please, you don't plan to update the guidance like all This typically deal with this quarter, but can you talk about how the quarter came in versus your internal expectations, I mean, you made a comment that Photovil was better on the revenue side, but I guess how would Vida and then when you And how do you view the quarter on the consolidated basis?

Speaker 3

Yes, I'll take it on a macro basis, Joanna, and then flip it to Kevin and Nick for more detail. But Albert? No. Our internal estimates, both Reuters and VITAS exceeded them. So we were very pleased on a macro basis with the quarter in both segments.

Speaker 2

What I would say is, again, actual commentary on how the quarter came in. VITAS, we saw continued improvement in what has been a key Aspect of what Nick's trying to do and that is adding more licensed healthcare professionals. We're adding those. The expectation is that we want to add them faster than the Average Daily Census comes in for a couple of reasons. We want to stay ahead of the power curve and we want to build up a cushion For the end of the retention program.

Speaker 2

So That's going well according to plan. Road to rear capsule commentary, I'd say, Very strong early part of the quarter, a little bit slower down

Speaker 3

a little

Speaker 2

bit From those healthy odd days, a little slower in the latter part of the quarter, We get some questions. Is that indicative of the economy slowing down? Some of the Activities, Roto Root, that are less emergency, is that kicking in? Maybe to a small extent, It largely comes down to us for us, taking advantage of the opportunities with but experienced management. And we're still suffering a little bit in Rotorua from the fact that A lot of our managers have been hired away by private equity for various service offerings.

Speaker 2

I think we've done a good job in Closing the door on that, but we're still suffering from some of the losses we had in the 12 month period preceding the recent quarter. So the capital commentary is overall good, participants are in the same store, adding the employees and in Roto Rooter, a little bit different business in Roto Rooter. We want the phone to ring in Roto Rooter and then we want to effectively respond to those phone calls. And that's a constant battle. So but overall, happy with the results.

Speaker 4

Nick, anything to add? On VITAS' end, just one level deeper, when we think about the expansion of clinical capacity, that Continues to be a result actually of better performance, both from a hiring and turnover improvement, which is very encouraging. On the admission side, as I referenced on sequential admissions growth compared to the 4th quarter, every segment was up high single digits to low single digits on a buttermilkentile basis and the resulting days of care expansion are coming in line to beating some internal expectations. So Rina, really pleased with a lot of the granular pieces that result in some of the metrics we report.

Speaker 5

On the last point on improving capacity, adding the staff, it sounds like it's going faster than you initially but expected. So if you continue on this space, right, does that change your view in terms of when you is expected to be back to pre COVID census levels. And I guess what's your latest view on that?

Speaker 2

Let me start by saying, yes, generally, it's a range. And To be very helpful, I'd say, yes, it looks like a little bit sooner rather than later, but it's hard to be precise on that. But it's not surprising that in this environment, if you have the staff, we have a better shot at getting the patients. And all So the way we look at it is VITAS' internal metrics during the pandemic were worsening On a month by month basis, and it was inevitable what was going to happen to the ADC. We're on the other side of that.

Speaker 2

It's almost just as inevitable on the improvement on ADC As it is, once you have the staff and we have not done, I know we're not being coy. We haven't done precise calculations as far as When we're going to get back to that to, let's say, our pre pandemic ADC level. But If we wanted to invest in an algorithm, it probably could come up with a pretty good estimate, but Not too much use for that, but that's one of the reasons why we to compare and contrast, we mentioned about Roto Rooter. I mean, it's such a difference. In VITAS, We're fighting very hard to get back to where we were at the start of the pandemic.

Speaker 2

In Roto Rooter, residential sales were up 73% From that period. So it's a tale of 2 cities and negative people are making Progress at a good solid pace.

Speaker 4

Yes. Directionally, if we were to say, do we is it faster but Today than what we would have anticipated 4 or 5 months ago. Obviously, I think that answer is yes. And the bottom line is if we can continue to win The war on talent, which is very thoughtful and we have the demand there for that talent to admit and care for patients, which we do, It's just a question of trajectory, right, at this point. So as long as we can continue to do that, whether it's 200 a quarter, whether it's 250, whether it's 150, we are right now in many of the markets in which we operate, all The teams are very being very successful in that, and it has a compounding effect for existing staff And their level of satisfaction in what we're able to do for the community.

Speaker 4

So really excited about the compounding morale and cultural impact that comes with that.

Speaker 5

And I guess it relates to expanding of Staff and how it translates into Sensus to your point that you've seen this nice sequential growth. So would you characterize that it has also been happening faster? I mean, you have a guidance for the full year and I guess prior comments were that you participants are expecting more of the Sensors growth in the second half of the year. So, this 3% growth year over year this quarter, was it better than expected all we've been thinking previously when it comes to the full year.

Speaker 3

All participants This is Dave. It's gone better than I expected. As you remember, when we developed the business plan, we conservatively estimated we'd add 25 Net increase in licensed healthcare workers per month, dollars 75 per quarter. And obviously, we've been beating that In all three quarters, we had the hiring and retention program, almost tripled it, what we did in Q1. So I guess what we're trying to avoid, but is having a line in the sand of when we get back to normal.

Speaker 3

But I'll stick my neck out a little bit and just say, if the current rate of capacity expansion continues And running more like 50, 75 increased licensed healthcare workers per month, 200 plus per quarter. In 2024, we'll return to our pre pandemic census. But that's a big if the rate of expansion of capacity continues at The same pace.

Speaker 2

And David, it's interesting because of the lag. We'll be at our pre pandemic licensed healthcare professional level Months before, we're at the census level.

Speaker 3

Almost by definition. Yes. Yes, 2. And that's what's straining our margins now is we have to build the capacity before it contributes to census and then that census is negative margin until they've been in program for about 30 days or longer, that incremental piece. So That's why we're having margin pressure today because we're building back capacity, but that capacity, as Joanna, you pointed out, is getting to work pretty quick the subsequent quarter, much faster than we first anticipated when we put this program in place in July of 2022.

Speaker 4

So nothing changes regarding timing expectations inside of the year related to that, but really excited of getting off to Very fast start.

Speaker 5

No, definitely a good traction there for sure. And I guess another topic all On VIDA's side in terms of Medicare, right, so the proposal that came out calls only for 3% market basket update, which is worse than So kind of what is your expectation there? I know you on the last call, you said You would assume it should be more closer to like 5%. So obviously, well below that. But is there a reason why you would think that the final Update update will be better similar to what happened last year or are we kind of back to maybe not much of an improvement and you're going to have to deal with the 3% the market basket.

Speaker 3

And what I would say, Joanna, as we Talked to a number of shareholders and analysts. We put a number out in the 4th quarter of what we think the minimum should be given inflation within The hospital wage index basket and what the hospice industry is experiencing. CMS has basically been caught using what I would call Forecasted data that may be historically forecasted and actual turns out to be pretty similar in terms of inflation by component. But with the spike in inflation that happened over the last 18 months, it appears from our perspective that CMS uses forecasted data that is Badly below actual inflation, and they never true up from forecasted to actual inflation measurements as done by the Bureau of Labor and Statistics. So CMS has been caught lagging the increase, and it really hasn't been noticed though because all Forecast and Natural have been running pretty low 2.5% historically for what, a decade plus.

Speaker 3

Now inflation is running through healthcare more significantly all And CMS, I think, has been caught, not passing through true inflation. And that's why MedPAC issued 2 separate reports In March of 'twenty three and April 'twenty three, frankly pointing out how badly flawed The market basket CMS is utilizing because they are not accurately measuring appropriate inflation in healthcare models. All And it is a problem, and we will do just fine. We have scale, so we have leverage. So we end up with the upper quartile of adjusted EBITDA and gross margins.

Speaker 3

Most of the competitors in hospice are small not for profit hospices, many in rural markets participants are in the midst of this issue of not passing through appropriate inflation reimbursement increases, capacity for some of our small competitors will shrink and access to hospice in rural markets specifically will be limited. So we are pointing out painfully If CMS does not start approaching hospice and giving increases in inflation, The smaller hospices will struggle and probably go out of business.

Speaker 2

Which is also just to add here, But no, we don't anticipate a significant change from the preliminary number at this point. And Again, it doesn't we're this gives us our marching orders and we tried in the Q4, we tried to send the message out to CMS and the market as far as what we're observing as far as the inflation factor structure with regard to the adjustment mechanism, we're comes out as approximately 2.8, which is No one thinks that's what the inflation factor is in the wage market for hospitals and hospices.

Speaker 4

Only other piece to highlight it is, I think it is better understood inside of D. C. Now and being openly but advocated for and debated not only within the hospice segment, but just as importantly within the hospital segment and those trade associations since we're

Speaker 5

participants are in this proposal. There were other things included in there around increased surveys, more oversight, Some questions there from CMS and also there is a higher penalty for those not submitting the quality data. So in that context, how is Vida's positioned there? Do you expect to look at some assets maybe that will be there to be acquired as they look to Kind of to your point scale up and with VIDAS going to act on that and I can see for these increased surveys and other things in the reg, I guess, but you can also help VITAS is positioned there.

Speaker 4

Donna, just to speak to that. Many other things, and I'll bucket it as program integrity. We are in support of as well as the trade associations who had made those joint recommendations on behalf of their membership to be proactive in the way in which the government could go thinking about helping the industry expansion of licenses that are not providing care in local markets heavily concentrated in 4 states, including California. And so some of the pieces they're talking about of expanding penalties to 4%, etcetera, 1st and foremost, don't have applicability to VITAS. We conform and comply with everything on day 1.

Speaker 4

And some of those providers That would be impacted by it wouldn't necessarily become acquisition targets because they're not submitting the data because they're not caring for patients. Participants, therefore, they have no real strategic value from an acquisition standpoint. There's some actions that can be taken to clean up but Optics of provider expansion that wouldn't impact members inside of the community, and I think that's really what a lot of those items are focused on, not The fact that something is wrong with the benefit or that there's quality concerns around going back to mission focused long standing providers that are actually providing care in the communities.

Speaker 5

Thanks. Thanks for the call here.

Operator

Thank you. Our next question comes from the line of Ben Hendricks of RBC. Your line is open.

Speaker 3

Thank you very much. I was hoping you could give us Your thoughts on the Medicare cap runway, you had shifted your referral strategy amid staffing shortages, which you noted could eventually press cap limitations. Any update on the cap trajectory overall now that hiring capacity is opening back up? Thanks. All Yes.

Speaker 3

Ben, this is Dave Williams. Of course, during the pandemic, we were actually stayed out of any significant cap problem because all Although our admissions had dropped, our revenue dropped as well and specifically a shift to less high acuity care As we are capacity constrained, so it's actually the drop in that high acuity care, that really gave us room under the Medicare cap Building limitation liability. So during the pandemic, we were actually just fine. Many programs had actually expanded. However, there is a limitation and we can't have length of stay go up indefinitely.

Speaker 3

And that's why we were as we would have And now at 15, median length of stay too. That's kind of in our sweet spot. We're historically, pre pandemic, at average between 1416. So, a long winded way of saying is we've avoided any Medicare cap building limitation with a drop in admissions because we had a drop in high acuity care. All Now that we're back to admissions growing and actually now that we're back to slowly increasing our presence in hospitals as a preadinent location of referrals, we should be back into expanding admissions and once again being or continuing to be nicely below the billing limitations.

Speaker 3

But it would have been a problem if we didn't start growing admissions with capacity expansion. That's what we've done now basically for 3 quarters. So I think Medicare cap as a risk continues to dissipate, except in California, where we have exceptionally high reimbursement but geographically, but the Medicare cap protection is a uniform rate throughout the country. So high reimbursement markets continue to run a bit of risk on Medicare Cap Billing. On the other hand, even with Medicare and the 2 programs we're watching, They're very, very profitable.

Speaker 3

We don't anticipate Medicare cap being a material issue, certainly in 2023.

Speaker 4

And just to reinforce it, I don't want to go back, the sequential admissions growth in the hospital pre admit segment 4th quarter to 1st quarter was up 8%. So So while we talk about it from a community access, we still are servicing all of our key partners in the market, including the hospital segment. That helps to provide a data point and full agreement around the lack of concern. Correct.

Speaker 3

Great. Thanks for that. And clearly better than expected progress on the hiring front. Any change in your thoughts on how retention shakes out on those new hires? And any chance that you could re up the retention program with more funding to address that?

Speaker 2

So let me start by saying, we've been pretty clear that The program was to address some historical, I mean, I mean not historical, but things that were Happening for the first time in history. Again, accountants don't like to say one time events, but we do not anticipate Reinstituting a different retention program, making it permanent. Our view was for one moment in time and It seemed to we've put it in. We've waited for an inflection point. We put the system in at that point.

Speaker 2

It's had Great success, but it's I think at a certain point, it becomes self propagating. I mean, there's element that Nick said. To the extent that you have more staff, everyone who's on your staff is happier And thanks to everyone. The company is doing a better job and the people are not wrapped around the axle. So, to the extent that you have those forces working with you, We do not anticipate continuing it.

Speaker 2

Now having said that, I can't imagine any set of circumstances where we continue it. I don't want to Doctor. Nara, on the point of sake, if there was some reason that they had abundant sense To reinstitute another program, we would do it, but we don't see those facts lining up to be in the realm of possibility.

Speaker 4

All Just a little more color with that, Ben. Don't see that as a need. While we talk about it on these calls as though it's a singular item driving it, there is a Large subset of well north of a dozen plus other complementary pieces, that also contribute all a lot of the metric improvement and obviously we track both hiring turnover satisfaction on a bunch of different layers And all those things are directionally improving. And so that tells me the program itself has been very beneficial. But in the same regard, getting back to a lot of our more normalized pieces, but also Making sure there's sufficient time being spent recognizing, rewarding, celebrating employees, highlighting the mission of why people join hospice, but also What makes VITAS special in that situation is all the real compounding effect that's helping these things in a substantial way and makes it sustainable.

Speaker 4

That's why I can use the word confidently sustainable on a go forward basis.

Speaker 3

Participants are in the line with us.

Operator

Thank you. 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.

Speaker 2

Well, I just wanted to thank everyone for their kind attention, And we're very comfortable with the results and we'll get back about 3 months from today and report on what's going on presently.

Speaker 3

Participants Thank you.

Operator

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

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Chemed Q1 2023
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