Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good morning, and welcome to Day 2 of Oppenheimer's 32nd Annual Healthcare Conference. My name is Michael Wiederhorn. I'm the health care services analyst here. Today, we're hosting Chemed. We have President and CEO, Kevin McNamara; Chief Financial Officer, David Williams; President and CEO of VITAS, Nick Westfall. So today is going to be a fireside chat format for the audience. We should -- there should be a Q&A portal on the top right corner of your screen to submit questions, and feel free to use that function.

So good morning, guys. Thanks for coming. Thanks. And hopefully, this will be our last virtual hopefully, next year, we'll be back in person. Welcome. So I'll just kind of jump right into it here with kind of a broad question. Just kind of can you update us what you're seeing in terms of emissions and expenses trends post on the corona, kind of give us a color where kind of things are -- kind of how you think things are looking like at this point in time.

Nick, why don't you start with VITAS.

Okay. Sounds good. So as you might imagine, as well as the rest of the health care community, we're seeing positive trends as it relates to unexpected absences from our team for safety reasons, exposure or we're being coming down with the virus. So it's good news as it relates to lifting the net available number of clinical staff on any given day to care for all the patients we have on census as well as respond to referrals coming into the organization. So we're hoping that stabilization continues. Some of the recent activity over the last week, 1.5 weeks over in Europe and China hopefully stays over -- hopefully, it does not make its way over to the U.S. And we continue to build back basically with our existing staff as well as looking to bring on net new clinical resources to continue to respond to some pretty positive trends as it relates to people reaccessing the health care system in a more normalized environment, and that's reaccessing it across all settings, not just the hospital setting, but long-term care, physician offices, et cetera. So hopefully, we'll look to build back, and that's obviously built into our guidance, anticipating a continuation of normalcy through the second half of '22.

Okay. And I'd say with regard to Roto-Rooter, it's interesting. The -- like any home services business, people working remotely at home helps productivity. They get easier to schedule work to be done. So we've seen that for about 2 years. I would say that last year, I would characterize as a breakout year for Roto-Rooter. Frankly, they had too many calls to handle. And part of that was because of that demand that was coming in and also the fact that I would say that our marketing department and their exploitation of Internet research resources compared to our competitors. I'm not saying that we're cutting edge, Silicon Valley operatives. I'm just saying compared to our competitors, which are mom-and-pop operations, there is no comparison. So because of those 2 factors, it becomes for Roto-Rooter a function of can we add qualified service people. And we did last year despite labor shortages. And the reason because we had the business and success -- to get success in that -- our workers work on commission. And if there's more work for them to handle, they make more money than they thought possible. And they're likely to stay and tell a friend. So the -- I would say that pandemic has been good in that respect for Roto-Rooter, but it's really just a function -- if we can continue to let's say, win the Google war and continue to add service band, it seems like a business where we can cover increases in inflation. It's an emergency service. So we're very hopeful on the continued success of Roto-Rooter, even as we approach the end of pandemic.

That's great color. Go back to focusing on hospice. There clearly has been a number of headwinds back in the business recently, including higher discharge rate, referral mix disruption. Other companies have been talking about patients coming in later in the process or winning hospice all together. What is your sense about the core issues? Like I said, referral mix, higher discharges, coming in later? What do you think is -- how would you rank it? How do you think this is going to turn around? How do you think what's going to take to fix those issues?

Yes. So on those 3 topics, and I think I'd add a larger fourth one in there as well. But just first referencing those 3 items as we rank them. I think the biggest component is the abatement of patients appearing to access the hospice benefit later in their disease trajectory. I think as the normalization of patients access in the health care system continues to trend back towards prepandemic levels. That by itself should subside. When we get into referral mix, some of that is born into that disruption, how and when and where people are accessing the health care system, so under that same vein as it begins to alleviate and as patients and families become more comfortable placing their loved ones in necessary settings of care of like long-term care throughout the country, that should help to return back to whatever the new normalized discharge and referral trend looks like for the industry on a go-forward basis. And really, how that plays out as it relates to elevated discharges really becomes one and the same of those patients that could be accessing the hospice benefit later in their disease trajectory. So their median length of stay had been shorter throughout all the episodes thus resulting in the net-net, more discharges than admits on whatever period in which you're going to measure. The fourth, and I would say, bigger issue that will continue to play out throughout all of this calendar year as well as next calendar year is the inversion of where inflation is, not that, that's a surprise to yourself or anybody on this call, not only from a salary and wage but just from a total cost perspective as well and whether that's running 4 or 5x greater than our most recent price update of net 2.3% for us last October 1 that will have some lag, which we spoke about in our earnings call and will catch up over time, but we're dealing with the reality of that cost inflation today. And that's going to provide some marginal headwind in the short term until some of the pricing implications from the federal government catches back up as well as the very unique labor disruption that has occurred with contracting travel nursing companies spiked inflation that all the hospital systems talk about and sort of the trickle-down effect to all of us as home care providers.

And Mike, I would add to say that if I was prioritizing, I would say that the -- number one, you'll hear us that near term, we'll talk less about senior housing and occupants being down. And the reason we're not going to do this the last several months, our referrals would be going up nicely, okay? And we just, frankly, have a shortage of qualified personnel to service everybody to take everybody. And at least in the short term, it looks like the business is there. Now you might say, well, how do we -- let's see light at the end of that tunnel. And the answer is we're trying to be very creative in hiring nurses without just giving everybody a $30,000 bonus, that doesn't work for a business that has basically one customer, the federal government. But what we can do is be creative, work on retention of newly hired people. And again, we're trying things out to the extent that the other to answer your question as far as what's the upside once -- if the panic, if the pandemic is over. How do things get better. And I mean I don't know. I focused on the -- you read the statistics that 20% of people in the health care community have left that -- the service component have left. Well, I don't know if they've left permanently and to the extent that nurses have left because of fear of interacting with people with COVID and being stressed with the whole concern of COVID and the protective gear you wear -- when they come back, that would be a welcome addition to VITAS. But if I was going to -- Nick has a -- Nick is like the old performer as old as spinning 13 plates. I kind of just focus on saying, if we get the demand that seems to be there, if we get more nurses, we should be out of the woods.

Yes. It's workforce, workforce, workforce. We'll manage the market dynamics as they continue to subside from patients accessing the benefit. But we should see normalization of it. But those that have the clinical workforce in hospice, the full complement nurses, home health aides, social workers, chaplains, physicians, we'll be able to aptly respond to the care needs that -- this today and will always exist for appropriately managing patients near their end of life.

Okay. So you jumped into labor. I was definitely going to come to labor next. So -- but as you're kind of touching on all the labor issues, you had some markets that the large drops in ADC. So how are you handling staffing in those markets versus where you have -- the markets where there's issue with capacity to handle the growth in ADC. So both sides of the coin, kind of what are you doing operationally or incentive wise to deal with those concerns on the labor front.

So operationally and from a -- let me start on the incentive component of it and my commentary is the same you might imagine. Our whole industry, everyone is an advocate for one another. But if anyone had found the 3 or 4 silver bullets that were really going to work effectively, they're going to tend to execute those without sharing any of those publicly, right? And so we're doing many of the similar things and hopefully just kind of execute them better that everybody else in health care and in home care is doing as it relates to elevated the total net number of clinicians coming on board being hyper focused on retention and specifically in certain time frames from our retention, which has never been more important than it is right now of establishing a relationship starting before they come on board, but in particularly in those first 90 days because of just the optionality every clinical worker has to really go do whatever the heck they want out in the community in which they service as long as they want to be in health care. From an operational standpoint, really that is a -- we have relative game plans that we've had to enact throughout the pandemic when we either anticipated certain aspects related to the census we had on service, and we knew we were going to have a few folks out or we had unanticipated folks that came down than were symptomatic or were exposed and therefore, we're having a shuffled case load from a coverage perspective. And so I guess the blessing in disguise is we became very good at that triaging over the last 24, 26 months. Really wished we didn't need to do that, but we've mechanized and institutionalized how we approach those things. And with Omicron behind us, the stability of the workforce that we expect to wake up, show up and be available to go provide care has very much increased and hopefully, that continues. And that helps to alleviate some of the unexpected triaging that could occur on a case-by-case basis, particularly in communities that had spikes and exposures.

And just to amplify what Nick has said. I mean my perspective on it because everyone likes baseball or near baseball analogies when talking about business, but build it and they will come. I mean if you -- if we had sufficient admitting nurses and other service personnel, our sensors would grow, let's put it that way. We haven't looked at programs and had a decline in ADC and thinking we've got to cut nurses. I mean it's the opposite. And so I'm quite hopeful as we win that struggle and done that diminishing the difficulty of it. It is a struggle for Nicholas people. But at least in my mind, that's half of the equation. So I'm hopeful.

And just as a reminder, I realized this seems like 2 decades ago, and yet it's 2 years. But in the first year of the pandemic, we were very intentional and we publicly came out to let every -- make everyone aware of that even as we saw disruption and anticipated census disruption due to admission disruption in the first quarter or 2 of the pandemic, we've very consciously made a decision as an organization not to let any of our team members, particularly our clinical team members go as part of that process. Others did. And so that allowed us some additional flexibility over the last year as things subsided, everyone saw elevated turnover across the industry to be able to continue to care. So that's sort of where we sit right now, but it's metal against metal as we continue to build back our -- the net number of clinical resources that we're able to deploy in every market across the country.

So kind of going from there, you talked about the cost of labor. How should we be thinking about margins going forward and longer term with the industry?

Yes. What -- Mike, this is Dave. What we're really going back to is we're still targeting the pre-pandemic margins, and I'll give you one caveat on that, though. The pre-pandemic margins, which were about 17.5% to 18% adjusted EBITDA margins. And that was what we really did for the last full year '19 with 1 quarter of the higher reimbursement in high acuity care, we posted, what, 7.75 -- 17.75%. I think that's a good number. I don't think our high acuity care is going to rise to where it was pre pandemic for a variety of reasons that there was regulatory pressure to raise the bar on what -- how long people stayed in high acuity and how you met and exceeded that buyer to go into high acuity. But with that -- absent that, there's also some efficiencies that were driven into hospice care that we think we'll hold on to, hopefully, TeleCare and the face to face, we'll continue with that. So there's some reduction in cost, call it, on a model going forward, a little uncertainty on what our high acuity as our total days of care percentage will be. But I still think in the end that upper teens, mid-teens to upper teens adjusted EBITDA margin is achievable and sustainable. When we get there is kind of a wildcard in terms of disruptions to the pandemic runs out, we'll return to that. Is that a 2023 or 2024 that you get that full year higher adjusted EBITDA margin?

And Mike, one way to look at the -- what Nick referred to is, call it, this situation where we get our price increase in arrears. And for 20 years, that hasn't been a problem really because inflation has been normally low. But since the calculation of our last increase for hospice, there's been a historic rate of increase of prices, which, of course, is not captured in the reimbursement number, but it is captured in the market for clinical resources. Now obviously, we're going to get an increase in October. We'll see what it is. We'll see how it's -- whether it's the real number or what. But the way we look at that's a onetime thing that we're dealing with now to the extent that there's a lag in improving. Does it -- do we get better immediately. We don't get better until there's a period where inflation is abating. And I don't know, we wouldn't in this room certainly suggest to you we know when that period is going to become -- is going to begin. But we're fairly confident that what we're seeing is largely the struggle for failing to have reimbursement equal inflation. We think the worst is -- will be over on that in October. And then it's just a question of how long till we get back, assuming that 7% to 8% inflation is not permanent, let's put it that way.

But the guidance of 15.5% to 16% that was included in our most recent calls, one, given all things that Kevin and Dave just alluded to, we feel confident in our ability to execute. But as they alluded, there's a lot of things going on out in the market. And long term, one of the bigger drivers, just to reinforce without getting up on the soapbox, is how the industry and how VITAS continues to operate inside a high acuity with the government's recognition that it's required to be provided under the conditions of participation yet across the industry, so many aren't doing it particularly in continuous care. And frankly, as you might imagine, we're very strong advocates for a full comprehensive suite of hospice services, primarily not because of the benefit of the patient. But it also helps to create a great avenue where when patients have a period of crisis and they continue to be appropriate, they're able to stay on the benefit and not unnecessarily revoking to go onto a very costly and very disruptive setting of care like an emergency room typically only to be rerouted a week or 2 later. And that's just -- that's not in anyone's benefit.

Yes. And we're -- for one thing, we're advocates for hospice in general, and we think that ultimately, get even for patients that don't choose hospice, but to the extent that we continue to build the recognition that hospice is great for the patient in that condition and also it's good for the government. Yes, that's good for the whole hospice industry, but we're 8% of the -- 6% to 8% of the business of last as industry. So yes, we're -- it's the success. We're advocates. We want hospice to be well respected and continuous care and high acuity care are 2 ways -- are 2 important aspects of it. The silo aspect of the federal government is tough because a couple of years ago, they increased reimbursed with 35% and 40% for the -- to a level of high acuity with a recognition that they had to incentivize people to do more of it. And yet, you're still on the regulatory side, they'll still say, "Well, you're doing more than this other asset that's doing 0. So what's the problem? So we took them -- we always try and say I think the problem is more with the hospitals doing 0, but...

But it's not since the pandemic, there's actually less high acuity care being performed pretty wide. With those increases in reimbursement, which is just, I think, very reflective of the labor disruption.

And how difficult it is to do in a high-quality way.

Yes.

No, that's great. That's really useful. I move gears. Obviously, oil has been rising. Can you kind of give us your thoughts on your exposure to the gas prices? What are your current reimbursement rates for travel? And what point would you consider changing that?

Under discussion now.

That's a tough one. Obviously, in the short term, the reimbursement is more in the cost of gas in the long term, you can't ignore the other wear and tear on the vehicle. But it's a tough one. I mean if we're talking about wanting to keep employees that becomes -- we can't blame the pandemic on gas prices. The gas prices are part of -- we have people driving around providing service for over 90% of our service days. So...

Going to the pump probably every couple of days, and they know what the...

And we have to take that into consideration. But it's like Nick says, it's kind of -- that's not the kind of thing we released, but it's not lost on us.

Just to point out the obvious on the VITAS side, it arguably is part of the hospital -- the blend for the hospital market basket index calculation on October 1. But as it sits right now, it's not as though we have any pricing control to help offset appropriate and adequate reimbursement for those things. But it's absolutely under discussion here, no different than it is. I'm sure any other well-run organization...

This goes to the -- that's part of the inflation that is not captured from our reimbursement because it was calculated last March.

Yes. Totally understand. I shift gears. I've been covering you guys, I think like 20 years now, and you definitely sounded a little bit more optimistic on the M&A front and that's hard for you in the last decade. So can you give me some kind of your thoughts around potential M&A on the hospice side, which, like I said, has not been a focus for you guys for a long time. So...

Yes, our color on that was strictly related to a changing environment and that changing environment really consists of 2 macro pieces. First and foremost, we're seeing inflation creeping into the economy, some would argue faster than a creep. And typically, inflation triggers higher interest rates. We'll see what the Fed does. Higher interest rates actually tends to make it start shifting it more to a buyer's market than a seller's market. So folks with clean, pristine balance sheets can weather higher interest rates, we kind of welcome the higher interest rate.

Strategic buyers do that.

So it's that -- yes, absolutely strategic buyers could finally have an advantage over financial buyers. So it's that environment, coupled with, we've seen the multiples come down in terms of valuation from the mid- to upper teens. They seem to be coming down to low double digits, up 10, 11, 12x adjusted EBITDA and you can debate the amount of that adjusted EBITDA. So that's the second one. But then -- I guess, really, there's 3 factors. The third one, which is probably going to be more pressing is smaller hospices that don't have access to capital, they were already running on thin margin. Even by MedTech report that came out yesterday. Hospitals are still running negative EBITDA margins for their captive hospice subsidiaries. So hospitals have their hospices have negative margin. But what we're really seeing is the labor is going to squeeze, these well-positioned well-regarded hospices are going to get squeezed on margin as they fight and they pay higher compensation to their employees to retain them. They may not be able to keep the doors open or the quality of care is going to suffer. So that is also potentially resulting in some maybe nicely positioned hospices we could do on a tuck-in we could take advantage of. So it's the environment that we see improving relative to the potential for doing deals, but don't misinterpret that as we're working on a pipeline as we speak. That's not there. But for the first time in years and years, the environment seems to be improving to make it more of a buyer's market, not a seller's market for quality post-acute care and hospice.

And that coupled -- all those factors coupled with the fact that there are counties in Florida, where we don't have a license. I mean we are always -- have always been very interested in acquisitions or starting de novo in those counties where we're not in. That's highly restricted CON market. But -- so I guess when you combine the fact that yes, there's some significant swaths of Florida that we have a healthy appetite for, when you combine the 2 factors, as Dave said, that maybe financial buyers aren't going to be as active as a competitor and the fact that there may be some things that become available out of necessity. But that's what they're saying. I mean to the extent that I don't think the shareholders or potential shareholders should think that we're changing our growth strategy to a big bang acquisition strategy. It's just there aren't many hospices out there that are like VITAS that are in large metropolitan areas that run what we call a full level of hospice with high acuity and full-time medical directors. I mean there just aren't many out there so that even if they do become available, we look at the kind of shock to the margin to what we -- what they're selling it for and what we're -- how we would operate it. So yes, I wouldn't take too much from that, but again, we're always looking.

Just the last maybe comment on that. There's targeted geographic markets to use an illustration, as Kevin was alluding to. There's places that have really thought about the hospice benefit in a thoughtful way like Florida and others. And those are the markets we ultimately target. There are others, one in which we operate in California that has recently had to change their rules and laws because with restrictions and without recognizing barrier to entry limit low bars or barrier to entry, they had to put effectively hospice moratoriums across the state because the number of providers in LA County went from 70 to 400 on a 2-year basis. And that's not good for anybody, particularly the community and the patients and families. So those aren't markets that you'd sit and target expansion in if you -- if we weren't already operating. And I can -- I joke with our team that there's not a week that goes by without a potential acquisition target that comes across unsolicited via e-mail in LA County as that illustration. So it's every market is unique and different.

Well, we are -- we hit that at the end of the time here. Unfortunately, I think it's a Roto-Rooter, I apologize, but I think this is a good conversation on the hospice side and really good color there. So we appreciate your...

On Roto-Rooter, the printing machine is still working. We have plenty of ink, so we'll print the money as...

It's coming up roses.

No, honestly, that's the most important thing here to hear that. That's the -- that's great color as much in 10 seconds, I liked that. But I want to thank you guys for participating. And hopefully, next year, we'll be in person back together again. Thanks again.

Thanks, Mike.

Thank you.