Chemed Corporation (CHE) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you for joining us today. I'm Ben Hendrix, healthcare services and managed care analyst here at RBC Capital Markets. And with me here this morning is Kevin McNamara, President and CEO; Dave Williams, CFO; and Nick Westfall, CEO of the VITAS Hospice division, from Chemed Corporation. This is the leading provider of hospice services through its VITAS segment and provider of commercial and residential plumbing and drain cleaning services through its Roto-Rooter segment. Thank you guys for joining us today.

Great to be here.

So average daily census remains pressured by fewer referrals from senior housing and skilled nursing, which typically see higher average length of stay. Can you give us an idea of how longer length of stay volume has progressed through the pandemic through the latest Omicron wave and what you expect for the balance of the year?

I mean, to clarify one point that we don't report referrals, okay, and referrals have been picking up. So it's a real question of what we report as admits. And even that, internally, we break that down from admit from what source and that is the hospital-based admit, which is shorter-stay patients and then all other, which much higher. But Nick, why don't you, with that in mind, offer a response?

Yes. So progression inside of the first quarter, we continue to see a positive pickup. And it's not to state the obvious here, but Omicron disruption in late -- mid-December through mid-January. With that, I think the 2 data points we've referenced verbally with it is when you take those segments, as Kevin define them, for hospital and then all nonhospitals, so community physician offices as well as the long-term care segment, on a year -- on a sequential basis, Q4 to Q1, that segment was up a little over 5.5% from an admit perspective when overall admissions for the organization were down 8.9%. So split- and mix-wise, it's -- you can see the differentiation there. And then on a year-over-year basis, it's up about 2.5%, and so further attestation to our team that's continued to navigate and really focus how we are responding, continuing collectively throughout every community we operate in but also ensuring we're partnering with people who are identifying hospice patients appropriately earlier in their disease trajectory, which is what's been impacted.

And part of the answer to your question also is in tracking this median length of stay is very important to us. And that is, I think all the patients go right to the median and say, "What number is that?" And during the pandemic, the heart of the pandemic, is it [ total ] 11 days, Nick?

Yes.

Now it's as high as between 16 and 17 days. So clearly, we say what was the effect when nursing homes and senior housing were largely closed to new occupants and certainly visitors, and any kind of -- any type of activity fell to a very low level. In other words, VITAS is getting admits referrals largely from the hospital source. And god, your question really is, are we seeing an improvement in senior housing, which is key. And the answer, there's no question, the referrals we're getting from senior housing are up nicely. Our admits are up, not as high as the level of referrals, and that gets to the next question of labor, which I'm sure you have other questions. But I mean, just that labor, the admitting nurses to follow up on those and then the nursing staff, the clinical staff to follow through. But yes, I think the answer to your question is we've seen a change from the depths of the, let's say, call it, the senior -- the pandemic and its effect on senior housing.

And there's also a numerator and denominator ratio, and that is we are taking in less-negative margin patients and less super short-stay patients, and that's also helped quite a bit in terms of relieving the pressure. So we can avoid some of those negative margin patients because we're focused on people to get the maximum benefit and days of care for hospice. That's also been affecting our numbers, which is why you see an unusually larger movement on our median length of stay and even our average because we have fewer of those 3-day patients in our base.

In other words, when we look at it internally, we say there are some internal metrics that are not normal for VITAS and not necessarily long term. They're not our goal. And the -- but because of what's going on, you've seen our reported net income has been in line with guidance for VITAS. I mean it's not like -- it's pretty predictable business. I mean for the census we have, we're making the amount of money we would expect. It's just the hospice industry in total is still in the throes of the pandemic.

And just that some of it, it's timing and trajectory that comes along with it is all consistent with where we had anticipated some of the guidance. Obviously, we didn't anticipate Omicron occurring in January. But in terms of the recovery for it and days of care, it's consistent with what we put into our full year guidance for '22 and the other publicly available information. Whether it's nursing home occupancy or some ALF net input that some of the other publicly traded companies have come out to speak about in a positive light in the first quarter, all that is encouraging, not only looking at our internal metrics, but continuing to hear affirmation of occupancy continuing to pick up in senior housing and inevitably, a percentage of those patients are going to be hospice appropriate.

Yes. We've definitely seen that number, seen among our senior housing companies that occupancy continues that upward trajectory. Kind of given that pace, I think typically, your senior housing and skilled nursing census has kind of been in the 18% level. And do you have a -- in terms of your mix, do you expect that to kind of get -- or what's the timing around kind of getting back to that? Or is that something that you have line of sight on?

No, that was a snap. That was atypical for our nursing home. That did not include our associate living facility.

Just nursing homes.

Just nursing homes. Okay.

And census, not admissions.

And to answer one question is, as long as there is a scarce resource, labor, I guess I would expect our percentage of senior housing as a percentage of our services just go up slightly as compared to a hospital which tends to use and need a lot of labor that at the present time is not readily available.

But you're right, though we did hit a low of 14%. And we typically have been running at 18, so we're definitely on the path to return to that. But even as senior housing is recovering, we need those residents also to age in place before you naturally kind of they start being identified by the medical director as hospice appropriate. So we probably need 2 to 3 quarters of that nice returning occupancy before I think we start seeing a normalized referral pattern.

We've seen 30 to 40 basis point sequential quarterly improvement in that from our reported numbers.

And just before we start talking about labor, traditionally, VITAS has had a higher than industry mix of higher acuity levels of care. And you've mentioned your hospital admissions. In the first quarter, and as you've already noted, there was a conscious shifts to kind of avoid those lower-margin basis.

Not avoid.

Not avoid to...

Just not emphasizing. I'd say how it works. I mean hospital-based referral base is very important to VITAS in every program we have, okay? We still do high acuity in every program. To the extent that we prioritize our scarce resources, if you get 4 referrals, and 2 of them are senior housing and 2 of them are hospital-based. Well, our scarce resources may well go to the 2 senior housing referrals with the intention of going to the hospital. The hospital referrals eventually may or may not -- whereas in the past, they may have -- we may have had a new nurse on the site of the hospital and tried get to them in 10 minutes, and that might be a day. So I'm just saying, I want to say, hospital-based admissions are still important to VITAS, not avoiding them. It's part of the business that we participated in. And -- but until we're -- until those resources are back in our control. I don't -- I mean, I anticipate this lift to the...

But not a permanent shift in strategy?

No, all referral sources and all partners. We want to service the entire community. The other aspect of this, when you think about the clinical care teams and burnout and bandwidth that is occurring throughout all of health care, for those patients, and if you can -- if I use Kevin's metaphor of, say, 4 referrals and maybe irrespective of the capacity you have for admission nurses to be able to respond to all of those, when you think about onboarding patients onto your care team from a burnout and throughput perspective, those patients that are able to access the hospice benefit and maybe enjoy the full fruits of it for 30 or 60 days, or able to be cared for through that entire 30- to 60-day trajectory by a team and that episode is far more favorable than 15 people coming through a 2-day churn with onboarding, discharging and all the coordination, and that helps manage burnout for our clinical care teams as well. So we've really helped to remind everybody for our team, we're all in this together. And so from a community education, from an admission standpoint, from a clinical care team perspective, everyone is rowing in the same direction.

I guess, the other way of looking at what Nick is saying. Hospice is there to get out of the nonresponsive curative market, like sitting in the hospital bed. If you're a 3-day, 4-day class of patient, it doesn't look that different than being in the hospital. You're besieged with people getting you on the service as it were in the [ beds ]. It's interesting doesn't start really looking like a hospice as it's envisioned until the patient has settled into a schedule. And that's hard to get in to that mode for a patient who's with you 3 to 6 days.

So that's always been the case for 40 years inside of the benefit. It's just highlighted in the pandemic, right? The #1 comment you get out in the community for anyone that stops and says, "Oh, hey, where do you work? What do you do?" That type of thing is, "Hey, I've experienced it. Wow, I wish I would have known about hospice earlier in my loved one's trajectory." It is the absolute most common theme, and that's what we're continuing to grow towards.

Let's transition a little bit to the labor backdrop because you guys have touched on already a little. What is your experience with agency utilization, with premium labor costs with wage inflation. You can kind of just where you've been, where you are, where you're going in terms of how you're thinking about that.

So if we start at the agency side of it, just as a reminder, how our configuration is a little different than some of our other public competitors. The agency impact or premium labor is far less significant for us because inside of the hospice conditions and participation, everyone's effectively an employee, except for a small subset that we're able to contract out for continuous care. So unlike home health, which has -- may end up with 8% of their total nursing days at peaks, big agency and therefore, premium pricing, that's not the case with us. So for us, it's really continuing to manage our core employee-based workforce associated with it. And so no different than every other company that I've spoken in the last day or over the last 20 months. We're all balancing and navigating the same challenges of inflationary cost outpacing pricing and reimbursement, right, from the federal government, but in the same throes, doing all that we can internally to optimize the ability to retain our skilled clinicians as well as attract and identify new ones and look to find the most efficient way to bring them into the organization as quickly as possible. And so we made a lot of improvements in our onboarding processes, et cetera, so that we can really accelerate the time of identifying a candidate to them accepting to getting them in the door and getting them properly educated and out in front of patients.

And kind of continuing on that, you mentioned the reimbursement outpacing inflation. What are your thoughts on CMS had the market basket up at 3.1% and at 2.7% for hospice. Your thoughts about that? Is it sufficient? Will it catch up?

I'll -- go head, Nick.

I was shocked by the number, frankly. If you think about it, the headline CPI, of course, this came out in, what, the second or third week of March, where they announced on a proposed rule, and they said they did the math, 3.1%, 40 bps up for the market -- for the productivity factor, ended up at 2.7%. And if you think about it just based on the last -- there was a mini rebasing that happened in the prior year where they played around with the labor component and the nonlabor component of our reimbursement increase. And for everyone here, 65% of the increase that hospice has enjoyed is typically based upon the hospital wage index basket. The other 35 points, 100% of that increase is based upon CPI, health care CPI on an MSA or a market-by-market basis. Well, they came up with this 2.7%, headline 3.1%. The headline that came out at March 31 or in April for the March results was what inflation was running at 8.5%. If you just take 35% of 8.5, you get to the roughly 3% number, assuming the market basket -- the upper wage index basket is 0. They're lagging -- they're using stale data, and they're lagging their reimbursement increase. And that's going to exacerbate the situation that everyone has experienced in the industry. So we are looking at high single-digit year-over-year increase in the overall for the overall net, what we're doing for our folks. And if you headline that again to a 2.7% increase, yes, it's not a result of how do you turn around and triage your licensed health care staff, how do you turn around and say cross-subsidization of patients. We need to avoid negative margin patients if we want to keep the doors open and maximize days of care available. But without a doubt, CMS is slow walking reimbursement increases. For us, we can weather it just fine, but for the majority of the industry who are living hand to mouth, they're going to get squeezed.

And I don't -- to answer first also, I'd like to see the math behind it, whether -- I mean, it's not -- this is not an administrative function. I mean it's embedded in the hospice legislation. I just -- I don't want to understand the math behind it, but we'll adjust accordingly.

Let's switch over to our Roto-Rooter briefly. The residential segment growth has moderated but still remains strong despite people returning to the office. Can you discuss the dynamic? And do you believe that you've captured the market share that you expected to in the residential side?

Well, that's a separate thing. The residential share we capture, we think we'll hold on to. I mean that -- and with regard -- I kind of internally just look to be kind of a jerk. I gave Rooter a hard time when they were saying, "This pandemic is really helping us. Don't count on it forever," in some respects. I said no. I said you're getting some -- you're getting -- they have a scarce resource labor. You're getting great productivity because there's no loss, everyone's home. I mean somebody says, "I have a problem. I have a problem but I'm at work. Can I do it after 5 or when I get home," so you can't get -- all the jobs not evenly spread out through the day. More people were available to get things done. So it wasn't so much people -- I heard some of the things that, well, they're just -- the dripping water, people are at home and it bothered them more so they can have that fixed. I don't think that's -- I think that was a small -- very, very small element of it. You had the -- it did have the ultimate productivity shift with everybody being available. We're easing out of that. There's still more hybrid work, more remote work than 3 years ago. And what we see with Roto-Rooter's business is the base business, let's say, mainline problems for plumbing, drain clean, from that, it's usually an indication of a bigger problem, something that either there was water damage in our water restoration business. And that's something that the dispatcher can -- the call center person can pick up in dispatch and we can capture that business. But it's also what we're seeing increasingly over the last 6 years, problem with the mainline, plastic piping as opposed to clay piping. Clay piping is a thing of the past, but so 40% of the houses have it. But with plastic piping, it tends to fail completely. Everything runs smooth and then it collapses and needs excavation. And so what we're able to do is get -- very early on, we have -- we get an indication of this could be not a $900 job or an $800 a job but a $4,000 job. And that's what -- if you say what's very important to Roto-Rooter is, yes, getting those a pickup in the mainline jobs, but there's so much more that can be captured from those. And so when we say -- let's say we take a look at the last 2 years, we see 2 things going on. We see Roto-Rooter having good, strong market capture on the mainlines. And increasingly, they're doing a good job selling the benefits of the overall fix to the problem. And we think with regard to excavation and if there's water damage, that's a different manner for consumers because that's largely covered by insurance. So that's another one that is an easier sell. You say, look, you've had water here or damage, if you don't do something, you're going to get mold, other damages. It's covered generally by their insurance. We have increasingly got very good relationships with insurance companies. They know we're a professional national company. They know us, that relationship has gotten smooth. So I guess when I respond to Roto-Rooter, I say, "Yes, there are things that happened during the pandemic that helped Roto-Rooter's job business." When we look at the growth at Roto-Rooter, it's hard to say, "We don't look at that," than saying, "Well, that's sustainable because we're adding new territory or there's been a major shift." All we're doing is doing what we previously have done. We're winning the Google war. We're competing against mom-and-pops on the Internet, and it's no contest. But ultimately, we're going to get to the point where that's a basic business, not a business where we've seen 15% to 20% increases in sales in 1 quarter over quarter, another quarter. What we're looking at is Roto-Rooter's great cash flow, great business on a sustainable basis, taking market share. But we really have nothing negative to say about Roto-Rooter.

No, not at all. And just to point out, I mean, the industry for same day, next day, predominantly emergency plumbing and drain cleaning service, that industry before inflation takes into consideration really can't grow at a greater rate than household formation. You want to just use that as a rough example. The numbers that we put on the board then clearly have indicated we've taken share. And as we've gone through the pandemic and we get here today, we're hanging on to that share. It's very sticky to us. And it's largely coming from the fact of great brand. We have a huge dominance in the Internet sub domains, both on natural algorithm as well as paid search and then the 3 24/7 call center where response time is exceptionally fast for us. Even if you don't -- if you call us at 11 p.m. tonight, even though you don't want to see us at 11 p.m., the fact is we'll queue up that job for a tech the next morning. A mom-and-pop competitor, they'll come in the next morning and maybe get that call and say, we can schedule for the afternoon. You can't overstate the dominance our call centers give us with our brand awareness. But the last point on what the market share, Kevin and I were initially kind of concerned that we were going to see a bit of a correction. And all of a sudden, maybe residential drops in terms of demand as commercial returns. And it's been much more softer an inflection point of, for example, this last quarter, yes, residential was only up 7%. On the other hand, commercial was up 14%. And that is the epitome of the perfect transition in terms of the huge residential demand that's not dissipating, but commercial is returning to more norms all and it's both on -- it's commercial, residential plumbing, draining, those core services, they're all up about the same. Break it out by region, they're all up about the same, which gives us a lot of confidence this is a permanent foundation we're working on, not something that will dissipate 12 months after the pandemic is over.

And the last point I'd want to make, it's interesting to compare and contrast to the hospice side. Our technicians, they say a scarce resource, we'd like more of them in almost every branch. They're a scarce resource. How do you obtain scarce resource's compensation? I mean we had bad last 4 years. Roto-Rooter's average compensation in the field has gone from $68,000 to almost $81,000. So we might say, how does that happen? Well, they're on commission. As we grow, as our prices go up because of inflation, whatnot, they get a pay increase. And again, it's one of those things where it's -- in tough times, we share the difficulty with them as we get a commission on fewer sales, and they have to tighten their belts Well, during the good times, we both -- they do better, we do better. And at this particular time, it helps us on the retaining workers and retaining them and hiring new ones.

When you think about our licensed techs who are tenured, so they've been with us several years, they're actually north of $90,000 a year in earnings.

That's the average for everybody.

That's a good wage for a dirty fingernail business, but it does require skill, and you're working in a tough dirty environment. And that's a fair wage where individual is doing that kind of work.

So in last few seconds, the both businesses have done very well, trading under the same ticker for a while. And as the market has still fairly recognized the value of both businesses together, and any thoughts on how you might consider the 2 businesses going forward?

Well, we have an open mind. We always had since we purchased, the 20 -- the 73% of VITAS we didn't own previously when we -- 18 years ago when we bought it. We knew at that point we said -- a hospice company and we said at the time, "Well, look, we've had a background in health care originally." Dave moved over from Omnicare. And we said that will be our emphasis. We'll go to health care conferences, and we'll see what happens. We'll be -- we'll try and be very transparent with our numbers so it's easy to do the sum of the parts. And if somebody is interested in saying, "I can offer you here. You're not getting the value. The market is not giving you the value from one of your constituent parts. The market has a way of solving that." And we've always had an open mind for that, but I think when you follow your stock price, you'd say, "They have done a pretty good evaluation of the constituent parts against them."

Great, guys. I think that kind of brings us to the end of our session. Thank you very much for joining us today. It's been great having you.

Thanks for having us, Ben.

Thank you.