Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the 2022 Jefferies Healthcare Conference. My name is Taji Phillips, and I'm a member of the health care services team here at Jefferies. It's my pleasure to introduce our speakers, David Williams, CFO of Chemed; and Nick Westfall, President and CEO of VITAS Healthcare. Chemed Corp. operates through its two segments: number one, VITAS Healthcare Corp., a leading national provider of hospice services; and Roto-Rooter, the largest national provider of plumbing and drain cleaning services. So without further ado, I'll pass the microphone to Dave and Nick to go ahead and talk more about Chemed.

Thank you. We actually were planning on a fireside chat and there seem to be a little mix up in terms of a formal presentation, which just bores Nick and I to tears because it's much more fun when we ask relevant questions from you guys. So Nick and I had a private bet that we go the entire day and we'll do a shot every time labor comes up. But we decided we wouldn't make it through this presentation, let alone the rest of the day. But I think -- we're getting a lot of questions on Roto-Rooter, but we'll hold those to the back of this presentation, and we'll first talk on the challenges of licensed health care workers. And Nick and I can play off of any questions you guys have. But Nick, why don't you give us the state of the union for VITAS on our health care workers.

Yes. No, it sounds good. So not as a surprise, I think, to anyone, but VITAS is no different than the rest of all segments of the health care industry. We are continuing to have the absolute focus on recruiting in. As important or more importantly, retaining all of our team members, but in particular, our skilled clinicians. And so we've spent a lot of time dialoguing about it as well as I know our competitors have both in this conference as well as other ones recently. And as we entered into the year with the unexpected variant and provided guidance through the first quarter, and we'll obviously provide an update with commentary when we release our second quarter results and potentially update our full year guidance, but really happy with the performance of the team to date, as well as some of the assumptions and expectations we made into the latter half of the year, which were going to be aspects of the pandemic subsiding, referral source activity across all segments continuing to normalize, and we're continuing to see that. The team has done a fantastic job at allocating resources accordingly. And really, the thing I'm most happy with is the execution. And we look at this on a day-by-day, week-by-week, month-by-month basis of our team being able to attract skilled clinicians to the workforce here at VITAS. But just as importantly, really reinforcing some of the key elements for our team members to, once they've joined the organization, to stay with the organization and really look at this as an entire career with career ladders, accelerated onboarding. A lot of the normalized business -- delivery business process things that many of us are all trying similar things. The one piece that I'm happiest about is the team really doubling down and tripling down on what is somewhat unique to the hospice industry and the hospice benefit. People join hospice companies because they believe in a mission. They have a calling. It's not always 100% driven off of compensation. So while we will compete with the travel nursing companies and others, which have subsided a little bit, the reality is they're looking to join organization that allows them to fulfill a clinical calling that they signed up for to join originally. And so we spent a lot of time making sure we're being very thoughtful and intentional of reminding all of our team members about that, celebrating those accomplishments, and while it may sound soft as it relates to the context of this conference, it really does make a difference in terms of elevating overall job satisfaction. People come to work for other people and believe in an organization inside a hospice. People don't come to work a company name ultimately. And so those relationships and the reinforcement of it have had some real positive outcomes here in the near term.

And Nick, just to follow up on those remarks. I know that you had made some comments that suggest while nursing is clearly an issue and making sure that you have staffing capacity for all of your hospice is clearly an issue. You've also made comments about how some nurses are also returning. Can you provide some details on the factors driving this phenomenon in terms of demographics, behavioral or economic and if possible, quantify the percentage of your applicants that were formerly in hospice, left, and are coming back?

Yes. Sounds good. So to be consistent with not only our public commentary, but even inside of one-on-ones and everything else, we've decided we're going to speak about those things as in adjectives versus absolute numbers. We obviously track those metrics. And as you alluded to, it is unique and different, both on a site-by-site basis, state-by-state, region-by-region basis. What I will say is some of our former colleagues returning to the organization, that has continued to happen. And we're welcoming them back with open arms. And some of that, it's very much situational, whether for the most part it was grass is greener exploring opportunities in other realms, such as travel nursing or other pieces where pricing was something that was so attractive for them and their families. They didn't want to turn down that opportunity but they quickly realized the reason in the care delivery and the fulfillment that they were receiving by being in hospice and being with VITAS wasn't being accomplished in rounding the 4 walls of an ER or a facility-based setting. And so some of those clinicians are coming back to the workforce. And frankly, what we've also found is we're able to appropriately articulate our value proposition to clinicians that want to be in home care, and that's really a subsegment of the skilled workforce population. And we have to do all we can to help them understand what we offer compared to other hospice organizations. And there's some real attraction to that offering. And the thing that we don't want to do is rest on our laurels that once they've joined the organization, that we're going to assume they have the utmost happiness, they feel part of the team in what is still a very stretched environment as we continue to care for more and more patients every day. And so that is what I was alluding to in terms of the reinforcement of getting back to some of the behavioral things we did pre-pandemic where we had a little bit more time to afford the luxury but really acknowledging, celebrating, welcoming and creating a personal relationship with every single new team member that joins the company. And so we can talk about the acceleration of onboarding, we can talk about elevated career ladders, compensation ladders. All of those things are very real, but inside of the hospice company, if you were to say, what's the number 1 or 2 things that we've done to have some recent success, it is the leaders and the entire team really reinforcing that call to action of let's create and really reinforce the personnel, the personal bond with every single one of our team members. And that has some -- reaped some very good fruit. And frankly, hopefully, has -- we're playing for the long game here, right, the mid and the long game. So we're bringing on VITAS team and family members that hopefully are with us their entire career.

Great. And then shifting to reimbursement a bit. You've mentioned hospice reimbursement rates as an offsetting factor to inflationary-related expenses, yet the proposed ruling came in lower than your expectations, and there is a considerable lag between when your expenses and reimbursement are realized. If wage increases continue to outpace reimbursement rate increases, this reads like more of a risk. Can you elaborate on how you're thinking to this dynamic and your plans to mitigate elevated cost if the final ruling doesn't bode in your favor?

So when we think about the elevation of the risk, and I know Dave will hop in here as well, that absolutely is the case, right? From a formulaic calculation standpoint, if the rate that's inside of the proposed rule, and we expect it to uptick slightly, 2.7% across the industry. I think everybody in this room would agree, if you've read any inflationary numbers, whether it's 8.5% or something greater than that, that pricing increase woefully lags behind the real cost of inflation of operating a business. And so not only for VITAS, but for everybody else inside of the industry, just as a reminder of us needing to be fiscally responsible in all aspects of the business. But with that being said, we're not short-changing as it relates to compensation rates, particularly for our skilled workforce. And we're looking for every opportunity and we have for the last 2.5 years, and we'll continue to do so to become more efficient in other non-bedside activities, and you could say administrative activities, everywhere across the org so that the dollars that are coming in are able to be reinvested in the right place inside of the organization and still produce a steady expected return for the shareholders, and we feel good about our guidance for the rest of the year. That's one aspect of it. I think the other aspect is particularly inside of the industry for single site providers and maybe even some of the regional providers, those headwinds may be very challenging over the next few quarters and years. And so it probably serves as a catalyst for the ongoing consolidation inside of the industry. And with our strong balance sheet, we'd be looking to potentially take advantage of the right opportunities, particularly if valuations are more attractive based upon that circumstance. And if that's the case, the cultural alignment inside of the organization is being additive to the portfolio, et cetera, make a whole heck of a lot of sense. And in an environment where skilled clinicians are at a premium, and it's also another potential to not only expand our reach across the country, but also our reach as it relates to the total number of nurses, social workers, home health aides we have inside of the organization. Dave, any other comments?

Well, to really build on what Nick said is, yes, the government has the ability to slow walk the inflation factors that eventually get into reimbursement. Relative to Chemed and VITAS, quite frankly, this is probably viewed more as an opportunity than a problem given we're effectively debt-free at $7.5 billion market cap or so. I think our net debt as of today probably stands around $65 million, $70 million, depending on the timing of our PIP payments. But we have effectively no debt. So we have the ability to manage within VITAS in this environment of slow walking even though inflation is trying to erode our margins, all things held at constant -- things aren't held constant. Nick has done a wonderful job as the entire team has of balancing off the ratio of negative margin patients to profitable patients. And we've done a very, very nice job of managing that mix during a shortage of health care workers. That's eased our margins quite a bit. So we have the ability to take some pain. But frankly, we're more looking at the landscape for VITAS for hospice as where are the opportunities to [ approach ] quality people who are working in our communities but don't work for VITAS, as well as opportunities, frankly, just pick up market share by expanding our workforce that we get aggressive on, hiring and retention bonuses. So we're seeing an environment where it's going to work well for us. The bigger question is how long is a shortage of health care worker is going to run? How long is the industry going to tolerate someone who has 5 or 6 jobs in a 12-month period? Will that start stabilizing? I suspect it will, but is that over 6 months or 18 months? But we see a lot of opportunity to utilize our balance sheet, tolerate a squeeze on margin to expand our footprint. But we're -- quite frankly, we're looking for a little more clarity on how this is going to run. But it's going to be disruptive for quite a while.

The other pivot to that, which is not as embedded as a causation inside of some of the rate impact is, the one positive, very positive outlook for the industry overall is a silver lining where all of us wish the pandemic never happened, of course. The silver lining inside of the pandemic is something all leaders inside of the industry have continued to try to push for since the benefit was enacted, which is overall awareness that high-quality comprehensive care can be provided at home, particularly at end of life. And so the pandemic and given all the complexity that was brought with it helped to do nothing but accelerate the country's overall awareness that high-quality care can be provided at home. And so as the aging demographics move into -- move in from a positive standpoint, the fact and open acceptance that care can be delivered, end-of-life care can be delivered at home should be a really positive thing for the industry. And while if you take some of the publicly available CMS data, we were running 51%, 52% of total Medicare deaths receiving a singular day inside of the hospice benefit. While that percentage has dipped slightly due to the elevation of some of the denominator with that because of some of the COVID deaths, the reality is that represents about 1.2 million beneficiaries any given time. If that goes to 60%, which would be another 0.25 million or so recipients of hospice care on an annualized basis, the real opportunity is, in addition to that 0.25 million, the recognition with care being able to be delivered at home, the median length of stay, half of the 1.2 million are receiving 2 weeks or less of care, a 1/4 of that population is receiving 1 week or less day of care. And so with open awareness to the hospice benefit, even if we kept the adoption at, say, 1.2 million beneficiaries with aging demographics and tailwinds, an expansion of that median length of stay to, say, 4 weeks as opposed to 2 weeks is a big win not only for the industry and every provider, but most importantly, a big win for the patients and families that will be -- will experience 4 weeks of the comprehensive benefit as opposed to really a 2-week window. So we're really optimistic around the outlook of what the industry and the benefit will represent the country long term. And we're balancing that against some of the short-term headwinds from a labor and management and opportunity standpoint.

Great. Thanks for the detail. And then kind of shifting into your long-term outlook for Chemed over the next few years. Can you both just break down what you're thinking in terms of growth for VITAS and Roto-Rooter?

Yes, I'll just go to the VITAS one first because Roto-Rooter is pretty quick. Really the unknown is how much inflation is. Prior to the pandemic, what we would have said is we could grow admissions 3% to 5%, so call it 4% admission growth. We're running about an increase on length of stay about 2 days a year on a base of low 90s. So that was about another 2% growth. So actually, if you think about it, if admissions are growing, say, pick a point, 4%, length of stay is expanding 6%. We are growing days of care 6%, 4 points at admission, 2 points on length of stay. And then of that 6% of a day of care, think of that as the service widget. We were getting pricing between 2% and 3%. So that would take us to high single digit in terms of revenue growth. For Roto-Rooter, it was a little bit different, but there was a combination of we thought sustainably, pre-pandemic we could do same-store basis 6% growth on that line, sustainable. The real unknown as we go through the pandemic and get out of it is what is inflation, how much is transitory, how much is going to be embedded for the long term. I can't answer that yet till the Fed gives us clarity on what they're going to do. But -- so we'll stick to the pre-pandemic numbers in terms of sustainable growth. That's still good. And maybe that number has to move up if inflation is more tenacious than we think. But if inflation is up another 200 basis points over that 2% to 3%, then you just expand the revenue growth [indiscernible].

Excellent. Are there any questions that I can field from the audience? Go ahead.

[indiscernible]

That is a great question. It's probably somewhere in between, meaning, I don't think they would go back necessarily to the pre-pandemic, pre-COVID rate. The reason I make that comment is if you think about 18% to, say, 23% of that skilled nursing workforce who may have left the industry, right, accelerated retirements, other pieces with it. By definition of just supply-demand economics, that's going to change that expectation. What it also is not going to represent is travel nursing rates and some of the ripple effect that, that has cascaded throughout all of health care, right from travel nurses to the hospital systems and then transitioning down to the home care providers. Because a hospital system that brings on 2 or 3 more nurses can immediately deploy them for very profitable elective surgeries. And inside of the economics of the home care industry, the hospice industry, in particular, that same dynamic does not occur. And so why I'm bringing all that up is we'll see exactly where it ultimately shakes out. It will very much be market by market, but it's probably something greater than the pre-pandemic levels, but not running at the 30% to 50%. Because, frankly, the reimbursement environment, the pricing environment really wouldn't be able to sustain that, the country wouldn't be able to sustain that long term. And so it will -- like a lot of things in life, it won't be at either the extremes that will normalize back to more consistent run rate. And some of that run rate is, by definition, built into the results all of us as providers are delivering on a quarterly basis, right? You're seeing it real time from a delivery standpoint. And we'll continue to be competitive in the market. But just as a reminder, for hospice, rate is not the #1 driving factor. It's very important. I'm not saying it's not. But someone joins the hospice industry and a hospice provider for more than just a paycheck, at least that's our experience. So those are the clinicians, those are the nurses that we want to bring in because if you're simply trying to compete on a paycheck-by-paycheck basis in today's environment and even pre-pandemic, that's going to be a losing proposition as a hospice provider.

Are there any other questions from the audience today? Okay. In conclusion, I just want to pose a final question to you, Nick and Dave. Can you share some final remarks relating to sentiment that would make investors excited about the future of Chemed in terms of Roto-Rooter and VITAS?

Sure. From a VITAS standpoint, I don't want to step over my line, but I'll make a comment maybe to lead in from a Roto-Rooter standpoint. As we look at the second half of the year, and it's embedded inside of our guidance, getting back to normal or new normal, we're very excited about. And the ability to continue to hopefully bring on more and more clinicians and create an environment where we're retaining more and more clinicians will only help to accelerate some of the growth trajectory we have baked inside of the back half of the year for our guidance and really catapult us into '23, where the government lands on pricing obviously helps to impact some of the pieces for '23 and beyond. But the recognition by the country of care being able to be delivered at home, I think, really is a catalyst to the overall industry. And it's a question of, can we find, recruit and retain enough clinical staff to continue to respond to the ever-growing need in every single one of our communities. That will lead to some continued predictable return for Chemed and its shareholders coming from VITAS. And with that being said, I have to compliment my sister organization, I'll let Dave speak about it, but from a Roto-Rooter standpoint, as you can see inside of the last 2, 2.5 years, in every pandemic recession, any type of activity, Roto-Rooter has always grown and gained market share, and you can see that inside of some of the numbers. And Roto-Rooter's business model is one that's able to control pricing and pass back that pricing increase to its workforce because of its commission structure in which it's set up. And so I would say the sky is the limit for Roto-Rooter. And so the combination of the two should yield a very attractive investment in return to every single one of our Chemed shareholders.

Yes. What I would say regarding Chemed and the shareholders, Chemed is run with a focus on shareholders, sustainable growth in earnings per share is what really matters and earnings per share should actually be backed up by free cash flow per share, which it does. We're underlevered deliberately because you can't be in health care and be highly levered because the hits will come faster than you can change your care and economic model. So the beauty on Chemed is strong cash flow. And to date, we run our businesses very well. But our distinction that has given us, I'd consider more sustainable growth and our earnings per share is, we tend not to piss away shareholder capital. We take a hard look at what acquisitions are valued at, what our shares are valued at. We look at buying shares that is competing with what we can do on the acquisition front and returns have to be risk-adjusted. As long as we have that approach, I think we can outperform the market by being very, very diligent with the cash that's generated from both of our businesses.

Great. Well, thank you both for joining us today. That will conclude the session, and please enjoy the rest of your morning and day.