Chemed Corporation (CHE) Earnings Call Transcript & Summary

Hi, everybody. I'm A.J. Rice, healthcare service analyst at Credit Suisse. We're really pleased to have next up, once again presenting at our conference is Chemed. We have Kevin McNamara, President and CEO. We have Nick Westfall, President and CEO of the VITAS subsidiary.

Kevin, we're 5 months or -- 5 months, I'm losing it here. We're 11 months into the year. It's been quite the year. What would you say have been some of the wins for Chemed this year? And where have been some of the challenges maybe just to level set everyone?

Okay. Let me start then and say it's come in pretty much as guided, as expected. Roto-Rooter, another solid year on top of 2 fantastic years during the pandemic. And the comment on that is just saying, yes, some of the reasons why it was -- kind of the rate of increase of Roto-Rooter was un-sustainably large due to the pandemic, some of those conditions abated, but very good solid year for Roto-Rooter. I'll turn it over to Nick. But say with Nick, it starts and ends with the fact that you don't -- 6 -- 8 months into the pandemic, there were reports that 20% to 25% of clinical health care workers had quit. I said that's impossible. Where are they going to go? Were they going to take 2 months off? I didn't understand it. But that's what happened. If I would say based on my general understanding, I think what we saw was -- and that's good because it suggests a cycle that we can get through. But what it did was we had excess clinical retirements. That is people beyond normal retirement age, retiring people at retirement age, retired people who are within 2 years of retirement. We're getting past that. I mean we're getting 2.5 more years of nursing school graduations. We're replacing a lot of those workers that maybe have very good reason for getting out, but we had to deal with one other element. With those developments, we had burnout of the retained employees. And until we get to the point where we're in an equipoise between the service requirements and the people who have to provide those -- that service, we're going to be fighting that issue. We've made some headway. So with that, not stealing your thunder, Nick, but we'd lead by saying this year started and ending with a shortage of clinical personnel. Why don't you talk about other headwinds and how you've at least already started to turn that headwind around to a tailwind?

So like Kevin alluded to, consistent with our guidance, as I think most of this group is aware, we slightly raised the remainder of the year, the guidance here, a few weeks back. As it relates to VITAS overall, we are seeing some very encouraging signs develop inside of the third quarter, which we spoke about on our call. From a recruiting and retention standpoint, really proud of the team as we've doubled and tripled down. Our turnover improvement has been rather significant, and that occurred at the beginning part -- tail of the first quarter into the second quarter. And one of the things we announced as an organization was a recruiting and retention program that took effect starting July 1 for all of our existing targeted clinical staff of 5 disciplines as well as all new hires. And it's added fuel to the fire in terms of our ability not only to continue retaining more of our clinicians but attracting more to come into the workplace. And so in the third quarter, we added 172 clinicians inside of that program. And it's exciting because not only does it continue to build back our clinical capacity. But with that, inside of the hospice benefit, we've seen some encouraging signs on a week-over-week sequential days of care growth that, frankly, we haven't experienced since the start of the pandemic given all the dynamics of the health care system and the referral flow disruption being materially impacted. So it's encouraging through the end of the year as well as launching us into '23.

And just to make sure on the clinician, that's mainly RNs and LPNs? I know in hospice, you can have other types of staff, but I don't have a sense...

It's everybody.

It's everybody?

It's everybody. But what we're referencing in the 172, it's nurses, home health aides, social worker, nurse case managers. So it's a subset of the broader clinical team but really core and fundamental from a hospice [ condition support ]. So of that 172, call it, a little more than half of that is nursing-specific with the hospice benefit really being nurse-driven.

Right. How about the 172? What is -- I saw that number. What's the context for that? How -- what kind of -- is it relative to open positions or relative to staff? I mean is it a big number or a small number? I know it's a positive number, which is good.

And the most important thing, the fact that it's positive. It's been negative for 13 straight months, so the fact that it's positive is good. Trying to put it in context for you, it's difficult because one part of me doesn't want it to grow, that number to grow at a faster rate than ADC. It's kind of there's a build it and they will come element to it. We're going to build that. It's the highest priority. We're going to build that number and have the business coalesce around it. And the best example I can give you is out of pure necessity. So on our last quarter, our hospital-based admissions were down 23%. That's our doing. We didn't have the workforce to deal with the high-acuity needs of people coming directly from a hospital in the hospice. And it sounds like a comment that might be, "Oh, we can get more business if we wanted to." Okay. There was an example. We could -- VITAS could have more business if we wanted to. We just didn't have the wherewithal to service it.

No, I get that. Is that -- on those new hires, in some areas, I know you got to go through orientation and they're not productive for a while. I don't know about hospice. Do these people come right in and contribute?

And one clarifying component. The 172 is a net number. So it's an addition. We hired more than 172, right? So it's a net number, which we thought was the best reflection of growing clinical capacity, right, without getting through, all right, turnover improved 15%, et cetera. Bottom line, end of the day, what's the net number? To your question around does it take a little while to build out, getting them up to speed, depending on whether they come from hospice, whether they haven't, et cetera, it absolutely takes, call it, 4 to 6 weeks depending on background to understand how we deliver care from VITAS' standpoint and for some of those clinicians, maybe understanding the hospice benefit to begin with. And so embedded inside of the quarter, we put up a expense tag for marginal compression inside of that 172, which was about 70 basis points or a little more than $2 million. But we are effectively saying we brought on this clinical staff. We're bringing them up to speed. It's an additional expense, and we came in line with expectations. Or if you excluded the 70 bps, we exceeded expectations from a financial contribution standpoint. We would anticipate that continuing, which means we're continuing to build back more incremental clinical staff, which is going to support growth through the end of '22 and into '23 and beyond.

And I know you implemented a program where you were -- retention sort of bonuses and things like that. And did that -- I mean, I think there is a commitment to stay if you take the bonus for a while.

Well, you get it at the end of the period.

You get the bonus at the end where you...

At the end, so there's no commitment. I mean if you're -- we're on service at the start of the program and you were on service 12 months later, you get the bonus.

Okay. Got that. I didn't know if you were paying it upfront, but then you get a nurse back or something later.

It's the commitment. That's what we internally and externally branded as the different -- difference maker program. And that is the participants in that program are the number we're referencing in that 172 number. So we publicly came out when we announced it to say we anticipate that cost to run about $37 million. We'll see at the completion of the program what the cost totally is, but we adjust that out of all of our earnings. We adjusted it in the third quarter. So that way, everyone with full transparency gets an eye into this onetime program. And it's a onetime program, 24 months, when it's finished because it's for all existing staff as of July 1 in those roles and all new hires for the next 12 months. When they complete their service with us at that 1-year window, they get that lump-sum bonus payout at that time. And so it's adding fuel to the fire of what for us was an internally improving metric of turnover going down but in the same regard, trying to identify and bring in clinicians that want to join the hospice benefit and therefore, trying to differentiate VITAS.

And another -- Nick's also saying it. We waited on this program until we saw some normalcy and stability come to the market. So the idea is not even to jump start. We've already seen it. We're just trying to accelerate the rate of improvement.

And just to be clear, so you're taking that and your adjusted operating results do not include that?

That's correct. And just a couple of words on our thinking behind that. The government, there was a CARES Act that gave us $80.2 million. We didn't take that into income. We had the cash. What do we use it for? Yes, there are things like extra masks and protective materials. We would report on that each quarter as we expended it. First year, we gave each one of our VITAS employees 2 extra weeks of vacation to charge for that. The second year, we gave all the employees 1 additional week of vacation. We came to the realization, we were still going to use the money for damage done to the business from the pandemic. But we said, labor shortage, we're past the issue where the employees are dealing with loved ones with COVID. We're -- but what we wanted to -- and also, when you give vacation, if somebody leaves, especially in California, you pay them the vacation. So we said, let's change it. Let's use some of that cash that the government gave us in a different way and save it in this retention program. I'm just getting along -- I'm not repeating what you said. I'm just getting into the accounting. So now we're saying, we didn't take in income. We have the cash. We think it's important to use it for the benefit of the employees. And to the extent that it is in [ excess ], we best estimated at $38 million, we'll expand that. And the program will not be repeated under almost any set of circumstances after another CARES Act-like type payment.

That's why that 70 bps is exclusive to the difference maker program.

We took the [indiscernible] through the [indiscernible]

[indiscernible]

What about your base salaries in the business? Is that going up at a similar rate?

[ Not 8% ], but it goes up. I mean they still get their adjustment.

Is it higher than it was last year or this year? Or is this retention -- this bonus program sort of an alternative to boosting wages?

It's not an alternative. It is truly a separate component with it. We believe, and as we got into it, yes, the -- I'll exclude out our merit increases, which we provide, and we've managed that inside of the business, and it's different and unique based on performance and everything else that comes with it. But from a financial standpoint, we try to manage that. We have managed that exclusively to the price increase. So we have a manageable, sustainable business that produces very predictable operating results with it. As we get into what's the price point for hiring different staff in different markets, it is very much market specific. We've adjusted like everybody else has to not only be competitive from a wage standpoint but also be attractive for new hires. And we think we're at a pretty good level right now. We've made those adjustments. Those would all be reflective in our historical earnings. And so from a trend standpoint, we feel confident given everything that's going out there that we are paying a fair wage. It's proving out by our ability to attract and retain people, and we'll manage it accordingly.

And the other point that we're getting at, which Nick made very importantly, and we're increasing their base salaries in the same general way we've increased them every year. That is a rate that's tied to the increase that we're getting.

And there's -- and we've been able to take the other operating levers to ensure that if we can become more efficient in other areas of the business, no matter what that looks like, we're taking every opportunity to do that as well.

Certainly been a lot of discussion about labor within the hospice segment, but there's also been the top line issues around ADC and so forth. And a lot of things go into what your average daily census is. Obviously, length of stay; obviously, admissions, a variety of things. I don't -- I could ask you a bunch of individual questions, but maybe I'll throw it out there. Where are you at on ADC? Where are you at relative to where you were pre-pandemic? And are you on an upward trajectory at this point? Or is it stabilized? What do you think?

So let me start at the end and then we'll work backwards with it. So from where we are, sort of peak to trough or where we started the pandemic to where we are now, it's roughly about 2,000 ADC lower from when the pandemic started, 19.3% down to where we've reported recently. With that being said, the -- we made some commentary inside of our third quarter results and the Q&A of seeing some encouraging signs on week-over-week sequential ADC growth that we haven't seen since the start of the pandemic. And so that's really encouraging not only because it is consistent with what we're talking about of building clinical capacity. The business is there. We're going to continue to bring on more patients, and the days of care contribution from those patients, we would expect and anticipate continuing to expand. And a different way to answer the question on something we've been consistent with over the last 2.5 years is when the pandemic started, if you think about all the patients we had on service at that time as 1 cohort, cohort A, all those patients and their disease ran through the same trajectory it was almost un-impended by the pandemic, right? We were able to be out with them. We were able to care for them. But the new patients that we brought on from that point forward were accessing the hospice benefit later in their disease trajectory. And so that weighting of cohort A and cohort B had an impact to cause downward pressure on census like it has for the entire industry. That took about 6 to 9 months from when the pandemic started because of the dynamics of that for everyone to begin to see it. Now when we're on the tail end of it, where you would expect that, call it, that 6-month lag, which hopefully we're now at the end of having transpired, where we're all getting back to business in terms of being able to service the communities in which we operate and grow census on a sequential basis.

And it is, Nick -- implicit to Nick's answer is the fact that the cycle would have -- would probably have progressed further had we had more clinical staff to handle referrals. In other words, people are going back to the doctors, going back to the hospitals, getting terminal diagnoses, but we're limited in service. Certainly on the hospital, you see that last quarter, our hospital admissions were down 23%. That's because we didn't have the staff to do it. So we've already completed the cycle where the normal referral industry for the hospice has returned to what we would expect that to be, something that would be very good for us.

Some of the other companies have talked about that nursing home piece that, that, in some ways, was the best hospice patient because they get diagnosed earlier in their illness and their length of stay was longer. And obviously, nursing homes have gotten hit very hard in the pandemic and have been somewhat slow to recover. Is that back to normal, nursing home referrals, you'd say, at this point?

It's getting close to -- I always hesitate to respond with back to normal because you never know what the new definition of normal is. What I can speak to is Kevin has alluded to the admission performance for the hospitals. Well, on the same nonhospital setting, which is physician offices, the SNF setting and the ALF, that component was flat. And we've had a community access initiative as we've tried to balance responding to more -- as many referrals as we have. When you get into the long-term care setting itself, both on a year-over-year and sequential basis, admissions are up between 3% and 4% on the sequential and the year-over-year. And the day-of-care contribution on average is stronger in those settings than it has been elsewhere. So we're encouraged by not only our concentration and performance with it. But as occupancy in SNFs continues to rebound like it has by 3% to 4% nationally, we track it on the markets in which we operate. We track it within Florida. Those are all encouraging signs, not to discount the challenges that business has had as well. But we're there to be a good partner, and we've intentionally ensured we have stayed with those partners to make sure we're there to respond to patients' needs when they have them.

And I know sometimes, this can be a definitional thing. Different companies talk about it in different ways. But one thing you're calling out that I haven't heard the other guys talk about to the same degree is acuity mix shift. What specifically are you seeing there? What is that?

So in terms of what we've seen, our total high-acuity days, right, and the reason why some of the other publicly traded competitors don't reference it as much is because their operating model, their clinical model is not traditionally inclusive of providing all 4 levels of care. So continuous care and general in-patient, which is a requirement of the conditions of participation, we do. And we bring it out because it has an outsized impact on top line because of the reimbursement that comes with it. Our most recent quarter, I'd have to go take a look at it, but we disclosed that I think we did about 2.8% of our days of care were high in those 2 segments, continuous care and general in-patient. And those are down from maybe running around 4% from a total days-of-care standpoint. It has an outsized impact to top line revenue. But from an operating model, we're still committed to delivering that type of care in the communities in which we operate when it's needed. And we think it's really important for a variety of reasons. But one of the primary reasons is it allows us to be the best partner to a variety of a bunch of different referring entities out in the space because when someone is eligible to elect the hospice benefit and goes through a period of crisis, which is the definition of when high acuity needs to be deployed, we're able to provide that care, whether it's in a bed of a hospital, right, from an in-patient standpoint, or on freestanding. But most importantly, inside of their own home, which is what continuous care is, it allows them to remain on the benefit without having to revoke and go back into the hospital or emergency room for a $100,000 visit. And so we help to reduce total cost of care, and that aligns with a lot of the value-based incentives of the referring partners out in the community. So we think it's a different -- it is a differentiating offering for us, also is the right thing to do for patients who pay us.

Right. And you called out Cap impact as well. We don't hear that as much, Cap billing limitations. Anything to highlight and how that's impacting your results?

Well, it's a California issue. It's largely because I think there are a flaw in their methodology. I mean San Francisco reimbursement is significantly higher than other states, but they have the same Cap limitation. So we deal with that. It's -- it seems a bit unfair. It's a market where most of our referring entities -- very often, referring entities have their own hospice. So there's even higher-quality offerings don't necessarily relate -- you only get so many referrals no matter how good you are. So it's a situation we just hope to manage at the cost of doing business. Nick, you were very sanguine about the level of Cap this year relative to your expectations, so something we just deal with.

I'll ask a couple more quick ones here and then pivot over to your other business. On the -- there is this question of whether we've seen excess deaths because of COVID and whether that's having an impact on today's hospice pool potentially. You guys have any view on that?

Yes. But I mean, it's something that we -- it's a thing of the past. In other words, the hospice demographic is the super elderly. There's no question that with the COVID, when you look at deaths, the super elderly were susceptible to a very bad reaction having caught COVID. We observed that. Did it affect the hospice industry? Yes. The bigger effect over deaths was the fact that the super elderly didn't go to doctors' offices and hospitals. And so they weren't educated about the benefits of the hospice election, as Nick mentioned earlier. And even now when they've gone back to those institutions, they're now deciding to come to the hospice much later. So there was a lost period that was more significant, I think, than the deaths, was the whole group that wasn't exposed to the benefits of hospice. Hospice is a greatly misunderstood benefit. And so again, we're past that. So I know that there was a report and it caused some consternation -- or not consternation, caused some disruption in stock prices, which it was just, I think, it was wrong only in that. I think it was -- we were talking about a relatively limited cycle. We're talking about the super elderly. And every year, there's a growing number of the super elderly coming in the hospice.

To dispel it, some of the facts in the report. 2021, more patients were admitted to the hospice benefit than ever. 2020, more -- this was the second highest year of the number of patients accessing the hospice benefit. The denominator changed because of a bit of the pull-through. But at the end of the day, it is just the disruption of when they were accessing the hospice benefit, not fewer patients are going to be eligible. Because, I mean, get to the silver tsunami and everything else, it was really [indiscernible].

I would say though, you'll get another number. The -- we went through a cycle where the number -- the percent of people dying in the United States who had at least 1 day in hospice went down about several percent, 4%, 5%. So I mean we -- that had an effect, but it's one that we're already passed.

Well, this is one of the fun times in the conference where, as a health care analyst, I get to ask you guys about Roto-Rooter, and so I have to always brush up on that. But it seems like you've had a good year in Roto-Rooter. And I was interested, and again, this is being sort of a novice at it. But it looks like you were pretty strong on both the commercial and the residential side. And I was a little surprised by that given the economic discussion and backdrop out there, but maybe give us a little flavor on what you're seeing in both of those segments.

Okay. We're seeing some strength. Now here's the Roto-Rooter during the pandemic. Residential, boom. The problem with the commercial then was that because of economic downturn, it was that the businesses were closed. So it went to 0. But what we've learned is, particularly with our California operation, which was a repurchase a little more -- about 2 years ago with -- of our largest multi-location franchisee, a lot of California operations, there were some issues about operating a business like Roto-Rooter in California. We got over those. But the nature of that business was more commercial. Instead of being 2/3 residential and 1/3 commercial, it was flipped. And we've learned something from them and their approach on the commercial side, and I think Roto-Rooter is a better company for living through that and really learning that, that approach, as long as you have sufficient manpower -- we've been able to grow our manpower -- as long as you have sufficient manpower, the commercial side of the Roto-Rooter business is a -- it's a big plus. And to the extent that now it really -- your answer to your question is, okay, more focus on commercial. What about the recession? And the only thing I'll say is, given the nature of these businesses, as long as they're open, they feel it's -- Roto-Rooter is providing a necessary service. So we say Roto-Rooter is recession-resistant, not recession-proof, on the commercial side because of the nature of the commercial enterprises. These aren't big plants. These are restaurants, shoe stores, strip mall locations. Until you see a significant downturn, significant enough so that those start going out of business completely, not just cutting their hours, it shouldn't affect the Roto-Rooter commercial business.

And when you look at the different pieces that you do in the commercial side, it's not just traditional plumbing, I guess. But there's just drain cleaning, excavation, water resolution. Are all those equally strong? Or is one particularly stronger than another?

Well, I would say this. There -- prior to this year, they've all been equally strong. In other words, from mainline plumbing is where we get the excavation work and the water restoration work. There's not a separate business. We get all our excavation and water restoration work comes from internally generated jobs. What I would say is there are some aspects -- there's 2 aspects, let's say. Excavation, there is a decision you make. Do you want to have a $6,000 to $7,000 excavation? Or do you want to just put off the problem for 2 months and have it stopped up even though you have a partially collapsed pipe? Obviously, in periods of economic distress, you're going to get a few more people saying, just clean it out, don't excavate. Another thing we watch very closely is our close rate. Roto-Rooter is a high-priced service. It's a price leader. And the way the business works is somebody calls, so I need service, how much is it going to cost? We say, "Well, we don't give price over the phone. We'll send somebody out there. He'll look at it. He'll give you a written estimate." And you can say, yay or nay. There's no cost for coming out here. And you can see, in a period of economic distress, if the price seems high than what rather -- maybe, they'd call another plumber or anything. And they'd say, "Well, I normally charge $275, but I can't get out there until 7:00 tonight or 9:00 tomorrow morning." They call us and we say, we go out there and they sit there with that estimate, and they say, "Boy, it's $200 higher. I'm going to wait until tomorrow." Well then, our close rate ticks down. Now what we've seen this year so far is the close rate going down a little bit. I suppose if it hadn't, I'd be worried about maybe we weren't charging enough. But it has gone down a little bit. Historically, as we've reached -- gone into even severe recessions like 2009 to '11, the close rate never went down significantly.

Interesting. What about labor on this side of the business? Do you have the labor you need? Is that a challenge?

It's always a challenge. We would have more if we've had -- if we can snap our fingers and have more skilled personnel, we'd hire them tomorrow. I would say that because business has been good and our workforce is predominantly commission-based, we've done well. They've done great. So we then tend to retain more, easier to hire somebody you're not constantly fighting that battle where your people are being trained and going out the door, and you're hiring another one. If they're making more money, everybody is happy. We're still in that mode. But we always like more. I mean there's -- I put it this way. During the pandemic, we were getting way more calls we can handle. I would say, virtually every one of our operations, we could use more personnel. Now maybe 57% of them, we can use more personnel. So it's always a challenge, but Roto-Rooter has had the luxury of pretty good job hiring because they've been able to -- a package based on commission where they can make a very good buck.

Yes. Okay. You mentioned that you had a chance a couple of years ago to buy out one of your big franchisees. I know that's been a part of the story occasionally. Anything about the pandemic and going through that, that either makes that kind of activity more likely, less likely? Are there opportunities?

Well, there's still opportunities that tend to be small. I mean I would -- to a group of investors, I would say the acquisition side of Roto-Rooter is just little dribs and drabs. We've purchased most of but not all of the big opportunities out there. That is major metropolitan areas.

And let me just ask you, obviously, share repurchase has been a huge part of the story over the years. Anything changed on that pace of buybacks or prioritization of that?

Last year, we had some opportunities where we thought we're going to be opportunistic, and we bought a lot last year. We generally, over time, expect to spend. Our depreciation is just about equal to...

CapEx.

Yes, our operational CapEx. And so that our free cash flow, this is about equal to our net income. And our goal generally is, absent some other good rationale for deploying it, that's what we're going to do. And let me just add, as far as whether there's anything that's been changed, no, we do not expect the tax on...

Dividends.

Dividends is significant. For us, there's -- the exception for dilution caused by stock options, stock awards, with that, there's still an impact from it, but it's at a rate that will not dissuade us from thinking that's opportunistic.

That's great. I really appreciate Chemed participating again this year. Thanks, Kevin. Thanks, Nick. Next up in here will be P3 Health Partners.

Thank you very much.

Thanks.