Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good afternoon. Welcome to Oppenheimer's 33rd Annual Healthcare Conference. I'm Mike Wiederhorn, the healthcare services analyst. It's my pleasure to have Chemed Corporation today. We have President and CEO, Kevin McNamara; and Chief Financial Officer, David Williams. This is going to be fireside. Welcome, guys. Thanks for joining us today.

Thanks, Mike.

Thank you. I'll start off with a general question. Can you just kind of give us your thoughts around now that you're a few months into 2023 under your belt, how should we view trends in the business? And do you think we can use this year as a normalized base to grow off of?

Well, look. Let me start with saying that we gave guidance in the middle of September, and we've already identified some positive trends in the business. And just -- as just repeating kind of a vague comment in the release of that discussion of fourth quarter earnings. The trends are continuing. I mean Roto-Rooter has been helped by this year by [ weather ] for its business. And so I want to mention that. We normally don't talk about weather, but it's really good, extraordinarily good. And within VITAS, the basic trend is -- that's why we've hired people -- more people. That's going better than we thought. And not surprisingly, census growth is going better than we thought tied to that. Well, that David, as far as other trends that you've spoken of, whether they are continuing now, what do you have to say?

Yes. So more granular that you guys don't see the color intra-quarter or what I would say is monthly. But really, once we started working on the hiring and retention program in the second quarter of '22, it was fully defined by the end of the second quarter, the employees knew it was coming. We had meetings with them. But really, we had a dismal retention, and we lost a significant amount of licensed healthcare workers in Q3 of '21, Q4 of '21 and Q1 of 2022. We actually had great performance in Q2 of '22 where we didn't leak. We attribute that to people knew a meaningful program was being put in place. Well, of course, we made the announcement, the program is in place. And monthly throughout Q3 and sequential monthly through Q4 and now going into February of 2023, we see some very nice sequential performance month-over-month that's very encouraging and adding capacity. Equally is contributing to growing admissions and census monthly. And that -- and the flip side of that as well is we were anticipating a 90- to 120-day lag between the time we added additional capacity until it really materialized into census. And that seems to be running closer to a 60-day lag. That also is encouraging that, obviously, when we bring on new admissions or new census, it's negative margin until they get past a 30-day mark. But it looks like we're writing great sequential performance, running tighter in terms of correlation of capacity to adding census than we would have thought. And we're currently running at twice the rate of capacity build, I think, net hiring of licensed healthcare workers. We're running close to twice the rate that we anticipated in our guidance of 25 FTEs a quarter. And now it looks like that is going to running much closer to 50 per quarter, but we'll see how this plays out. But I don't think the performance could have gone better than it has in terms of good capacity build, consistent and sequentially building admissions and census.

Yes. We would have been reluctant to build the clinical capacity too much faster than we have.

And absorb it intelligently. I think that's right. I mean if we had 500 people who showed up at the door, you're hard for us to absorb that in methodically. But no, I like the pace. If we stay at the current pace, I think we're substantially back to normal by the end of '23. Pace stretches out a little bit. It will probably take part of 2024 to normalize, but it is very, very encouraging.

Sorry -- are there any markets in particular, specifically that you're seeing any capacity constraints that you would like to talk to or give us some more granularity about?

Really almost all of them in terms of we're trying to add -- there's more demand than we have capacity for in terms of patients we could take in, in almost all of our programs.

Yes. I mean we've had some issues where they were very [ acute like ] New Jersey. But for instance, to us, I would say the focal point is Florida. And as Dave said, we could use more clinical personnel in every branch. And we're looking and we're seeing it have some success in doing so. And our expectation is that census will follow.

Okay. Yes. Let's move over to more on the labor. On your retention program, how is that going? How -- in terms of how it's being deployed and when should we expect it to translate to ADC growth, what I think you're kind of alluding to earlier. So -- and should we expect the new caregivers to be dedicated to new patients? Or do you need that capacity to address existing caregivers' workloads?

It's really caregiver workloads and blending them into the teams. No one kind of works -- it's all kind of pooled by team, and we're running at about 325 teams across all of our programs. So yes, they get blended in. We are seeing the cause and effect is pretty tight, Mike. So within 60 days of kind of the pop in capacity from the hiring, we're seeing a response to admissions and census. So it's happening now. Its largely function as a negative margin because the incremental new patients we're getting obviously don't have any profitability until those patients get passed at least a 30-day mark. But obviously, what we did in certainly Q3 of 2022 is giving us benefit in Q1 of 2023. So we think we're going to be bootstrapping. At some point, quarter -- sequential quarters might even be equivalent. They both built the same amount of census or as -- capacity. As long as we're adding census at the same rate, quite frankly, sequential, it should start being transparent. And we'll start lapping things, what, in Q3 of '23, we'll have good comparisons to Q3 of '22. But we're seeing the results now, and you should see them sequentially happening when we report the first quarter of 2023.

When is the referral program -- when is the program slated to terminate for new clinicians? And are you expecting any turnover once the payments are made? Kind of what are your thoughts around that.

Yes. We anticipate that for a variety of reasons, people -- a number of things to hang on if there's some kind of supplemental payment, whether it's delayed retirement, we will keep the job even though they moved to a slightly more inconvenient area, that type of thing. And so we expect some of that to occur. We think that if we run with a cushion that is, we're ahead of the game on hiring. By the time we get to that, it will be just a little bump in the road. Again, I think that the question that is a follow-up to this thing, okay, but what do people expect to get $10,000 extra every year? Well, it's been described, and it really is part of our pandemic response. In other words, the government gave us $80.2 million. I didn't take it into income. We said we have it. We're going to use it for pandemic expenses and basically employee issues. The first year, we gave 2 weeks extra vacation just feeling that people need it -- that's what they were looking for, take time out to take care of family members to -- would be out of work if they've been exposed to somebody with coronavirus, that type of thing. The second year with -- that cost is over $20 million. The second year, we said, okay, earlier in the year, we kind of thought, okay, the pandemic is tailing off. We gave 1 week of extra vacation tied to the pandemic. And we got to the point where, again, by that point, our clinical staff was low. More vacation for them didn't seem to be indicated. So we said this time, we're going to just pay the remainder of the amount basically that we received as the -- in the pandemic response in the form of like cliff-vested cash payment. And we've tried internally to do everything possible so that people realize this is associated with the pandemic, like the vacation that crested 2 years previously, had 2 additional weeks. This is a payment that they'll receive, tied to pandemic. Pandemic's is a thing of the past. I don't doubt that we'll hear -- that won't be the last we hear of it, but it would be -- certainly, the company's intention is to end it like -- associated with pandemic and indicate that it's over. If that's -- if you understand what I'm saying. I mean, yes, that's not...

Yes, that's perfect.

That's something we look to be recurring. This is a business that labor management, we're basically -- a government program is [indiscernible]. The government sets the prices. Somebody who works for a hospice under normal circumstances can't expect their pay to go up much faster than the rate of reimbursement increase.

But we're also prepared if 1 or 2 -- if some programs, it's very appropriate for them. We'll offer some type of hiring retention program to continue, but it will be on a one-off basis. It won't be across the board, definitely.

We're not Doctor there but it will have to be -- there's a high, high barring any continuation.

I would also say if you think about what we did and why we did it, we had a core tenured licensed healthcare worker force that has gone through the pandemic, and they were getting burned out. So these are the people who have put up with constantly changing schedules, difficult to get time off, not quite sure what you're doing on a daily basis until you get your assignments. And we're bringing a lot of people that were getting trained. Those new trained people then quit. It was wash, rinse, repeat. So frankly, we stemmed the attrition on our tenured folks, and we brought in a significant amount of new people who are staying. So all of a sudden, our tenured people's life got a lot easier. Their schedules became more normal. They could get scheduled time off as well as immediate time off if they needed it. So their life got better. So we do expect some people who delayed, say, retirement for this program. But with that said, we don't think we're going to trigger a significant turnover on July 1 because the -- these people's life has gotten better over the last 6 months. So I think they're going to stay with us. And the new people we're hiring as they approach the 1-year mark, whether it's in September, October, November or early '23 is their first day, so they'll invest early '24. We -- if we keep people a year, we know statistically the probability they're going to be 3 or more years of tenured employee is very high. So we also think as the new hires' cliff vest in this program, they're going to hang around. So we don't expect a huge turnover that result in, I got my money now, I'm leaving. But we're obviously going to watch it very closely.

Perfect. Moving over to referrals. Can you discuss where the referral source trends are at this point in time? Are you still seeing dislocations with some provider rate referrals relative to pre-pandemic? And how has your strategy shifted over the last 6 months?

Well, one of our strategies is because we've had a very scarce resource is our efforts to call upon hospitals has -- it's not like it's dried up, but it's -- we've cut back on it. And as a result, that is a number that's over 50% of VITAS' referrals. We're still getting them, but there was some big sector to deemphasize. So our total number of referrals until we're back to normal and making the full effort to get the hospital referrals, I would say that number is going to still look like it's under pressure. But some of that -- I mean a good portion of it we're doing intentionally. We give our referrals by source. They're solid, not quite where we want them to be. But from the right sources there, they have come back substantially. Dave, I don't know how much you share on this -- more specific to that.

We're pretty granular on that on a quarterly conference call on where our referrals have come from. And I think that's exactly right. You're dealing with scarce resource and you want people to -- if you're dealing with scarce admission personnel, you certainly want to be taking in patients and get the maximum benefit for those resources. But we definitely see in '23 increasing our referrals and admissions where high acuity hospitals were the preadmit location. But we don't expect that to be a flood. We also anticipate growing high acuity care off of the current base, but we don't really see it going much over the 4%, 4.5% level in terms of total days of care. 4.5% might be too high. But...

People remind me, what were admits from hospitals down in our reported quarters? Do you have that in front of you?

I don't have it, but I want to guess around 15% to 20%.

Yes. I was going to say 20%. So there's no reason with a normal effort we wouldn't expect within short order for that number to be 20% higher for that sector, which was over 50% of our referrals. So it's really hard to analyze the numbers on an overall basis.

But we will go back as we have increased capacity. We will return to the high acuity hospitals, absolutely. It's not like we left, but we're just strained on resources right now.

Just deemphasizing. In other words, if you take -- if you get a referral and you take 3 days because you don't have the personnel to follow up on it, you're going to convert fewer. And at the same time, if you don't call upon those referral sources of and you're not going to be high -- high on their priority list. So it's a delicate handling. No one's hurting their back. Obviously, we need those in Florida and pretty much in California, pretty much long term for cap protection. But again, if we don't have the resource -- if 6 months ago we didn't have the resources to handle the patients that might result from them, we had to take action.

What are you seeing on the senior housing side? Are you seeing any changes there as occupancy starting to build up on the senior living side of the business?

Yes. It's been a little lumpy between nursing homes and assisted living facilities. But yes, it has gotten better, but not remotely close to where it was before. But it is absolutely improving. And our community efforts in that regard, community access has improved but not normalized yet.

Okay. Perfect. In light of time, I'm going to try to shift here just to Roto-Rooter because, obviously, that continues to be a big driver of your business and your growth. It's performed very, very well since the pandemic started, whether due to increased demand in the residential business, changes in the competitive landscape. Looking forward, where do you see the growth in the business coming from? And how should we look at realistic growth rates there?

What I would say is for the industry for, call it, the same-day, next-day, predominantly emergency plumbing and drain cleaning services, which there's no Bureau of Labor and Statistics data on that as the carve-out industry doesn't exist. But with that said, generally, we would say the industry can grow at the same rate as household formation in terms of demand. The more households, that is where the industry gets its growth. Roto-Rooter has basically been taking methodically little pieces of market share plus our price increase that we passed through, which pre-pandemic was running around about 3% to 4% in price increase, maybe occasionally hit 5%. But it was kind of bumping along that way. And I would expect that would be post pandemic, the same thing, mid- to slightly upper mid-single-digit revenue growth. That's very sustainable with a slight increase in margin, maybe 10-ish basis points. The more interesting thing, Mike, I would say is, yes, we had a good year in '22, not as good as '20 and '21. But it was a better year than you would think for what did not happen. And that was we didn't see our growth go to 0. There would have been a realistic thesis, certainly in the start of '20 and into '21, yes, we're getting a lot of demand. Will we hang on to that demand growth? Will it -- post pandemic, will it just disappear? Well, we obviously had great results in '20, even better results in 2021, but '22 still grew. Basically, our adjusted EBITDA was up about $25 million, to 10%. So that also indicates we did okay in '22, but more importantly, there didn't seem to be any diminishment in the market share we picked up in '20 and '21. That's the key takeaway. So going into '23, ex price increase, I think we're looking at flat demand roughly across all regions.

We're doing better than that.

We are doing better than that. We did better in Q4. We obviously are anticipating the possibility of more significant consumer headwinds. So we gave cautious guidance for Roto-Rooter. Right now, I'd say it's more likely than not we're at the high end of the guidance that we gave for Roto-Rooter in terms of revenue and margin, EBITDA growth. So we feel great about Roto-Rooter. VITAS, just to revisit that in terms of our guidance, we're a little bit of a pickle. '24 -- '23 is going to be a very good year and position '24 nicely. If we're more successful at growing capacity, hiring more workers, frankly, that could depress margins and profitability but make the getting out of this pandemic hole even faster. If we fail to actually grow capacity like we want, I think we'll deliver better financial results, but that just means part of the rebuilding drifts in the '24.

We want to thread the needle.

That's -- yes.

Thread the needle to '23. We'll cushion to handle the bump on the lapping of the cliff-vesting or the achievement of the cliff vesting and again -- but all the metrics look fine on that for the guidance. I don't want to leave Roto-Rooter because we're just starting...

Yes. I just want to say is when you look at our guidance overall and Roto-Rooter is a big contributor to the growth in '23. But frankly, both businesses are so well positioned to capitalize on opportunity. I'm very, very optimistic, and I'm generally not that way in times of price, but we are well positioned, and our competitors are not. But yes, Roto-Rooter is going to be the gift that keeps on giving in '23 definitely in terms of increased profitability.

When we think about the impact of recession on Roto-Rooter, kind of what are your thoughts there? And what percent of your jobs are discretionary in your opinion? I know you guys have talked about this before. I just want to kind of refresh that.

A small amount.

Yes, it's small. We always say maybe it's tied to excavation, which is the big-ticket uninsured number. And a certain percentage of those jobs, somebody could say, we show them a film, and we say, "Look, there's a partial collapse either of that clay pipe or a bend in the plastic pipe." And we say, "It's going to be a continuing problem unless you dig it up." And there is -- how much of that going to be, and it's $6,000. And they say, "Oh, is there anything else I can do?" We say, "Well, you clean it out a couple of times, and then have us back in 6 months. We cannot guarantee the work. You have to pay for it." And they go, yes, that's a better option for me at this point. So I mean, to the extent you have people doing that, that has some effect on the business. But what I'm saying is, and I'm raising another issue, last 18 months, a much bigger issue has been, let's say, on some of those ancillary services is if we lose the branch manager or the excavation manager to maybe something we've seen is that where private equity has gotten involved in the service industry. And one of the places they are looking for managers and technical support is Roto-Rooter, big national company with training programs, management training programs. And to me, the risk we face in this -- in any 1 year is something that dwarfs the economic big picture -- is whether we lose 6 managers instead of 3. So to me, that's my bigger worry by far rather than kind of the conceptual academic approach of the economy on a small part of the Roto-Rooter business. The next question then said, "Oh, that's a bigger problem. What -- are you doing anything?" And we are. Part of the problem we have is the private equity people talk pie in the sky and what could happen. It looks like a big payday, sounds pretty intriguing. I mean we're already seeing people who -- been gone 18 months who are saying, consider coming back and didn't quite work out the way I thought. The exit strategy doesn't seem to be quite as quick as they laid out. And we're dealing with that. But in response to that, we're also coming up with kind of a relatively small stock option equity plan for key technical people, which we think will be a bit of -- certainly not a golden handcuff, but a handcuff of sorts at least to respond to the new type of threat from competitors for hiring them away.

Which we've seen -- we've gone through this multiple times over the decades in terms of they try to steal our good people. They're successful sometimes. It rarely works out though for someone who's corrupted the economic model by overpaying for talent.

Well, unfortunately...

Overpromising to pay for talent.

Good point.

Guys, unfortunately, we're out of time. I really appreciate the color today. I wish we had another half an hour, but we don't. Once again, thank you for participating and giving us good insight on what's going on with VITAS and Roto-Rooter.

Okay, Mike, and if you and your team need to set up some calls with some of the attendees today with me, I'm happy to do it.

We appreciate that, David. Thank you very much. Thanks. Thanks, everyone.

Thanks, guys.