Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good morning. Welcome to Oppenheimer's 34th Annual Healthcare Conference. I'm Mike Wiederhorn, the health care services analyst. It's my pleasure to introduce Chemed Corporation. With us from the company today is Kevin McNamara, President and CEO; Mike Witzeman, CFO; and Nick Westfall, CEO of VITAS. One more note before we jump to the fireside, there's a Q&A box in the top right corner for those who want to ask questions. So we'll jump right in here with kind of a broad question to start out.

Can you guys provide us with an update on the business, how do you feel coming out of Q4 into the new year as we get into Q1, enter Q2 shortly?

Yes. This is Mike Witzeman. I think we feel very, very good about the direction of both businesses. VITAS, obviously, had a very strong '23 and is continuing that into '24, and we see a lot of upside there. Growing top line, maintaining or slightly improving margins, and we see that has been a very positive trend for '24. We see improvement for '24 for Roto-Rooter. We think the first quarter, Roto-Rooter is going to be a difficult comparison based on some weather events that happened in '23. And then we see what we would call very modest improvement, particularly in demand over the next 3 quarters of '24, all in, then a fairly decent '24 for Roto-Rooter but not without some headwinds that we're still working through.

Can you start talking about hospice trends? How has demand trended overall? And are you able to meet the demand with your capacity at this point in time?

Yes. Mike, it's Nick. And the short answer is yes. I mean the demand, as you can see through our fourth quarter numbers and continuing into '24 and inferred inside of the guidance is very strong and robust. And of course, the continuation of the success we've had of being able over 6 quarters and anticipate that continuing through all of '24 to continue to methodically build our bedside capacity to meet that increasing and growing demand is a wonderful combination. And we feel really good about it, particularly early into this year, as I alluded to, I think, on our fourth quarter transcript, some of the disruption we get in the holidays from a hiring standpoint, not a retention standpoint has really abated as we would anticipate. And we're full steam ahead in '24.

When we think about referral source trends, where are you at respect to short stay, hospital [ ones ] versus longer length of stay of assisted living and nursing homes? Are you back at steady run rate? Or is there still opportunity here? Kind of what are your thoughts strategically going forward from there?

Yes. No, I think there's ample opportunity across all 4 segments. And you can really see it across all of '23. But if I just focus in on the fourth quarter, we really are in a balanced approach. And while we also have highlighted our community access initiative, which I'm really proud of the team for how successfully they have and are continuing to execute on that, if we just take the fourth quarter, hospital-based admissions were up 0.5 percentage point, but still really strong from a demand standpoint. The community access, which really encompasses both the home, the nursing home and the ALS segment, when you aggregate those 3 individual segments together, it was up 13.9% in the fourth quarter. And so that continued momentum really continues to catapult us into '24 and beyond. And we've really now institutionalized that balanced approach that we put in place almost 2 years ago across the organization, both out of need and necessity with the scarcity of resources, but was also the right thing to do for the short term, midterm and long term for us organizationally. So demand is strong across all segments. And the real differentiating piece that we are experiencing every day is if you're a high-quality provider that has successfully proven the ability to not only stabilize but grow your workforce, you're in a real differentiated position right now compared to some of the others in the marketplace. And the overall hospice demand isn't waning. It's not going to wane. We can talk about it from a demographic standpoint. But even an acknowledgment that earlier access in the hospice is substantially better, not only for patients and families but the overall Medicare trust fund, really adds some significant tailwinds to us and the industry in '24 and beyond.

And can you kind of piggyback off this, how has this impacted your length of stay and acuity going forward?

Yes. So length of stay, as you can see, has incrementally expanded. From an acuity standpoint, we referenced it as a percentage of everything overall. We haven't waned in any way, shape or form around who we are and why we think that's important, meaning we accept all patients irrespective of acuity and complexity or even ability to pay. And we think that creates that differentiation for us in the marketplace being an independent provider. With that being said, the total number of patients that we're caring for that are more acute and complex is smaller as a percent of total and smaller also in general than prepandemic levels, and we forecasted that in our '24 guidance to continue. And it's really a function of when we have a smaller percentage overall of patients coming to us directly out of an acute facility, AKA, hospital or emergency room, on average, they're coming to us earlier in their disease trajectory. And with less highly acute symptoms, it's not to say that may not occur when they're on service with us. But it's just a fewer directly as a percentage of the total coming out directly from the hospitals. And we would anticipate that to continue in '24 and beyond. But in no way, shape or form are we deemphasizing the need and support both hospital systems and highly complex patients [ meet ] all the communities we serve.

Perfect. Shifting over to labor. You guys have done a great job there. What are you seeing there of recent now that the retention program has been over for 9 months? Are you seeing any changes in turnover? And is hiring strong? Yes, give me some color there.

Yes. No. I mean we're now 8 months post graduation of that program and all the metrics, no matter how we cut it, are very sustainable and lead to the overall narrative we've been providing around feeling extremely confident regarding the sustainability, not only with very strong hiring rates in every market we operate in across the country, but more importantly, the continuation of the retention efforts that, yes, the retention program helped to create a catalyst for it. But we've seen just the same amount of success of people once they get their payout, choosing to stay with us as well as everyone that joined us continuing to stay with us that were ineligible for the program. It really is -- hospice gets down to it is a calling for most of our team members. It's a very mission-focused piece. And while compensation plays an important role related to it, the culture or the ability to truly service patients where they are, those types of things, go a very long way in terms of retention and continue to be a really attractive place for people to want to come if they want to get in the hospice industry.

Are there any market-specific issues that you're seeing in terms of labor demand?

Not specifically. I think the only overall subsector that is not market specific but as discipline-specific is LPNs, in general, continue to be more difficult given I think there's a variety of other segments throughout health care [ knots ] that are hospice specific that are really honed in on trying to retain that subspecialty because they were having success with registered nurses. And so we're continuing that balance, but that's really the only subsector us and others in the industry continue to have any challenges with. And that's across the country.

When you think about reimbursement, what are your thoughts on reimbursement? Are we looking at another sub-inflationary increase? Or is there any other potential provisions that could alter that?

No. We're -- it's good news, bad news. It's statutorily written in absent change from Congress. And at this point, because of the way the formula methodically works, it's going to be sub-inflationary and there is no true-up mechanism related to it because it's really a timing question of we know what the forecast of the hospital market basket index is before you get into productivity adjustments. And it takes almost 2 years post the application of that rate before the information gets caught up real time, and there's no true-up mechanism. So us and every other provider in the industry, we'll just continue to manage through that circumstance. The good news is it's still one which is a predictable reimbursement increase, albeit maybe lower than total cost of inflation. And there's a real policy recognition inside the beltway that hospice for 40 years has really been beneficiary to the Medicare trust fund in reducing total cost of care. And so access to hospice, earlier access to hospice returns fund to the Medicare trust fund. And so hopefully, that gives you great confidence not to tinker too much in the negative way with anything regarding reimbursement.

Well, on the interest in hospice, it seems like on a related topic, we've heard that there are some potential interests in extending the benefit beyond the current 6 months. Is there any -- we've heard this before. Is there any truth to this? Is there getting momentum in Washington? Or is this another headline?

We would, of course, love it if that turned out to be a reality, having been in Washington even as latest as last week for a variety of different things. I don't know. I mean, the one thing I'd like to clarify is the hospice benefit is an unlimited benefit, right? And too often the initial prognostication requirements, being 6 months, given the way of people having a misconceived notion that there's some statutory limitation for how long someone can be on hospice, right? You have independent physicians. We have guardrails around the recertification efforts to keep eligible patients on the benefit when they outlive the original independent prognostication that comes along with it. So while there is an acceleration of total cost of care savings, the latest study looked at it up to 12-month basis, but it's 11% on average total cost of care savings for patients that are on the benefit between 6 months and 12 months, which is almost 4x greater than the current average from a savings standpoint. I think there's a real awareness that the earlier access really benefits patients and families and the Medicare trust fund. And so if there was some support to it, that would be wonderful. But we're not banking on it now because we want to be good stewards of the initial prognostication and doing everything we can to build awareness. No different than President Carter has done through his journey that's well over a year at this point to the country being open and talking about hospice and the very positive, enlightening experience it can be.

But Mike, as you know, in the -- for the standard insurance contract for...

Non-Medicare.

Patients who are under 65, they've chosen to not have a 6-month terminal status definition. They do it for one reason, and they think, okay, they think it's better for the patients to have that option and they think that is going to save them money. Those are the kind of forces that probably are persuasive to some in government. It's just that how the silo approach to handling problems that the government don't necessarily leave the most rational, reasonable solutions.

Yes. But we would be very supportive of it materialize. We're just also encouraged, Mike, not to go off on a total tangent of even the news as recent as of Monday of last week, where CMMI announced the cancellation of the carbon demonstration project that has proven to not be successful both from a -- for the carbon component, both from challenges on the provider level, but decreasing appetite from a plan level from a participation standpoint. All those types of things help to clear the runway for real good, constructive policy conversations that should act as tailwinds for the industry this year and beyond.

Perfect. One question on VITAS and Roto-Rooter. Can you discuss the margins? And how do you view 2024 margins versus your updated long-term targets on the hospice side on the VITAS side?

Yes. I mean as we guided -- as we mentioned when we came out with our guidance for '24, we're going to anticipate 17.8% to 18.3% range on adjusted ex cap EBITDA margins. That compares a little more favorable than to the last full year that was pre-pandemic. With that being said, a lot has changed, right, in that 4-year window. And so the one thing we would say is, we feel confident in the range in which we've provided, and we'll balance that with growing demand, continuing to grow our clinical workforce, continuing to pay prevailing market wages that run potentially higher than the reimbursement rate associated with it. And we as a good steward and provider of the funds that primarily Medicare reimburses with us, we'll make the best use out of every dollar that comes along with it without ever sacrificing in any way, shape or form, care at the bed side. So it's a long-winded way to say, feel good about that range and the predictability of that range from a marginal standpoint, but also the confidence in continuing to grow overall dollars, primarily with volume expansion as well, right, that we can return it to shareholders.

Perfect. In light of time, we're just going to move over to Roto-Rooter and maybe we'll come back to the hospice in a little while. Can you just broadly discuss what you're seeing on the Roto-Rooter business. You're seeing some declines in call volumes, increases in conversion rates. How do these metrics compare to pre-pandemic levels?

Sure. The call volume, interestingly enough that we're experiencing right now is almost exactly in line with the prepandemic levels. Conversion rates still is higher than the pre-pandemic level, and that's -- we've built a workforce that we think that is probably more motivated potentially now because of the -- we built it during the pandemic when the call volumes were much higher, 10% higher, 10% to 12% higher. And now they're more motivated because they're all commission-based. And so they're going out and maybe being a little more motivated to convert those calls because they know that they don't necessarily have another call sitting in the wings if they don't convert this job. So we see continued decline from the pandemic level in call volume and continued increased conversion, which is how in '23, we essentially -- those 2 things along with our price increases, how we held our own at Roto-Rooter. We also think the first quarter of '24 is going to be a difficult comparison, and that's bearing out so far. But the rest of '24 looks as we had guided at year-end.

Mike, let me just make a couple of comments, not really responsive to your question other than they generally relate to Roto-Rooter. What we saw last year in the first quarter was just it was like the good old days of the pandemic were continuing. We think that some of the underlying forces in the industry were being masked by kind of unprecedented demand caused by weather-related issues on a very broad swath of the country. When we got to the end of the first quarter, we said, boy, the phone has just stopped ringing. And at the time, we said, clearly, there's indications that it's macroeconomic forces are having an effect on the business. Clearly, as we said, something that seems to be important to our business is that we had at least an 18-month period where inflation far exceeded wage growth in the United States. And we just thought it had kind of caught up to us a little bit. Certainly, hard for us to believe that to the extent that we were seeing with regard to decline of calls. And again, as you already mentioned, we did a good job internally of making sure we got a price increase on the calls we did get that we did a good job converting. And we made the best of a bad situation and have kind of flattish results. I mean I'll just make one other comment to the fact that one thing we saw reflected on the marketing side. And let me say it relates to Google, which is a great partner, I'm making no negative comments on Google. But it became -- and they don't -- they're a bit of a black box. They don't share a lot of information. But it became very clear to us that during this period where everyone was in this segment was struggling. They made some changes. And the changes they made, and this isn't the right forum to go into all the details, but basically, very much favored small mom-and-pop operations. And it had a clear impact on the number of calls we're getting. And their theory that it was an existential crisis for many of those, and they were -- just from a number standpoint, there were a significant segment of their customer base that buys services from Google on the paid advertising. And I think that some of the changes they made were misguided not in the interest of Google, forget whether their interest of big providers like Roto-Rooter. And I think they're going to be in the process of rationalizing those as the conditions from a macroeconomic standpoint are normalizing. A long-winded way of saying is, we're dependent on getting calls from the Internet, which means Google, which, at their black box, which they constantly are making changes in their algorithms. They're just -- the current mix is making a tough situation a little bit tougher for us. But something we've been aware of when we proposed guidance for the year. That's one of the reasons why for what I think is a dynamic business with a lot of great prospects, Roto-Rooter that is, it's still -- the guidance was pretty modest. But I would say that the rationale for that is that the dislocations are very much on the marketing side. I mean, what we've had -- when you look at some of the -- just a broad brush, we're spending a lot more to get a lot fewer calls. I mean that's the situation that calls for change from without and change from within. And we've also seen things that we made reference in the release -- fourth quarter information that when things get tough on the commercial side, we have a big [ sensitive ] customers that are looking for discounts. And that is not how -- that's not the Roto-Rooter business model, and we've walked away from some business on the commercial side. But we -- during this period, we're having to make a lot tougher decisions, lot tougher choices that we had during the pandemic. And the net effect is, luckily, at the field level at Roto-Rooter, we've had it since 1980, we're very confident in the management of Roto-Rooter and the strength of its service mark and the strength of the business. Overall, we're not alarmed. At the same time, we're looking at a guiding towards pretty modest growth. But Mike, anything else to say on that?

I mean, just touching on the commercial side, you're seeing some pushback there. So what is the strategy there now going forward? You're saying -- obviously, it sounds like you're not caving on the pricing there. So kind of what's -- what are your thoughts about going forward there? And then also, historically, you've seen similar instances whether you have softness through the economy, what has happened, how is the rebound, how long has it taken kind of any qualitative statements, color on that would be great.

So I'll start, and I'm sure Kevin will have a couple of thoughts, too. But from the segment out our commercial business between different things, the issue we saw in the fourth quarter largely had a lot to do with big box kind of retail environments. Those were the kind of businesses that we're asking for outsized price declines or price concessions on our part that we weren't willing to necessarily go through with. And what we've seen, and I can't -- obviously, we're not going to guarantee anything, but what we've seen historically is these are local managers who decide they think they can run their plumbing expenditures by dealing with local mom and pops and those sorts of things. And they wind up not getting the service that they are used to with Roto-Rooter, they can't afford to have their bathrooms closed for 3 days because the mom-and-pop can't get there. So we've had instances of this happening before and it seems as if in most instances, those big-box retailers come back to us over the course of time when they figure out, it's not as easy to manage as they might have thought and it's not necessarily purely price that they need to manage on. And then the second thing, I would say, is a lot of our commercial business then is more local, property managers, those sorts of things. And we've continued to increase our efforts to go call on those local customers as we see fit. We pick the top 10 customers. We have a list of potential customers, and we've made significant efforts even starting in the first quarter here in '24 to really go call on them. It's an interesting dynamic because a lot of them don't see as interested as maybe in prepandemic and having face-to-face meetings. So we're working through exactly how to reach those folks.

And Mike, I'd add a couple of things that, frankly, during the pandemic when some branches of Roto-Rooter had more business they can handle, they have more -- they focused on the residential side if only because those were easier customers. Sometimes, the commercial customers drive a tougher bargain. They're on tighter schedules. I mean it's a little bit tougher customer to make happy. But that's on the margin. I think more significantly, you just have to say, okay, it's somewhat effort. But then you also have to look at something that has bailed out the residential side, which is very strong performance on excavation and water restoration. Those additional service lines are a little bit tougher sell on the commercial side. They're more likely to get second and third bids for the ancillary services. So there's an element that without those improvements that residential wouldn't look as even as strong as it did in the fourth quarter as well. So all those factors combined to make it a lot tougher compared to the operating conditions during the pandemic, but we're making adjustments.

That's great. In light of the time here, one more question, just a bigger picture. Capital deployment. Typically, you guys are growing aggressive with share buybacks. Stock's been really strong. Can you talk about your priorities in light of a rising cash balance? And also in terms of the M&A market, what do you see? Is there some -- you seem to mention some stuff potentially on the hospice side. And I know you still -- one in San Diego on a Roto-Rooter side or you look at tuck-ins potentially on a Roto-Rooter?

For the foreseeable future, we will always do some level of share buyback on a quarterly basis using our free cash flow. So at the current stock price, we might not take huge swings at it, like we maybe have in the past. But we will always do at least some level of programmatic share buybacks on a quarterly basis. And then from an M&A standpoint, and Nick can obviously elaborate some on VITAS, but from a Roto-Rooter standpoint, the franchises that seems are struggling as much, if not more, than Roto-Rooter is. So we think that there's probably more opportunity now than there has been. They're not necessarily purely financially driven. These are -- the franchises are usually family-owned businesses that have been in the family for generations. So there's certainly an emotional component to being able to acquire them. But we think from a pure financial standpoint, there's probably going to be some opportunities over the next 12 to 18 months.

Yes. And on the hospice and, Mike, you alluded to it, some of our tone may have picked up in terms of what we see occurring in the marketplace. And the reality is, as we discussed a little bit of a bifurcation of providers that have -- like VITAS that have come out of pandemic that have been able to successfully execute on building bedside clinical capacity, meet demand, et cetera. That's not necessarily the case all throughout the country as well as I've been associated now for a dozen years in an official VITAS role. It's the best environment when -- that I've seen in that entire window where you now have opportunities in markets that maybe we had always desired to be in for a variety of different reasons for strategic purposes, where we may have real opportunities to engage and evaluate acquisitions in those markets and at pricing that makes a lot of sense. And just as importantly, those providers, which are similar mission-focused providers no different than VITAS, we're really able to hone in on the types of people in which they have. And we've been able to prove over time, as illustrated through the pandemic or through prior acquisitions, real focus and continued commitment to all those practitioners at any potential target as well as really lean into the relationships, the long-established relationships many of them have had in the market to make an acquisition and more importantly, the integration of those acquisitions successful. So we think we're in the early innings of really being able to explore a lot of those, and it's not some of the previous volume that occurred when capital was cheap where you had a lot of, call it, nonmission focused recently lifted up providers that were looking for an aggregation or a sale. And we also didn't have great interest in some of the markets that they were operating in. So it's -- we're really encouraged and intrigued at this point. It will be interesting to see what '24 and beyond lead to that might be alternative uses for capital as well.

Well, that's great. I think we -- unfortunately, we're out of time. I appreciate your time today. Kevin, Mike and Nick, really appreciate all the thorough answers here. And thanks again for participating.

Thanks, Mike.

Thank you.