Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Jefferies Global Healthcare Conference. My name is Molly Steinberg with the investment banking team at Jefferies. I'm pleased to introduce Mike Witzeman and Nick Westfall, with Chemed today.

Thanks, Molly.

Jackson at Jefferies Research. We've got a presentation for you. We're going to run through a few questions on the front end. So thanks again, everyone, for joining, and thank you guys for being here. Really appreciate it.

So maybe to jump in I mean, I think people know in the audience that there's sort of 2 distinct segments. We'll probably focus a little more on VITAS given the -- but maybe if you just want to just jump in with sort of -- say your view on how things go, a brief overview of the model of the business. And some of the history behind how those 2 businesses got pieced together.

Sure. So Chemed started in 1971. We're a holding company. So we just own and run and buy and sell other businesses. So we've never been particularly health care focused. We've never been industrial service focused, but we can sell good opportunities. So we bought Roto-Rooter in the 19 -- early 1980s, our founder had a personal relationship with the founder of Roto-Rooter. We bought it in the early '80s for $17 million and we've grown it to what it is today. Very similarly, Chemed had a personal relationship with the founder of VITAS. So we bought into VITAS in the '90s. I think we bought roughly 25% preferred -- stock, got 7%, 9% return on that a year. Then in the early 2000s, the founder of VITAS was interested in selling the business, went through a process, had a sort of a winning bid. And at the time, we said, "Well, with that bid, we'd be the buyer than the seller of our minorities. And so a plumbing company bought VITAS, and we've run it for the last 20 years. We don't make any claims that there's great synergies between the 2. The only similarity is that they're both preeminent service businesses with great marks within their industries and very, very, very good cash flow from both and we've successfully operated them for the last 20 years.

Super helpful. So maybe jumping into hospice. That's been an area in health care coming out of the pandemic that's been a little slower to recover some sort of fluctuations in the market. I think over the past few years that we've seen -- maybe what's the sense of what you're expecting on the demand and emissions growth front? And how do you feel like -- where do you think we stand in terms of that normalization out? Are we getting to a normalized level? Is the length of stay in the right place?

I would say we are and have been in a normalized level for quite some time now. The thing we talked about going into the pandemic and hindsight being 2020 turned out to be -- to be right, was illustrating everyone inside of the hospice business model, demand never waned even inside of the pandemic. So referral demand never waned and only accelerated. But what we saw during the pandemic were 2 primary factors: one, patients accessing the benefit because of the disruption to the referral streams, up later in their disease trajectory. So median length of stay really compressed. We hit a low of about 11 days in -- about the middle of the pandemic. And the reality becomes when you look at length of stay and just the census in which you had on service as 1 cohort, they were, for the most part, unimpacted, as they transition through the pandemic. But all new referrals that were coming in, a little compression from a days of care standpoint and length of stay. And so as the pandemic waned, we said there was about a 6-month tail, where regarding the ADC trends that you would see going into the pandemic, that turned out to be the case. And then -- so we're at 19,378 in March of 2020 that are peak from a census standpoint, that leveled out at about 17,100 in the summertime, late summer of 2022, and that's when we saw really the pandemic waning, and we successfully executed on the sustainable strategy of recruiting and retaining our -- particularly our bedside clinicians, and that's led to now 8 quarters of sequential capacity growth and sequential ADC growth that puts us at growth trajectories that are at all-time highs in the history of VITAS as well as since Chemed ownership at this stage.

Got it. Super helpful. And maybe 1 of the things we've seen from other peers was 2 things you pointed to, right, the referral sources sort of being gummed up or some of those flows changing a bit. It feels like all that's sort of in the right place. And then on the clinical side, what's sort of the secret sauce to being able to grow clinical capacity. It's been a really hard environment, starting to normalize on the wage inflation front, at least when you look at the macro health care data, but versus nurses going to travel in a hospital, move to other settings -- how have you been able to navigate through that?

The pandemic really forced, I think, everyone in hospice, particular with VITAS to really look in the mirror and reflect on what has made the benefit successful from a traction standpoint, from a human capital standpoint for 45 years. And that is really the mission-focused orientation for many clinicians that are out there. And so what we really did, we had a catalyst of a recruiting and retention program that I think everybody is aware of, but really layered in and doubled and tripled down on all the cultural components that make a mission-focused hospice organization so unique. And for people aren't traditionally chasing the highest paycheck. If you are, you're going to go via a travel nurse inside of an acute care hospital and relocate and live in the city every 3 months. If you want to join hospice, it truly becomes a calling. And we've been really successful not only at recruiting folks into the hospice space, but also in markets in which we're competing against other providers, illustrating how we go about providing care, how we go about doing a team-oriented cultural wrap around, which was the foundation of the benefit. And that has had a compounding effect for 2-plus years and what continue to lead to our success on our ability to retain our team. We've never really had a big of a recruiting issue, but that compounding success has led to our ability to continue to effectively respond to an ever growing referral demand. I think the other aspect embedded in the question from a referral source standpoint that occurred in the pandemic that sometimes doesn't get as much press is, as an industry, we did a pretty good job of through the advocacy and policy piece through things like the NORC study, which was out of the University of Chicago that helped to illustrate the total cost of care benefit and quality benefit to the Medicare trust fund when patients access the hospice benefit earlier in their disease trajectory. And between that, we referenced it internally as our community access initiative, we're very optimistic about the outlook of not only the industry for the country. But the outlook for what the industry provides to many of our referral sources as their reimbursement streams continue to move towards value-based care and how hospice and a pre-hospice [ pile ] to benefit really are huge drivers of that value-based care, both from a total cost of care reduction but from a quality and output standpoint as well. So we're in a really good place as an industry and obviously, we feel very good about where we're positioned in the industry from a company standpoint.

And as Nick talked about a little bit, but when we compete on a local level, a lot of the smaller providers haven't quite -- still haven't quite gotten over some of the staffing issues that we were seeing in 2022 that led to the retention bonus. And so on a local level, hospice is a pretty small -- a small community, everybody knows each other. And so VITAS in the places that we operate have come to be known as a good place to work, not only mission-driven, patient care focus driven, but also our employees aren't working 60 or 70 hours a week. They don't have to work all weekends. They can take their vacations when they want. So it's a better place to work, and we can offer a competitive wage. So it sort of compounds on itself.

Makes a ton of sense. And so maybe -- you're getting back to growth in that hospice have been over the past 1.5 years, right? We look at some of the high-level stuff. The government seems to think home health and hospice both are sort of high single digit, pushing 10% growth businesses. How do you -- and maybe you can expand this Roto-Rooter to give the full picture, right? But how do you think about the growth outlook for VITAS going forward and maybe the growth outlook for the full enterprise going forward?

Yes, absolutely. I'll start on the VITAS side, Mike, you can fill in the Roto-Rooter complement with it and the bridge there. But as we go about volume growth, if you look at our first quarter results as an illustration, we're looking at low double-digit volume growth from a census standpoint, and that's driven primarily from admission referral demand as well as an incremental component from a length of stay expansion. We feel very comfortable and optimistic that outlook, both in '24 as well as '25 and continuing to do that sequentially in the markets in which we operate. And as you referenced, the hospice industry is in the most recent right, the second highest forecasted growth rate from the federal government at about 9% CAGR, just below personal care for the country. And more hospice is needed, earlier access to hospices need. And when you take those macro [ hand written ] along with the demographic, those tailwinds along with the demographic tailwinds, we think the industry has a vital role to play in the future of health care delivery in the country and at home. And so translating that back to VITAS. We feel really good about our current forecasted growth trajectory. We will make updated guidance, as we've alluded to, at the end of the second quarter to not only update it for our outperformance year-to-date, but also to include our most recent acquisition in that guidance. And I'll turn it over to Mike on the Roto-Rooter forecast in front.

Sure. So in general, we would say that Roto-Rooter obviously, sewer and drain cleaning and the plumbing industry is a pretty mature industry. So we would look at probably 5% to 7% top line growth on a normalized run rate. I think as anyone that follows our story has seen over the last, call it, 4 quarters, 5 quarters now. There's been some top line issues at Roto-Rooter. A lot of it is macroeconomic driven. During the pandemic, Roto-Rooter and a lot of home service companies really boomed when people were home. We think that pulled forward a lot of what we would call sort of voluntary jobs, where maybe you wouldn't do a job if you weren't at home all the time, but since you're at home already. So pull forward some of our demand -- so we had tough comparisons. And then with some macroeconomic uncertainty, inflation, consumer sentiment issues, we've seen a little bit of soft demand. That translated in the first quarter, the Roto-Rooter revenue being down a little less than 6%. So 2024, I think we're looking at something that would be in the neighborhood of flat. But from a longer-term growth perspective, we would certainly look at 5% to 7% top line growth. So when you add the 2 together for Roto-Rooter and VITAS, we would, on a normalized basis over the next, call it, 24 months with VITAS' outsized growth with Roto-Rooter probably in [ '25 ] getting back to a more normalized growth rate, we would look at high single-digit revenue growth, translating some of that into some leverage on the EBITDA and the income line. And so 10% growth. We've always done -- we have done for the last 20 years of programmatic stock buyback plan. And so we continue to -- intend to continue that program. And so we can easily get to 10%-ish EPS growth on a yearly basis fairly. I think we're comfortable with that.

One thing I was -- we're missing -- mentioning on the pricing side for those new to the maybe the hospice industry is feel very comfortable around the statutory way in which pricing is forecasted and provided on hospice, predicated against the hospital market basket index. And so the stability and predictability of that pricing increase, albeit it is still and has been below overall cost and labor inflation, but for all of us as providers, we have fiscal responsibility to manage that on a go-forward basis. But from a pricing and stability standpoint, the benefit itself is protected and absent an active Congress and statutory reform. It's 1 of those things that adds predictability to our model on a go-forward basis.

Yes. And maybe it's a great point to differentiate versus like the home health space or somewhere that's...

That's why we bring it up...

Yes, of course. So you brought up the latest deal the VITAS business. That's maybe a good segue to just say what does the environment look like? I know, if we run the historical track, valuations ticked up very, very high, especially in the hospice side and, call it, 2020, 2021. Our sense is things are starting to pull back and normalize a little more, but there's a lot less data points out there. So maybe getting a sense of what's your appetite for deals? What does the marketplace look like broadly?

So I can talk about our appetite for deals and then Nick can talk more about the marketplace. But for those that don't follow Chemed too closely, we have no leverage. So there's no debt on our balance sheet. We currently have a little less than 1x free cash flow on the balance sheet currently. So from an appetite perspective, we can absorb fairly significant deals without any -- really without adding any leverage, any significant leverage -- so we're in a great position. We have a very strong balance sheet to be able to do any deal that makes sense, as you mentioned, from a valuation standpoint. And I'm sure Nick will talk about it, but from a hospice perspective, we would be much more interested in restricted states where there's a CON requirement versus an unrestricted states, unrestricted states, it's harder to justify on a return basis, what you're buying in hospice.

Compared to just a de novo alternatives that come along with it. But yes, multiples ran up, you saw a lot of folks that were in other aspects of post-acute looking to get into the hospice industry to try to build out the sort of post-acute continuum thesis in our portfolio, that drove some of the multiples in our opinion up, leading up to the pandemic. Where we are right now and the covenant acquisition really helps to reinforce it. We're very optimistic about -- and that acquisition and the integration of it has gone incredibly well, where you had 2 mission-focused organizations. We're 1 of the original founders of the hospice benefit that have come together and the community reaction has been fantastic. And so not only has pricing come into a line that we believe is very immediately accretive, but also has a great outlook, but it's helped to fill in a pipeline to of opportunities for us that historically had really created an unnecessary divide that was focusing on taxation status initially that took some of those points off the table and really are now more focused on providers, particularly long-standing providers to look at what's the right configuration for them to continue to service the community if they've been doing it for many decades and covenant and their Board give them a ton of credit. That was their mindset going into and that's a relationship and reputation-based approach, and we feel that we have a strong reputation and go about things the right way, and it puts us in a unique position to be a very attractive partner in some of those pieces. And we don't see that waning for many years to come as providers come out of the pandemic, look themselves in the mirror and say, what do we want to do and is our current configuration, the best way to service the communities like we have for many decades or should we look for partners, who have size, scale and the ability to complement a lot of things. And so we're really optimistic about the rest of this year '25 and beyond.

And just as a quick aside on that as well. On the Roto-Rooter front, as I mentioned, Roto-Rooter had some top line issues, but as a result of that, the franchise -- our franchises have probably had a harder time with some of the economic issues. They don't do the marketing we do, and those sorts of things. So there's a pipeline of reacquiring franchises, which is what we have done, significant to grow Roto-Rooter so significantly over the years. There's a pipeline forming there, too. We've seen more activity and gotten more calls in '24 than we probably have in the last 5 years combined. So the combination of the 2, we're very bullish on potential M&A activity over the next 24 months.

Got it. Really, really interesting. Maybe on the hospice market a little more broadly, and this include M&A opportunities or organic. You referenced part of the deal run-up was larger players that have diversified post-acute exposure. If we think about that landscape, 1 of them is gone now. One of them is potentially soon to be gone, but kind of off the table for the time being. Another 1 going through strategic review, still some turbulence there. And then on the private side, balance sheets that probably are prohibitive from being aggressive on the M&A front. Can you size up all of that and maybe for all of them, focus with more noise on the personal care and the home health side in terms of rates and various other things. Does that present an opportunity for you both organically or on the M&A front. Can you maybe speak to what that looks like given all the things we're seeing across large players?

Yes. So the short answer to that is yes. Across the board for a lot of the different factors. With all that being said, the thesis for the [ creation ] of many of those organizations is still heavily predicated on what the future of risk-bearing entities and particularly insurance plans or Medicare advantage in particular, what's their appetite and what is their strategy around either partnering with providers such as VITAS and others to deliver care in different services throughout the communities in which they want to serve, or have ownership in those provider spaces and operate them in distinct but yet sub other arms, whether it's [ Optum, Center Well ], et cetera. Carrying all the different brands that fold underneath the insurance company. And I think that, at the end of the day, will continue to be the primary driver as to what's the right configuration in the post-acute space for long-term growth. But the underlying piece in what makes us really optimistic and opportunistic in VITAS is trying to make sure we're proactively in front of ensuring the services in which we deliver primarily right now only hospice and palliative care our preeminent ad value can illustrate that return and can lean in and illustrate those things on business-to-business relationships. And hospice really drives a large total cost of care return and quality return out in the marketplace. But there is no doubt the future of health care is out in the home and out in the communities, and there is absolutely a role on the acute and the outpatient component that comes around with it. And we think we're really well positioned to be a -- preferred provider of choice with scale, where populations are, where people are, either taking on risk from a membership standpoint or contracting directly through other protocols. And we're going to continue to do that. And we're going to ensure we're in the markets that become the most attractive. And there are some markets we're not in today that I believe we will be in that just continue to better position ourselves if you go to the last slide in the VITAS deck, to be nimble from a Chemed ownership standpoint around continuing to either leverage our balance sheet and deploy that to create that strategic opportunity, or if the right opportunity presents itself doing what's in the best interest for shareholders and divesting it to that strategic partner if their preference is to own that continuum as opposed to partner in that continuum. So we're really well positioned. And as you point out, on some of the private assets in our space. Not having outsized leverage allows us to be very nimble if there are certain regulatory shifts one way or the other, and that has been a very intentional thesis of Chemed for the entire ownership period of VITAS and ever since I joined in 2009.

Got it. Okay. One more for me, and then I'll leave it to any closing remarks you guys want to leave people with? You mentioned the palliative benefit over -- maybe in a fairly kins way, what are the steps to make that more meaningful or to expand to sort of pre-hospice benefit? Do you need a Medicare reimbursement mechanism? Or how do you see it?

We would love a Medicare reimbursement mechanism in some of our industry conferences. I come out publicly say, I was hopeful about it in the past. I'm not as hopeful that will have a defined Medicare construct for it in the near term. But I do think as providers and providers of community-based palliative care, there is a real value that we see out in the community, and it is a pre-hospice complementary benefit, not a cannibalistic benefit. And so we've entered into and will continue to enter into business-to-business relationships where we can prove and provide those outputs to the federal government, and they create momentum for Medicare reimbursement, but there is enough opportunity in other value-based arrangements where we believe as the provider of palliative care and having advanced care planning and goals of care conversations earlier with patients and families, they have substantially better outcomes, keeps them out of higher cost unnecessary post-acute settings, and we'll introduce them earlier in their eligibility trajectory to the hospice benefit, so it will really -- it will benefit the industry as well as VITAS on a go-forward basis. So I think we'll have to do it privately on a business-to-business standpoint. But if the Medicare benefit, which we constantly discussed got lifted up, we, of course, would be all in and working with -- working everybody up in D.C. to make sure that's packaged in the right way.

Got it. Super interesting. 30 seconds left. Anything you guys want to leave folks with here?

No, I would just conclude we are very, very optimistic about both of our operating units. They're both very well run. We have a great balance sheet to be able to take advantage of opportunistic M&A opportunities. And I think -- we're very bullish on the next 3 to 5 years for Chemed and both of the operating unit.

Awesome. Thanks, guys.

Thank you.