Chemed Corporation (CHE) Earnings Call Transcript & Summary

Hello, and welcome again to the 43rd Annual JPMorgan Healthcare Conference. I'm Sean Perkins, an associate in the Healthcare Investment Banking Group, and I'm joined today by Chemed Corporation, with Kevin McNamara, President and CEO; Mike Witzeman, Vice President and CFO; and Nick Westfall, Chairman and CEO of VITAS Healthcare. So with that, I'll turn it over to Kevin. Thank you.

Thank you. In presentations like this, I always like to take a couple of minutes to explain the rationale or why it is that we're a company with a plumbing and drain cleaning company and a hospice company. It really goes back to history, and that is that Chemed started off as a spin-off of W.R. Grace & Company in 1971, with several businesses, largely specialty chemical businesses, eventually developed a health care group. And in 1981, it spun off what became a nursing home pharmacy business, Omnicare. And it retained some health care businesses over the years, sold a number of its -- bought and sold a number of companies, mostly in the chemical field. And in the early '90s, had the opportunity to make an investment in VITAS, which we did and had a preferred stock situation there and very good. We held it for a long time. During the late '90s, sold our other businesses and had basically our VITAS position, cash from selling the businesses and a company that we had bought in 1980, Roto-Rooter, we paid $18 million for them, and it's largely a nation's largest franchisor of any service, but one of the early television advertisers. So it's very well known as far as the service market, but a relatively small business. And so we actually changed the name of the company to Roto-Rooter at that point. Surely thereafter, we had -- we were notified by the VITAS management saying that they had found a purchaser for the company. And we said, well, great, what's the price? And they told us and we said, well, at that price, we'd rather be a purchaser than a seller. And so it was -- we actually borrowed more than our market cap at that point and purchased the 2/3 of VITAS that we didn't basically have the interest in up to that point. Now that was made an interesting situation. So that left us with the Roto-Rooter business, some debt and VITAS. And again, we were familiar with the health care business. I mean I was -- I actually was with Chemed Healthcare Group and then when Omnicare was formed, went with them as an employee as well. But we said, well, we want to be a health care company. We want the focus to be on VITAS. We want to go to health care conferences. That's the shareholder base we want to attract. Of course, there were questions at the time whether owning Roto-Rooter would be a distraction. We had bought and sold a lot of companies. We said, look, if it creates value, we would look to separate the 2 companies. If not, we would just have a lot of transparency in the reported numbers. So it would be easy for investors to do the sum of the parts. And if it was creating value, we just said we're familiar with it, focus on the health care business. The Roto-Rooter was an established business with us, very well run, good basic business. And we just said, well, until something better comes along, that's how we would maintain it. And this happened almost 25 years ago. I mean 21 years ago, just about 20 years ago right now. And when we look at the results, we say, well, what have we had? Over the 20-year period, we have 2 businesses that are similar in that they both have -- they're service businesses. They are market leaders, and they both have very good cash flow -- one more, sorry. It's on my screen, but not yours. During this period, the 20-year period, the adjusted net income for VITAS over the 21-year period is up 10.8%. We have the period Roto-Rooter was up 14.4% per annum. Again, I mentioned good cash flow, the magic of leverage, reducing the share count of Chemed from 27 million to 15 million shares outstanding. That meant that our adjusted net income over the period for Chemed is up 21.7%. Again, when you risk adjust those results, it's pretty good because they're largely -- largely not driven by acquisitions, driven mostly by same-store growth with some geographic expansion, both in VITAS and in Roto-Rooter, but pretty basic businesses. I would say that just going back to summarize, I mentioned the cash flow. At the current time, Chemed has no debt, a couple of hundred million dollars on the balance sheet. In dividends and share repurchases over this period, we've done $2.5 billion, okay, returned to shareholders. And not surprising, at this next chart, you look at -- it's our stock price and our adjusted earnings per share. You can see both show very consistent growth. As I said, 21% over a 21-year period is good. It's hard to think that it could continue at that rate, but it's -- there's some hiccups from here and there, including last year. We've been able to do that. But let me start going down the specifics, turning over to Mike to talk a little bit about Roto-Rooter and other basic financial issues, Mike is our Chief Financial Officer.

Thanks, Kevin. As he says, I'll cover a couple of slides on Roto-Rooter, but I'll be brief given that it's a health care conference and then turn it over to Nick on the VITAS side where he'll do lot of the heavy lifting of talking on what's happening at VITAS. So as Kevin mentioned, Roto-Rooter, generally speaking, is a grinded out kind of required business in the country. Coming out of the pandemic, there was -- there had been so much business that -- because people were home, our business during the pandemic had really skyrocketed. So there was some demand that had been pulled forward. And as you can see from this chart, '23 and '24 have been a little weaker than we would like for Roto-Rooter, a little bit of revenue decline year-over-year. But we're -- we're still -- ultimately, we're still very optimistic about the Roto-Rooter story for the long term. We're very bullish on the fact that plumbing is a required service and that industry demand is going to sort of return to what we would expect our normal 4% to 6% growth to be in the short term here. As Kevin mentioned, it's kind of odd, to have 2 companies, a plumbing company and a hospice company. And so we always are evaluating what are we going to do with these 2 things over the long term. And essentially, from a Roto-Rooter perspective, we've spent time garnering the cash flow. It's a very, very solid cash flow business and supplementing either VITAS growth things that VITAS wants to do or as Kevin mentioned, buying back shares, using the free cash flow with no leverage at all on our balance sheet. So I think our current best view is we're going to keep generating those cash flows from Roto-Rooter and using them for other things in the business to provide outsized growth. With that, I'll let Nick talk about VITAS.

Thanks, Mike. So as we transition and talk about VITAS and health care in general, this picture really encapsulates the last few years for VITAS. So let me walk the group through it here briefly. This outlines our quarter-by-quarter overall average daily census, which is our patient volume. Going back from the start of the pandemic through the third quarter of '24, which is our most recently reported quarter affiliated with it. When we think about it, and I'll briefly spend a second on the pandemic, in March of '20, our average daily census for that month was 19,378. And as everyone in this room is aware and every other provider through the course of this conference will highlight pandemic hits and with an acceleration of burnout and turnover, we were not immune to that whatsoever. The one thing that is unique to VITAS as well as the hospice overall is what we didn't see in the pandemic was any waning of demand for our services. The thing that changed was with all the disruption to the health care system, patients were being referred to hospice providers later in their disease trajectory. So that was impacting length of stay. And so if you look at that decline from the first quarter of '20 all the way through the spring time to summer time of '22, it's one which was unfortunate but also was predictable. And so we hope -- we believe we got a lot of credit because we forecasted those things as best as we could, no different than any other health care provider through the course of the pandemic. What we want to focus on in the vast majority of our story and the questions we've gotten over the last few years is an inflection point which was in the spring time of '22, what I did and what we challenged our entire VITAS organization about was looking ourselves in the mirror and acknowledging what our key core strength, the #1 strength we have organizationally is our culture. The VITAS culture is our strongest asset. Most companies say it. I think we've walked the walk related to it. And so we really looked ourselves in the mirror, and I challenged all of our leaders and said, we need to elevate and refocus on our culture. It's what has been great at that time for 42 years since the company was founded, and we became laser-focused on reducing retention. The other component that we layered into that was had an intentional focus on what we refer to as a community access initiative. And what that means is, while demand never waned, we needed to become more intentional around balancing our business on a market-by-market basis of not only just responding to hospital-based referrals, but also all the other non-hospital segments, facility, specialty physicians, et cetera. To give you an order of magnitude, that means going from 51% of our admissions being hospital-based to 46%. So it's not a substantial shift but it is an important component of this narrative. And so with the early success we saw for challenging our leaders and our local teams in terms of really improving our retention, driving down turnover, we enacted a recruiting and retention program that we officially launched. That started in the third quarter of '22 and went for 1 year until it completed at the second quarter of '23. That function that is a catalyst for us where we focused on 5 clinical disciplines at the bedside. And we added net bedside capacity during that window, which is more hires than folks that left and it was really turnover improvement that drove that of 784 bedside clinicians in that 12-month period. The more important part in what we get most of the story about here is, well, the program acted as a catalyst, leaning into and focusing on the cultural component and the sustainability of that cultural component and continuing to drive down retention, our performance since the expiration of that program has outpaced our performance during that program. So while we added a net 784 bedside clinicians for those 5 disciplines in the window, any trailing 12-month window since the exploration of the program is well north of 1,000 clinicians. So we have built a sustainable model to recruit and retain staff to meet that ongoing demand. And as you can see here in the graph running through the third quarter of '22, what that has translated to is in August of '22, we hit our low point, 17,000 -- my notes real quick -- 17,100 ADC. And as we exited the third quarter, we were carrying for well north of 22,000 patients. And that growth trajectory, I'll translate to from a financial performance here on the next slide. But -- the vast majority of all that growth was organic. There are a few de novos in there and there was our largest acquisition, but it's not material to the volume number there at the beginning part of '24. I'll talk about here in a second. So as we look towards the next chart, I'll very briefly reference Column 3, which is '23 performance. We grew top line at roughly 10%. We grew adjusted EBITDA at a 12% clip or $22 million, focusing in on the first 9 months of '24, and we'll release fourth quarter results and '25 guidance here at the end of February. But when you focus on it, you can see the patient volume translation coming into return on financial performance. So we grew for the first 9 months of '24 at about 16% top line. 14% of that's volume, 2% of that is pricing. And as you can see from a bottom line, I'll focus on the pretax component of it, we grew at 58% on a dollar basis from adjusted EBITDA. There's a little bit of noise related into that for some expense components in the prior year. But just as importantly, you can see we saw a marginal expansion in that 9 months window of 460 basis points. And it's what's led us to reinforcing our guidance through the year of an adjusted EBITDA margin of 19.3% to 19.7%. What that means and what we get a lot of questions are is that's fantastic. And what will '25 look like, what does the outlook look like? And what I wanted to reinforce here is as we think about the future of VITAS and we'll reaffirm it when we come out with guidance, we have a sustainable path to a new normal growth rate with it. And so in the short term, we're going to continue to grow organically like we have. Historically, we would have said patient volume was maybe somewhere in the 4% to 6% range. Over the last 6 months in most of these conferences, we've referenced, we believe we'll finalize it with our '25 guidance. Our new volume expectation is probably somewhere between 8% and 10% from a volume standpoint. So that's great in terms of repeatable grinded out approach. When we think about the short term, what we also have the opportunity to do is to continue to leverage our balance sheet. There are, at a minimum, 12 states we don't operate in that we think are very attractive to us. And we are out actively sourcing deals, and we expect some of that deal flow to continue to come through here in '25 and beyond. There are a lot of factors contributing to that on a go-forward basis. And I wanted to come back to an important component that occurred in the spring time of '24, which was an $85 million acquisition we did of a long-standing 43-year-old nonprofit hospice provider up in the Panhandle of Florida and Alabama. Why that's so important is, in our industry, and we believe we're at the early part of an inflection point, historically, non-profit and for-profit has been an inhibition around the ability of thoughtful consolidation of long-standing mission-focused organizations. Their Board and leadership saw the opportunity from an alignment standpoint. We've executed on that. It's fully integrated. It's outperforming our internal expectations. But equally and more importantly, the community response, the cultural response, the integration components that are so key to hospice and palliative care have gone fantastic. And we think we're in the early roads of really an ongoing consolidation inside of the space from a short-term standpoint. Long term, hospice and palliative care sits squarely in a value-based environment. I think anyone that's familiar with the space is aware of that. It drives down total cost of care. It elevates quality and the pandemic just accelerated the country's recognition that high-quality care can be provided at home. So we feel great about -- from a Chemed standpoint and from a VITAS leadership standpoint, we're operating a high-quality provider. There's very few in the space that are scalable at size. And so we'll continue to grow it selectively, like we've discussed, to expand our footprint across the country. And from a long-term standpoint, whether it is ongoing provider consolidation, health system consolidation, the payers' appetite to own or partner in the space, we think VITAS is incredibly positioned to just accelerate growth, provide high quality of care on the community in which we're talking about. And for this purpose, from an investor standpoint, just returned predictable, growing earnings to our shareholders that are accretive to EPS and Chemed's overall growth story. So with that, that's all of our prepared remarks at this point. And so I wanted to have the opportunity to take some questions and answers. Thanks.

[indiscernible] special program at this point? I believe a couple of your locations were selected for it.

To your point, it's very early innings. There really hasn't been any activity affiliated with it. Two of our locations were inside of the original 50. And as a reminder for the audience, not only the entire industry, but even bipartisan congressional support was behind this going into the year around how sort of deeply flawed the algorithm for the special focus program was to begin with. And so while time will tell around what '25 looks like for those selected providers, I think there's still a lot of activity. And even with the transitional team with the new administration, there's an opportunity to discuss, hey, should the special focus program continue as it is planned? Or should it go back in and really think through what was sort of an agreed upon, like I said, bipartisan acknowledgment that it was not ready for prime time. But with all that being said, the hospice industry and all long-standing providers want an elevation of quality and expectations on a go-forward basis. And so I'm hopeful that we'll be able to have a collaborative approach ongoing with the new administration to get this right. And we also have a consolidated trade association for all 6 industries inside of home care that came together last year that we have new leadership in place. And so that gives me some optimism industry-specific, but as it relates to us, provider, or anyone else that was on the original 50 that has been taken down modified and acknowledge the data was wrong even in the last 1.5 weeks by CMS. There's been no actual experience from a survey activity standpoint.

Just to be clear, the 2 VITAS programs that were selected are not 2 of our larger programs. And so while we do take it very, very seriously, at least from a financial standpoint, we don't believe there's a big issue for us specifically. But as Nick said, there's a lot of larger industry issues at play here.

Yes. Let me just give you one bit for people maybe who aren't as close to the situation as you are. This algorithm they use it a very substantial element. And correct me if I'm wrong, Nick you're closer than I am, but it's substantiated complaints. That is where there's been a problem. And again, we have human beings going out and doing a lot of patient days at all these over -- this is over a 3-year look-back period, I believe. But in one of the branches that is on the list, it's basically because they had us for having over this period, 4 substantiated patient complaints. That is -- it could be something like whether it's a patient who was in a nursing home and had a wound and it didn't heal. Maybe the nursing -- maybe your hospice provider should have noticed that they had a wound, that type of thing, unrelated to their cancer diagnosis, for instance. We accept that, substantiated complain, okay? The issue is, in this particular one, they have this for 4 but 2 of them were unsubstantiated. Investigated -- the state investigator will then say, yes, that's not a complaint against VITAS. And the issue as well, the records we don't properly reflect that. Now what does the hospice provider do? Say, well, you say we're on this list because we have 4 substantiated complaints -- patient complaints in the 3-year period. But we don't. And they kind of said, "Well, okay, we'll look into it." I mean that's the -- when you talk about the industries up in arms about this program, that's how specific it is. And then when ultimately we get to the point where they're looking at, let's say, a program like Florida that might over this period have 1 million patient days.They'll be looking at the same substantially complaints for 1 million patient days with other hospices that might have 1,000. I mean it's kind of -- again, we're concerned about it. It hasn't affected the business, it's embarrassing. It's something that, yes, no one wants substantiated complaints, but it's something we'll continue to work with the government, and Nick has been very active and through his associations to just address it from a public relations standpoint.

To drill down into a few of the comments just to help to further clarify it. So over about a 3-year window since the initial announcement was the industry has tried to help collaborate with many of these things. And so there is definitely data integrity concerns, not only that relates to us but other providers that have played out since the list was announced on December 20, and that's going to continue. I think there'll be even more activity coming out this week related to that. One of the other key areas and it goes back to how deeply flawed the algorithm is to begin with that Kevin was alluding to when he was discussing overall size is if there's no normalization inside of -- if you're going to use survey activity related to it, you could make an argument that it needs to be normalized for scale and how many patients are being cared for. So to put it in perspective, just order of magnitude and these are extremes at this point, but our consolidated Florida window over that 3-year period provided 20 million days of care, okay? And it's going to be compared against the same provider that may have provided 20,000 days of care. And that's fine, and that's a standard and it's a high-quality expectation that we all want to hold ourselves to. But the opportunity for a potential complaint to occur, we would argue in the industry as our -- it is not the same just mathematically. However, the approach is -- well that's fine, we'll figure it out as we go. And so it's a fluid circumstance. I think the one thing to remind everyone about and it's what we don't want to be dismissive about but the approach for all of this is, hey, we're going to come in and we're going to survey. We get surveyed all the time, so do all the other long-standing providers. And we have great success with all of those things. So there's no concern around -- we're not a poor-performing hospice, I think, looking and knowing some of those providers on the list. They're not either. And it's just something we'll navigate through as a collective industry and hopefully doesn't become too large of a distraction with the hopeful goal of continuing the positive narrative of all the things that hospice continues to provide and being a solution for the Medicare Trust Fund and wanting to continue to elevate quality but not conflating it with other narratives of fraud, specifically isolated in 4 states, things like that. That's why the federal advocacy in the ongoing federal advocacy will be so important for the industry and for VITAS overall. And we'll continue our leadership role in that.

Clearly you guys are the leaders in Florida. Are you concerned with now the change in the administration in the United situation with Amedisys, Humana buying Kindred, [indiscernible] getting closer to acquiring several different hospices. And my second question is, what are you thinking about in value-based arrangements especially around that big market of yours. And clearly, you are the leaders. The reputation that you have in that market is second to none. You have an executive that I have to mention her name. [ Betty Bell ] is the superstar or the superstars, but the market is changing, right?

It absolutely is. And I agree wholeheartedly. Betty has been with us for many, many decades. And in fact, we just were hanging on last week she's great along with the rest of our Florida team as well. So to take it in 2 part in the order in which the insurer and the payer appetite to continue to either own or partner in the space is one we pay a lot of attention to as well as have dialogue, right, of course. Humana had taken an approach where they wanted to own include the Gentiva component in the full Central asset, and they've divested and diluted some of that ownership because of brand perception, death panel risk and other reasons maybe why they didn't want to have ownership anymore in the hospice and palliative care space, but they wanted to own the home health space, right? And so when they purchase that asset, that has its own dynamic. The United Optum component, really specific around Amedisys because LHC once again is a home health asset for the most part. They have a little bit of hospice. We'll see if from an Amedisys standpoint, but the important thing to consider inside of Florida, in particular, or else in the other 12 states I referenced and that our certificate of need in Florida certificate of need. In the hospice industry, the thing that has a lot of uniform agreement now is where you have low capital and barrier to entry components, unlike the hospital industry, certificate of need when done right, functions very effectively to ensure access to care continues to happen, but you don't have a lot of unnecessary noise. So if I take a flip side of that, California, which is the primary area for fraud inside of the industry, has over half of the hospice providers in the country embedded inside of it, all of which have occurred in the last 4 years. The governor solution was do an active moratorium not to allow any more hospice providers, so a retroactive certificate of need to be reapplied in Florida, so -- or to be reapplied in California. So Florida, in some of those other states really are the prime example for where really high-quality hospice care continues to be provided, and that becomes important from a payer dynamic standpoint. So we cover about 80% of the population in the state of Florida. We entered into a new market we announced publicly at the completion of the third quarter up, in Tampa, we were awarded another one up by the villages here recently. So we're really excited about that story, but we're naive to partnership, and that's what I mentioned from a long-term trajectory. As it relates to value-based care, because the 2 things go hand-in-hand, we know and feel great and have been able to prove our value proposition in value-based care. Total cost of care reduction, elevation of quality, which is the holy grail of everything. What has been unique on a partner by partner basis is referral source and health systems basis is whether they want to partner or whether they want to really explore business-to-business contracting. And it's still early innings, but our business-to-business contract related to it. We're willing and want to take, we'll take full risk on everything because we know what that outcome is. The dynamic is many of those risk-bearing entities in a value-based arrangement, aren't used to someone taking -- will take full risk. They just want to come in like an insurance company and take the lion's share of the profits and negotiate on rate discounting on the back end. We've been unwilling to do that, and we'll continue, I think, as an industry also to be unwilling to do that. And so it will play out over time, but it's why I can make the comment for 40 years or 40-plus years in all the research illustrates high-quality hospice providers and high-quality pre-hospice palliative care providers drive down cost, elevate outcomes, and it's why I'd rather be operating in a space that is on the right side of the value-based equation and just being mindful and thoughtful about it from a business and scale standpoint versus being cut and trying to scrap for $0.60 on the dollar as compared to Medicare reimbursement which is a long-winded way to say it's going to continue to play out for 5 to 10 years. And as we think about VITAS and the VITAS asset, we think it's really well positioned. We'll continue to scale it accordingly, and we think it's a preeminent partner no matter which way the ownership versus partnership equation transpires long term. Great question.