Chemed Corporation (CHE) Earnings Call Transcript & Summary

Good morning. Welcome to Oppenheimer's 35th Annual Healthcare Conference. I'm Mike Wiederhorn, the health care services analyst. It's my pleasure to introduce Chemed Corporation and CEO, Kevin McNamara; CFO, Mike Witzeman; and CEO of VITAS, Nick Westfall. Welcome.

Thanks, Mike.

Thanks, Mike. Great to be here.

Thanks, guys. Thanks for attending virtually. Always appreciate it. So as we are in the middle -- coming out of Q4 into Q1 here. Can you talk about what you're seeing from VITAS coming out of Q4?

Sure. I mean, I think overall, it's pretty consistent in line with how we -- what we expected when we put together our full year guidance for '25. So overall, volumes are still continuing in line with the relative range in which we predicted and all the other variables that are going in are falling in nicely as we sort of continue to operate on what we've deemed as our new normal on a go-forward basis. I think the only other piece that has changed, which is an operating metrics, but some positive news and recognition on the regulatory front with acknowledgment by CMS that they have effectively pulled the special focus program for this calendar year, but for all obvious signs that will go back into sort of a rule-making discussion and hopefully get it right for the industry long term. So steady as she goes, consistent with what we had forecasted and full steam ahead.

We continue to be pretty optimistic about the prospects for VITAS in '25 and beyond. So I think we're happy with how VITAS is operating at the moment.

So you've been seeing really strong emission trends at recent. Where do you think volume growth settles out over the next 12 to 18 months?

I think for the most part, it's right in line with the census guidance in which we provided 8.5% to 9%. From an emissions trend standpoint, we'll see a slightly different mix that we've been talking about for 6 to 8 months with probably a higher percentage overall of patients coming from hospital from a preeminent segment across our entire enterprise. Traditionally, on average, those will have shorter length of stay. So it adds a little bit of compression to a 2024 volume growth rate. But all in all, it's 8.5% to 9% ADC supported by the right complementary emission trends and leading us into our overall guidance of 10.5% to 11.3%, I think, top line blended from a revenue standpoint.

If you see I think the 8.5% to 9% is still significantly above our historical average. So we're very happy with that level. And as Nick said, the difference between the '24 and '25 growth rate maybe something you might get to. But specifically related to the Medicare Cap. And absent that one specific limiting factor, we could probably still get to that '24 growth rate, but that's a limiting factor for the whole industry. So 8.5% to 9%, I think, is sort of a repeatable sort of long-term look at where we think we can grow sustainably.

What do you think -- obviously, you said that the numbers have come out, the growth numbers have come up. What's been driving that? What do you think kind of when we think about the industry from a whole, is it -- is there more understanding of the benefit, just the aging the population, you're taking share? Kind of what's I think the drivers behind this?

It's going to be the combination of all things like in many cases, it typically is. So overall, demographic shift, obviously, is in the industry's favor when you just look at to. Take the baby boomer into generation and particularly where they are from an average standpoint. And hospice is, I think everybody will know on this call, tends to bring patients on service in the early '80s. That's a primary driver. There's a recognition of the benefit and understanding of the benefit MedPAC just released their latest numbers on Friday that illustrates, I think it was 51, 51.7 total beneficiaries. We elected the hospice benefit and most recently completed '23 cap year. So the normal drivers around acceptance. I think the thing that excites us for the next 10 years is not just that demographic, but earlier access into the benefit and the recognition now that earlier access into the benefit not only means better quality outcomes for patients and families, but elevated savings from Medicare trust fund. And from a policy standpoint, that becomes just so critical and has rebaseline, particularly with the new administration that's looking for ways to improve health care, but do so that's accretive to the overall, the overall trust fund, as well as bending that cost curve. And hospice is squarely in the right place for that discussion. And so we hope that policy awareness all small tweaks will move in favor of more hospice, earlier hospice across the country.

That makes a lot of sense. So from a Trump 2.0 administration, you kind of see this as kind of not under a dark cloud here. You think you're very well positioned. You don't see potential areas for cuts or obviously, Medicare continue to be in across areas of conversation, but...

I think like everything, there's always the potential for misunderstanding. I think from a consistent positive messaging and general acceptance and belief of what we just stated around the hospice industry being one of the solutions for the Medicare trust fund. It's in a really good place. There was a ways and Med subcommittee meeting on post-acute last week. All the commentary from all of those committee members was frankly very positive towards hospice as it related to the overall post-acute segment. And so we think as an industry, the advocacy work that has gone on for the last 3 to 5 years, in particular, the new consolidated trade association, all those things hopefully allow the industry to be much more proactive and confident in all the dialogue that's supported with independent data to put us in a really good spot as an industry over the next decade plus. I think Mike, our only hesitation, our only concern is if you remember, in 2013, there is a 2% sequestration across the board on Medicare. So if the dose or something happens and they take a hacksaw to Medicare versus a scalpel that could affect us, but we don't hear anything that causes us concern on that front at the moment.

Perfect. So you mentioned -- you guys kind of mentioned cap earlier. Can you kind of -- obviously, you're getting -- you said more short length of stay admissions and so on. Can you discuss the cap pressures you're seeing in Florida? And you kind of mentioned on what's the plan to increase emissions at these programs? And how should we think about cap exposure across your entire portfolio?

So in Florida, I think it's been a bit of a progression. And in the pandemic, the long length of stay, patients were the ones who were losing because we didn't have access to those pre-emission locations in many instances. And so during the last 2, 2.5 years, Nick and Chemed, we've talked a lot about the community access program that was specifically designed to start taking in those completely appropriate patients from those preadmission locations. So we were intentionally increasing our length of stay. Then in '24, we saw early in '24, but we were going to moderate that a little bit. But that got exacerbated to some degree by the rate differential that we talked about that came out, I think, April, maybe April or May last year, where there's almost a 200 basis point difference between the cap protection number increase versus our rate increase in Florida specifically. And so that made the issue a little more urgent for '25 than we had originally anticipated. So that's sort of the progression of where we are. And as you say, we've talked about it, but we need to take in more hospital admissions. It's not a huge sea change. We have, last year, roughly 45% or 46% of our preadmission location admissions were from hospitals. And that just needs to get back to its more historical 50% or 51%. So it's not a huge change, but it will compress the growth trajectory we saw in '24 to still an above-average growth trajectory for sure, just not quite the record level of '24. And Mike, on the amid side, we've been very encouraged by the fact that the last 3 cycles we've got additional CONs in Florida, which, obviously, there's some time in developing them, but VITAS has a history of hitting the ground running on those and was providing a lot of room for growth as it was developed from a standing start, let's put it that way. So that's very encouraging.

And the only thing to probably button it up all around is just as a reminder, every year, the ongoing balance and management of Medicare cap in every market with unique CBSA as part of our ongoing forecasting standpoint and our analysis. I purposely and intentionally made some comments on the last earnings call that just sort of highlighted how the Medicare cap in general, and this is still just philosophical when it was put in place in 1983 and the benefit getting acted to just try to protect what was intended to be a desirable benefit, it was 100% cancer patients at that point. Now as we can all see, the hospice benefit has really expanded access and understanding across the board for every diagnoses and when you look at earlier access or longer length of stay into the benefit for every disease state as evident in the NORC study, that saves and elevates the total cost of care savings for the Medicare Trust Fund, it is sort of counterproductive to put a limiting factor like Medicare cap in place for providers where are the arguments, the earlier access, the more money it saves the Medicare Trust on, why try to put something in place that limits that earlier access or on a total weighted average. But it's fine, and it's also one of the things that has been in place for 45 plus years at this point and every provider is used to managing written one year maybe the circumstance in which we're talking about. The next year, the price increase for that CBSA may be lower than the overall national average. And therefore, it generates cap cushion on October 1 just because of the math associated with the national cap rate compared to the individual markets. So it's a year-to-year evaluation, but it's minor in terms of just shifting strategies on a market-by-market basis.

And I think you also asked about the trajectory everywhere else. And I think it's steady as she goes. The place we've historically had cap is in California, and that's just -- that's a difficult rate environment. There's just fewer days that you can build in California based on the higher reimbursement rate there based on the higher cost of living. And so that will always be a tougher cap environment, but that's sort of saying as that's what we've, we've been, as Nick said, managing for years now. So everywhere else is pretty steady. It's Florida. That's really the focus of what we're looking at.

Kevin, you mentioned the CONs and de novo actions in Florida. So kind of take us kind of the ramp up there and economics of these locations, how that's going? Kind of just give us kind of a status of where that's at?

So ramp-up wise, I'll keep using the new normal term. The last 5 years, we've really looked at elevating our ramp-up performance and entry approach on a market-by-market basis in every new market. Florida is where the vast majority of the de novos have lifted up, and it's been extremely successful. So the point is we'll have teams in place months before we effectively get the authorization, building relationships, building awareness. And in Florida, where there's better and broader brand awareness, it just really helps to -- the lesson we learned is we tend to have far more demand than we had ever anticipated on day one, and we better have all the team members and clinicians to care for those patients. And so we've matched those 2 things up, and it's really led to a ramp-up in our last few CONs that are -- everyone is a new record setter from the last one. Where we are currently, we have Pasco County that has just been recently lifted up. That's going well. Every market has its own unique opportunity embedded inside of it. And we're moving forward with Marion County that has full clearance and authorization that has occurred since our last earnings call. So we're excited to get into Marion County over the next few months. And we think that one is very attractive because we serve all the surrounding counties around Marion County. We get a lot of patients already that leave Marion County going into the territories in which we are -- they go home, right? They're crossing the county lines and we're caring for them today. And so we think that is a very exciting one for us for the second half of '25 and into '26.

Including expect the villages.

Yes, everyone's pretty familiar with the villages, the largest retirement community. At least in the country, if not the world, the village is a smack dab in the middle of Marion County. So we're very excited about it. Ramp-up time and curve and how it translates economically. We don't think it would be substantial to overall earnings from an EPS standpoint in '25. But as we go back to Medicare Cap as an example, every Medicare admission that we're receiving for the most part there is a first-time Medicare admit without any census related to it. And so it's very accretive as it relates to generating Medicare cap cushion for the first 3 years of any new CON.

For guidance, Mike, and Nick touched on it, it's neither of them are going to be material from a top line perspective for '25 and they both will probably have some level of operating loss in '25, but not material there either. And that's all sort of worked into the guidance. But it's probably '26 before we maybe see them turn profitable. But as Nick said, for '25 that by far, the largest impact is going to be Medicare Cap.

And the ramp-up costs were already assimilated into our budget for '25. So the costs were there. It was just an expectation on volume, like I mentioned, because we will -- we would have -- whether we open in May or June or whether we open in September, our ramp-up cost piece looks very similar as we get the teams prepared hired offices set up, leases, et cetera, just to be off and running on day one.

Perfect. Just to be fair on time here, I'm going to move over to Roto-Rooter, even though I can continue to ask another 15 minutes of questions on hospice. But obviously, Roto-Rooter has been a little bit uneven over the last 12, 18 months, definitely has been some pressure over there. So can you kind of give me your updated thoughts on the positioning in '25 coming out of the year kind of where you're at, at this point in time?

Well, you'll see from our guidance, like we're encouraged by certain recent develops. And when we have summary starting in the second quarter last year. What we saw in developing or was really a sales problem. A top line problem. I don't -- we've talked a lot about what caused the recovering from the pandemic having -- and home service has been so good during the pandemic that drill a lot of private equity funding that we saw a very uncertain market for bidding for space and Google. All those things happened and we saw a significant decline in the number of calls that was getting quarter-on-quarter. And we took a number of steps to combat that. In addition to that, we saw that Google has evolved over the last several months, and that is -- they had a loss leader program, which is to attract more people onto the network called LSA, where they basically it was a bargain price and just slowly over the last 3 quarters. That slowly, I mean, the cost of that has more than doubled over the period. So again, a little less competition there. But the bottom line is that we have -- we observed for really the first time in the whole time, this own Roto-Rooter in 1980, a top line problem. And normally at Chemed, the #1 focus is margin and profitability. We had to shift gears a little bit and say we had heavy rising and that we had to focus more on sales. And to the extent that, I would say, Stage 1 for us is improving the top line, which Roto-Rooter's doing. And over the last couple of quarters, we've said we've had some comments. Yes, but your margin is it previously was. That's the case. That's kind of Stage 2 for us improving the margin and also -- but part of it is a part and parcel of the fact that part of our focus is about commercial. And commercial has always been a little lower margin, a little tougher competition. The situation repeat your job. You almost get second and third competing bids. But Roto-Rooter, again, based on our guidance we made as encouraging results for us. Not out of the woods, compared to the [ Halcyon ] days of the pandemic. But I'm encouraged. Mike, what would you say?

Yes, Mike, I would say there I think there's a fundamental difference maybe with the guidance we gave for '25 versus what we had talked about for the guidance in '24 around this time last year. I think the guidance last year was based at least somewhat on us thinking that the economic environment was going to improve, and that didn't turn out for us. This year, the guidance in '25 is much completely based on some of the things Kevin talked about, specific management programs that we've put in place in '24 that are showing results. Kevin talked about commercial specifically, and commercial is going to be the outsized driver for revenue growth in '25. The other thing that we've talked about is conversion rate from the calls we do get for residential converting those into water restoration and excavation jobs when appropriate, just a higher rate of conversion there. And we've seen some improvement there in the latter half of '24. So our confidence in '25 comes solely from the fact that the improvements we saw, say, in the fourth quarter were driven by management programs and initiatives specifically. So said another way, baked into the '25 guidance, it's really no expectation relating to improvement in the market itself.

Okay. So Yes, it sounds like, obviously, commercial business is coming back faster than the residential business. Can you discuss what kind of the, I guess, the seasonality or the cadence of that of the commercial versus the residents? And I guess, also another part I saw, part of the rebound was like you said, you saw improvements in the water restoration business. Are there further opportunities there as well? And are there similar practices that might be able to help other locations in addition to what you did previously?

Commercial is probably less dependent on seasonality. Those are large apartment complexes, McDonald's, multiple McDonald's franchises, and they're going to use this multiple times a year based on issues they have. So I would say commercial has some dependence on seasonality, but not nearly as much as residential. Residential has seasonality, of course, in cold weather months, fourth quarter and first quarter are usually our highest revenue quarters. Cold weather and wet weather is good for us. But ultimately, that tends to sort of even out over time. So we're encouraged at the overall strength of the underlying metrics more so than specific seasonality issues. Talking about water restoration, that's what we were talking more about residential. And essentially, if you remember, Mike, earlier in the year of '24, we talked about a specific initiative we took in commercial, where we looked at 8 underperforming branches and really focused on those and tried to pulled through some specific actions in each one of those 8 underperforming branches. Roto-Rooter went through a similar playbook than early in the fourth quarter on wet water restoration from residential in 8 branches they saw that were underperforming from a conversion standpoint and water restoration is almost exclusively determinant based on first to the customer's door. We want to get there before an insurance -- before they call their insurance company. And if we can do that, we are very, very good at closing the deal. But if they call the insurance company first, it's much less likely that we will get to work. So there was a specific management process undertaken for 8 underperforming branches and those really improved in the fourth quarter and continued to show positive momentum in the first quarter of '25.

And Mike, one thing, just to put it in perspective, we talk about how we improved the business without the macroeconomic situation changing or even the competitive landscape on Google. And I'll just use this as a basic example. Something that Roto-Rooter has not done can have a lot of emphasis on and it's been in commercial excavation. And one of the reasons is that it's a highly competitive, they're bigger jobs. In other words, some are huge jobs. So not necessarily the bread and butter of Roto-Rooter excavation business. But this order of magnitude, what we view as a lead. That is where our technician has digital camera work or what have you determined that this is a possible excavation job. The conversion rate for those type of jobs. Historically, it's been about 8%, okay? In other words, it's a tough market to get those. To this emphasis over the last 6 months, it's been 11%. So we've been looking at the margin. We've been more competitive on our bids. But we're having significant improvement in that type of thing, but we still have a lot a long way to come. I mean, just out of single digits, there's no reason why, in time, we can't approach our -- the same conversion rate that we see on the residential side. So that's an area where -- that's the method by which we're running, pulling ourselves out of the situation.

By virtue of the size of those commercial excavation jobs, it's much more likely that potential customer would go out and get 3 bids and those sorts of things. And so we've had to really look hard at, as Kevin mentioned, the price of those jobs. And maybe give in a little bit on our premium pricing model a little bit, not hundreds of basis points, but given a little bit to get that job and we're being more successful getting those jobs.

Perfect. I have one more question on Roto-Rooter. You talked about private equity in the past, being more competitive, continuing to ramp up their spending. Is that starting to slow down? What are you seeing from that perspective from a competitive environment from the PE shops?

Well, let me give you one example. We recently did a secret shopper just as confirming this. But there seems to be many cities almost a price war for the basic drain cleaning. And for example, in Cincinnati, at least 3 businesses, usually HVAC businesses, which has been purchased by private equity and they've expanded into plumbing or bid in plumbing, but dramatically increase our emphasis on it. We see these companies basically bidding more than Roto-Rooter for placement on Google. So we look at our placement costs, and we see that we're in the middle of the road. We shoot to be #3, 2 or 3 in the bidding. We're happy if we're on the first page. Coupled with the name recognition of Roto-Rooter that usually serves us well. We paid in excess of $90 per click, okay? For our placement, which is third. And we -- and it usually takes us "a click and a half" to get a job. Okay? So we know what our Google costs are. And our competitors are advertiser, they'll clean any drain and there's 3 of them in Cincinnati, and it varies from $78 to $99. We contacted, we had somebody who had an actual drain problem, they contacted one of our competitors, and they came out and they cleaned the drain for $99 -- excuse me, for $91. Why they -- I think obviously, they paid more -- and it was [indiscernible]. They got the job base from Google. And we say, "That doesn't sound like sustainable competition to us". It's they're obviously looking to establish enablement in Cincinnati, but if they paid in excess of $100 to Google for the job, paid a service person to come out and do the job and hope to report profit on it. I mean, again, it's -- that gives you some indication of the level of competition. It is a [indiscernible] competition? Is it a race to the bottom for them. I think it may be, as you know, like over the years, we do not advertise price. We don't give price over to the phone. Somebody contacts us, they say, how much is it? We say, well, look, we said so we don't know. We have to analyze the situation while -- one example that will give you a written free estimate, you're under no obligation if you want us to do it, we'll do it. I mean that's how Roto-Rooter conducted business for their entire existence. So we feel that -- I touched on the residential side, it has a dampening effect on Roto-Rooter's residential business to have that type of competitor out there advertising and providing service loss. But it's heartening for us too in that if that's the best they can do. That is compete with us by making no profit or operating a loss, we think we'll be fine. And it's just a matter of how much -- what the investment horizon. If they really think they can sell the business based on a multiple of top line, more power tool, ultimately, you have to make a profit and provide the service.

One last question here. We got like 30 seconds. So always a good question for you guys, capital deployment. That's always been something you always going to watch what you guys are doing. You guys have always done -- been very intelligent in terms of the use of capital. So just kind of your last thoughts on that.

Well, the playbook that Kevin and my predecessor, Dave put together on capital deployment, that has not changed. You saw in the fourth quarter, we saw a dip in our stock price, we saw interest rates coming down on the cash we had on the balance sheet, and we took a bigger swing at buybacks. But as always, our first priority would be accretive acquisitions like we did at VITAS with covenant last year, but we'll always do some level of share buyback on a quarterly basis. We think it's the right thing to do from a free cash flow standpoint and especially at the moment, no matter what the stock price is, we're bullish enough on both of these businesses over the next 12 to 24 months that it's going to look like a good deal from a return standpoint on a risk-free basis, essentially no matter what price we buy at the moment.

Perfect. Well,we're out of time. I appreciate your time today always participating and love hearing the story, and it sounds like everything is on track. So like I said, thank you. Thanks again for all your time.

Thanks, Mike.

Thanks, Mike. Have a good one