Chemed Corp (CHE) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Chemed Corporation Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Ms. Sherri Warner with Investor Relations. Please go ahead, ma'am.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2019 ended December 31, 2019. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.

During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of February 18 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated February 18, which is available on the company's website at chemed.com.

I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Sherri. Good morning. Welcome to Chemed Corporation's Fourth Quarter 2019 Conference Call. I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail. I will then open up the call for questions.

Consistent with the first 9 months of the year, our fourth quarter 2019 operating results were very solid and at the high end and, in many cases, exceeded our internal expectations. In the quarter, Chemed generated revenue of $522 million, an increase of 14.2%. Our consolidated net income in the quarter, excluding certain discrete items, was $4.22 per diluted share, an increase of 26%.

VITAS' admissions have continued to strengthen throughout the year. In the fourth quarter of 2019, we admitted 17,479 patients, which is 5.4% above the prior year and compares favorably to the second quarter 2019 admissions growth of 3.8% and our third quarter admissions growth of 4.4%.

VITAS revenue increased almost 11% in the quarter. This was driven by a combination of our 6.1% growth in Average Daily Census as well as our annual Medicare price increase that was effective October 1, 2019. This 11% revenue growth resulted in a 26.8% increase in adjusted EBITDA.

Roto-Rooter continues to show consistent growth in our core plumbing and drain cleaning service segments with aggregate revenue increasing 21.2% in the quarter and adjusted EBITDA expanding 20.9%. While we posted excellent growth in adjusted EBITDA, our overall adjusted EBITDA margin of 24% was a slight decline over the prior year quarter. Normally, with such a significant increase in revenue, the Roto-Rooter cost model would show an increase in EBITDA margin. However, our Roto-Rooter growth -- our Roto-Rooter margin growth was held back as a direct result of our previously announced Roto-Rooter acquisitions that initially generate operating margins that are substantially below our Roto-Rooter operating metrics.

As most of you are aware, in the second quarter of 2019, we acquired the California franchise territories serving Alameda County and portions of southwestern San Joaquin County. These acquired territories had annual revenue of roughly $11 million and serve a population of approximately $1.7 million (sic) [1.7 million people].

In September 2019, we completed the HSW acquisition, which was our largest franchisee. HSW consisted of franchise territories in Metro Los Angeles, which includes Inland Empire, San Fernando Valley, San Gabriel County, Orange County as well as territories in San Diego, California; Dallas and El Paso, Texas; Phoenix, Tucson and Florence, Arizona; Salt Lake City, Ogden, Park City and Provo, Utah; and Portland and Salem, Oregon. Collectively, these HSW Roto-Rooter locations serve approximately 32 million people with an aggregate revenue base of about $70 million.

These acquisitions have been immediately accretive to earnings. However, we acquired these territories knowing their gross margins, EBITDA margins and pricing and mix of service offerings were significantly below the average of our existing Roto-Rooter operations. For example, in the fourth quarter of 2019, the HSW acquisition had gross margins that were 10 percentage points or 1,000 basis points below the Roto-Rooter average. The HSW branch operating margins were 18.8 percentage points below our average Roto-Rooter branch operating margins.

The operating performance of these newly-acquired territories are slightly ahead of our initial projections. However, we are in the midst of a project to reengineer these branch operations to emulate our Roto-Rooter branches. I have strong confidence that every one of these acquired territories will have significant operational improvement in margins and overall profitability over the coming quarters.

With that, I would like to turn this teleconference over to David.

Thanks, Kevin. The VITAS' net revenue was $340 million in the fourth quarter of 2019, which is an increase of 10.7% when compared to the prior year period. This revenue increase is comprised primarily of a geographically weighted average Medicare reimbursement rate increase of approximately 5.5%, a 6.1% increase in days-of-care and an increase in the Medicare Cap billing limitation that decreased revenue 0.3%. This growth was partially offset by acuity mix shift, fluctuations in net room and board and contractual adjustments, the combination of which negatively impact revenue growth approximately 0.7% when compared to the prior year period.

Average revenue per patient per day in the fourth quarter of 2019 was $198.48, which is 5% above the prior year period. Reimbursement for routine home care and high acuity care averaged $164.62 and $996.82, respectively. During the quarter, high acuity days-of-care were 4.1% of total days-of-care, an 11 basis point decline over the prior year quarter. This 11 basis point mix shift in high acuity days-of-care reduced the average increase in revenue per patient per day from 5.5% to 5% in the quarter.

In the fourth quarter of 2019, VITAS accrued $4.5 million in Medicare Cap billing limitations. This compares to the prior year Medicare Cap billing limitation accrual of $3.5 million. VITAS currently has 30 Medicare provider numbers. On a 12-month trailing basis, 23 of these provider numbers have a Medicare Cap cushion of 10% or greater, 3 provider numbers have a cap cushion between 0% and 5% and 4 provider numbers have a Medicare Cap billing limitation.

The fourth quarter of 2019 gross margin, excluding Medicare Cap, was 26.3%, which is a 204 basis point margin improvement when compared to the fourth quarter of 2018. Selling, general and administrative expenses were $21.2 million in the fourth quarter 2019, which an -- is an increase of 3.9% compared to the prior year quarter. VITAS adjusted EBITDA, excluding Medicare Cap, totaled $70.5 million in the quarter, an increase of 27%. Adjusted EBITDA margin, excluding Medicare Cap, was 20.5% in the quarter, which is a 259 basis point improved -- margin improvement when compared to the prior year period.

Now let's turn to the Roto-Rooter segment. Roto-Rooter generated quarterly revenue of $182 million for the fourth quarter of 2019, an increase of $31.9 million or 21.2% over the prior year quarter. On a unit-for-unit basis, which excludes the Oakland and HSW acquisitions Kevin mentioned earlier that were completed in July and September 2019, respectively, Roto-Rooter generated quarterly revenue of $162 million for the fourth quarter of 2019, an increase of 7.9% over the prior year quarter.

Excluding the Oakland and HSW acquisitions, commercial drain cleaning revenue increased 7.1%, commercial plumbing and excavation declined 0.1% and commercial water restoration declined 17.4%. Keep in mind, commercial water restoration represents only 10% of our total water restoration service revenue. And overall, on a unit-for-unit basis, commercial revenue, excluding these acquisitions, increased 1.2%. On the residential side, excluding acquisitions, our residential drain cleaning increased 10.1%, plumbing and excavation increased 7.4% and residential water restoration increased 14.6%. Overall, residential sales, excluding acquisitions, increased 9.5%.

As of December 31, 2019, Chemed had total cash and cash equivalents of $6.2 million and long-term debt of $90 million. During the fourth quarter of 2019, the company repurchased 50,000 shares of Chemed stock for $20.7 million, which equates to a cost per share of $414.11. As of December 31, 2019, there was approximately $104 million of remaining share repurchase authorization under this plan.

Our guidance for calendar year 2020 is as follows: revenue growth for VITAS, prior to Medicare Cap, is estimated to be in the range of 8.5% to 9.5%. Both admissions and Average Daily Census in 2020 are estimated to expand approximately 3.5% to 4.5%. And our high acuity days-of-care are estimated at 4.1% of total 2020 days-of-care.

Full year adjusted EBITDA margin for VITAS, prior to Medicare Cap, is estimated to be 18.7% to 19%, and we are currently estimating $18 million for Medicare Cap billing limitations in calendar year 2020. Roto-Rooter is forecasted to achieve full year 2020 revenue growth of 13% to 14%. This revenue estimate is based upon unit-for-unit revenue growth of approximately 4% to 5% in our core plumbing and drain cleaning services, continued but slowing revenue growth from water restoration services combined with 12 months of revenue from the Oakland and HSW acquisitions. Roto-Rooter's adjusted EBITDA margin for 2020 is estimated to be in the range of 23% to 23.5%.

Based upon the above, full year 2020 adjusted earnings per diluted share, excluding noncash expense for stock options, tax benefits from stock options, costs related to litigation, intangible amortization of reacquired franchise rights and other discrete items, is estimated to be in the range of $16.20 to $16.50. This 2020 guidance assumes an effective corporate tax rate of 25.2%. For comparison, Chemed's 2019 reported adjusted earnings per diluted share was $13.96.

I'll now turn this call over to Nick Westfall, our President and Chief Executive Officer of VITAS.

Thanks, Dave. VITAS had an excellent fourth quarter, completing what was a solid 2019 where each employee came together to focus on execution throughout the entire year. I would like to thank each of our VITAS team members for their ongoing commitment and dedication to making these results a reality.

In the fourth quarter, our Average Daily Census was 19,258 patients, an increase of 6.1% over the prior year. Total admissions in the quarter were 17,479. This is a 5.4% increase in admissions when compared to the fourth quarter of 2018 and is our third sequential admissions growth rate increase starting with the second quarter of 2019. This sequential performance continues to be a result of our collective organization, striving to improve all aspects of our ability to differentiate VITAS and efficiently serve the patients' families and referral sources in each of the communities in which we operate.

During the quarter, admissions increased in all 4 of our preadmit locations when compared to the fourth quarter of 2018. Hospitals, which typically represent 50% of our admissions, increased 5.8%; home-based admissions increased 1.5%; assisted living facilities increased admits by 9.4% and nursing home admissions expanded 0.2%.

Our average length of stay in the quarter was 95.2 days. This compares to 92.6 days in both the third quarter of 2019 as well as the fourth quarter of 2018. Our median length of stay was 16 days in the current quarter, which is 1 day less than the 17-day median in the prior year quarter. On a year-to-date basis, median length of stay is 16. Median length of stay is a key indicator of our penetration into the high acuity sector of the market.

With that, I'd like to turn this call back over to Kevin.

Thank you, Nick. I will now open this teleconference to questions.

(Operator Instructions) And our first question comes from Joanna Gajuk with Bank of America.

This is Joanna Gajuk from Bank of America. So in terms of, first, with VITAS, margins were pretty good in that segment. Obviously, we know the rate are coming much better. And I guess even after you raised your view for the year, so you came much, much better than your updated guidance. So can you talk about the main areas of upsize -- upsides versus your internal expectations would drove a better performance in Q4?

Yes, Joanna. I'll -- this is Dave Williams. I'll comment first. So the -- of course, we knew we were going to get a price increase. That was significantly higher than anyone anticipated when the CMS announced it in July, August. And basically, they were taking a rough cut of 20 basis points out of routine home care. And then general inpatient care from a national rate was going to go up 35%, and continuous home care was going up almost just a hair under 40% nationally. But we had a lot of uncertainty regarding how that would actually impact our fourth quarter as well as what we're looking at going into 2020. And the big unknown would that be -- of that would be, of course, geographic mix shift, which always moves around for VITAS. But the other side of it is what would our high acuity days-of-care turn out to be in the fourth quarter of 2019 as well as going forward in 2020. As an example, as you know, we mentioned that there was a really slight decline in our days-of-care and continuous home care and GIP combined, which is what we call high acuity, that's declined 11 basis points in the quarter over the prior year, going from like 4.18% to 4.07%. That very modest 11 basis point decline actually shaved about 50 basis points off of our price increase, going from 5.5% to 5%.

So what we -- when we gave our initial guidance, we were somewhat conservative knowing that high acuity care mix shift is going to have a significant impact on the pricing points we realized, but it looks like we stabilized around 4% to 4.1%. And that's really what we ended up projecting into our guidance for 2020. So we ended up with a net 5% price increase, and that's really the big driver in terms of the 125 basis point EBITDA margin increase for VITAS in 2020 over 2019 with, of course, a bit of that growth, actually half of -- some of that 5% growth -- some of the 5% price increase growth we had was translated into higher margin in VITAS' fourth quarter 2019 EBITDA.

But you bring up a great point because we don't have any control or driver relative to what high acuity care turns out to be in any given quarter or any given year. It's the thousands of individual decisions made by our physicians based upon current patient needs. So we're still keeping a close eye on what that ratio turns out to be, but it's not a ratio we're in any way of -- in control of. But I'll turn that over to Nick to see if he has any additional comments.

Before I turn it over to Nick, I just want to say there's also another skewing factor within high acuity and that is whether it's continuous care or inpatient care. And obviously, if -- continuous care has a little bit higher margin. So that -- if that shift, that affects the relationship as well. But having said that, Nick, any other comments for the question?

No other comments other than just to reinforce the last point, Joanna, which Dave made, the decision-making related to whether patients are experiencing a period of crisis and, therefore, warrants a higher level of care, whether it's continuous care or GIP is very patient specific and clinically driven by our physicians and our care teams. And so while they'll continue to make those decisions, we're just watching what that translates into from a total -- percentage of total days on a go-forward basis and modeling that into our guidance on a go-forward basis.

Right. So on that point, so you're saying that your guidance for 2020 assumes 4.1% total days-of-care being high acuity. So how does this compare year-over-year to '19?

So I'll walk you back through each of the last few quarters so that you can see the degree of comfort with it. In Q2 of this year, it was 4.2%, which was flat against the prior year. Q3 was 4%, which was 70 -- 7 basis points less than the prior year. And then as we just reported, it was 4.1%, which was 11 basis points less than the prior year quarter. So that normalization around 4.1% is what we felt comfortable with going into 2020 as we anticipate total days-of-care to continue to expand, but the ratio between routine home care and high acuity to remain consistent with what we're experiencing at the tail end of 2019.

So I'm sorry, so you're saying that -- so I'm sorry, so year-over-year for the full year, you're expecting the high acuity days-of-care as a percentage of total to actually increase or decrease slightly?

To remain relatively flat, which is at that 4.1%.

Yes, but just -- the full year 2019, Joanna, just so we're clear, came back to 4.17%. But everything we're benchmarking is off of fourth quarter 2019 so that's really what we think. And it does look like it stabilized. Like remember, Nick mentioned, it was 4% even in the third quarter of 2019, 4.07% in the fourth quarter of '19. We really do think it's stabilized. But we have to emphasize, this is just an accumulation of physician-based decisions. And if we see a spike in referrals that come out of hospitals, that number could go up. If we drop a little bit in that hospital-based referrals that result in admissions, the high acuity ratio could drop a little bit.

It's based exclusively on patient need, which is very much a market-specific dynamic.

Right, understood. And then on that front, in terms of the guidance for the margins in VITAS for the year, so the guidance imply sort of 120 basis points or so increase year-over-year. Obviously, in Q4 alone, this -- the margin increase are much more dried. So I assume it's the dynamic of Q4 of 2020 having a normalized revenue growth, right, locking the rebasing, those higher rate. So is that a way to think about it, that we should expect the first 3 quarters have a nice -- or above 100 basis points margin expansion and then things will normalize in Q4 of 2020?

Certainly, things will normalize in the fourth quarter of 2020, when we see what our October 1, 2020 increase is. It would be probably reasonably conservative to keep that in a range of 1% to 2%. But typical of our business model, when you get all of the price increase from the federal government on October 1, well, certainly, October 1, inflation hasn't eroded any of that price increase, so you expect more of that to fall to your EBITDA line. But then as you go out throughout the quarter and then you go into the following year, as people have passed through pricing, wage increases, as inflation erodes that, you certainly -- all things held constant, economically, you'd have to expect an erosion of that margin from the fourth quarter. And that's what we experienced throughout the year. If you look at the last 10 years, the only thing that can offset that in terms of inflation eroding is the little bit of leverage we have in our fixed or semi-fixed costs in the form of central support costs.

Right. And the other piece of the guidance on VITAS where you're guiding to Average Daily Census growing, call it, 4% and admissions growing 4%, but in terms of the Average Daily Census, clearly, 2019 came in much better. It was 6% for the year, still is above your guidance. So is this just some conservatism here? Or are you just kind of looking on the tough comps in second half of '19 because the growth was so strong? Or can you just kind of frame to us how we should think about the ADCs?

And I guess with that, there were some comments made how you're trying to drive better experience for the patients and referral sources. So can you talk about that? Give us more specific examples of actions you're taking that allows you to deliver that 6% ADC growth that you did in 2019.

Sounds good, Joanna. I'll take a stab at answering both of those, and I'm sure Dave and Kevin may have some additional color to add into it. But for the admission and the ADC range inside of 2020, it's consistent with some of our historical approaches to it, which is to provide a conservative range on both of those operating metrics. And throughout the course of the year, we may modify that range as experience comes in. And so admission growth and ADC growth, while there is a correlation to it, is also unique, depending on the unknown of how long a patient is ultimately going to stay with you for all those appropriate patients that come on, on Day 1. So to your point, it is -- I don't know if we'd describe it as conservative, but it's consistent with our historical guidance of a range for both that we'll update throughout the course of the year.

And the only thing I wanted to add is what -- there's a factor that can affect these numbers. That is in areas like Florida, California, where we want more short-stay patients and we actually want the average length of stay to go down, the salespeople, they spend more time calling on hospital discharge planners and sources of patients that are more likely the short-stay patients as opposed to assisted living care organization. So I mean to the extent that -- what I would see as a success for 2020 would be some adjustment in that -- those efforts, maybe even admits outpace ADC. And the benefit -- you might say, well, there's -- from a normal operating reporting situation, that creates some challenges, but it should help you on the Medicare Cap. And again, we're doing it. We think that there's a 2:1 payoff or something like that. I mean -- so you got to put it all together. But I personally -- yes, VITAS is -- when you look at their projections and their guidance, they're in good position to deliver on.

And to reiterate Kevin's point, as we look at 2020, we hopefully would see a admission growth rate continuing to grow, like it has and mentioned sequentially, and our ADC growth rate will be what it is, depending on how long those patients stay with us.

To answer your second question, Joanna, related to the comments on what's driving some of that sustainability and slight increases from an admission growth perspective, at a very high level, I think there's probably 3 components I'd speak to. It obviously is much more tactful at a localized level, but it's a continuation off of our multiyear strategy. It really focuses on a variety of things, I'll comment on 3 of them. But being an independent hospice without any ownership or affiliation with upstream referral sources, it has always been critically important for VITAS to do these things. And the first one is separating out the value proposition of hospice. So it's a why hospice to those referral sources and then why VITAS. And I think we've been very successful at being able to educate and explain both of those things. The second one is just ongoing improvements and consistency with our education and training, not only out to the patients' families and referral sources, but internally with our team, to focus on all those key factors that are really influencing our success in the admissions area.

And then when we think about tactful feet on the street, we're always focusing and measuring our improvement on things such as speed of response to those referral sources when speed of response is critical, such as a hospital discharge planner. And so we could probably spend the next 1.5 hours talking about some of those strategic execution pieces, but that's what the team has been focused on. We're going to continue to be focused on it with some new initiatives also rolling out in here inside of 2020. And we're just going to continue to focus on the execution on a day-to-day level there. And hopefully, the results will continue to follow.

Okay. And a different topic on, I guess, staying on hospice. So there's I guess a lot of different small proposals and things that would create some changes here. So can you kind of comment on some of those? I guess any update on the proposal to carving the hospice benefit into MA in terms of are you actively trying to position ahead of that? Or are you waiting to see what's going to come out from these MA plans? And also I guess some other proposals from that and I guess even the President's budget had some other proposals to make some changes in hospice benefit. So can you just frame to us kind of how you think about the reimbursement outlook for hospice and maybe comment on any of these proposals that are out there?

Yes. I just want to start, Dave, by saying, Nick and Dave follow these potential changes very closely in both from an association standpoint and from political contact standpoint. And the more you know, you don't know. But let me just say, before I turn it over to him and maybe Nick can talk about some specifics, we operate on a presumption that the status quo is not going to hold forever. We don't anticipate anything to happen in that soon. But like a lot of things, things change. I think the benefit of Roto-Rooter and the type of company that is national in scope, we will be -- should be the most adept at adjusting to these changes, whatever they are. And so I'd just say, at the top level, I'd say we'll see what happens. I don't expect it -- things to last forever. But I'm very confident in how we'll be able to deal with the changes. Now Dave, anything kind of up specific potential changes that we're doing?

Yes, yes. Let's -- so your question, we need to break out into 2 kind of government stakeholders: one is CMMI, Center for Medicaid & Medicare Innovation, basically create different ways of billing to make the health care system more efficient; and the second one is, I think, you were basically referring to MedPAC recommendation.

So let's take the CMMI first. What -- CMMI is currently working with Medicare Advantage plans, and they're trying to gauge their appetite, whether they want to offer within MA plans, a hospice option. And it's still an unknown. We actually -- there's going to be another conference call with CMMI next week, basically getting a feel for what -- what are the MA plans interested in, what will be the positive and the negative or the potential unintended consequences as well as what will reimbursement be. But it's all what we would call as a demonstration project, a very small-scale project over the next several years to actually gauge what the impact would be on Medicare beneficiaries, efficiencies of a continuum of care, are you keeping things at arm's length by these decisions made by the patient as opposed to an insurance company trying to save on curative care costs. But CMMI, the whole point of demonstration projects and modeling is try to figure out the reaction to the health care system without disrupting all of Medicare. So that's going to be several years in the making.

The second one is MedPAC, which is the advisory board on reimbursement to Congress. And what MedPAC does is, on a very broad-based scale, they look at everything reimbursement from Medicare and they come up with various observations, some of them just at 30,000 feet, some of them in depth. But at 30,000 feet as they made the thought, should the cap protection on Medicare billing A, B indexed for different reimbursements by different geographies. For example, we -- it's about a $30,000 Medicare Cap protection per admission, but that $30,000 is the same in San Francisco with a $240 routine home care reimbursement as Baton Rouge, Louisiana, which I think is below $140. So they're talking about indexing the cap, not having an increase in hospice and then reducing cap by 20%. And that's a proposal that will get discussion, but I suspect even MedPAC doesn't expect Congress to take that up. But I'll also turn it to Nick to see if he has any other observations.

One other just very quick comment to add on to it. When you take all of them, including CMMI or what was inside of the President's budget, but at the CMMI level, to reinforce Kevin's, we're actively engaged in the dialogue to be a stakeholder to provide any input to CMMI or any other governmental stakeholders that are really trying to achieve in the recognition of one thing. Hospice, when it was enacted on the Medicare benefit in '83, was the first value-based, full-capitated risk reimbursement, and it drives down total cost of care inside of the system and improves quality for patients. And so what we're trying to collectively figure out in the country is how do we get more appropriate and greater access to patients, and we believe in that. That will be good for the industry and for the country. It's a matter of how we get there and how the rules and/or demonstrations evolve, but we see that as a very positive thing potentially for the industry in the future as well as a positive thing for patients and families throughout the country.

I think the end takeaway is how Kevin open this, and the status quo in health care will -- it's -- this is going to be dynamic, not static. And you have to have a care in business model that's prepared for changes in reimbursement, whether it's going to be next year or 3 or 4 years down the road. And we have structured VITAS and our capital structure, and our business model's prepared for these type of changes.

So just to follow up on the CMMI. This is a proposal, and this is going to be a demo on these certain markets. But to my question, are you in discussion with MA plans already as well? Or are you first going to -- trying to work with CMMI on how they're going to structure? Because I guess the next step on will be the rates, right? They will have a proposal first, I guess, for the rates adjustments to include the hospice in those states. So any plans already you're kind of looking to providers for inputs on that? Or that's not really there yet.

So Joanna, for the most part, until the pricing and the actuarial piece comes out, which would -- the first time would be scheduled from next week for some of those public awareness, at that point, the plans will have, well, arguably, enough information to begin to formulate their desire and whether they want to participate in individual markets or not. And at that point, we already have relationships with some of those plans, and we'll just discuss whether it's mutually advantageous or not. But there are current gaps in the proposed design that still need to be addressed and ferreted out that are important details by CMMI.

So you almost have to think of it as CMMI has done a great job of engaging all stakeholders, which would include the hospice industry, MA plans, just to name a couple, as well as the Academy of Hospice and palliative care physicians. But the reality is CMMI has been directly engaged with MA plans with hospice industry providing thought process and input, both the CMMI and MA. But the active participants right now are CMMI and MA, and we're kind of waiting in the wings to see how we can participate in that plan once we have clarity on what CMMI and the MA plans have reached an agreement on. That's a big unknown stone.

Okay. I will leave the floor and go back to the queue. But appreciate...

No, actually, Joanna, you can finish. It's a light queue, So if you have more questions, please keep going.

Okay. Yes. So we talk about hospice and VITAS. And I guess the Roto-Rooter, the organic growth is pretty good. When you talk about the 7.9%, excluding the deals in the quarter, that's pretty robust. But it seems like you're kind of guiding to a further deceleration. So is it also similar to what you described in the VITAS outlook, that you're sort of more conservative there? Because you're talking about 4% to 5% on the core side of things. So there's some missing piece here to bridge from that number to 13% to 14% overall revenue growth for Roto-Rooter.

No. We would consider -- actually, the core base business at 4% to 5%, if you look at historical, is actually fairly robust. I think it's a direct result of our more detailed and aggressive campaign on Internet marketing and making sure we show up and paid in natural search. But I think you -- some of the core businesses getting -- water restoration played an outsized role in our unit-for-unit growth over the past several years. That has attritted. So really 4% to 5%, given an industry that has almost no growth, we consider extremely positive. But then, of course, we have the additional growth from having a full year of acquisition revenue and profitability, even though it's a low-margin profitability still...

Relatively low.

Relatively low. The acquisitions, I've been taking it from that 4% to 5% to that 11%. So actually, the core growth for Roto-Rooter, we consider actually robust given an industry that really can't expand much beyond household formation rates.

Joanna, the one thing to keep in mind is when we bought over $70 million in sales, the -- and I'm focused on California. It varies, as we said. The HSW acquisition was in Southern Texas, Arizona, Oregon. But generally speaking, the -- because of pricing, because of service offerings, because of mix between commercial and residential, that acquisition had sales of a little over $2 per pop, $2 per population. The average Roto-Rooter branch average is over $4. So obviously, to answer your question really is, well, how quickly we have a big thought that we're going to -- they're going to be very successful, they've done it time and time again. They're going to be very successful in bringing these branches into the mainstream of Roto-Rooter. Is it going to take 1 quarter, 6 quarters, 7 quarters? They've got a long way to go. But what makes us exciting, again, what we think is we're going to see nice quarter-over-quarter growth coming from that major acquisition on top of what Dave just described as solid operating conditions for the base Roto-Rooter business.

All right. So yes, to that point, obviously, you're guiding to margins slightly down year-over-year, right, because the deals that you described came at a significantly lower margin, so just putting them into the numbers driving it down. But -- and you mentioned the actions you're taking or trying to decide what you will do inside these territories. So can you give us a little bit more details in terms of the different considerations or different factors to trying to take into consideration what will be happening in these territories in terms of keeping them or not keeping them and pushing prices or not pushing prices or any other part of the strategy that you're taking and how, I guess, this would influence the margin improvement? Because to your point, the expectation is that you bought them on -- you bought them, you bring them in at lower margin and then over time, you will improve it. So just trying to assess, to your point, about the speed of these changes and whether there's -- there are any actions that will make the margins move faster towards the average. Is there any way to kind of frame for us what we should be looking for in terms of these changes and how they will drive margins?

Well, first, I think you have to turn to our guidance we gave for Roto-Rooter for 2020 for the impact overall in terms of our margins. What you're really asking for is the timing and sequencing of different things, and each location that we acquired is different. For example, the locations that have a large amount of commercial business, that certainly is more price sensitive, where commercial accounts use you multiple times a year or residential may only use you once every few years. So it's really the question of manpower in the individual location, the timing of price increases for commercial versus residential as well as you don't want to increase your residential Internet marketing unless you make sure you have the manpower to deal with the business. So each one is unique in how we approach it, and it's not like it's a one size fits all. So I think in terms of the timing of the overall impact the acquisitions have on our margins, you have to just utilize the guidance we provided last night and during this call today as what will happen in 2020 overall.

Right. So that's what I was getting at, that you expect margins to be down for the segment year-over-year. So then should we expect to sort of ramp up through the year? As in the margins are more pressured in Q1, and then Q4, you exit closer to -- trying to close the gap. Or how quickly should we expect the gap to be closing down a little bit?

I think you expect it to go into 2021 in some of the locations, but we expect margin improvement, obviously, in 2020. But we couldn't even say with confidence, "Oh, gosh, this is going to be an impact in May of 2020 and the other one is going to be September of 2020. Phoenix will have this." The sequencing is based upon manpower, which has turnover. The sequence is based upon the commercial residential mix as well as what we can pass through pricing as well as getting traction on our Internet marketing for residential. There's a lot of permutations. The only thing we can say confidently is we haven't had a failed acquired territory ever since we bought Roto-Rooter in the 1980s. The only question is the timing and how quickly and robustly they start operating at. But we can point to one operation in Nevada, one operation in New York. It actually took us several years until we had the right combination of people, mix, pricing, commercial, residential before we were comfortable with their operating performance as others we fixed in 2 quarters.

Let me give you an example, Joanna, one of the problems Roto-Rooter's dealing with. The previous owners didn't care that much about their Internet reputation, okay? They dealt with -- they had a lot of industrial and corporate clients. And so when we bought it, there's a number of things we wanted to do. First thing we wanted to do is we want to hold on to the technicians. I mean without the technicians, we don't want to train a whole new batch to start from scratch. So the number of changes you can make are -- you look at that both ways.

But just give you an example, okay, one of the most significant ways that improve marketing where you apply in the Internet is customer reviews. Roto-Rooter generally spends a lot of effort getting customer reviews and anybody who talked with Roto-Rooter kind of it's high priced, but they give great service. Well, it's going to take some time to get -- and a lot of time to get those customer reviews to a Roto-Rooter level. Let's put it that way. And you might say, "Well, can't they just push out?" Well, it's like pushing a string. It's -- you do a good job, and you hope that 5% of them turn in a review. So I'm just using that as an example.

Despite their best efforts, it's going to take a while to be hitting on all cylinders on a very -- that very important signpost. Okay. No way to say -- yes, we're very hopeful. It's very hard for us to give more guidance than that is how quickly it's going to go that we -- all -- what we said in our presentation was our overall metrics on these branches has slightly exceeded our expectations. I mean when we do a Board [memo] authorizing the purchase, we go into great detail. And we make all sorts of operating metric prediction. So we don't release them all to the public, but we make all those, and we say, okay, to the Board, "We want to buy this company. Hold us to these metrics." And as I said earlier in the presentation, we're exceeding those, but they -- in reasonable range. And no idea as far as the speed of those other changes.

Great. I appreciate the color here. So there's I guess a lot you're trying to undertake, make changes in this market. So we should just, I guess, expect more of a -- benefits there from these actions in 2021.

(Operator Instructions) Our next question comes from Frank Morgan with RBC.

I was just curious about -- you talked about -- back to the hospice side of the business, the admission growth being so strong. And I know part of it, you had easier comps, but you're now several quarters into this. Is there anything you're seeing outside of what you're specifically doing that you're seeing in the marketplace? Is anything changing there that's allowing this higher level of admit growth now in the 4% to 5% range?

And then my second question is -- and then I'll hop off, is related to just plans about external growth. Any de novos and what are you seeing in M&A?

So Frank, as it relates to the market, what we're continuing to see is the ongoing swell of appreciation and desire to understand what's, again, the value proposition of hospice as upstream health care entities, more and more of their reimbursements gets folded into value-based and total cost-based reimbursement as opposed to fee-for-service. There is that recognition around the desire and appetite to appropriately identify hospice-appropriate patients and transition them while providing right of choice to the best quality hospice that can keep them on the benefit as appropriate. And so that's just sort of that ongoing trend, and it's blending well into our internal improvements we're making towards VITAS continuing to differentiate itself being an independent hospice provider across the nation.

But nothing on a number of -- or I mean consolidation of providers, shrinking of providers, nothing like that. You're just saying it's not a supplier capacity, it's just more pure demand.

It's a pure demand. But to your point, there is a ongoing consolidation of provider ownership, right, upstream. It's not necessarily the number of providers. And so as those large -- as that consolidation occurs, there's a recognition across those enterprises of a preference to have more of a single-stop provider that can do everything, provide the full complement, provide all 4 levels of care, basically do hospice the right way. And so we think VITAS is well positioned with our size and scale in order to do that. And we're just continuing to manage and to ensure we have the right balance of resources so we don't become constrained from a capacity perspective and can take on all that new business throughout 2020 and beyond.

And in your second question, Frank, is we don't expect de novos to be typically like they are every year. It's not a big driver in terms of the overall census or revenue on any given year.

But if we got a (inaudible) one in Florida or buy one in Florida, we'd do it.

Absolutely. But it doesn't really impacts revenue or overall profitability much.

But Frank, as you see out in the marketplace, pricing and premiums on hospice businesses from an acquisition still continue to trade at a very large premium. So absent an additional strategic alignment, we'll be -- we're still evaluating all of them. But as you hear from everyone else, pricing is very high. And that's why in certain markets, de novo, if we want to enter that market, may be the best market entry strategy.

Thank you. And I'm showing no further questions at this time. I'd like to turn it back to Mr. Kevin McNamara for closing remarks.

Well, my remarks are limited to thanking everybody for their kind attention. I know it's a busy day. And thank you for the thoughtful questions, and we'll be prepared to do the same thing in about 3 months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.