Chemed Corp (CHE) 2023 Q2 法說會逐字稿

Good morning. Our conference call this morning will review the financial results for the second quarter of 2023 ended June 30, 2023. 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 these -- projected by those forward-looking statements as a result of a variety of factors, including those identified in the company's news release of July 26 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 July 26, which is available on the company's website at chemed.com.

I would now like to turn -- 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 Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's Second Quarter 2023 Conference Call. I will begin with highlights for the quarter, and Dave and Nick will follow up with additional operating details. I will then open up the call for questions.

Our second quarter 2023 operating results released last night reflect significant improvement in VITAS' operational metrics post pandemic. In the quarter, our admissions increased 5.9% over the prior period. These strengthening admissions continue to drive higher patient census. In the second quarter, our average daily census, or ADC, expanded 1,077 an increase of 6.2% when compared to the prior year and 3.2% when compared with the first quarter of 2023. VITAS' improving operating metrics are a direct result of our retention and hiring program launched July 1 of last year. This program was designed to stabilize turnover in our tenured staff as well expand patient capacity. Since July 1, 2022, our staffing has methodically increased on a sequential basis over this 12-month period.

This increase in staffing and related patient capacity has been converted into increased admissions and census. The retention program has generated an aggregate increase of 784 licensed health care professionals, the majority of which are licensed nurses. Over the last 4 quarters, VITAS has increased bedside professionals on a net sequential basis by 172, 103, 200 and 309, respectively. The majority of the expanded capacity from the 309 net hires in the second quarter of 2023 is forecast to benefit admissions and census growth in the second half of the year.

On June 30, 2023, our end of the month census was 18,542 patients. This compares to our June 30, 2022 ending census of 17,360 for a net increase of 1,182 patients. This raw patient increase translates into $84 million of annualized billable revenue. Our revised guidance does assume sequential ADC growth to moderate in the second half of 2023 when compared to the first 6 months of the year.

Now let's turn to Roto-Rooter. By all indications, Roto-Rooter is encountering what I can only describe as headwinds on consumer spending. As noted during our first quarter teleconference call in the last few weeks of the first quarter, we observed an increase in weekly revenue volatility, indicating a potential softening in consumer demand. Since March, we have observed increased weakness in weekly call volume and revenue. This weakness has continued throughout the second quarter. Overall, our call volume is down approximately 13% when compared to the prior year quarter.

Although call value volume is a crude measurement, it does indicate consumers are moderating their behavior in terms of discretionary plumbing and drain cleaning services. Roto-Rooter has offset a portion of the softening demand with material increase in close rates. Our call centers conversion rate, the rate at which a call is converted into a technician-scheduled ticket has increased 230 basis points. Our technician conversion rate, the percentage of time a tech arise at the home or business and convert a scheduled ticket into doable work has increased 160 basis points. These improved conversion rates have materially reduced the impact of softening consumer demand. We have seen some recent signs of improvement in overall demand over the last few weeks.

However, our guidance assumes Roto-Rooter continues to be modestly impacted by consumer spending headwinds for the remainder of the year. To summarize, I'm pleased with the accelerated improvement in VITAS post-pandemic. Our increased growth in licensed healthcare professionals, strong admissions and corresponding growth in patient census, has positioned VITAS to return to normalized operating metrics in early 2024. Roto-Rooter is well positioned in spite of economic headwinds on consumer spending. We anticipate continued expansion of market share by pressing Roto-Rooter's core competitive advantages in terms of excellent brand awareness, customer response time, 24/7 call centers and aggressive Internet presence.

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

Thanks, Kevin. VITAS' net revenue was $321 million in the second quarter of 2023, an increase of 7.8% when compared to the prior year period. This revenue increase is comprised primarily of a 6.2% increase in our days of care, a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%, partially offset by 100 basis points from sequestration. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by 10 basis points in the quarter. Average revenue per patient per day in the second quarter of 2023 was $197.02 and which is 178 basis points above the prior year period.

Reimbursement for routine home care and high acuity care averaged $172.91 and $1,031.58, respectively. During the quarter, high acuity days-of-care were 2.8% of total days of care, essentially equal to the prior year quarter. The gross margin and adjusted EBITDA for VITAS were both negatively impacted by CMS reimplementing sequestration, which reduced these margins by 100 basis points when compared to the prior year quarter. Gross margin in the second quarter of 2023, excluding Medicare Cap and the retention bonus program was 22.7% 143 basis point increase compared to the second quarter of 2022. Our adjusted EBITDA, excluding Medicare Cap, totaled $50.7 million in the quarter, an increase of 1.4%.

Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 15.7%, which is 101 basis points below the prior year period, really all of which has contributed to sequestration. As Kevin noted earlier, VITAS increased the licensed healthcare staff by 309 professionals in the quarter. This resulted in total licensed staff increasing by 784 professionals since the inception of the retention program on July 1 of '22. The increase of 309 net professionals hired during the quarter of 2023, think of it as basically underutilized labor capacity, is estimated to have negatively impact margins in the second quarter by approximately 80 basis points.

Now let's turn to Roto-Rooter. Roto-Rooter generated revenue of $233 million in the second quarter of 2023, which is a decline of 0.2% when compared to the prior year quarter. Roto-Rooter's branch commercial revenue in the quarter totaled $55.5 million, which is an increase of 1.3% over the prior year. The aggregate commercial revenue growth consisted of drain cleaning revenue declining 3%, plumbing increasing 5.4%, excavation increasing 2.9% and water restoration increasing 9.7%.

Roto-Rooter's branch residential revenue in the quarter totaled $158 million, which is a decline of 1.1% over the prior year period.

The aggregate residential revenue growth consisted of drain cleaning decreasing 8.6%, plumbing declining 2.8%, excavation expanding 3.8% and water restoration increasing 2.5%. Roto-Rooter's gross margin in the quarter was 52.3%, which is an 89 basis point decline when compared to the second quarter of '22. Adjusted EBITDA in the second quarter of 2023 totaled $65.9 million, a decrease of 4.5% and the adjusted EBITDA margin in the quarter was 28.3%, 128 basis points below the prior year period.

Now let's take a look at our guidance. VITAS' 2023 revenue prior to Medicare Cap is estimated to increase 8.5% to 9.5% when compared to 2022. VITAS' forecasted full year revenue growth is negatively impacted by 75 basis points as a result of the sequestration relief in the first half of 2022 compared to a full year of sequestration in 2023. ADC is estimated to increase 6.5% to 7.5%, and full year adjusted EBITDA margin prior to Medicare Cap and accrued bonuses related to our retention program, is estimated between -- to be between 16.5% and 17%, and we're currently estimating $11 million of Medicare Cap billing limitations in calendar year 2023.

Roto-Rooter is forecasted to achieve full year 2023 revenue growth of 1% to 2%. And Roto-Rooter's adjusted EBITDA margin for 2023 is expected to be between 28% and 28.5%. So based on this discussion, our full year 2023 earnings per diluted share, excluding noncash expense for stock options, tax benefits from stock option exercises, costs related to certain litigation settlements in our retention bonus program is estimated to be in the range of $19.90 to $20.10. Current 2023 guidance assumes an effective corporate tax rate on adjusted earnings of 24.7% and a diluted share count of 15.2 million shares. For comparison, Roto-Rooter's 2022 reported adjusted earnings per diluted share was $19.75.

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

Thanks, David. As Kevin discussed, we implemented a targeted retention and hiring bonus program at VITAS effective July 1, 2022. This program was focused on licensed nurses, including admission nurses, nurse managers, home health aides and social workers. These onetime retention bonuses range from $2,000 to $15,000 per licensed healthcare professional to total 12-month forward-looking cost of this program, including payroll taxes and government mandated overtime calculations, is estimated at $43 million.

All retention bonus payments are individually cliff vested and paid out after the employee has successfully completed 12 months of continuous employment. From an economic perspective, approximately $37 million of this retention program was to maintain existing staffing levels. The additional $6 million is estimated retention bonuses represent bedside capacity expansion. This additional $6 million in retention bonuses has helped to contribute to ADC increasing 1,182 when comparing the month of June to its prior year.

On an annualized basis, this 1,182 increase in patient census will generate annual revenue of approximately $84 million. During the second quarter, we expanded our licensed healthcare professional staff by 309 employees, bringing the total licensed healthcare staffing expansion attributed to this program to 784.

In the second quarter of 2023, our average daily census was 18,392 patients, an increase of 1,077 or 6.2% when compared to the prior year an increase of 562 or 3.2% sequentially. The sequential monthly ADC growth in the fourth quarter of 2022, the first quarter of 2023 and now the second quarter of 2023 is very encouraging, given the timing lag of increased staffing which then generate subsequent emission and census expansion.

In the second quarter of 2023, total VITAS admissions were 15,611. This is a 5.9% increase when compared to the second quarter of 2022, and a 5.3% improvement when compared to the fourth quarter of 2022. In the quarter, our nursing home admissions increased 13.7%, assisted facility admissions expanded 3.9% and hospital-directed admissions increased 4.5%, and our home-based patient admissions expanded 3.8% when compared to the prior period. All 4 segments increasing positively. Our average length of stay in the quarter was 99.5 days. This compares to 103.7 days in the second quarter of 2022 and 99.9 days in the first quarter 2023.

Our median length of stay was 16 days in the quarter and compares to 17 days in the second quarter of 2022 and 15 days in the first quarter of 2023. To recap what our team has recently accomplished, we now generated 4 quarters of sequential growth in licensed healthcare workers and 3 quarters of sequential growth in ADC. We have developed what I believe is a very sustainable path to building back our capacity, patient base and overall operating performance to pre-pandemic levels and beyond.

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 Ben Hendrix of RBC Capital Markets.

This is Mike Murray on for Ben. Starting with Roto-Rooter, could you remind us of your mix of discretionary versus nondiscretionary jobs -- and do you believe this deferred maintenance could become a tailwind in 2024? Or do you think more people are doing the jobs themselves?

Well, Ben -- Mike, the definition of discretionary is in the minds of the consumer. But with that said, well under 10% of our volume, we consider discretionary, well under -- but it's -- again, it's up to the consumer to decide. What we have seen is an increase though in nondiscretionary jobs, the discretionary jobs on a relative basis. So what we're doing is the more severe phone calls are still coming in. And again, that's well over 90% of our volume, but the customers are clearly self-selecting on the annoying toilet that's constantly running the upper tank because of a bad sealer valve. Those are the things that you could defer or attempt to do yourself. So the small annoying projects.

But we actually have seen an increase in bigger jobs over really the last 6 months. But very little is discretionary, where we're a grudge purchase in the first place. No one guess this purchase satisfaction of getting your house back today where it was 2 days ago. So the fact is people call us because of necessity, and that's just down just a hair.

And I would say, Dave, that the -- what you have is what we describe as discretionary or putting something off. It's putting something off a couple of months not permanently. So -- but it's hard to say. You're getting at a question which is a tough one. When you look at a drop in call volume like we had, I mean, again, if you -- our best thinking on it is that we had a period of 18 months where wages were not keeping pace with inflation, and there was a significant gap.

And that had -- I think it outside the fact that consumer decisions, we take comfort in the fact that that's turning around at this point. And we have a very basic business in Roto-Rooter. There's no sense in any way that we're losing market power or share. Our close rates are higher than they've been, not surprisingly because people are more incentivized to push for every sale. It's something that we look at. We look at the softness as being not confined to one region, which suggests us that it's an issue that's outside of our control. It's not -- the softness is not due to having turnover at a couple of big branches. It's more pervasive than that.

But at the same time, what Dave was really suggesting is to the extent when you have these really nondiscretionary problems, it's going to take it's going to take somebody to fix it eventually, and there's no reason for us to believe that they are any less likely to call Roto-Rooter.

And I just have to say, call volume is up significantly from pre-pandemic levels. I mean, obviously, double-digit but it does look like the consumer is a little exhausted. And I think this has happened a couple of times in the last 20 years. I think I can point to kind of post the -- great Recession in 2010, and there was some disruption around 2001. But this doesn't happen very often, and it does take kind of a -- it takes a very, very broad geographic kind of disruption, and I think that's what we're seeing in all 4 of our regions throughout the country. The softness is everywhere.

Yes. That's good. And another thing, a question you haven't asked, is it seemed like it came on pretty quickly. I mean, obviously, from our previous call 3 months ago, we notably said we noticed it in the last month of the first quarter. It was -- many of the effects we're probably already starting to land for Roto-Rooter. However, it was covered up by unusual weather patterns, which were -- which basically had business going through the roof for the first 2 months -- first -- of the first quarter. So it's something -- some of these forces that we see at work are more than -- they didn't just pop up in the second quarter. They were probably already having some effect by the first quarter. But again, so unusual weather in the first quarter kept everybody working around the clock then.

So -- when the weather moderated, we had fairly severe difference. So again, we're -- one good thing about having the Roto-Rooter business, it's got -- they've indicated early, great brand awareness, great marketing position. One thing we haven't said is that one of the biggest limitations to Roto-Rooter's business is a workforce and our workforce has never been stronger. We're prepared for an uptick. We probably have 2 larger workforce given the current call volume. But again, there did a lot of effort and expense in developing that workforce. So we give ground gradually in that regard. So we're not aligned to any respect with the Roto-Rooter business.

And Ben (sic) [Murray], to your question on a tailwind, the answer is probably these jobs will come to us. But in light of what see and call it in March and then in the second quarter, we have gotten conservative on the Roto-Rooter guidance. We're actually guiding to -- typically, we see seasonality where Q3 tends to be -- all the quarters are relatively significant, but Q3 tends to be down a couple of points from Q2. Q4 actually, on average, has been up as much as 7% for seasonality from Q3 to Q4. We were also very conservative, and we guided that sequential growth from Q3 to Q4 of this year to be only up a little under 3% because we don't know what's happening with the consumer spending. We think we put forward conservative but realistic guidance for Roto-Rooter. We're encouraged by what we see in July relative to our guidance. But with all that said, I -- we're waiting to see a sigh of relief in other consumer spending categories to say, this is just an anomaly. But then we haven't seen that yet.

Right now, we're going under the assumption that consumer is a little exhausted and they're going to avoid spending on Roto-Rooter to the extent they can. But like I said, 90, 95-plus percent of our volume is unavoidable.

Okay. And just okay. And just a follow-up to that. How does the magnitude of the decline in call volumes compared to past consumer cycles? And in those instances, how quickly did it take for demand to return?

The call volumes unusually -- we've never seen call volume with the kind of spikes we've had. So actually, this is actually an unusual drop. And we've never seen weakness in demand go beyond 12 months.

I'm just throwing one out there. It's always been a very short-lived cycle and it doesn't happen often, but it does happen. Like I said, the Great Recession and 9/11 and then kind of the dot-com blow up in '99, 2000 as well. Those are the ones that come to mind, but it doesn't happen often.

Okay. All right. Just real quick shifting to VITAS. You just had the 1-year mark on your hiring and retention program. Have you seen a pickup in turnover for the 10-year employees so far. And then on the flip side of that, has hiring slowed materially since the retention program ended.

So Mike, this is Nick. The answer to both of those answers is no. So we have not seen a material pickup to turnover. What I will say, we're still in the first month related to it. So we always like to say 1 month number makes a trend, but we feel good about it. And for all prior commentary, all the things that weren't relegated to just the financial payment but cultural enhancement, other items that tend to keep people with an organization is what was the driving force for some of those confident comments in the prior quarters about the expiration of the program. And then in regards to hiring, the hiring rate has -- we've been able to hire successfully where we need to on a market-by-market basis. And so we feel confident in our ability to do that going forward.

And Mike, nothing stops -- where it's appropriate to have a small retention program in a market for certain disciplines. It's just not going to be necessary to carve it out or even call it out at this point. We believe we can do it where necessary on a very small basis that you guys won't even see.

Okay. All right. That's helpful. And just one final one. Given the repayment of your debt during the quarter, how are you thinking about share repurchases in the back half of the year?

We still think share repurchase is what appears to be the best way to return capital to shareholders. At the same time, with what the Fed did yesterday, we're now getting about 5.5% pretax on our overnight money. And so from that standpoint, it's no longer the 10 basis points of nothing we used to get 2 years ago. So we actually aren't penalized by sitting on cash because of the overnight return that's basically right now, all kept with JPMorgan Chase. But share repurchase is a continued part of our capital deployment.

We will do so.

Yes. Every quarter we anticipate it.

(Operator Instructions) Our next question comes from Joanna Gajuk of Bank of America.

So I guess, first on VITAS slowly things are going there pretty nicely, and you raised your guidance and expect a 9% revenue growth, call it year-over-year. So how should we think about there is some growth going forward? Is it a sustainable growth rate? And also with this growth at the rate when it comes to (inaudible) while expenses expect to returns to 2019, which seems like we already are very, very close to that. How should we think about margins if that was to happen?

Regarding margins, very, very encouraged with where we are now. If you actually think about the headwinds we've created by excess capacity unutilized labor because that will be utilized in Q3 of this year, the 309 people we hired. Actually, it does look like we're going to get to our target fairly comfortably to that, call it, that 17.5% adjusted EBITDA margin we enjoyed in the fourth quarter of 2019 seems very achievable within '24. I don't want to get too optimistic beyond that, but it's encouraging.

And regarding our guidance for the second half of the year, we actually assumed census growth moderates in the second half of the year compared to the first, where we'll add about 75% of the census we added in the first half. We're assuming in the guidance, we add pro rata throughout the second half of this year. So we expect the momentum to continue, but we conservatively estimate it to slow a little bit from the first half. Nick, anything else we should add on that?

No, I don't think so. Just as a reminder, if you start comparing prepandemic to exiting pandemic dynamics. There's a lot of different variables inside of it, right, just to not to recap it, but it's about a 3-year window. And one of the other aspects, and you can see it through the distribution of preadmit institutions, while we continue to service the entire community of where we're at. The community access initiative will continue and is effectively baked into our approach on a go-forward basis in every market. We'll see what that translates into for 2024 and beyond, but it puts us at a good -- it should put us at a good jump-off point at the end of the year.

I'd also say is we talked about this in past quarters. When we look at census, we actually follow it in buckets, and we look at it as tenured buckets. So how many patients have been with us 0 to 30 days, 31 to 60, 61 to 90, and we do that all the way out. And obviously, during the pandemic, when we had weak admissions, the 13% of our patients in the past 6 months, that actually got bled off during the past 3 years or really 2 years. And really, over the past 3 quarters, Nick and his team have really started material growth in all of those aged out buckets. So the path that we're returning on and we lose money on half of our patients, 13% or so make it past 6 months. We are doing a great job of refilling the statistical outlier buckets of beyond 180 days.

So that's another indirect way of saying that the momentum we picked up in the recovery is on a really, really solid foundation of census.

And last comment, just a relay why that's important not only for VITAS, but the overall industry and also for the Medicare Trust Fund is there's recent independent literature, we're out on the hill today continuing to educate. And what it helps to further illustrate is for the entire hospice industry. There's a need for earlier access and the more there is earlier access, there's more total cost of care savings to the Medicare Trust Fund, including past 12 months with almost 11% cost savings. So I bring it up because hopefully, that trend continues consistently for the overall industry because it's significantly beneficial for the Medicare Trust Fund.

Great. And I guess, if I may, just a follow-up on that point, right? The Medicare rate beta proposal, right, it came out with the pushback from the industry arguing this should be sort of a onetime adjustment for the market basket as is being below cost inflation the prior 2 years. So I guess to think any traction on having CMS actually act on it? Or do you need Congress to do something along these lines? And what do you expect in the final regulation that should come out any day.

So I think the commentary with it, we'll see -- it's fully within CMS' authority to do so. There's all indications that final rule itself will be issued in the very near future. And so as opposed to speculating, we'll sit back and see. The ongoing calculation, as we've alluded to, significantly lags reality since it's paid against the hospital market basket index, and it impacts more than just the hospice industry, right? It impacts the hospitals by definition as well. And time will tell. I think the important piece going back to the value of the study is the fact that hospice is one of arguably the only industry that is -- returns money to the Medicare Trust Fund inside of health care as one that we hope CMS hears and the Congressional leadership hears so that they continue to support ongoing reimbursement because of the value of the benefit for the overall country and to the Medicare Trust Fund.

Yes. But Joanna, your point is a good one. Our association estimates with the proposed rule that CMS put out a couple of months ago, they've held back on a little over 5% of increase based on inflation measurement on the market basket. Obviously, that impacts the entire industry, but it's existential for the small players who lack scale, which is over 50% of the provider numbers out there. So frankly, one of the reasons we are picking up licensed healthcare staff and expanding their census is because our small mom-and-pop competition which exists in every market, they're truly struggling because they lack scale and that 500 basis points of inflation is kicking their butt.

And so right now, CMS by holding back on reimbursement is creating opportunities for the players who have scale to expand market share. And that's what we're going to do, but we really wish CMS would true up the inflation. We'll take the share, but it's a tough way to get it.

No. And I guess, that's a question. Would you be interested in buying out some of these providers? Or I guess at this point, you should say that it's cost effective or more cost-effective to just hire away the workers.

Massively more cost effective. As Kevin said in our prepared remarks, it cost us $6 million incremental in this retention bonus to expand our workforce. And that creates -- based on just on the expanded census we've enjoyed through today, that's $84 million of revenue that cost us $6 million to acquire. If we're under prepandemic, we would have paid anywhere from $100 million to $120 million for $84 million in revenue, which obviously, we didn't do because we thought those were crazy valuations. But right now, we're getting it through competition.

And the problem with buying the hospices, they're almost always too small to be profitable based on what we think is we think it's tied to quality. But to the extent that we're a big public company, we have to have safeguards and provide all levels of service and whatnot in the too low census base that's just not economically feasible.

But acquisitions aren't off the table, Joanna. We could see doing a footprint that gets us in an area we're not in and would even pay a multiple for that, but then we have to average down that multiple by basically increasing the size or whatever we acquire through market competition.

And in a county in Florida, that we're not in...

Yes. Actually, California and Florida typically are very successful in that regard. But we're not opposed to it, but at the same time, you know we're very serious about protecting shareholders' capital. If we put it at risk there better be a commensurate return.

That makes sense, obviously. And I'm sure -- you alluded to it and obviously sitting on the cash is not a bad idea, I guess, as of now. Just switching to the Roto-Rooters. So I appreciate the commentary that you assume this weakness, I guess, continues, but I guess it sounds like July may be indicating some changes there. So yes, what would has to happen, I guess, in your mind for kind of the call volume, I guess, to return or kind of reverse the strength. What are you looking out there in the market to be able to say like all this is happening or it will happen soon?

Well, this is a tough -- that's a tough one. It comes down to why does the phone not ring? Sometimes we know why the phone does ring and it's because it's -- there's raining in some part of the country and whatnot and causing all sorts of havoc, which is good for the Roto-Rooter business, but tough on the people. And why -- but generally thinking, why does it ring, why it did not ring? The only thing we can point to is, let's say, Internet marketing that drives the sales that we have.

To the extent that we have various measures, I mean, of course, I don't want to get too far in the weeds, but there's the natural search, which is free, which you hope Roto-Rooter pops up, and that's tied to their algorithm and there's all sorts of things that you do. You have bricks-and-mortar -- more bricks-and-mortar stores to get better coverage. You do well on that. There's paid search. There's one measure of paid search, which is -- you want to make sure that you show up on the first page more frequently. And the vexing thing is that we're doing better than that than we ever have. In other words, we're showing up on the first page search more often.

We're just continuing to refine that and hope to even improve that. But to the extent that search to the entire category is, we believe, down substantially. It's the reverse of the converse of the phrase -- the rising creek covers a lot of storms. The creek is in the whole category, is down for people starting the search. But to answer your question, One thing we can do is, we can have our fingers crossed and hopefully the economic conditions improve so that there's more people searching for plumbing and drain cleaning, number 1.

But then number 2 is something that we continue to do. And we've had some success with based on some of our quoted metrics being better place on the Internet to capture more of the eyes to consider Roto-Rooter. So your question is a top one. It's vexing to Roto-Rooter. And I say with some trepidation that if it comes down to running a business that involves keeping your fingers crossed and hoping demand comes back, that's a tough way to -- that's a tough way to run the business. And we're putting that aside right now and doing what we can on the marketing side.

But you certainly can't ignore a significant increase in call center close rates and technician close rates at the residents has, like I said, materially offset the we call demand, but not completely.

And that just shows, as we said. Roto-Rooter has been around for a long time. They have good management. The good management that goes excess right to the field. If you said -- said 6 months ago, which you did. What are the issues in the Roto-Rooter. We said we only had an unprecedented 18-month period where we had some of our top branch managers hired away by private equity. Now that's largely stopped for a variety of reasons.

And we said at the time, our softness is really -- the fact that we had new managers in the number of locations, an unusually high number of new locations where we had new managers. And again, time has helped settle that, but the softness we see is more pervasive, more tied to overall economic conditions. And we think based on kind of our research that some of the factors that cause that are ameliorating. So -- but we don't kid ourselves when we're talking about big economic conditions. It's hard to draw too many to make conclusions based on what almost by definition is in (inaudible) data.

And the last question here to that end. So would you expect cost cutting? Are you doing anything differently given the calls volume being down? And I guess, what are...

No, you got to remember, one thing about Roto-Rooter, we do not quote a price over the phone. We don't advertise the price. I mean the way -- in other words, somebody calls us, they have no idea what Roto-Rooters' going to charge for the issue. We send somebody out. They give a written estimate for what it costs. That's the first time that the customers sees the price.

And actually, as Dave said, our close rate, once -- first of all, when somebody calls the close rate -- the conversion rate by the person on the phone is higher. When we send the technician out who mentions price for the first time, those close rates are going higher. No, the cost-cutting side, we think an important aspect of Roto-Rooter is make sure that we protect margins, especially in inflationary periods and we make sure we get price increases that reflect the inflation.

And again, that's another success area. We think we have gotten that price increase. Price cutting doesn't really work for Roto-Rooter. We don't advertise. Some plumbers advertise, we'll fix any drain for $99. Now that's not the case. I mean then they find out that there's a $50 charge for this and a $50 charge for that. And they said, "Well, they not your drain. No, you're drains are exception." But we don't do that. So cost cutting on the Roto-Rooter side is -- would only come from something I referred to earlier, and that is we built our workforce through a lot of training and expense.

And we're probably a little too high given our current call volume. And to the extent that we're not going to lay anybody off or cut anybody, but to the extent that there's turnover would be a little less aggressive in filling those spaces caused by the termination probably.

I mean you if said if our workforce was up 4% year-to-date, traded down to being up 1% or 2% I think that would be very reasonable. And that would be the cost cutting. And of course, a company like Roto-Rooter labor is everything. So that would have the effect of cost cutting, but it would be passive rather than active.

Yes. And generally, it's semantics, but I mean, our approach on cost cutting is we don't cut costs, we reengineer costs out of the system. What can we do for less money or hopefully less money into a better job doing various things. But reengineering is the sustainable way to drive down your expenses, not just through stress, you start whacking expenses that usually helps in the short term and hurt you in the long term. So we're much fans of 3, 6, 9 months, engineering various costs downward, but not just wacky.

At this time, I'd like to turn the conference back to Kevin McNamara for closing remarks.

Okay. My remarks are limited and thanking everyone for your kind attention, and we'll continue to work and again, make recovery from an unusual -- unusually tough quarter for us, but again, we think we're still on a winning wicket. And thank you, everyone.

This concludes today's conference call. Thank you for participating, and you may now disconnect.