Chemed Corp (CHE) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Chemed Corporation First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Holley Schmidt. Please go ahead.

Good morning. Our conference call this morning we'll review the financial results for the first quarter of 2022 ended March 31, 2022.

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 our April 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 April 26, which is available on the company's website at chemed.com.

I would like now 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, Holley. Good morning. Welcome to Chemed Corporation's first quarter 2022 conference call. I will begin with highlights for the quarter, and Dave and Nick will follow-up with additional operating detail. I will then open up the call for questions.

Our first quarter 2022 operating results released last night reflect very solid performance for both VITAS and Roto-Rooter. Both operating segments' financial results exceeded our internal estimates despite the continued disruption triggered by the pandemic.

For VITAS, this disruption is remains elevated with regard to the hiring and retention of licensed healthcare professionals. U.S. News and World Report as estimated as many as 20% of licensed healthcare workers exited the labor market during the pandemic. This has impacted turnover within VITAS' as licensed staff. And our turnover rate continues to be above our pre-pandemic rate in several of our professional classifications.

Fortunately, we are beginning to see indications of normalization as we continue to expand resources focused on hiring and retention initiatives in our markets. Beyond managing staffing levels, we are observing increased pressure on salaries and wages. To date, we have managed these pressures with increased paid time off or PTO.

We view it is inevitable that healthcare wages will permanently increase if we continue to have a nationwide systemic imbalance in supply and demand for licensed healthcare professionals. The guidance we issued earlier this year anticipate significant increases in overall compensation for licensed healthcare professionals when compared to pre-pandemic annual compensation rates.

Fortunately for VITAS and the hospice industry, there is a natural hedge against inflationary pressures on costs, specifically labor. The annual increase in Medicare and Medicaid hospice reimbursement rates is based primarily on inflation in the hospital wage index basket as measured by the Federal Government's Bureau of Labor Statistics.

Typically, the annual inflation measured as of March 31 is used to determine the following October 1 reimbursement increase. This should give the hospice industry reasonable long-term stability in operating margins in an inflationary environment, albeit with a 6- to 18-month lag from inflation measurement to the actual reimbursement increase.

The second pandemic trigger challenge for VITAS is the continued disruption to senior housing occupancy and related hospice referrals. Our recent admission data suggests senior housing is in the process of recovery. Pre-pandemic, nursing home-based patients represented 18% of our total average daily census or ADC.

The nursing home ADC ratio hit a low of 14.3% during the pandemic. In the fourth quarter of 2021, our nursing home-based patients represented 15.6% of our total ADC. This increased an additional 30 basis points to 15.9% in the first quarter of 2022.

Our 2022 guidance anticipated sequential improvement in senior housing-based patients in the first quarter of 2022, with an acceleration in senior housing admissions anticipated throughout 2022.

For Roto-Rooter, our most significant challenge has been to increase manpower. We increased technician headcount by 8% in 2021. And our technician manpower in April 2022 has expanded 6.8% when compared to the average Q1 2021 headcount. The April 2022 headcount has expanded 3.3% when compared to our average manpower in the fourth quarter of 2021.

Based on current service demand levels, Roto-Rooter continues to remain understaffed in many of our markets. Technician compensation plays a crucial role in recruiting new employees as well as retention of our existing base. Our average 2021 technician and field sales force compensation is over $81,000 per year. Most of our technicians are paid on a commission base manner on revenue generated.

As a result, pricing for our services is a critical component in increasing technician wages. We successfully implemented an inflation-based price increase at the beginning of 2022, and we'll carefully monitor key inflation metrics for consideration of additional price increases in the second half of 2022.

Roto-Rooter is well positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time, 24/7 call centers and Internet presence.

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

Thanks, Kevin. VITAS' net revenue was $299 million in our first quarter of 2022, which is a decline of 5.3% when compared to the prior year period. The revenue decline is comprised primarily of a 4.1% decrease in our days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase of approximately 1.3%.

Acuity mix shift had a net impact of reducing our revenue approximately $7.1 million, or 2.2% in the quarter when compared to the prior year revenue and level-of-care mix. The combination of Medicare Cap and other contra revenue changes offset a portion of this revenue decline by approximately 30 basis points.

In the first quarter of 2022, VITAS accrued $2.5 million in Medicare Cap billing limitations. This compares to $1.5 million of Medicare Cap billing limitations in the first quarter of 2021. Of VITAS' 30 Medicare provider numbers, 28 of these provider numbers have a Medicare Cap cushion of 10% or greater, and only 2 provider numbers have an estimated fiscal 2022 Medicare Cap billing limitation liability.

Roto-Rooter generated revenue of $231 million in the first quarter of 2022, which is an increase of $19.8 million or 9.4% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $54.4 million, which is an increase of $6.9 million or 14.4% over the prior year quarter.

This aggregate commercial revenue growth consisted of drain cleaning revenue increasing 17%, plumbing increasing 17.1%, water restoration expanded 8.6% and excavation increasing 7.1%.

Roto-Rooter branch revenue in the quarter totaled $157 million, which is an increase of $10.5 million, or 7.2% over the prior year period. This aggregate residential revenue growth consisted of drain cleaning increasing 3.1%, plumbing expanding 14.6% and excavation increasing 5.9%, with water restoration increasing 7.7%.

Now let's turn to -- let's look at Chemed on a consolidated basis. During the quarter, Chemed repurchased 57,500 shares of stock for $27.4 million, which equates to a cost per share of $475.71. As of March 31, 2022, there was approximately $175 million of remaining share repurchase authorization under this plan.

Chemed restarted its share repurchase program in 2007. Since that time, Chemed has repurchased approximately 15.8 million shares, aggregating approximately $2 billion at an average share cost of $126.42. Including dividends over this period, Chemed has returned approximately $2.2 billion to our shareholders.

We anticipate providing 2022 updated guidance as part of our June 30, 2022, earnings press release.

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

Thanks, Dave. In the first quarter, our average daily census was 17,313 patients, a decline of 4.1% over the prior year. This year-over-year decline in average daily census is a direct result of the pandemic-related disruptions across the entire healthcare system since March of 2020.

In the first quarter of 2022, VITAS admissions in total were 16,530. This is an 8.9% decline when compared to the first quarter of 2021 admissions and a 1.7% sequential increase when compared to the fourth quarter of 2021.

In the first quarter, on a year-over-year basis, our hospital-directed admissions declined 15.7%, total home-based preadmit admissions expanded 2.8%, nursing home admits increased 7.8% and assisted living facility admissions declined 7.4%.

Our average length of stay in the quarter was 104.8 days. This compares to 94.4 days in the first quarter of 2021 and 97.9 days in the fourth quarter of 2021. Our median length of stay was 14 days in the quarter and compares to 12 days in the first quarter of 2021 and 15 days in the fourth quarter of 2021.

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

Thank you, Nick. Now it's appropriate to consider any questions that come before the group.

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

So I guess a couple of follow-ups first. So you said that the quarter was better than internal expectations. So can you quantify the magnitude of how much better was it versus internal? And I guess, what drove that? I mean versus our model and the Street estimate, it seems like margins were better. So can you kind of flag to us any major drivers for that? And then are those sustainable?

Let me start just by -- I made that comment. And I just meant that we gave guidance in February, and obviously, we're a little ahead of that guidance and -- gratified by that overall performance. But Dave, point out, obviously, our margins were a little bit higher than we anticipated.

That's right. And so what really comes down to is what I'd just call the sequential acceleration of inflation. So on average, we certainly expect more inflation in, say, Q2, 3 and 4 than Q1. We said definitely, more inflation, cost escalations in Q2 over Q1, and we expect Q3 to be a little more difficult with inflation than Q2. So sequential pressure, all other things held constant, assuming we don't do anything to remediate some of the inflation pressures.

But with that said, Joanna, yes, VITAS beat on margin. They were like, what, Nick, roughly a fraction of 1% below where we thought on revenue. Margins were a little stronger to the tune of, call it, a couple of million dollars. So we try to avoid parsing things in terms of internal guidance on quarters. But VITAS basically came in at revenues stronger by, slightly by, oh, 100-ish basis points on margin that we're pleased with.

Roto-Rooter beat a little bit on revenue and definitely beat on margin, not to the magnitude of VITAS, but pretty solid quarter as well. Relative to our internal estimates, Joanna, again, I'll use adjectives not specific numbers. But underlying Roto-Rooter, we were exceptionally pleased for a couple of reasons, one of which was we kept talking about what we expected was the pivot from residential to commercial as kids go back to bricks-and-mortar schools, parents start returning to a place of work at least for a few days a week. So we fully expected commercial to increase, restaurants, retail business, all of the above. And that happened at 14-plus percent increase on revenue.

And on the commercial side, that was a little higher than our internal estimates. But what we were super pleased at is we continue to have some really, really, really solid growth in Roto-Rooter residential, and that grew at a little over 7%. So from our internal estimates, we're seeing a great pivot to commercial without really what I'd consider any weakness on the residential side. Margins are stronger because we were conservative on inflationary pressures starting right away in Q1. Clearly, it will kind of boil throughout the year.

VITAS side, obviously, we're taking more effort to just maintain what I'd call strong labor presence to maintain quality of care and plans of care. And we're just, like I said, trying to manage the balance of licensed healthcare workers.

On the Roto-Rooter side, more dynamic. If we see inflationary pressures, we'll continue to raise prices if that's appropriate. And we have to look at pricing as a major tool because that maintains our plumbers and drink leaders, and that's the enticement for people to come onboard to the Roto-Rooter team.

So yes, we outperformed internally, I'd still say modestly better than I would have realistically thought at the high end. But the reality is we are going to have a little bit of pressure going forward, but I feel exceptionally comfortable on our macro guidance.

No, that's great color. I appreciate the details. And I guess to this last point, you're talking about the labor pressure. So you said that your guidance already had expected or assumed significant increases in overall compensation. I guess in prepared remarks, you just made that statement. So can you quantify for us what exactly you assume in terms of the growth in (inaudible)of VITAS?

No, we don't give that granular detail and certainly within a quarter.

Okay. No, I wasn't talking about the quarter, but talking about the full year?

No, no, because -- no, we won't go into that kind of detail either.

Okay. And then I guess on the flip side, where the Medicare rate update the proposal came out calling for call it roughly 3% rate update. So was this kind of how you were expecting and modeling in terms of including in the guidance? And I guess anything else in that proposal that you're looking at that we should be also focused on?

I'll comment on the proposed rate increase, and I'll defer to Nick and Kevin on some of the other components in that proposed rule.

But no, actually, I was surprised at how low the number was. And I was also a little surprised that they actually didn't give the underlying metrics to do the calculation. Historically, CMS has utilized the hospital wage index basket from April 1 to March 31, and that's the solid data from the BLS they used for the October -- the following October 1 increase.

And with the slight rebasing that they did in October 1 of 2021, there was a little bit more shift to CPI, a little less emphasis on the hospital wage index basket. But the way the ratio roughly works is 65% of the increase is the hospital wage index basket, 35% is based upon CPI or inflation.

So I was surprised when they came out in the second or third week of March before that data is finalized with the proposed rule. But more importantly, the headline number on CPI at March 31, 2022, was 8.5%. If you just take 35% of 8.5%, assume the hospital wage index basket will be flat, no increases in that regard, you would come up with obviously a larger number than they're proposing even after you take out the 40 bps of productivity factor that they included in.

Of course, most of that is supposed to relate to the hospital wage index basket. But I really want to see the underlying data, and it does seem like CMS is building in more of a lag from the measurement of inflationary pressures in hospice and to the point where they pass it through to reimbursement on October 1.

They obviously didn't use the March numbers at the very least.

Literally. But even still, I think the CPI pressures then -- what was the previous? What was the number through February, what, 7.9% or something like that? So we're curious to see the underlying data. At the end of the day, they could create more of a lag. But at some point, the way the reimbursement factors work, reimbursement will catch-up in totality to the total inflation over whatever time period we want to talk about.

Yes. So as it relates to the other aspects of the rule in general as well as guidance, we put a realistic estimate inside of that last quarter, so it won't materially impact our full year guidance. And we'll be able to talk more specific about it after the second quarter when we update guidance, and we have more clarity as the final rule starts to come out.

For the nonwage-related aspects, which are almost as equally important in some years, more important than the rate itself, we were pleased to see it was consistent with our expectation that there were not a lot of material regulatory changes, which then, in turn, create process changes, additional administrative burdens, which over the past years, a lot of those things had been incorporated in.

So pleasantly surprised, but consistent with expectations given everything else going on in the industry that it was everything that was anticipated and will continue to have a minimal disruption by implementing any minor items that would go final in August for the October 1 effective date.

I appreciate a comment and appreciate the fact that there were no additional changes is always good, especially with everything that's going on.

But on that front, last question on VITAS. So you talked about Roto-Rooter, you gave us great start in terms of including -- increasing your workforce on the Roto-Rooter side. So can you give us some stats on the VITAS side in terms of your net hiring?

You mentioned that turnover was still high, but it sounds like you would still not where you were expecting or many not where it should be. So can you give us some of the pieces in terms of -- is turnover improving in recent months and also net hiring or any kind of measurements you can provide on the kind of the headcount on the VITAS side?

So consistent with how Dave was talking about, and Kevin was talking about first quarter performance based upon adjectives from a description perspective, I'll do that as it relates to some of the hiring components since we don't release those aspects publicly.

Overall is our net hiring rate and turnover rate performing better than our 2019 levels pre-pandemic. No, it's not. That's what we alluded to inside of our commentary. However, there have been some encouraging signs from a trend perspective inside of the quarter as VITAS, no different than any other healthcare provider, continues to double and triple down with an absolute focus on both recruiting and retention for, in particular, our clinical workforce like we've been consistently talking about for the last few quarters.

There's positive progress, but yet like everything in hospice, it is a market-specific impact. So there are some markets where we're seeing real positive progress. There's others where we're continuing to flip the proverbial pancake to continue to try to make headwinds.

But at the end of the day, that will have the biggest impact on 2022, 2023, no different than it does for every other hospice provider out there in terms of our ability to continue to attract and retain high-quality clinicians.

Okay. So I guess so you're seeing some improvement. So there's like the kind of the net headcount on the VITAS side is also improving?

We're seeing positive trends as it relates to it. And it's a day-to-day battle not only amongst competing with others in the industry, but others outside of home care, in the nursing home segment, in the hospital segment, in the travel nurse contract agency segment. So we're all searching for similar resources. And like I said, it's a day in, day out, but I'm happy with the level of effort and focus the team has put in and I promise you will continue to put in as we traverse the rest of '22.

Okay. Great. And I guess so my last question, I guess, on the Roto-Rooter side and I'll go back to the queue.

So you mentioned the price increases that it seems like, I guess, the stock they worked -- that you implemented earlier in the year and that you might consider additional price increases. So what would it regard is just the inflationary data points? And so can you kind of give us a flavor of the magnitude of things in terms of these price increases that you did, and you consider doing?

And I'll start and just say that we consider Roto-Rooter a premium-priced service offering. And we look at that market-by-market very closely, being careful not to -- to be premium priced, not overpriced. And again, if inflation continues at its current elevated rates, I mean, we don't -- early in the second half of the year, we will make those calculations and not hesitate to make a price increase if it's indicated. David, any other color on that?

No. I mean part of the issue is the variability, like compare Baltimore to Cincinnati. They had completely different increases that passed through. And then within each market, we would have a different rate increase for excavation versus, say, drain cleaning. And then water restoration, that price increase comes from Xactimate as well.

So the reality is it's a hodgepodge, and Baltimore was completely different than Cincinnati. On average, though, we were actually based upon the headline number of 8.5% at the end of March. We got a little room to go for price increases still to catch-up to inflation.

And it's supply and demand. We said we have many, more than several programs where we have more calls than we have people to service them. You can imagine that the classic response to that is increased prices and bring the 2 in alignment, and the supply and demand. So that's the kind of thing we -- but I guess, Dave's point is we are not limited to doing that once a year at the beginning of the year.

Normally, we do it in low inflation. It would be crazy to lag by 12 months when inflation is already in our economic model, you patch through the price increases. But Joanna, the reason we actually gave granular numbers on Roto-Rooter is because of the consistency of what I consider strong hiring and retention trends. So we can actually use it to predict out how Roto-Rooter is performing.

Nick is just reacting to an extremely volatile labor market where it's hard to discern any trends one way or the other, whether it's an RN nurse practitioners or home health base. But on the Roto-Rooter side, the reason we spend so much time talking about labor is, labor is a critical component of just driving commission revenue and then their commissions.

But the fact that we were able to grow labor consistently throughout 2021, the year of the Great Recession, the fact that we continue to grow labor, both in the skilled and unskilled technician areas throughout the first 4 months of 2022, I think is just a good indicator of the strength of Roto-Rooter. And that's why we get so granular is we weren't -- it's a very predictable trend line at this point throughout the year. Momentum is with Roto-Rooter both in demand as well as in our ability to service that demand with a growing headcount.

No, definitely, the 8% and even the 3% numbers that you gave for Roto was definitely good. Good to hear that as an indicator for where the business is going.

(Operator Instructions) Our next question comes from Ben Hendrix of RBC Capital Markets.

Just a quick question here. I noticed that with 4 -- about a 4% decline in days of care versus your ADC guidance of down 1% and 1.5%. I know you noted that kind of decreased hospital admissions went down pretty significantly, and that looks like it shifted your kind of days of care mix.

How do you -- trying to get an idea for cadence through the year, how does that develop through the year kind of in terms of maybe top line impact? And then at what pace would you expect kind of labor inflation to impact costs over the course of the year? Just -- really just trying to get an idea of how you're thinking about cadence.

So from an ADC perspective, you're spot on regarding the actual prints. But as we think about it and we think about the entire calendar year, one of the other aspects we included in our comments last quarter for guidance is keep in mind while we don't provide quarterly guidance, we did provide some directional guidance towards ADC growth accelerating in the second half of the year.

And a lot of that, you start to see some leading indicators of that -- the execution out in the marketplace as we continue to focus on the community-based segment as well as the broader segment. But you can pick up on that as it relates to the disparity in our admission numbers with the nonhospital segment having positive both year-over-year comparisons and even more positive sequential Q4 of last year to Q1 as well. So...

I think this is my point. I'd just tell you, internally, now we don't talk about overall admissions. I mean, in fact, other than the fact that investors are used to hearing that from hospice providers internally, we're talking only in terms of from once they arise.

That's right. That's exactly right. So from a Q4 of last year to Q1 of this year, the nonhospital segment admissions sequentially increased a little over about 5.5%.

And so from ADC perspective, the Omicron variant in the first -- in January does have an impact to total days of care inside of the quarter. But we continue to see it as a good, hopefully, launching point for the remainder of the calendar year as many of the disruption pieces inside of the pandemic are behind us, and we're dealing with more of a regular referral flow and a continual shift of focus as we look to ensure we are deploying our admission resources to respond to the most appropriate referrals out there and go from there to bring on all appropriate and eligible patients that we respond to. So that's from an ADC perspective.

Your other question, Ben, right, was pace and cadence as it relates to labor, salary and wage and from an inflationary perspective. And we are in line through the first quarter with what -- where we anticipated it. From a wage and salary standpoint, we have some prudent programs and course throughout the course of the year, including annual merit cycle that hits in the middle of the year, and all that's incorporated into our guidance.

The biggest barometer that we are looking at on a day in and day out basis is really growing our net headcount as it relates to our licensed clinical resources. And more and more hoping, as we bring those resources in, that they're coming in, in a full-time capacity versus a part-time capacity or a per diem capacity, which adds a degree of complexity towards some of that labor management on a go-forward basis.

But feel good about where we are right now, consistent with our full year guidance. But time will tell over the next 8 months from today.

At this time, I would like to turn it back to Kevin McNamara for closing remarks.

Well, I will only reiterate a remark that we were gratified with our operating units. And we're certainly -- generally in line with what we expected when we gave guidance in February and a little above that, and thank everyone for their attention, and we'll be back in 3 months for the discussion of the second quarter. Thank you.

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