Chemed Corporation (NYSE:CHE) Q3 2023 Earnings Call Transcript

Chemed Corporation (NYSE:CHE) Q3 2023 Earnings Call Transcript October 26, 2023

Holley Schmidt: Good morning. Our conference call this morning will review the Financial Results for the Third Quarter of 2023 ended September 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 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 October 25 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 October 25, 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.

Kevin McNamara: Thank you, Holley. Good morning. Welcome to Chemed Corporation’s third 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 third quarter 2023 operating results released last night, reflect continued improvement in VITAS’ operational metrics. In the quarter, our admissions increased 7.5% over the prior year period. These strengthening admissions continued to drive higher patient census. In the third quarter, our Average Daily Census, or ADC, expanded 1,617, an increase of 9.4%, when compared with the prior year and 2.5% when compared with the second quarter of 2023. VITAS’ improving operating metrics are a direct result of our retention and hiring program launched July 1st of last year.

This program was designed to stabilize turnover in our tenured staff and 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 in roughly 60 to 90 days. This 12-month retention program generated an aggregate increase of 784 licensed healthcare professionals, the majority of which are licensed nurses. This retention bonus program ended in the second quarter of ’23. However, in the third quarter, we continued to expand our licensed staff and related patient capacity. VITAS net bedside headcount increased by 157 licensed professionals in the quarter. Our September 2023 was ADC — excuse me, in September 2023, our ADC was 19,047 patients.

This compares to our September 2022 ADC of 17,325 for a net increase of 1,722 patients. This raw ADC patient increase translates into $123 million of increased annualized billable revenue. Our revised guidance assumes continued sequential ADC growth in the fourth quarter of 2023. Now let’s turn to Roto-Rooter. As I discussed last quarter, Roto-Rooter continues to manage through what I can only describe as headwinds on consumer spending. Overall, our call volume was down approximately 13.6%, when compared to the prior-year quarter. Although call 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 significant portion of the softening demand with a material increase in close rates.

Our call center’s conversion rate, the rate at which a call is converted into a technician-scheduled ticket, has improved 4.8%. Our ticket void rate, which is the rate of canceled jobs before technicians can be dispatched, improved 4.6%. Our technician conversion rate, the percentage of time a tech arrives at a home or business and converts a scheduled ticket into billable work, was essentially equal to the prior year. These improved conversion rates combined with price increase resulted in Roto-Rooter increasing revenue 40 basis points when compared to the prior year. We continue to see stabilization of our demand in our weekly revenue. Our guidance assumes Roto-Rooter will help modest fourth quarter sequential growth when compared to our third quarter of 2023.

This conservative revenue guidance for Roto-Rooter’s fourth quarter seasonality demand assumes continued consumer spending headwinds for the remainder of the year. To summarize, I am pleased with the accelerated improvement in VITAS post-pandemic. Our increased growth in licensed healthcare professionals, strong admissions and corresponding growth in the patient census have returned to VITAS to normalized operating conditions. 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 conference over to David.

Dave Williams: Thanks, Kevin. VITAS’ net revenue was $334 million in the third quarter of 2023, which is an increase of 12.5% when compared to the prior-year period. This revenue increase is comprised primarily of a 9.4% increase in days of care, a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%. The acuity mix shift positively impacted revenue growth 24 basis points 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 increased revenue growth by approximately 20 basis points. Our average revenue per patient per day in the third quarter of 2023 was $196.43, which is 296 basis points above the prior-year period.

Reimbursement for routine homecare and high acuity care averaged $172.52 and $1,026.48, respectively. During the quarter, high acuity days of care were 2.8% of our total days of care, which is an increase of 5 basis points compared to the prior-year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $54.9 million in the quarter, which is an increase of 53.4%. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 16.5%, which is 441 basis points above the prior-year period. Now let’s take a look at Roto-Rooter. Roto-Rooter generated quarterly revenue of $231 million in the third quarter of 2023, an increase of 0.004% compared to the prior-year quarter. Roto-Rooter branch commercial revenue in the quarter was $56.8 million, an increase of 1.5% over the prior year.

The aggregate commercial revenue growth consisted of drain cleaning revenue declining 4.2%, plumbing increasing 1.8%, excavation expanding 11.9%, and water restoration increasing 2%. Roto-Rooter branch residential revenue in the quarter totaled $155 million, an increase of 0.003% over the prior-year period. This aggregate residential revenue growth consisted of drain cleaning decreasing 6.7%, plumbing expanding 0.003%, excavation expanding 3.2%, and water restoration increasing 4.3%. Adjusted EBITDA in the third quarter of 2023 totaled $66.9 million, a decrease of 3.7%. The adjusted EBITDA margin in the quarter was 29%, which is 124 basis points below the prior-year period. Now let’s take a look at our updated guidance. VITAS’ 2023 revenue, prior to Medicare Cap, is estimated to increase 9.3% to 9.5% when compared to 2022.

Full year 2023 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. Our Average Daily Census, or ADC, is estimated to increase 7.3% to 7.5%. And full year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 15.4% to 15.7%. The total pre-tax cost of the retention program in 2023 is estimated at $23.8 million. This reduced our adjusted EBITDA margin guidance for 2023 by approximately 180 basis points. We are currently estimating $8 million for Medicare Cap billing limitations in calendar year 2023. Roto-Rooter is forecasted to achieve the full year 2023 revenue growth of 1.6% to 2%. Roto-Rooters adjusted EBITDA margin for 2023 is guided to 28.4% to 28.6%.

Based upon the above, full year 2023 earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, cost related to litigation, and other discrete items, is estimated to be in the range of $19.82 to $20.02. This guidance includes $1.18 per share of after-tax costs related to the 2023 portion of the retention program. This revised 2023 guidance compares to previous guidance, as recast to no longer exclude costs related to the retention program of $18.72 to $18.92. Current 2023 guidance assumes an effective corporate tax rate and adjusted earnings of 23.6%, and a diluted share count of 15.2 million shares. Chemed’s 2022 adjusted earnings per diluted share was $18.78, that includes $0.97 per share for costs associated with the 2022 retention program.

During the third quarter, the company finalized a realignment of its state and local corporate tax structure. This realignment, effective January 1, 2022, was based on the location of operating resources and profitability by business segment. This reduced state taxes for 2022 and 2023 and is estimated to result in a 24.3% effective tax rate starting in 2024. I will now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS Healthcare business segment.

Nick Westfall: Thanks, David. As Kevin discussed, our 12-month retention and hiring bonus ended on June 30, 2023. This program was very effective in stabilizing and expanding our patient capacity. All retention bonus payments are individually cliff vested and paid out after the employee has successfully completed 12 months of continuous employment. I’m also very pleased that we have continued to expand our workforce and patient capacity in the third quarter without this retention program. In the quarter, VITAS increased net bedside headcount by 157 licensed professionals. Similarly, I’m pleased that we’ve continued to see strong retention of our team members, who received their retention bonus payment, illustrating the sustainability of improvements in culture and morale at our locations.

In the third quarter of 2023, our Average Daily Census of 18,859 patients, an increase of 1,617 or 9.4% when compared to the prior year, and an increase of 467 or 2.5% sequentially. As Kevin mentioned, we crossed the 19,000 ADC mark in September of 2023, at 19,047 patients. This compares to our September ’22 ADC of 17,325 for a net increase of 17,022 patients. VITAS has generated quarterly sequential ADC growth over the last four quarters. In the third quarter of ’23, total VITAS admissions were 15,774. This is a 7.5% increase when compared to the third quarter of ’22. In the quarter, our nursing home admissions increased 2.8%, assisted living facility admissions expanded by 17.1%, hospital-directed admissions increased by 6.5%, and our home-based patient admissions expanded by 9.2% when compared to the prior-year period.

Our average length of stay in the quarter was 103.1 days. This compares to 106.2 days in the third quarter of ’22 and 99.5 days in the second quarter of 2023. Our median length of stay was 17 days in the quarter and compares to 17 days in the third quarter of ’22 and 16 days in the second quarter of ’23. To recap what our team has accomplished, we’ve now generated five quarters of sequential growth in licensed healthcare workers and four quarters of sequential growth in ADC. We’ve developed what I believe is a very sustainable path to methodically build our clinical capacity and patient base to pre-pandemic levels and beyond. These accomplishments were a result of the unwavering commitment, dedication, and focus each VITAS team member has toward fulfilling our mission in every community we serve.

I want to take this opportunity to thank our entire VITAS team for what we have done to get us here today, and I look forward to what we will accomplish going forward. With that, I’d like to turn this call back over to Kevin.

Kevin McNamara: Thank you, Nick. It’s now an appropriate time to entertain any questions people might have.

Operator: Okay. Thank you. [Operator Instructions] Our first question comes from the line of Ben Hendrix of RBC Capital Markets. Your line is open.

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Q&A Session

Ben Hendrix: Hey, thank you very much. Just on the VITAS in terms of the new revised guidance, I wanted to get your thoughts on how you’re factoring in the hiring that you saw in this quarter into your revised estimates? And can you remind us kind of what you’re expecting in terms of pull-through in 4Q from some of the new hires that you noted? I think you noted about 150-some-odd new nurses. Thank you.

Nick Westfall: Yeah, sounds good. So, in terms of forecasting for the fourth quarter, it obviously takes — we have previous five quarters of experience around what we believe to be the translation from a census growth standpoint. So, it’s obviously factored into our fourth quarter guidance for this year. And as alluded to in the comments, feel very good about our methodical approach. While it was 157 net bedside headcount expansion in the third quarter, there’s no reason to believe that can’t continue and won’t continue throughout the end of the year, which will launch us into ’24 and we’ll include that in our 2024 guidance when we discuss that in February of next year.

Dave Williams: And Ben, what you probably noticed, if you kind of do the math on the three quarters of actual to get to our full year guidance, we’re anticipating a pretty big sequential pop from Q3 to Q4 in our adjusted EBITDA margin ex-Cap, and that’s primarily due to three factors, one of which is all of the price increase is going to drop down to our EBITDA line, really all of it. And geographically, we came out what, 20 basis points ahead of the national average?

Nick Westfall: 3.3% is where we anticipate.

Dave Williams: So, we’ll pick up about 3.3 points that way. And then the other issue we’re looking at is Nick and his team are still actually monetizing, although they’ve done a substantial piece of it, the huge growth rate in labor in Q2, the 302 increase in bedside FTEs, as well as he’s digesting the 157 and we do — are getting leverage on central support costs, relative to the marginal revenue growth. So that’s just a long way of saying is we are going to have a very, very nice pop around to about 21% in the fourth quarter adjusted EBITDA margin, but certainly that is not the go-forward margin for ’24. We’re obviously working on a very good, very positive tailwind in terms of how we’re monetizing this huge capacity increase as well as admission increases, which are expensive. But when we give ’24 guidance, it’s going to moderate from the fourth quarter, obviously.

Ben Hendrix: Thank you. That’s very helpful. Moving quickly to Roto-Rooter, can you talk about the water restoration trends? It looks like the revenue is a little softer than what we’ve seen in past quarters. Remind us of any seasonality that goes into that number? And kind of how that business is faring amid some of the broader consumer headwinds? Thanks.

Dave Williams: In terms of seasonality, there’s not much, but I rarely like to — we don’t like to talk about weather. But for example, in the first quarter of this year, we had extremely cold weather that contributed to frozen pipes. Frozen pipes tend to have a lot of water restoration work because they burst and there’s water in certain parts of a structure. So, from that standpoint, there could be a modest amount of seasonality. Beyond that, every water restoration job is largely, bespoke. It’s triggered from a small plumbing or drain cleaning job, then that results in, “Do you want this water and humidity removed?” So from that standpoint, it generally tracks plumbing and sewer and drain work. However, we are still doing a great job of responding quickly to jobs that have a high probability of water restoration and capturing that business.

So for right now, because of our speed of response, we’re actually outperforming in water restoration, the growth in sewer and drain, but we eventually expect that to be totally correlated within a couple of years.