Chemed Corporation (NYSE:CHE) Q4 2023 Earnings Call Transcript

Chemed Corporation (NYSE:CHE) Q4 2023 Earnings Call Transcript February 28, 2024

Chemed Corporation  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Holley Schmidt: [Call Starts Abruptly] Financial Results for the Fourth Quarter of 2023 ended December 31, 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 February 27 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 27, 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; Mike Witzeman, Chief Financial Officer of Chemed; and Nick Westfall, 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 fourth quarter 2023 conference call. I will begin with highlights for the quarter, and Mike and Nick will follow-up with additional operating details. I will then open up the call for questions. Our fourth quarter 2023 operating results released last night reflect continued improvement in our VITAS’ operational metrics. In the quarter, our admissions increased 7% over the prior year period. These strengthening admissions continue to drive higher patient census. In the fourth quarter, our Average Daily Census, or ADC expanded 1,918, an increase of 11% when compared to the prior year quarter and 2.6% when compared to the third quarter of 2023. During the fourth quarter, we surpassed our pre-pandemic ADC all-time high.

VITAS’ continued improvement in operating metrics is a result of our 12-month retention and hiring program launched in July of 2022. This program was designed to stabilize turnover in our tenured staff and expand clinical workforce capacity. This 12-month retention program generated an aggregate increase of 784 licensed healthcare professionals, the majority of which are licensed nurses. The retention bonus program ended in the second quarter of 2023. However, in the second half of 2023, we continued to expand our licensed staff and related patient service capacity. VITAS’ net bedside headcount increased by 157 licensed professionals in the third quarter and 84 in the fourth quarter. The fourth quarter increase was below our internal target, but the lower number was not wholly unexpected as hiring around the holidays is more challenging due to individual schedules and vacation plans.

Our 2024, VITAS guidance assumed strong ADC growth driven by continued successful hiring and retention of licensed staff. Now let’s turn to Roto-Rooter. As discussed over the past few quarters, Roto-Rooter continues to manage through what can only be described as ongoing headwinds in the consumer sentiment and consumer spending within our sector of the economy. Overall, our call volume is down 18.7% when compared to the prior year quarter. The last week in the fourth quarter of 2022 was significantly impacted by a nationwide deep freeze. Excluding that one week in 2022, call volume is down 13% during the fourth quarter of 2023 compared to the same period as 2022. This decline is comparable to the call volume declines we have been experienced the second and third quarters of 2023.

Roto-Rooter has offset a significant portion of this softening demand with improvements in close rates. Our call center’s conversion rate, the rate at which a call is converted into a technician scheduled ticket has improved 5.4%. Our ticket void rate, which is the rate of canceled jobs before a technician can be dispatched, improved 1.8%. Our technician conversion rate, the percentage of time a tech arrives at home or business and converts the scheduled ticket into billable work improved 1.3%. Commercial revenue at Roto-Rooter declined 7.9% in the fourth quarter of 2023 compared to the same period of 2022. We’ve noticed that some of the same demand issues with our commercial business as we have experienced with our residential business. For example, as our large big box commercial customers have struggled with demand issues, we have been approached with requests for significant decreases in prices.

We’ve walked away from this type of business. There’s our belief that when demand issues abate, this type of customer will return to Roto-Rooter for its consistent, high quality, reliable service. We continue to see overall stabilization of demand in our weekly revenue. Our guidance assumes improving demand trends starting in the second quarter of 2024. 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 have returned VITAS to normalized operating conditions. Roto-Rooter is well-positioned in spite of economic headwinds on the consumer spending in our sector; 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 the teleconference over to Mike.

Mike Witzeman: Thanks, Kevin. VITAS net revenue was $350 million in the fourth quarter of 2023, which is an increase of 13.6% when compared to the prior year period. This revenue increase is comprised primarily of an 11.0% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.3%. The acuity mix shift negatively impacted revenue growth 38 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 61 basis points. Average revenue per patient day in the fourth quarter of 2023 was $201.33, which is 200 basis points above the prior year period.

Reimbursement for routine home care and high acuity care averaged $177.62 and $1,058.60, respectively. During the quarter, high acuity days-of-care were 2.70% of total days-of-care, a decline of 6 basis points when compared to the prior year quarter. Adjusted EBITDA excluding Medicare Cap totaled $83.3 million in the quarter, an increase of 61.6%. Adjusted EBITDA margin in the quarter excluding Medicare Cap was 23.7%, which is 705 basis points above the prior year period. The fourth quarter adjusted EBITDA margin comparison was positively impacted by a number of items. The expense attributable to the retention bonus program in 2022 resulted in a 406 basis point improvement in the 2023 margin. As Nick will discuss further, VITAS reverted back to its pre-pandemic vacation policy, which resulted in an estimated 135 basis point improvement.

Finally, the lower than anticipated hiring rate in the fourth quarter previously discussed by Kevin, provided less drag on the adjusted EBITDA margin from onboarding and training costs. Now, let’s turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $235.9 million in the fourth quarter of 2023, a decrease of 1.1% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $56.8 million, a decrease of 7.9% over the prior year. Roto-Rooter branch residential revenue in the quarter totaled $162.5 million, an increase of 2% over the prior year. Adjusted EBITDA in the fourth quarter of 2023 totaled $64.9 million, a decrease of 6.4% compared to the prior year quarter. The adjusted EBITDA margin in the quarter was 27.5%, which is 154 basis points below the prior year period, largely driven by an increase in Internet marketing costs.

Now, let’s discuss our 2024 guidance. VITAS’ 2024 revenue prior to Medicare Cap is estimated to increase 9% to 9.8% when compared to 2023. ADC is estimated to increase 6.5% to 7%. Full year EBITDA margin prior to Medicare Cap is estimated to be 17.8% to 18.3%. This compares to the 2019 full year adjusted EBITDA margin prior to Medicare Cap of 17.7%. As discussed previously, we believe that a return to pre-pandemic margin was likely once the industry stabilized. The 2024 guidance assumes we are able to successfully offset continued marginal compression headwinds caused by above average hiring and retention levels along with wage increases outpacing our reimbursement in 2024. We are currently estimating $9.5 million from Medicare Cap billing limitations in calendar year 2024.

Roto-Rooter is forecasted to achieve full year 2024 revenue growth of 3.5% to 4%. Roto-Rooter’s adjusted EBITDA margin for 2024 is expected to be 28.7% to 29.1%. Due to the nationwide deep freeze in early 2023, we believe that the first quarter of 2024 will be a difficult comparison for Roto-Rooter resulting in slight declines in revenue and profitability. Our guidance then anticipates modest demand growth for the remaining three quarters of 2024. The January 1, 2024 price increase implemented by Roto-Rooter averaged approximately 3.5%. Based upon the above full year 2024 earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $23.30 to $23.70.

This 2024 guidance assumes an effective corporate tax rate on adjusted earnings of 24.2% and a diluted share count of 15.2 million shares. Chemed’s 2023 adjusted earnings per diluted share was $20.30, including $1.04 per share for costs associated with the 2023 portion of the retention program. I will now turn this call over to Nick Westfall, Chief Executive Officer of our VITAS Healthcare Business segment.

Nick Westfall: Thanks, Mike. As previously 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. I am also very pleased that we’ve continued to expand our workforce and patient capacity in the second half of 2023 without this retention program. While the fourth quarter net headcount addition was below our internal expectations, we are confident that was caused by the circumstances of the holiday season and not any issue related to our ability to hire and retain the appropriate level of licensed bedside employees. While it’s only two months into the New Year, to further reinforce this confidence, we have seen a return to hiring and retention levels we anticipate for 2024.

In the fourth quarter of 2023, our average daily census was 19,352 patients, an increase of 11% when compared to the prior year and an increase of 493 or 2.6% sequentially. VITAS has generated sequential ADC growth over the last five quarters. Kevin mentioned in his opening remarks, we also achieved a milestone when we surpassed our pre-pandemic all-time ADC high during the fourth quarter of 2023. I’m particularly proud of the team for this achievement as it was accomplished faster than we originally forecasted when we began 2023. In the fourth quarter of 2023, total VITAS admissions were 15,867. This is a 7% increase when compared to the fourth quarter of 2022. In the quarter, our nursing home admissions increased 1.7%, assisted facility admissions expanded 16.4%, hospital directed admissions increased 0.5%, and our home-based patient admissions expanded 15.2% when compared to the prior year period.

Our balanced community-based strategy continues to be successfully executed by our team as illustrated by the consolidated 13.9% admissions increase in those segments during the fourth quarter. Our average length of stay in the quarter was 105.9 days. This compares to 103.9 days in the fourth quarter of 2022 and 103.1 days in the third quarter of 2023. Our median length of stay was 17 days in the quarter and compares to 16 days in the fourth quarter of 2022 and 17 days in the third quarter of 2023. As Mike previously mentioned, our fourth quarter 2023 EBITDA margin was positively impacted by a number of factors. While we were slightly disappointed with our net headcount additions in the fourth quarter, the positive side effect is that there were less unproductive labor onboarding and trading costs than anticipated.

Additionally, during the pandemic, we increased the amount of paid time off or PTO our employees could carryover from year-to-year from 40 hours to 80 hours. This was designed to allow for our workers to better manage burnout and be able to quarantine as was prescribed at that time without worrying about whether they would be paid for that time. In August of 2023, we announced that the carryover policy was reverted back to the historical 40 hours at the end of the year. As a result, we experienced higher levels of PTO taken in the fourth quarter than normal. Additionally, the amount of forfeited PTO at the end of the year was higher than historical levels. We anticipated — we estimate that this one-time PTO change added approximately 135 basis points to the fourth quarter EBITDA margin.

To recap what our team has accomplished, we’ve now generated six quarters of sequential net growth in licensed healthcare workers and five quarters of sequential growth in ADC. We now have a sustainable and predictable approach to continue methodically building our clinical capacity and patient base that has taken us past our pre-pandemic levels and catapulted us forward into 2024 and beyond. I want to thank our entire team as these accomplishments over the past few years were a result of the unwavering commitment, dedication and focus each VITAS team member has towards fulfilling our mission in every community we serve. We got here together and we are very excited for what 2024 and the future has in store for VITAS. With that, I’d like to turn the call back over to Kevin.

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

Operator: [Operator Instructions]. Our first question comes from the line of Joanna Gajuk of Bank of America. Your line is now open.

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Q&A Session

Joanna Gajuk: Hi, good morning. Thanks for taking the question. So I guess first on VITAS, since this was the last topic, but the guidance calls for VITAS revenue to grow 9% to 10% on census, growing 7% again. So that’s above, I guess, the kind of long-term growth outlook that you talk about in the past for the industry to grow mid to high-single-digits. So I guess the two part question is what gives you confidence you can grow volumes high-single-digits again? And I guess with that, what is the long-term outlook for revenue growth I guess in the segment after 2024; do you expect continuation of it? Is there something to be said about aging demographics or people accessing hospice earlier? Any dynamics that maybe imply the growth, this accelerated growth is sustainable? Thank you.

Nick Westfall: Maybe just to take the two parts, Joanna, this is Nick. Short answer for 2024 and beyond is yes. We think the volume growth rate combined with the pricing pieces is sustainable beyond 2024. The other factors that you’re referencing, whether it is aging demographics, people traditionally going into the age range where they access the hospice benefit, that’s very favorable from a tailwind standpoint. I think the biggest unknown is hopefully, and I think we will continue to see the momentum in the industry for people continuing to access the benefit earlier, which could drive overall days of care growth. And I realize there’s a lot of things contributing to that. You could get to federal government overall understanding through things like the NORC study that earlier and longer access is beneficial to the Medicare trust fund as well as to patients and families.

And then you can take other pieces that are very favorable, like President Carter’s continued journey on the benefit. He reached his one year milestone on February 18 and me and everybody else in the industry can’t provide enough praise to him and his family for the dialogue that has sparked across the country about what hospice is and what it can be. So I think there’s a lot of favorable tailwinds about for 2024 and beyond around overall understanding of the hospice benefit acceptance and the fact that it is a really sustainable and high quality program for the country.

Kevin McNamara: And Joanna, I think that for people building a model and referring to past periods for VITAS, you have to build in what Nick has described various forums as a mix shift with community access. I mean when you have to — when you look at our average length of stay going from high 90s to 105, that’s basically driven by the fact that fewer of our referrals are coming from hospitals, which still a very substantial largest [ph] source, I mean, don’t get me wrong, but referrals from other sources tend to have longer lived census. And so that mix shift makes some comparisons to past periods less relevant.

Nick Westfall: In the overall healthcare demographic of people seeking care outside, more and more of acute four-wall hospitals and facilities, I think helps to contribute to that for where we would see referrals coming to us.

Joanna Gajuk: So I guess if I may follow-up on the comment around mix into the community access strategy and increasing length of stay, how does it — I guess what’s your I guess strategy when it comes to dealing with Medicare Cap when it comes to these lengthening stays for some of these patients?

Mike Witzeman: No, the strategy itself doesn’t change as it relates to it. We’ll continue to manage it accordingly on a market-by-market basis. And we feel very comfortable that that balanced approach and I specifically used the word balanced in my opening remarks is what’s needed and necessary. And so while there is a broader expanded access, don’t want to discount the importance of our hospital partners and how that’s going to continue to be critical for us as an independent hospice provider in every community in which we operate.

Nick Westfall: And we still have a pretty high level of hospital-based admissions which help with the Medicare Cap. We don’t anticipate any real material Medicare Cap problems in the near-term for sure.

Kevin McNamara: Let’s put it this way, our Medicare Cap issues that we talk about really plot against occur in California, and that’s not driven by high average length of stay, it’s driven by very high reimbursement with a static nationwide level of cap measurement. So suffice it to say we’re knocking on wood here, but in the short and mid-term outlook, cap is unlikely to rear its ugly head.

Joanna Gajuk: Okay. That’s helpful color. If I may say, on VITAS on the margin side, so clearly you talk about some items that help to bring margins 23% versus kind of we talked about three months ago that Q4 guidance implies a little bit less than 2022. So I guess to explain the benefits of that. But I guess also your guidance calls for margins expanding, which is good. And there were some comments on the last call around like VITAS margins normalizing up 19%. So I guess you still to your point, the margins guidance 2024 call for margins to be above 2019 levels. But should we still think about going forward that there’s potential for more margin expansion towards this 19%? Like you said, if you continue to grow top-line high-single-digits, is there opportunity for — of getting closer to 2019? Thank you.

Nick Westfall: So the short story is the guidance and the range that we provided for 17.8% to 18.3%, we think is very reasonable from a bottom up budgeting standpoint. Forecasting around how much headwinds there is on marginal compression given pricing lagging and never catching up to real cost of operating the business is impossible to forecast what that means out multiple years at this point. But I think the one thing you’d say uniformly is we’re — our reference point up until the last call was coming back to marginal levels that were pre-pandemic and then seeing how it shakes out as we get to a very sustainable and predictable growth rate as well as overall profit contribution rate, and we’ll see what the marginal contribution then blends out to be that we feel very confident in and that comes out in that 17.8% to 18.3% range for 2024.