Q2 2022 Chemed Corp Earnings Call
Okay.
Good day and welcome to the Chemed Corporation second quarter 2022 earnings conference call. After the speaker's presentation there'll be a question and answer session.
As a reminder, this call is being recorded I would like to turn the call over to Holley Schmidt you may begin.
Good morning, Our conference call. This morning will review the financial results for the second quarter of 2022 and at June 32022.
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.
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 July 27th 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.
Conciliation of these non-GAAP results is provided in the company's press release dated July 27th which is available on the company's website at Chemed Dot 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 to be test VITAS Healthcare Corporation subsidiary.
I'll now turn the call over to Kevin Mcnamara.
Thank you Holly.
Good morning.
Welcome to Chemed Corporation's second quarter 2022 conference call I.
I will begin with the highlights for the quarter.
And David and Nick will follow up with additional operating detail.
I'll then open the call for questions.
Our second quarter 2022 operating results released last night reflect good earnings performance for VITAS and Roto Rooter.
Both operating segments financial results.
<unk> exceeded our internal estimates despite the continued disruption from the pandemic.
For VITAS. This disruption is primarily concentrated on the hiring and retention of licensed health care professionals I.
I believe this industry wide shortage of licensed health care workers will persist for the foreseeable future.
Accordingly.
<unk> has implemented a targeted hiring and retention bonus program effective July one 2022.
Program is focused substantially on licensed nurses nurse managers home health care aides social workers.
One time retention bonuses range from $2000 upwards to $15000 per licensed health care professional.
The total estimated 12 month forward looking cost of this program, including payroll taxes and government mandated overtime calculations will be approximately $37 million.
All retention bonus payments are individually cliff vested after the employee has successfully completed 12 months of <unk>.
The newest employment.
The second pandemic triggered challenge for VITAS is the disruption to senior housing occupancy and related hospice referrals.
Our region recent admission data continues to reflect a steady recovery in senior housing based patients pre pandemic nursing home based patients represented 18% of our total average daily census, or ADC.
Nursing home ADC ratio hit a low of 14, 3% during the pandemic.
By the fourth quarter of 2021, our nursing home based patients increased to 15, 6% of total ADC.
This increased an additional 80 basis points to 16, 4% in the second quarter of 2022.
Our 2022, David guidance anticipates continued improvement in senior housing base Sensus.
For Roto Rooter, and most significant challenge has been to increase manpower.
Technician manpower on June 30 of 2022 expanded four 3% when compared to the average Q2 2021 head count.
Based upon current service demand levels Roto Rooter continues to be under staff for skilled technicians and many of our markets.
Yes.
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 seven call centers and Internet presence with that I would like to turn the teleconference over to David.
Thanks, Kevin.
VITAS is net revenue was $298 million in the second quarter of 2022, which is a decline of four 5% when we compared to the prior year period.
This revenue variance is comprised primarily of a three 8% decline in days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase of approximately 0.8%.
Acuity mix shift had a net impact of reducing revenue of approximately $5 $2 million or one 6% 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 reduced our revenue declined by approximately 10 basis points.
In the second quarter of 2020 to VITAS accrued $2 million in Medicare cap billing limitations, which is equal to the accrual in the prior year.
Okay.
VITAS has 30 Medicare provider numbers 27 of these provider numbers have a Medicare cap cushion of 10% or greater one of our provider numbers have a cushion between 5% and 10%.
And two provider numbers have an estimated fiscal 2022, Medicare cap billing limitation liability.
Roto Rooter generated quarterly revenue of $233 million in the second quarter of 2022, which is an increase of $13 2 million or 6% when compared to the prior year quarter.
Roto Rooter branch commercial revenue in the quarter totaled $54 $8 million, which is an increase of $3 8 million or seven 5% over the prior year.
This aggregate commercial revenue growth consisted of drain cleaning increasing eight 4% plumbing.
Plumbing, expanding 10, 4% water restoration, increasing four 1% and excavation increasing four 2%.
Alright, and our branch residential revenue in the quarter totaled $159 million, which is an increase of $7 $6 million or 5% over the prior year period.
The aggregate residential revenue growth consisted of drank linear remaining essentially equal to the prior year quarter plumbing.
Plumbing, expanding nine 3% excavation declining 110th of 1% and water restoration increasing 14%.
Now, let's turn to come out on a consolidated basis.
In June 2022, Chemed entered into a five year $550 million amended and restated credit agreement.
The agreement consists of a $100 million amortize level term loan and a $450 million revolving credit facility.
The interest rate on this credit facility has a floating rate that is <unk> is currently sulfur plus 100 basis points as of June 32022, The company had approximately $387 million of Undrawn borrowing capacity under this credit facility agreement.
During the quarter Chemed repurchased 100000 shares of Chemed stock for $49 9 million, which equates to a cost per share of $498 and 61.
As of June 32022, there was approximately a $125 million of remaining share repurchase authorization under this plan.
Now, let's turn to our updated 2022 earnings guidance historically kermit's, earning guidance has been developed using previous periods key operating metrics, which have been modeled and projected out for future periods.
Critical within our projections is the understanding of traditional pattern correlations among key operating metrics. This modeling exercise also takes into consideration anticipated industry and macroeconomic issues outside of managements control, but are somewhat predictable in terms of timing and impact on our business segments.
Operating results.
The ongoing COVID-19 pandemic uncertainty regarding forward looking inflation and increased risk of an economic recession has made accurate financial modeling more challenging than historically.
The forward looking guidance I'm about to discuss should be taken with a recognition these macro issues could materially impact the company's ability to achieve this guidance.
With that said VITAS is 2022 revenue prior to Medicare cap in 2022 is estimated to decline between four 5% and 5% when compared to the prior year.
Acuity mix shift contributes an estimated 150 basis points of this revenue decline in.
In addition, the phase out of sequestration relief over the first half of 2022 is estimated to contribute at a national additional 120 basis points.
Our full year 2022 revenue decline.
<unk> is estimated to decline three 5% for the full year.
VITAS is full year adjusted EBITDA margin prior to Medicare cap is now estimated to be in the range of 17% to 17, 2%.
And we're currently estimating $10 million of Medicare cap billing limitations in calendar year 2022.
Roto Rooter is forecasted to achieve full year 2022 revenue growth of between five 5% and five 7% with an adjusted EBITDA margin in the range of 29, 2% to 29, 5%.
Based upon these metrics for the operating segments <unk> full year 2022 earnings per diluted share excluding noncash expense for stock options tax benefit from stock option exercises.
Cost related to litigation as well as the VITAS employee hiring and retention program, Kevin noted earlier and.
And other discreet items is estimated to be in the range of $19 30.
To $19 50.
This compares to our previous 2022 adjusted earnings per share guidance of $19 10 to $19 50.
Current 2022 guidance assumes an effective corporate income tax rate on adjusted earnings of 25, 1% and a diluted share count of $15, one 2 million shares.
<unk> 2021 reported adjusted earnings per diluted share was $19 33.
I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.
In the second quarter, our average daily census was 17315 patients a decline of three 8% over the prior year and essentially equal to our first quarter 2022 census.
We were encouraged to see signs of stabilization and slight sequential build of our average daily census, within the second quarter.
In the second quarter of 2022 total VITAS admissions were 14735 patients.
This is a 12, 5% decline when compared to the second quarter of 2021.
The vast majority of the submissions decline is attributed to the reduction of labor intensive acute hospital referrals. This decline was anticipated due to our ongoing community access initiative focus which continues to be successfully executed by our teams.
To illustrate in the second quarter, our hospital directed admissions declined 25% when compared to the prior year period.
This decline in hospital pre admit admissions was significantly offset by our nursing home admissions increasing five 3%.
With Liberty assisting living facility admissions, increasing five 6% and homebase pre admit admissions expanding <unk>, 2%.
<unk> average length of stay in the quarter was $103 seven days. This compares to $94 five days in the second quarter of 2021 and 104 eight days in the first quarter of 2022.
Our median length of stay was 17 days in the quarter and compares to 14 days in both the second quarter of 2021 as well as the first quarter of 2022.
This sequential growth in our medium length of stay is attributed to the successful execution of our community access initiative I referenced earlier in my prepared prepared remarks overall I'm very pleased with the execution of our entire VITAS team regarding how we continue to serve our communities as well as our renewed focus on recruitment and retention of our workforce.
With that I'd like to turn the call back over to Kevin.
Thank you Nick.
I'll now open this teleconference to questions.
As a reminder, if you'd like to ask a question. Please press star one.
Our first question comes from Joanna <unk> with Bank of America. Your line is open.
Okay. Great. Thanks, This is actually Kevin Fischbeck filling in for Joanna.
Hey, Kevin.
It's been about 14 years since I've been on a call so good to be back.
But I guess.
Couple of questions here.
First I guess, obviously you guys had a strong Q1 and Q2 the guidance raise so is less than the beat you had so far this year is there anything we should be thinking about as offsets.
To that upside so far.
Yes.
From a macro perspective, we basically have stronger revenue certainly running on our stronger margins on the VITAS side.
But without a doubt we did see a little bit softening on the roto rooter side in terms of revenue growth.
So that obviously kind of pull things back a bit but good tight expense management, we continue to outperform on margin, but I would say, it's really just a.
A more realistic second half of the year outlook given the fact that there is very much potential consumer.
Consumer spending pressure.
And we have seen most of our business. The vast majority of our business is really non discretionary, but we have seen a little bit of softness on discretionary jobs that just giving us a little cause for pause.
Alright, great and I guess.
<unk> seen a few companies actually show improvement.
On margins in Q2, when when volumes have been weak I mean, how much of the labor improvements because the volumes kind of came in a little bit like making it easier to staff versus kind of actual kind of improvement that you can see as far as hiring reducing temp labor reduce over time things like that.
Well I'll go macro and then flip it to Nick who actually has the hard job of actually managing this but frankly dialed into our guidance was our ability to grow manpower in anticipation of future census growth and we haven't grown manpower incrementally like we had hoped so some of that margin positive comparison from our guidance for the first.
Half of the year was due to our inability to expand licensed health care workers overly lean staffing I mean that would be more comfortable with.
Uh huh.
We're able to hold on and hire more workers and build it and they will come theory.
We certainly have examples of that where we came out.
Let's say we don't.
Our ambitions are down 12% largely driven by hospital base.
Admissions and.
We are a scarce resource labor and as we expand that.
The number of.
Licensed health care professionals, we have that.
<unk> admissions will.
First flatten out and then we think relatively shorter showed growth.
Just Kevin the expand a little bit further from a VITAS standpoint, it's exactly what Dave was alluding to as we were building the guidance at the end of last year and trying to project.
The pace in which we look to grow our net clinical resources over time, we've spoken about those.
Using adjectives as we did in the last quarter, but it's baked into the second half of the year's guidance.
Commented about it briefly as it related to the prepared remarks in terms of really encouraged by what the management team has continued to do in terms of our renewed focus on both recruitment and retention of skilled clinical workforce and what Kevin alluded to as well in terms of the enactment of a new program that's targeted for recruitment in <unk>.
Tension that launched here in July .
<unk> optimistic around the results of that going to also hopefully helped to produce as we.
<unk> finished the finish this calendar year and launch with momentum into 2023.
Kevin from our standpoint, we have an exceptionally strong balance sheet, obviously, almost no data about $85 million as of this morning net debt.
We have phenomenal cash flow from both of our segments and frankly, we're being proactive and aggressive in terms of the hiring and retention bonuses.
Acquire.
Nominal talent from other competitive programs contiguous to our operations. So we view this frankly as an opportunity to really expand the quality of our overall staff and hiring to augment people who've been working pretty darn hard for the last two years on our existing base of employees. So we're putting our <unk>.
Balance sheet and cash flow to work and as Kevin pointed out to me. The other day part of the cares Act money.
<unk> at the beginning of the pandemic.
Of the $82 million, we ended up using $44 million and under the government's definition of lost revenue.
That was basically cash flow thats still on our balance sheet today, we're putting to work that $44 million of loss revenue noncash flow cares Act money into this retention program. If you want to look at it from an economic standpoint. So we view this as an opportunity to really take our great base of employees now and augment them with it.
Additional staffing that we think will give us legs in 'twenty three 'twenty four in terms of sustainable growth.
Last comment is the businesses there from that demand overall hospice need all the communities in which we continue to operate so we're just continuing to proactively prepare to fulfill that ever growing increased demand.
And the mix shift that you mentioned a few times.
Is that is that in response to a constraint on labor sanguine, Labor's constrained I'd rather be growing.
Nursing home and al.
Missions.
And that if you get that incremental nurse, you would still want to be growing that.
Or is it just.
Just the way that it has kind of happened and when you get that incremental there. So we'll try to grow everything.
The short answer.
Yes, and it's very intentional.
We've tried to evolve over the last few years, particularly inside of the pandemic.
We're trying to highlight here community access initiative that I referenced earlier, if you think about it it's been our ongoing mission for over a decade. We've just been very laser focused on over the last two years to help educate the community for earlier appropriate identification of hospice patients and what we're really talking about here is we're identifying.
The partners being an independent hospice provider in all the communities. We operate that are continuing to do a good job to do that and are looking for ways to refer patients earlier in their disease trajectory to us. So that we can care for them and their families for a much longer time period, and that's reflective in our medium length of stay numbers as well.
But let me reiterate one point and that is our long term plan Hasnt changed.
If we didn't have a scarce varies scarce resource labor we would.
There wouldn't be quite this imbalance and effort as far as recruitment.
Would be broader.
We think that's good for patients good for the community good for the long range prospects of the company.
We don't have the luxury at this point.
<unk> been quite so broadened our approach because of the scarce resource of <unk>.
Licensed health.
Health care professionals, but our long term view has not changed.
Hey, Thanks, Nick.
Nick and his team is doing though Kevin is if he has one nurse for eight hours for a continuous care patient.
That's just a one to one ratio, but we're getting less of those high acuity patients out of hospital referrals. So now that one nurse can manage a pool of what a half a dozen patients neck, we have greater we have.
In a scarce resource, we're having more days of care related to hospice end of life care than we would otherwise quite frankly, its good for the system and it's good across the board in terms of maximizing the utilization of scarce nurses.
And the last people to really benefit from it our clinical teams at the end of the day, because we're really trying to manage through and help support them from a burn out standpoint, and so the longer patients are able to appropriately be on service with us we're hoping that also improves their over.
Overall quality and deployment experience with us and the proof of the pudding Nick.
Three months.
Hello.
Not necessarily significant but actual growth in ADC as opposed to the.
Previous year, and a half where we were.
Fighting a battle with them.
Facts of the pandemic and.
Reduction that's exactly right, we're very encouraged by some of the activity inside of this quarter.
Okay, Great and then I guess just to clarify the guidance you obviously provided it at the same night that the Reg came out so as.
Does your guidance kind of assumes that proposal and that the final rule, maybe came in a little bit better than that.
Potentially upside to that guidance or how should we think about that exactly so.
Or would pick it up in the fourth quarter, so that would work out to be a hair over 3 million, maybe as high as 3.1 million ex some of the private pay and that would equate to 15 cents a.
Share all things else held constant.
Alright, and then maybe last question in here.
Maybe on the Roto Rooter side, obviously, you mentioned that the revenue guidance is down I mean, how should we think about that that business in the run rate as we enter into 2023.
Well without a doubt we've always been guide into what I'd say is coming down to more sustainable levels as we picked up share.
My gut feel now is our competitors are going to be more strained than we are so without a doubt it's going to soften our revenue outlook than we had say when we developed our business plan in September or October of last year.
22, but I view it as we'll continue to have growth.
Profit margin will be strong, but I think we're going to again consolidate more additional market share and I expect in 'twenty three 'twenty four to even be more robust than it would have anticipated because every time, we encounter these economic turbulence think of it as a way to <unk> nine will emerge from it stronger so without a doubt we are going.
Take a little bit of a hair off of the growth rate, we are anticipating and as could result in even stronger 'twenty three and 'twenty four growth for roto rooter, because our competition generally doesn't do well in these economic disruptions.
And Kevin one thing I would add.
As a limiting factor for Roto Rooter is.
The workforce and the.
Last year, and a half <unk> been extremely busy.
No.
More business than they can handle.
So you can.
Lapped that.
The way you show revenue growth is.
The inflation, what's your price increase is.
People, who have were already fully occupied so the growth is inflation plus the ability to add manpower and.
And obviously in this environment Thats been fluor has done.
But has it.
We've done it at a low single digit rate of.
Sure.
The increase.
Please above who've done a bang up job, but that's just that's just life in the United States on the hiring front so.
Very healthy business I mean roto rooter.
Not a sustainable 15%.
818% profit increase type company year after year, but.
But again, we're very bullish on.
Roto rooter approach to the market.
This turns out to be.
A recession, that's somewhat meaningful it generally spells good news for our Roto rooter, when we come out of it in terms of market hiring front.
So as I say, that's a key element.
We have rigorous have both they have to have the demand and their marketing department has been providing that but they also have to have the manpower to.
The jobs.
I Love the club for Roto Rooter, one of my favorite ones, Kevin as Fortune favors the prepared and I would say roto rooter is prepared.
Okay. Thank you.
Again to ask a question. Please press star one one.
Our next question comes from Michael Murray with RBC capital markets. Your line is open.
Hey, Thank you this is Ben Hendrix, along with Michael Murray just.
At RBC here I was just <unk>.
We're really asked answered all my questions really but the main one being about the long term.
Outlook for the community access initiative, but.
I know that your strategy hasn't really changed but do you think that there is anything structurally among your referral sources that might be permanently shifted that might kind of changed.
Sure.
Median length.
The link to stay outlook long term.
Yes.
As the <unk>.
Daffing backdrop, normalizes and as we get back to normal.
Admission declines from alright admission patterns from referral services.
Yes.
Overall structural and this is a this is Nick is.
The only piece, if there's a silver lining from the pandemic.
Piece that really helps that continue to resonate there is not a surprise is the overall countries awareness around.
The value of providing care at home and so I think if we think about any structural change in may just be the recognition that that can be provided and that should have a positive impact over a multiyear basis on the ability of appropriate hospice patients to access the benefit earlier so.
As Kevin alluded to our long term strategy hasn't necessarily changed but.
Hopefully that provides some tailwind to the industry as well as frankly too.
All what is primarily Medicare beneficiaries across the country over the next 510 years.
But nothing structurally that would impacted negatively.
Okay.
Once we have full staffing and we start taking any more of those.
Hospitals as pre Avnet locations, the median will come down.
That the average length of stay will come down a bit so I don't view I view. This both of those numbers is somewhat higher based on our traditional metrics.
Just because of the shift we had to make in terms of scarce resources and staffing, but 17 would've still been a day or two shy of our pre pandemic run rate.
Got you. Thank you very much just a quick question on the Roto Rooter side I noticed that.
The branch for residential revenue the water restoration component continues to be a very strong.
Growth area and pretty much it seems like it has since you guys.
Sure inception into that business, just wanted to see kind of how much room to run there is on water restoration and kind of what's driving that continued strong growth.
Water restoration is the least discretionary of all of our segments.
So from that standpoint, we expect that any any any environmental hold up the best.
But the water restoration that business is 100% self referred from sewer drain work, where we found.
The majority of it is from sewer drain work from backup main lines.
So.
That's a long way of saying is we can't get additional water restoration is unless we continue to do to the core services. So it's going to come down to more match that the growth rate in core services broken pipes, and again backed up mainline we built out all of our branches substantially in terms of their water restoration capable.
<unk> independent contractors.
They are still building out their water restoration capability, but that will come through our water restoration segment, just independent contractors. So thats a long winded way of saying that is going to level off just like our overall core growth right.
Alright, and I would say.
Mature.
It's something that we've seen it as a good sign.
Over.
From day, one till now is most of the water restoration work is covered by insurance.
We have.
The service people kind of onsite thing we can do it.
And day, one Meru is a new kid on the block, but we had to get the insurance company to agree to pay for it.
They've never heard of Roto rooter as a provider increasingly.
They are being viewed as.
A very very responsible.
<unk> provided a very easy to work with.
Compared to.
Many of the competition that we run into so so the maturation level of that business will continue as we get we drive compliance with <unk>, we get all our referrals from our own jobs and to the extent that we can approach 100%.
Match up from.
Where there is a need for water restoration with our jobs then it will be completely mature, but theres still some room there but.
We don't want to change the characterization characters characterization that it is.
Our mature service offering at this point.
Thank you very much.
Yes.
There are no further questions I'd like to turn the call back over to Kevin Mcnamara for any closing remarks.
Thank you.
I would just like to say that yes.
Ratified.
What we thought was a very solid performance by both of the operating units.
And.
I think we have some.
In these uncertain times, some good strategies to deal with both the.
The inflationary environment and the continuation of the.
Pandemic and.
Just want to thank everyone for their attention.
Talk to you in about three months. Thank you.
This concludes the program you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Okay.