Q4 2022 Chemed Corp Earnings Call

February 24, 2023

Okay.

Good morning, Our conference call. This morning will review the financial results for the fourth quarter of 2022 and at December 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 February 23rd 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.

A reconciliation of these non-GAAP results is provided in the company's press release dated February 20, <unk>, 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, VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin Mcnamara.

Thank you Holly good morning, welcome to Chemed Corporation's fourth quarter 2022 conference call I will begin with highlights for the quarter and David and Nick will follow with additional operating detail I will then open the call up for questions.

Our fourth quarter 2022 operating results released last night exceeded key internal operating metric targets for both VITAS and Roto Rooter.

This resulted in Cam had reported fourth quarter and full year 2022, adjusted diluted earnings per share of $5 39.

And $19 75, respectively.

This compares to our initial adjusted earnings per share guidance issued in February of 2022 of $19 10 to.

To $19 50.

Our 2022 results were excellent given operating headwinds that developed it became more difficult as the year progressed. These headwinds consisted of greater disruption in hiring and retaining licensed healthcare workers higher inflation for a longer period of time than anticipated and the impact of inflation.

And the impact of inflation is having some consumer spending decisions.

For VITAS. These 2022 headwinds included Medicare implementing sequestration, resulting in a revenue reduction of approximately $15 million and industry wide disruption related to staffing licensed health care professionals.

Since we implemented our hiring and retention program in July 2000, and trying to VITAS staffing has improved significantly Nick will provide more detailed information on this issue later in the call.

We continue to see disruption in our referral patterns when compared to pre pandemic admissions. Fortunately these patterns continue to show improvement in key pre admit patient locations.

Pre pandemic nursing home patients represented 18% of our total average daily census, the census or ABC.

We're seeing home ADC ratio hit a low of 14, 3% during the pandemic.

Full year 2021, nursing home based census increased to 15, 1% of the total ADC.

There is the home centers expanded.

An additional 128 basis points to 16, 4% in 2022.

Our 2023 guidance anticipates continued improvement in senior housing base Sensus.

For Roto Rooter and higher inflation throughout 2022 did marginally impacted our revenue growth on the small portion of services that could be considered discretionary.

We can see the vast majority of <unk>.

Demand for Roto Rooter services as non discretionary or emergency based.

Water restoration is example of a 100% of non discretionary service water from broken or backup types must be removed immediately to avoid significant mold and water related damage to the structure.

Some of them were services could be could could be considered discretionary or potentially deferred by the customer until the problem becomes more severe.

As an example, our customers collect collapse mainline is a non discretionary excavation service. The failed sewage line must be replaced for the whole for the homeowner to rebate and the residence.

At a replacement cost of approximately 3000 to $6000.

Our sewage mainline with significant three routes penetration.

Should we replace as well however.

However, temporary fixes possible by using our roto Rooter steel cable machine to chop clear.

The truth of the mainline for approximately 400 to $700.

This lower cost fix is temporary as roots go back into the perforated mainline and about nine to 15 months. The customer will then have to pay for the solution to either be cleaned again are permanently replaced.

<unk> 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.

Roto Rooter services are primarily emergency based and non discretionary and our ability to respond faster than the competition as a significant competitive advantage and we will continue to provide rather with the ability to increase market share.

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

<unk> net revenue was $308 million in the fourth quarter of 2022, which is a decline of two 5% when compared to the prior year period.

This revenue decline is comprised primarily of a two 8% reduction in our days of care in a geographically weighted average Medicare reimbursement rate increase of approximately three 2%.

Partially offset by 200 basis points as a result of CMS re implementing that 2% sequestration cut that was suspended at the start of the pandemic in 2020.

Our acuity mix shift had a net impact of reducing revenue approximately $1 8 million or six tenths of 1% in the quarter when compared to the prior year revenue and level of care mix.

The combination of Medicare cap and other contract revenue changes negatively impacted revenue growth by 30 basis points.

In the fourth quarter of 2020 to VITAS accrued $2 7 million in Medicare cap billing limitations as.

This compares to $3 million of Medicare cap billing limitations in the fourth quarter of 2021.

Of VITAS 30, Medicare provider numbers 25 of these provider numbers have a Medicare cap cushion of 10% or greater.

One provider number does have a cap cushion between five and 10% and four provider numbers have a trailing 12 month billing limitation liability.

The fourth quarter 2022, gross margin, excluding Medicare cap and our hiring and retention retention bonus program was 26, 9%.

This is a 135 basis point margin decline when we compare it to the fourth quarter of 2021.

VITAS has reversed the severe attrition of our licensed health care professionals that began during the pandemic.

This was evidenced by VITAS expanding our licensed health care staff by 275, coinciding with the launch of our hiring and retention program beginning on July one 2022.

This higher staffing increase the aggregate cost of sales in the quarter by an estimated $4 4 million.

Excluding this capacity expansion fourth quarter 2022, gross margin would have reflected a modest margin improvement when compared to the prior year quarter.

Adjusted EBITDA margin in the quarter, excluding Medicare cap and other discrete items was 19, 8%, which is a 119 89 basis points below the prior year period.

The adjusted EBITDA margin was negatively impacted by 200 basis points for their re implementation of sequestration and an additional approximately 141 basis points due to the increased staffing and patient capacity from VITAS is hiring and retention program.

Roto Rooter generated revenue of $239 million in the fourth quarter of 2022, an increase of six 1% when compared to the prior year.

Roto Rooter branch commercial revenue in the quarter totaled $58 6 million, which is an increase of eight 7% over the prior year.

Aggregate commercial revenue growth consisted of drain cleaning, increasing five 5% plumbing, increasing 13, 8% excavation expanding five 1% and water restoration, increasing 27, 3% commercial revenue is showing excellent growth in the fourth quarter.

Roadway to branch residential revenue in the quarter totaled $159 million, an increase of 5% over the prior year and the revenue growth consisted of drain cleaning decreased two 1% plumbing expanding 7%.

Excavation expanding four 9% water restoration increased 13, 2%.

As Kevin previously noted we have observed a slight pullback for some residential services, although expanding overall this behavior does appear to up modestly impact the revenue growth of some of our excavation work over the past several quarters.

To illustrate this let's take a look at growth and excavation for the past five quarters compared to the equivalent prior year period.

In the fourth quarter of 2021 residential ex excavation revenue increased 12% over.

Over the prior year and 2022 quarterly excavation growth was five 9% in the first quarter.

Slight decline of 110th of 1% in the second an increase of nine tenths of 1% in the third quarter and growth of four 9% in the fourth quarter of the year.

This extra patient growth rate is lighter than growth generated over the last several years.

We believe most delayed excavation work will materialize over the next one to two years as Kevin referred that the delayed excavation become bigger problems for our residential customers.

Roto Rooters gross margin in the quarter was 53.0% a 68 basis point increase compared to the fourth quarter of 2021.

Adjusted EBITDA margin in the fourth quarter of 2022 totaled $69 3 million, which is an increase of 11, 4% the.

The adjusted EBITDA margin in the quarter was 29.0%, which is a 138 basis point improvement when compared to the prior year.

Ken that on a consolidated basis during the quarter, we repurchased 25000 shares of chemed stock for $13 million, which equates to a cost per share of $519.

At December 31, 2022 that was approximately $88 million of remaining share repurchase authorization under our plan.

2023 earnings guidance is as follows VITAS, but 2022 23 revenue prior to Medicare cap is estimated to increase 6% to 7% when compared to the prior year.

Forecasted revenue growth is negatively impacted by 75 basis points as a result of the CCAR sequestration relief in the first half of 2022 compared to full sequestration in 'twenty three.

Average daily census, or ADC is estimated to increase three 5% to 4% with the majority of our census growth coming in the second half of 2023 as increased staffing and operational capacity generates increased census.

Full year, adjusted EBITDA margin prior to Medicare cap and accrued and excluding accrued one time bonuses for our hiring and retention initiatives.

<unk> last year is estimated to be 15, 3% to 16, 6% and we're currently estimating estimating $11 million for Medicare cap billing limitations in calendar year 2023.

The guidance includes increased wages related to expanding our staff of licensed health care professionals at a rate of about 25 licensed health care workers per month.

Estimated increase in staffing should be viewed as VITAS expanding internal capacity to care for more patients.

ADC growth from this capacity expansion is estimated to lag growth.

Overall by 30 to 60 days with margins improving on this ADC as the census growth patients remain on service.

Roto Rooter is forecasted to achieve full year 2023 revenue growth of five to five 5% the.

The adjusted EBIT margin for Roto Rooter is estimated at 29, 3%.

To 29, 5%.

Based upon the discussion our full year 2023 earnings per diluted share excluding noncash expense for stock options tax benefits from stock option exercises and cost related to litigation and the retention program and other discreet items is estimated to be the range of $20 75.

To $21 10.

Adjusted earnings per diluted share should approximate our free cash flow.

Diluted share.

2023 guidance also assumes an effective tax rate and adjusted earnings of 25, 1% and a diluted share count of 15.0 million shares.

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

Thanks, Dave.

As Kevin referenced earlier, we implemented a targeted hiring and retention bonus program at VITAS effective July one 2022.

This program focused on licensed nurses nurse managers home health aides and social workers.

These onetime retention bonuses range from $2000 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 $40 million.

Retention bonus payments are individually cliff vested and then paid out after the employee has successfully completed 12 additional months of continuous employment.

During the fourth quarter, we expanded this licensed health care professional staff by 103 employees, bringing total licensed health care staffing expansion attributed to this program to 275 employees in the second half of 2022.

It is important to note. The majority of this increase is attributed to registered nurses, which includes admission nurses.

In the fourth quarter, our average daily census was 17434 patients a decline of two 8% over the prior year and an increase of 192 or one 1% sequentially.

The monthly ADC growth, we experienced within the fourth quarter is very encouraging given the timing lag of adding patient care capacity and then the subsequent sensitive census expansion.

In the fourth quarter of 'twenty two.

So it'll be tough admissions were 14829.

This is an eight 7% decline when compared to the fourth quarter of 2021.

I am very encouraged by our sequential increase in emissions, expanding 149 patients or one 1% over the third quarter.

This is attributed primarily to the capacity expansion from our hiring and retention program.

In the fourth quarter, our nursing home admissions increased nine 4% and assisted facility admissions expanded two 7%.

The hospital directed admissions declined 11, 3% and Homebase patient admissions declined seven 5% in the quarter.

Comparing the fourth quarter of 'twenty two to our second quarter is also encouraging in the fourth quarter, our admissions were slightly above our admissions in the second quarter.

This multi quarter sequential performance illustrates the consistency with which our community based access initiative is performing as we continue to be focused on incrementally and many more appropriate patients each and every day.

Our average length of stay in the quarter was 103 nine days. This compares to 97 nine days in the fourth quarter of 'twenty, one and 106 two days in the third quarter of 'twenty two.

Our median length of stay was 16 days in the quarter and compares to 15 days in the fourth quarter of 'twenty, one and 17 days in the third quarter of 'twenty to.

This growth in our median length of stay is attributed to the successful execution of our community access initiative I referenced earlier.

As well as the indications of patients accessing the hospice benefit and timeframes closer to pre pandemic levels.

Overall, I'm very pleased with the execution of the entire <unk> team regarding how we continue to serve our communities as well as our renewed focus on recruiting and retention of our workforce.

To recap we have now generated two quarters of sequential growth in licensed health care workers.

Sequential growth in emissions as well as ADC.

We have developed what I believe is a very sustainable path to building back our clinical capacity and patient base to pre pandemic levels.

Before I turn this call back over to Kevin I'd like to thank every one of my fellow VITAS team members and our leadership team there.

Sure will and daily perseverance to deliver on our mission got us through the pandemic and now the execution of our strategies through the end of 'twenty. Two has prepared us to have an exciting 2023, where we will continue to make a difference in every community we serve.

With that I'll turn the call back over to Kevin.

Thank you Mick.

I'll now open this teleconference to questions.

Thank you Sir.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced so which are your question. Please press star one again.

Please stand by while we compile the Q&A roster.

And I show. Our first question comes from the line of John a good Chuck from Banc of America.

Erica Please go ahead.

Hey, good morning, Thanks for taking the questions here. So I guess just following up to two Nick's comments the latest comments on that on that trends. So I guess, you set up monthly ADC growth.

During the fourth quarter can you give us some flavor of how things are tracking so far this year.

First you said that the improvement that you've seen in Q4 and also Q3.

Kind of any color you can give us on some of these metrics.

As you see them live.

This quarter so far.

Before.

I'd say were low to talk about.

Got it.

Quarter unreleased quarter activity other than to say I.

I will just say, yes, it's good.

It's what can we expect to see.

Were very encouraging very encouraging like you referred to in the fourth quarter.

We're still very encouraged sitting here today.

And I would say the same thing with Roto Rooter has won another good thing going forward, which is weather we've had great roto rooter type weather so yes.

We don't like to talk about other than to say.

It's good.

Okay, that's good encouraging I like that.

And I guess so.

When it comes to your guidance for the year for <unk> Thats coming back before we.

That's about right.

Yes.

The guidance calls for these margins to be down.

Got it.

Need to 100 basis points year over year, So obviously sequester coming back obviously high ones with more people and I guess also sensors, we're still going to be maybe 4% are still below 2019 levels. So is that a way to think about it that.

Four years.

Rich or get closer to that.

Pre pandemic margins you need to.

Get the census back to to that level.

Yes, Joanna this is Dave so I'll comment on a macro basis, and Nick and gives a lot more color on a more detailed but on a macro basis. If you think about what we're doing beyond the fact that we have a headwind on sequestration.

So obviously that impacts us by what Nick 75 bps.

One 9 million to $1 million that we also have an issue of course, the fact that the reimbursement increase was inadequate relative to some of the wages. So that creates a bit of a headwind period, but absent that you have to expect that margin to be down as we build capacity thats a drag on profitability.

You add licensed health care workers that they can't be immediately productive in terms of then the next day, we expanded census, so theres a lag we have the lag at about 30 to 60 days right now of adding capacity and then we see an impact on census, and frankly <unk>.

Six months ago, I would've said that lag is easily 60 to 90 days. So the cause and effect is tighter than what we want but the bottom line as you add capacity. That's a strain on margin then you bring on new patients more than you would have otherwise. That's also a strain on margins in terms of the admissions process in most <unk>.

All patients are negative margin for the first solid 15 as much as 30 days and program.

And then as that patient and program age out then they become positive margin. So thats a long winded way of saying you would have to expect margins to lag to increase capacity to grow the business and the other thing I'd add is this is a mirror image of what happened in 2020 when census held in but we did.

Have weakness and we lost our capacity to a certain degree with healthcare workers resigning so margins were much higher than you would have anticipated because census was there but you didn't have the ftes. So bottom line is.

Grow our capacity by adding health care workers licensed health care workers.

And then they will that will lag 30 to 60 days for Sensus, and then census will lag that marginal increase incentives by about 30 days until those patients are profitable.

And just to recap a few pieces in Dave's depiction, the $9 million or 75 basis points year over year comparison, obviously that has a marginal implication related to it and as we sit and.

Grow all the pieces, Dave talked about in terms of clinical capacity and the timings lags with it it all translates into that 16, 3% to $16 six.

Adjusted EBITDA ex Cat margin, we released as part of the guidance, but the bottom line on a day in and day out basis as we're continuing to be laser focused on driving growth inside of the organization and thats the combination of clinical capacity as well as servicing more patients and from a bottom line.

Total contribution from a dollar standpoint, and then the ultimate marginal contribution.

That will that will come through in 2024, probably looks more like.

An estimated ongoing margin now that the pandemic is fully behind us and we will see what census level. We're at at that point in 2024.

I would just add one step removed.

There is nothing that has changed in the hospice market.

Pandemic was a.

Big rock thrown into a pond, which caused all sorts of ripples and effects and splashes, but.

It's going to return to.

Based on what's going on there today.

We expect it to return to the same general dynamics from before the pandemic and.

VITAS is not lost market share I think that the.

Number of <unk>.

Percentage of deaths have a brush with hospice is going to return to its previous level and VITAS will be there and by that point have the staff to deal with them. So yes to us.

It's a.

We're just getting back to something we already have the.

Institutional.

<unk>.

People involved for a 19000 20000 census, hospice malanders waiting for the operating conditions to return to normal and Joanna If you think about it. So we're guiding adjusted EBITDA margin ex cap and a retention program for VITAS of about 16, 3% to 16, 6%.

But let's just go back to the last full year, we had before the pandemic so that would've been in the 2019 full year adjusted EBITDA margin was 17, 8%. So frankly, if you've taken just to take into consideration.

The headwind on sequestration, but the fact that we're still down from our census.

Census of $19000 loss at the end of 19 frankly.

Frankly, we're coming back on the adjusted EBITDA margin faster than I would've thought and frankly with some of the changes that have been forced on us through bobbing and weaving during the pandemic.

I suspect Nic has a lot more efficient now than we were a few years ago. So I think there is actually its more likely than not once we return to normal sized sensors get back to pre pandemic levels. I think our margins are going to end up a little higher because these efficiencies have now been incorporated into our normal operating.

<unk> approach.

And we will see what the pricing implication is on October one 2023.

Right.

Since you mentioned that so what do you assume for your Medicare rate increase in the fourth.

Quarter of 'twenty three.

5%.

Okay.

Okay. So nicely.

Lastly, accelerating from my God, I guess call it 4% educated guess guest.

Guests right now.

As you know they released a preliminary report related to it in the late <unk>.

In the next 30 to 45 days that will help to inform the ballpark range, we would anticipate October one frankly.

Frankly, we don't consider it the model they use <unk> to develop our increase in rate.

As less than transparent.

Alright, thats, another topic, but just coming back to that with the hiring in it.

We see the capacity does so just to clarify the 275. These are new hires or net hires and also what percent of the base is it and also.

You mentioned before that you expect to.

<unk> 25 per month still of staff.

I assume that's correct Matt.

So is that enough.

Really what im getting at how much more do you really to increase your net staff to be back to.

Yes.

Capacity you had before.

For coffee.

So let me the baseline to answer which is the most important one here is those are net numbers.

And it's enough.

The other answers.

Your second question to methodically absorb them in let's right, it's not like we're looking to.

Greatly.

Exceed that number.

Yes.

And so it's the methodical approach Kevin alluded to that is always focus back to where things maybe call. It. We're in an environment I'm talking about this philosophically, where we want to add clinical capacity to be able to absorb the demand we see in the marketplace.

And we're still ramping up to that and that demand is not only to help fulfill referral and admission activity, but also of course to care for patients who are joining the benefit more traditional at the time window more traditional than they were pre pandemic, which is encouraging and.

We will be on service with us hopefully for a longer period of time than they were during the disruption time period of the pandemic.

The health care system referred them later to all hospice providers inside of the benefit. So it's a long winded way to say, we will methodically continue to grow clinical capacity and we wanted to guide towards that which helps with as Dave was alluding to a little bit of a sharp short term marginal.

Impression, but the bottom line is as long as we can continue to improve our retention improve our hiring resulting in net growth of clinical capacity feel really good about the other operating metrics from a topline perspective from our ability to absorb what continues to be elevating demand.

Every market in which we serve and deliver predictable and sustainable operating results.

And Joanne and one thing that we follow and to say what we're.

What we're trying to achieve is.

We have the two grow in tandem.

No there is a light as they sort of lag factor. The current quarter margin is probably affected by a 141 basis points based on R. R.

Rough calculations to give you an idea of that.

So we're running a little ahead.

If you want to grow we think that the optimum rate.

Youre out ahead with the hiring for let's say just so you can put a cost on that is a 141 basis points. So we're not looking to be further ahead and have that grow to 200 basis points or 250 basis points I'd be comfortable methodically keeping that as we expand comes out pretty well.

And we have headlights.

That clears the area ahead of you.

A clear understanding of Nick can provide a lot of anecdotal color on this but if you think about adding capacity has put us in a.

Our virtuous cycle and what I mean by that is our tenured people were getting strained or schedules where havoc.

Rambling to take care of patients, where we're hiring these people they train them and they were resigning so it was burning out our tenured staff. So we've now entered the point, where we're adding capacity is giving relief to the tenured staff. It's not this horrible trend all of you hire people. They resign you hire other people so from.

That standpoint, the life of our long tenured people have gotten massively better now.

Was the fourth quarter of last year, that's reaffirming our ability to retain existing personnel as well as adding so were actually what we think as we have in a horrible spiral.

The end of 2020, and the pandemic and Nick and his team has completely reversed that.

Okay.

To add on that John because I am sure it will be embedded inside of either a subsequent question or other folks' questions.

If you think about it very generally at a high level. It has a compounding effect to it which is fantastic, meaning that baseline Dave alluded to existing staff real burn out and shortages.

And that also is elevated by people accessing the benefit later in their disease trajectory you couple that with a frustration because everyone joins hospice usually from a calling standpoint.

Being able to meet patient demand and so our teams have done a fantastic job at three very high level behavioral pieces, focusing daily on the existing employee experience. That's our tenured staff, Dave was alluding to there's a lot of detailed tactical things inside of it but also part of that is helping them understand the light at the end of the tunnel related to that.

Burn out in frustration the second is focusing on hiring and really improving the new hire experience. We measure that through 90 day in first year turnover. Both of those are performing substantially better than they were in the pandemic.

Third is taking that new team and really elevating the integrated culture and I know those three things sound simplistic they are difficult to execute upon the team's done a wonderful job and the result is the compounding effect of all three of those things lead to less burnout.

Camaraderie of a mission focused organization and then the ability to meet more and more demand and respond to demand.

And everyone personally begins to elevate their fulfillment of being able to impact that communities in ways. They signed up originally joined to be part of the hospice benefit and be part of VITAS, So that calling combined with a compounding effect.

Is really is really taking hold and it's something I'm.

Very encouraged by as we have launched into 2023.

No definitely I think but the.

Trends, improving there and the staffing and thanks for all this color just one last on that topic.

Sure.

Because you're talking about auto continue to add more staff, but I guess this.

Pension programs.

And so I guess a question there.

Do you foresee a risk of higher turnover, starting second half of 2003 when people get their bonuses and maybe Lee. So can you talk about.

Expectations for that and kind of what do you assume in your guidance on that front. Thank you yeah. So obviously aware of the risk.

Based upon what I just talked about from a compounding effect that has nothing to do with the difference maker program, but the difference maker program helps provided the catalyst for the existing staff as well as the staff to join us to be Incentivised inside of it that's our that's what we deem our recruiting and retention programs. The difference maker program. So little less concerned than you may have.

Zinc because of those pieces and the compounding effect because once we have the existing staff and the new staff that are with us for a year and that experience is elevated.

Our retention metrics.

Just continue to improve in a substantial way so, but we are aware of the risk and not.

Not discounting and we expect to see something but we're.

We believe that the.

Health care professionals to go to work for hospice in general are not dollar driven.

As a priority I mean, they could go to other.

Johnson and get a higher rate of pay at some stage.

Yeah.

Business and what Nick is suggesting is to really two things number one there is a view within the workforce that VITAS is stepping up to the plate to do whats necessary, what's necessary, if not necessarily to give people more money, but it's increased staff. They have the right amount of staff.

Four four.

The services were offering and so the net effect is at the end.

These are not hired guns.

But right out of town.

12 month data.

Some will.

I think that some people will sort of move or just.

Would normally move.

<unk> or havent change with a month or two.

Short of a period in which they're going to get their payment I could see them postponing. It can happen, but we think that will just be within normal ranges and Joanna and we have some pretty strong statistics support to <unk>.

Part of our expectation and that is we know if we can keep employee for 12 months.

<unk> ability there are long tenured employee three or more years is significantly higher than people are with us less than 12 months and it actually goes.

I played with US 90 to 180, 270 or $3 60 at that attrition rate drops, but we get them for a year behavior. They know what they know and we hang on to them and as Nick said, plus we've reinforced our tenured folks. So we have strong statistics to get another year that probability.

Hang on to these people for.

Definitely more for an additional year, but really three or more years is probably pushing around 75% that all comes back you joined the hospice industry clinically because of the calling and something you want to do if you were looking to maximize personal earnings. The reality is as you go become a travel nurse like many had done until that.

Carousel stops, but those arent typically what we what we see embedded inside of the industry.

Yes. Thank you.

Wanted to dominate.

And last question on <unk> side.

So the guidance calls for revenue to be up 5% call. It.

So that's a sale.

Alright numbers, so you're assuming some slowdowns like you mentioned, you're seeing potentially some of these excavation jobs.

Please go ahead. So assuming this continues into next year and also could you break the other 5% how much is price.

<unk>.

So kind of assuming that you go faster than the market in line with its market. Thank you.

Yes.

Great question, Joanna and yes of course, we pass through price increase on a bespoke basis, what we look for Baltimore is going to be different than what we do in Cincinnati re.

Our range of our price increase is going to be around five 5% to 6%. So frankly, if you look at that you can talk about July jobs small jobs geographic, but we're essentially in terms of raw procedures estimating we're going to be flat, which is actually we think fairly conservative.

As Kevin mentioned.

It's angels on the head of a pin on what is truly considered emergency but no. One gets a warm fuzzy by calling roto rooter and paying us $600 to get their house back to where it was the day before so what im saying is the majority of our jobs are non discretionary maybe they can delay it and we've taken <unk>.

<unk>, assuming an increase in consumer headwinds.

Im spending, but the ability to people to avoid these kind of emergency plumbing and drain cleaning services limited, but it is not recession proof as Kevin always has its very recession resistant, but we think we developed it.

<unk>.

And our guidance is some headwinds on demand that will be much higher than it is today. So frankly, I think it's more likely than that we are at the higher end of the roto rooter guidance, but.

We are guessing a little bit, but I go back to that.

The great recession, and the little impacted that had on our demand and that was before we implemented water restoration, which is not going to be pushing hopefully $200 million.

Hum.

Or slightly below that that is a 100% non avoidable you got standing water in some cases greater than Blackwater in your house, you are paying us to get rid of it its insurance.

Sure it's covered in postpaid.

And just to give a little bit more color.

Both.

Restoration and excavation are derived from additional procedures from basic small jobs as you can see water restoration continued to grow but excavation.

There are less in that water restoration that kind of the growth was there, but not as much which just tells you they didn't delay the water restoration, but they deferred a small portion of the excavation work otherwise excavation and water restoration, we probably would have been closer to the same rate.

Don't want to.

Beat a dead horse, but.

From my perspective, I know in theory.

<unk> demand.

Inflationary pressures and recessionary pressures have an effect on the business.

Got it.

Roto Rooter is such a basic business would be absolutely what has.

The effective number is more than.

More than the financial environment.

The fact that.

In the last 18 months private equity companies have been investing in service companies first thing the service companies need as local management.

Roto Rooter is one of the go to places to hire.

Service.

Qualified service managers.

And we if you ask me, how we're going to.

Uh huh.

Make sure we hit our numbers is going to be doing a better job holding onto our branch managers and excavation managers. The work is the work is available.

It's a bit of an art rather than a science.

<unk>.

Again, we have some programs now to improve our retention of those key people, but if you look over the 18 months.

It's been an onslaught and we have a couple.

Litigation matters going on that subject.

Poaching of.

Yes.

We don't kind of a several people from all from one brands we have.

Some compensation plans in place, but I will tell you right now and if we do a better job of that that will greatly outweigh any <unk>.

Overall.

Financial metric.

Thanks for all the answers I appreciate it.

Thank you.

And I show. Our next question comes from the line of Ben Hendrix from RBC capital markets. Please go ahead.

Hey, Thanks, guys.

Question on <unk>.

On capital allocation is there any change or any anything we should consider this year regard your capital allocation priorities or balance sheet management strategy for <unk>.

Ben This is Dave Williams.

<unk> slightly and that what I would say is if you look at our balance sheet and we redid, our credit facility last year, and we update a $100 million.

From $450 million to $550 million.

And we actually put a piece of a term loan on there of $100 million.

I think it's running at $101 million to $5 million quarterly amortization on it but given the spike in interest rates.

Frankly before when it was a 30 basis point penalty, we didn't have to keep it super tight lock on the balance sheet interest rates are low how much we can invest our cash was low but now it matters. So.

You are quite a good one we actually accelerate the payment of that term debt as a matter of fact, we've given notice that we are going to tranche down $50 million by the end of this month and will probably eliminate all of the term debt.

Early into Q2.

And then we're going to triage that free cash flow probably to share repurchasing.

After we have now zero debt.

Just because I mean, the swing line, we would do would be at 775% and I think sulphur plus a 100 basis points spread which is still a great right, but that takes us to what six 5% right now so.

Screw that we're getting rid of all interest expense regarding the term debt cash outflow and then capital goes to shares model sit on our balance sheet for opportunistic investments.

Great. Thanks for that guys.

Thank you.

And I show. Our next question comes from the line of Mike <unk> from Oppenheimer. Please go ahead.

Good morning, Thanks for taking my call.

Majority of my questions have been answered so I just wanted to hear can you kind of.

Discussed earlier about the referral trends and how they continue to evolve can you discuss how that strategy has impacted your length of stay and acuity and where the patients that are coming in in this process.

Yes, so without getting specific in the granular delineation of all of it.

One of the things that.

We needed to respond to particularly during the pandemic was.

The referral demand in many instances coming to us shorter in their disease trajectory than typically we ought to be very mindful around.

Where we were sending out scarce resources to not only respond and also.

Bring on bring on service. So the demand was has always been there and continues to be there.

We referenced it from a community access standpoint that we flow through our educational efforts our emphasis efforts but.

Clarify we are still of course and you can see it in the metrics.

Serving all of the segments of the market that we referenced and referred to externally from a pre admin standpoint.

That has continued that strategy continues and carries carries over and so on the margin what ends up happening not only is people access the benefit earlier in their disease trajectory, but we also focus in on.

The community, who typically refers patients and the types of patients earlier than the average.

Two to the hospice benefit that compounding effect, along with the compounding effect of staffing and clinical staff availability really yields an acceleration of ADC growth.

For the same number of admissions coming into the organization.

I hope that answers your question or not might be sort of directionally.

It has made a difference it will continue to make a difference and that's part of what's inferred inside of our 'twenty three guidance.

ADC going up three 5% to 4%.

And not referencing admission guidance, specifically because it causes a little confusion.

That's good color.

And one other question I know you guys are obviously always very quiet on M&A front.

Could you kind of discuss what the market looks like and where valuations are and are you seeing any changes in that.

And then the competitive landscape.

I don't think I've seen enough to actually be able to give a thought on what multiples are going for.

The multiples have a wide wide range and it's really probably driven by who the owner is right. Because you have private equity that may expect larger multiples and it's really just.

There is one aspect on price I think the underlying piece for a lot of the providers in this space and you hear it from other public commentary as if.

If you don't have the culture.

And strategic approach for retaining and growing your clinical capacity by definition, all operating metrics related to the business are going to decline and that's going to influence pricing as well as availability of each and every one of those providers. So that's really not significant.

Different than anything pre pandemic except for.

If you Werent proactively taking those steps in the middle of the pandemic to improve it you have seen an acceleration of decline.

And your.

Metrics, which is going to impact <unk>.

<unk> valuation as well as the multiple someone's willing to pay.

There arent too many platform assets out there so now it is.

People plucking off individual single and regional providers that really don't have the balance sheet or scale to continue to operate.

That's what we see in this space.

Okay. Thanks, very much I appreciate it.

Thanks, Mike.

Thank you.

I am showing no further questions in the queue at this time I would like to turn the call back over to Kevin Mcnamara, President and CEO for closing remarks.

Thank you yes.

We will finish the call. Thank you for your attention it was a nice solid quarter for us and.

We look forward to talking to you all at the.

Into the next quarter. Thank.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect good day.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good morning, Our conference call. This morning, we will review the financial results for the fourth quarter of 2022 ended December 31 2022.

Before we begin let me remind you that the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 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.

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 20, <unk>, which is available on the company's website at Chemed Dot com.

I will now turn the call over to Kevin Mcnamara.

Our fourth quarter 2022 operating results released last night exceeded key internal operating metric targets for both VITAS and Roto Rooter.

This resulted in Chemed reported fourth quarter and full year 2022, adjusted diluted earnings per share of $5 39.

The $19 75, respectively.

This compares to our initial adjusted earnings per share guidance issued in February of 2022 of $19 <unk>.

To $19 50.

And the impact of inflation has added some consumer spending decisions.

For VITAS. These 2022 headwinds included better care implementing sequestration, resulting in overall revenue reduction of approximately $15 million.

And the industry wide disruption related to staffing licensed health care professionals.

Since we implemented our hiring and retention program in July 2020 to VITAS staffing has improved significantly Nick will provide more detailed information on this issue later in the call.

We continue to see disruption in our referral patterns when compared to pre pandemic admissions. Fortunately these patterns continue to show improvement in key pre admit patient locations.

Pre pandemic nursing home patients represented 18% of our total average daily census, the census or ABC.

Nursing home ADC ratio hit a low of 14, 3% during the pandemic.

Full year 2021, nursing home based census increased to 15, 1% of the total AVC.

Home census expanded.

Additional 128 basis points to 16, 4% in 2022.

Our 2023 guidance anticipates continued improvement in senior housing base Sensus.

For Roto Rooter and higher inflation throughout 2022 did marginally impacted our revenue growth on the small portion of services that could be considered discretionary.

We can see the vast majority of.

Demand for Roto Rooter services as non discretionary or emergency based.

Water restoration is example of a 100% non discretionary service.

From broken or backup types must be removed immediately to avoid significant mold and water related damage to the structure.

Some of them are services could be could could be considered discretionary or potentially deferred by the customer until the problem becomes more severe.

As an example, our customers call up collapse mainline is a non discretionary excavation service. The failed sewage line must be replaced for the whole for the homeowner to rebating and the residence.

At a replacement cost of approximately 3000 to $6000.

Our sewage mainline with significant three route penetration.

Shouldn't be replaced as well.

However, temporary fixes possible by using a road, where steel cable machine to chop clear.

The truth for the mainline for approximately 400 to $700.

This lower cost fix is temporary as roots go back into the perforated mainline.

In about nine to 15 months the customer will then have to pay for the solution lines to either be cleaned again are permanently replaced.

<unk> is well positioned post pandemic and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness and customer response time.

47 call centers Internet presence.

Roto Rooter services are primarily emergency based and non discretionary.

Our ability to respond faster than the competition as a significant competitive advantage.

We'll continue to provide really the ability to increase market share.

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

<unk> net revenue was $308 million in the fourth quarter of 2022, which is a decline of two 5% when compared to the prior year period.

This revenue decline is comprised primarily of a two 8% reduction in our days of care in a geographically weighted average Medicare reimbursement rate increase of approximately three 2%.

Really offset by 200 basis points as a result of CMS re implementing that 2% sequestration cut that was suspended at the start of the pandemic in 2020.

Our acuity mix shift had a net impact of reducing revenue approximately $1 8 million or six tenths of 1% in the quarter when compared to the prior year revenue and level of care mix.

The combination of Medicare cap and other contract revenue changes negatively impacted revenue growth by 30 basis points.

In the fourth quarter of 2020 to VITAS accrued $2 7 million in Medicare cap billing limitations. This compares to $3 million of Medicare cap billing limitations in the fourth quarter of 2021.

Of VITAS 30, Medicare provider numbers 25 of these provider numbers have a Medicare cap cushion of 10% or greater.

One provider number does have a cap question between five and 10% and four provider numbers have a trailing 12 month billing limitation liability.

The fourth quarter 2022, gross margin, excluding Medicare cap and our hiring and retention retention bonus program was 26, 9%.

This is a 135 basis point margin decline when we compare it to the fourth quarter of 2021.

VITAS has reversed the severe attrition of our licensed health care professionals that began during the pandemic.

This was evidenced by VITAS expanding our licensed health care staff by 275, coinciding with the launch of our hiring and retention program beginning on July one 2022.

This higher staffing increase the aggregate cost of sales in the quarter by an estimated $4 4 million.

Excluding this capacity expansion fourth quarter 2022, gross margins would have reflected a modest margin improvement when compared to the prior year quarter.

Adjusted EBITDA margin in the quarter, excluding Medicare cap and other discrete items was 19, 8%, which is a $190 89 basis points below the prior year period.

The adjusted EBITDA margin was negatively impacted by 200 basis points for the re implementation of sequestration and an additional approximately 141 basis points due to the increased staffing and patient capacity from VITAS is hiring and retention program.

Roto Rooter generated revenue of $239 million in the fourth quarter of 2022, an increase of six 1% when compared to the prior year.

Roto Rooter branch commercial revenue in the quarter totaled $58 6 million, which is an increase of eight 7% over the prior year.

Aggregate commercial revenue growth consisted of drank cleaning, increasing five 5% plumbing, increasing 13, 8% excavation expanding five 1% and water restoration, increasing 27, 3% commercial revenue is showing excellent growth in the fourth quarter.

Roadway to branch residential revenue in the quarter totaled $159 million, an increase of 5% over the prior year and our revenue growth consistent a drain cleaning decreased two 1% plumbing expanding 7%.

Excavation expanding four 9%.

Water restoration increased 13, 2%.

To illustrate this let's take a look at growth and excavation for the past five quarters compared to the equivalent prior year period.

In the fourth quarter of 2021 residential ex excavation revenue increased 12% over the prior year and 2022 quarterly excavation growth was five 9% in the first quarter.

Slight decline of 110th of 1% in the second an increase of nine tenths of 1% in the third quarter and growth of four 9% in the fourth quarter of the year.

This extra patient growth rate is lighter than growth generated over the last several years.

We believe most delayed excavation work will materialize over the next one to two years as Kevin referred that the delayed excavation become bigger problems for our residential customers.

Roto Rooters gross margin in the quarter was 53.0% a 68 basis point increase compared to the fourth quarter of 2021.

Adjusted EBITDA margin in the fourth quarter of 2022 totaled $69 3 million, which is an increase of 11, 4% the.

The adjusted EBITDA margin in the quarter was 29.0%, which is a 138 basis point improvement when compared to the prior year.

Ken that on a consolidated basis during the quarter, we repurchased 25000 shares of chemed stock for $13 million, which equates to a cost per share of $519.

At December 31, 2022, there was approximately $88 million of remaining share repurchase authorization under our plan.

2023 earnings guidance is as follows VITAS in 2022 23 revenue prior to Medicare cap is estimated to increase 6% to 7% when compared to the prior year.

Forecasted revenue growth is negatively impacted by 75 basis points as a result of the sika sequestration relief in the first half of 2022 compared to full sequestration in 'twenty three.

Average daily census, our ADC is estimated to increase three 5% to 4% with the majority of our census growth coming in the second half of 2023 as increased staffing and operational capacity generates increased census.

Full year, adjusted EBITDA margin prior to Medicare cap and accrued and excluding accrued one time bonuses for our hiring and retention initiatives.

<unk> last year is estimated to be 63% to 16, 6% and we're currently estimating estimating $11 million for Medicare cap billing limitations in calendar year 2023.

The guidance includes increased wages related to expanding our staff of licensed health care professionals at a rate of about 25 licensed health care workers per month.

This estimated increase in staffing should be viewed as VITAS expanding internal capacity to care for more patients.

ADC growth from this capacity expansion is estimated to lag growth.

Overall by 30 to 60 days with margins improving on this ADC as the census growth patients remain on service.

Roto Rooter is forecasted to achieve full year 2023 revenue growth of five to five 5% the.

The adjusted EBIT margin for Roto Rooter is estimated at 29, 3%.

To 29, 5%.

To $21 10.

Adjusted earnings per diluted share should approximate our free cash flow.

Diluted share.

2023 guidance also assumes an effective tax rate and adjusted earnings up 25, 1% and a diluted share count of 15.0 million shares.

I will now turn this call over to Nick Westfall, President and Chief Executive Officer for VITAS healthcare business segments.

Thanks, Dave.

As Kevin referenced earlier, we implemented a targeted hiring and retention bonus program at VITAS effective July one 2022.

This program focused on licensed nurses nurse managers home health aides and social workers.

These onetime retention bonuses range from $2000 to $15000 per license 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 $40 million.

All retention bonus payments are individually cliff vested and then paid out after the employee has successfully completed 12 additional months of continuous employment.

It is important to note. The majority of this increase is attributed to registered nurses, which includes admission nurses.

In the fourth quarter, our average daily census was 17434 patients a decline of two 8% over the prior year and an increase of 192 or one 1% sequentially.

The monthly ADC growth, we experienced within the fourth quarter is very encouraging given the timing lag of adding patient care capacity and then the subsequent sensitive census expansion.

In the fourth quarter 'twenty to <unk>.

Total VITAS admissions were 14829.

This is an eight 7% decline when compared to the fourth quarter of 2021.

I am very encouraged by our sequential increase in emissions, expanding 149 patients or one 1% over the third quarter.

This is attributed primarily to the capacity expansion from our hiring and retention program.

In the fourth quarter, our nursing home admissions increased nine 4% and assisted facility admissions expanded two 7%.

Hospital directed admissions declined 11, 3% and home based patient admissions declined seven 5% in the quarter.

Comparing the fourth quarter of 'twenty two to our second quarter is also encouraging in the fourth quarter, our admissions were slightly above our admissions in the second quarter.

Our average length of stay in the quarter was 103 nine days. This compares to $97 nine days in the fourth quarter of 'twenty, one and 106 two days in the third quarter of 2002.

Our median length of stay was 16 days in the quarter and compares to 15 days in the fourth quarter of 'twenty, one and 17 days in the third quarter of 2002.

This growth in our median length of stay is attributed to the successful execution of our community access initiative I referenced earlier.

As well as the indications of patients accessing the hospice benefit and timeframes closer to pre pandemic levels.

Overall, I'm very pleased with the execution of the entire VITAS team regarding how we continue to serve our communities as well as our renewed focus on recruiting and retention of our workforce.

To recap we have now generated two quarters of sequential growth in licensed health care workers.

Sequential growth in emissions as well as ADC.

We have developed what I believe is a very sustainable path to building back our clinical capacity and patient base to pre pandemic levels.

Before I turn this call back over to Kevin I'd like to thank every one of my fellow VITAS team members and our leadership team their share will and daily perseverance to deliver on our mission got us through the pandemic and now the execution of our strategies through the end of 'twenty. Two has prepared us to have an exciting 2023 were.

We will continue to make a difference in every community we serve.

With that I'll turn the call back over to Kevin.

Thank you Nick.

I'll now open this teleconference to questions.

Thank you Sir.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced towards our your question. Please press star one again.

Please stand by while we compile the Q&A roster.

And I show. Our first question comes from the line of Jonah Good Chuck from Banc of America.

Erica Please go ahead.

Hey, good morning, Thanks for taking the questions here. So I guess just following up to two Nick's comments the latest comments on that on that trends. So I could see a set of montney ADC growth.

Alright.

During the fourth quarter can you give us some flavor of how things are tracking so far this year.

First you said that the improvement that you've seen in Q4 and I guess also Q3.

Kind of any color you can give us on some of these metrics.

As you've seen them.

This quarter so far.

Well before.

They were low to talk about.

Got it.

Quarter unreleased quarter activity other than to say.

I will just say, yes, it's good.

<unk>.

It's what can we expect to see.

Were very encouraging very encouraging like you referred to in the fourth quarter.

And we're still very encouraged sitting here today.

And I would say the same thing with Roto Rooter has one other good thing going forward, which is weather we've had great roto rooter type weather so yes.

We don't like to talk about other than to say.

It is good.

Okay, that's great encouraging I like that.

And I guess so.

When it comes to your guidance for the Air Force Thats coming back before we.

Ask about.

Sure.

Margins sorry, the guidance calls for these margins to be down.

And I need to 100 basis points year over year, So obviously sequester coming back obviously high on before.

People and I guess also sensors, we're still going to be maybe 4% are still below 2019 levels. So is that a way to think about it that.

Sure Yes.

Rich or you'll get closer to that.

Pre pandemic margins you need to.

Get the census back to that level.

Yes, Joanna this is Dave so I'll comment on a macro basis, and Nick and gives us a lot more color on our more detailed but on a macro basis. If you think about what we're doing beyond the fact that we have a headwind on sequestration.

So obviously that impacts us by what Nick 75 bps.

And $9 million million dollars. Then we also have an issue of course is the fact that the reimbursement increase was inadequate relative to some of the wages. So that creates a bit of a headwind period, but absent that you have to expect that margin to be down as we build capacity that's a drag on profitability.

You add licensed health care workers, they can't be immediately proved up Dave in terms of then the next day, we expanded census, so theres a lag we have the lag at about 30 to 60 days right now of adding capacity and then we see an impact on census, and frankly six months ago I would have.

That lag is easily 60 to 90 days so the cause and effect is tighter than what we want but the bottom line as you add capacity. That's a strain on margin then you bring on new patient more than you would have otherwise. That's also a strain on margins in terms of the admissions process in most patients all.

Patients are negative margin for the first solid 15 as much as 30 days and program.

And then as that patient and program age out then they become positive margin. So thats a long winded way of saying you have to expect margins to lag to increase capacity to grow the business and the other thing I'd add is this is a mirror image of what happened in 2020 when census held in but we did have.

Weakness when we lost our capacity to a certain degree with health care workers resigning so margins were much higher than you would have anticipated because census was there but you didn't have the ftes. So bottom line is.

Grow our capacity by adding health care workers licensed health care workers.

And then they will that will lag 30 to 60 days for Sensus, and then census will lag that marginal increase incentives by about 30 days until those patients are profitable.

And just to recap a few pieces in Dave's depiction, the $9 million or 75 basis points year over year comparison, obviously that has a marginal implication related to it and as we sit and.

Grow all the pieces, Dave talked about in terms of clinical capacity and the timings lags with it it all translates into that 16 three to $16 six.

Total contribution from a dollar standpoint, and then the ultimate marginal contribution.

That will that will come through in 2024, probably looks more like.

An estimated ongoing margin now that the pandemic is fully behind us and we will see what census level. We're at at that point in 2024.

I'd just add with one step removed.

There's nothing that has changed in the hospice market.

Pandemic was a.

Big rock thrown into a pond, which caused all sorts of ripples and effects and splashes, but.

It's going to return to.

Based on what's going on there today.

Expected return to the same general dynamics from before the pandemic and.

VITAS is not lost market share I think that the number of.

Percentage of deaths.

Brush with hospice is going to return to its previous level and VITAS will be there and by that point have the staff to deal with them. So yes to us.

It's a.

We're just getting back to something we already have the.

Institutional.

Well people involved for a 19000 20000 census, hospice malanders waiting for the operating conditions to return to normal and Joanna If you think about it. So we're guiding adjusted EBITDA margin ex.

Cap and a retention program for VITAS of about 16, 3% to 16, 6%.

But let's just go back to the last full year, we had before the pandemic so that would've been in the 2019 full year adjusted EBITDA margin was 17, 8%. So frankly, if you take just take into consideration.

The headwind on sequestration, but the fact that we're still down from our our census of $19000 loss at the end of 19.

I suspect Nic has a lot more efficient now than we were a few years ago. So I think there is actually its more likely than not once we return to normal sized sensors get back to pre pandemic levels. I think our margin is going to end up a little higher because these efficiencies have now been incorporated into our normal operating.

Approach.

And we will see what the pricing implication is on October one 2023.

Right.

Since you mentioned that so what do you assume for your Medicare rate increase in the fourth quarter of 'twenty three.

5%.

Okay. So.

Lastly, accelerating from my God, I guess call it 4% to get typically against right now.

As you know they released a preliminary report related to it in the late in.

In the next 30 to 45 days that will help to inform the ballpark range, we would anticipate October one.

Frankly, we don't consider it the model that you see.

<unk> to develop our increase in rate.

As less than transparent.

Great that's another topic, but just coming back to that the hiring in.

Please see the capacity so just to clarify the 275. These are new hires or these are net hires and also what percent of the base is it and also.

No.

You mentioned before that you expect to.

Roughly 25 per month still staff, so I assume that's correct Matt.

So is that enough.

Really what im getting at how much more do you really to increase your net staff to be back to.

Yes.

Capacity you had before.

<unk>.

So let me the baseline to answer which is the most important one here is those are net numbers.

And it's enough.

The other answers.

Your second question to methodically absorb them that's right, it's not like we're looking to.

Greatly.

Exceed that number.

Yes.

We will be on service with us hopefully for a longer period of time than they were during the disruption time period of the pandemic.

Compression, but the bottom line is as long as we can continue to improve our retention improve our hiring resulting in net growth of clinical capacity feel really good about the other operating metrics from a topline perspective from our ability to absorb what continues to be elevating demand.

Every market in which we serve and deliver predictable and sustainable operating results.

And Joanne are one thing that we.

Follow and just say what we are.

What we're trying to achieve is.

We have to grow in tandem.

We know Theres a lot as Dave said, a lag factor the current quarter margin is probably affected by 141 basis points based on our.

Rough calculations to give you an idea that that's.

So we're running a little ahead the way we do this if you want to grow and we think that the optimum rate.

Youre out ahead with the hiring and let's say just so you can put a cost on that is 141 basis points. We're not looking to be further ahead and have that grow to 200 basis points or 250 basis points I'd be comfortable methodically keeping that as we expand capacity.

You want to.

We have headlights.

That clears the area ahead of you.

A clear understanding of Nick can provide probably a lot of anecdotal color on this but if you think about adding capacity has put us in a.

Our virtuous cycle and what I mean by that is our tenured people were getting strained our schedules where havoc.

Scrambling to take care of patient or we're hiring these people they train them and they were resigning so it was burning out our tenured staff. So we've now entered the point, where we're adding capacity is giving relief to the tenured staff. It's not this horrible treadmill you hire people. They resign you hire other people so far.

On that standpoint, the life of our long tenured people have gotten massively better now from where it was the fourth quarter of last year, that's reaffirming our ability to retain existing personnel as well as adding so were actually what we think is we ran a horrible spiral at the end of 2020 and the pandemic.

And Nick and his team at completely reverse that.

Okay.

The add on that John because I am sure it will be embedded inside of either a subsequent question or other folks' questions.

If you think about it very generally at a high level. It has a compounding effect to it which is fantastic, meaning that baseline Dave alluded to existing staff real burn out and shortages.

And that also is elevated by people accessing the benefit later in their disease trajectory you couple that with a frustration because everyone joins hospice usually from a calling standpoint.

Being able to meet patient demand and so our teams have done a fantastic job at three very high level behavioral pieces, focusing daily on the existing employee experience. That's our tenured staff David was alluding to there's a lot of detailed tactical things inside of it but also part of that is helping them understand the light at the end of the tunnel related to that.

The third is taking that new team and really elevating the integrated culture and I know those three things sound simplistic they are difficult to execute upon the team's done a wonderful job and the result is the compounding effect of all three of those things lead to less burnout.

Camaraderie of a mission focused organization and then the ability to meet more and more demand and respond to demand.

And everyone personally begins to elevate their fulfillment of being able to impact our communities in ways. They signed up originally into a joint to be part of the hospice benefit and be part of VITAS, So that calling combined with a compounding effect is.

Is really is really taking hold and it's something I'm.

Very encouraged by as we have launched into 2023.

No definitely I think but the Cedar Creek that trends improving there and the staffing and then thanks for all this color just one last on that topic.

Because they're talking about adding continue to add more staff, but I guess this.

So attention programs and so I guess a question there obviously.

Do you foresee a risk of higher turnover, starting second half of 'twenty three when people get their bonuses and maybe Lee. So can you talk about.

Expectations for that and kind of what you assume in your guidance.

On that front. Thank you yeah. So obviously aware of the risk based upon what I just talked about from a compounding effect that has nothing to do with the difference maker program, but the difference maker program helps provided the catalyst for the existing staff as well as the staff to join us to be incentivized inside of it that's our that's what we deem are recruiting.

And retention programs and the difference maker program, so little less concerned than you may think because of those pieces and the compounding effect because once we have the existing staff and the new staff that are with us for a year and that experience is elevated.

Our retention metrics.

Just continue to improve in a substantial way so, but we are aware of the risk and not.

Not discounting it expects to something but.

We believe that the.

Health care professionals that go to work for hospice in general are not dollar driven.

As a priority I mean, they could go to other.

Jobs and get a higher rate of pay.

Business and what Nick is suggesting is to really two things number one there is a view within the workforce that VITAS is stepping up to the plate to do whats necessary, what's necessary is not necessarily to give people more money, but it's increased staff. They have the right amount of staff.

For the services, we're offering and so the net effect is at the end.

These are not hired guns.

But right out of town.

12 month data.

Some will.

Some people will sort of you who're just.

Would normally move jobs.

<unk> or <unk>.

Havent change with a month or two short of a period in which they're going to get their payment legacy them postponing. It can happen, but we think that will just be within normal ranges and Joanna and we have some pretty strong statistics support to support our expectation that as we know if we can keep employee for <unk>.

12 months.

Probability there are long tenured employee three or more years is significantly higher than people are with us less than 12 months and it actually goes you got to be patient.

With US 90 to 180, 270 or $3 60 at that attrition rate drops, but we get them for a year behavior. They know what they know and we hang on to them and as Nick said, plus we've reinforced our tenured folks. So we have strong statistics, if you get another year that probability you hang on to these people.

Four.

Carousel stops, but those arent typically what we what we see embedded inside of the industry.

Yes, Thank you I don't want to dominate.

Last question on <unk> side.

So the guidance calls for revenues to be up 5% call. It.

So thats a.

So that number so assuming some slowdowns like you mentioned, you're seeing potentially in on some of these excavation jobs.

Please go ahead. So assuming this continues into next year and also could you break the other 5% how much is price versus volume.

Kind of assuming that you go faster than the market and in line with its market. Thank you.

Yes.

It's a great question, Joanna and yes of course, we pass through price increases on a bespoke basis, what we look to it for Baltimore is can be different than what we do in Cincinnati, but the range of our price increase is going to be around five 5% to 6%. So frankly, if you look at that you can talk about July jobs small jobs geographic.

But we're essentially in terms of raw procedures estimating we're going to be flat, which is actually we think fairly conservative.

As Kevin mentioned.

It's angels on the head of a pin on what is truly considered emergency but no. One gets a warm fuzzy by calling roto rooter and paying us $600 to get their house back to where it was the day before so what I'm, saying is the majority of our jobs are non discretionary maybe they can delay it and we've taken guide.

Assuming an increase in consumer headwinds.

On spending with the ability to people to avoid these kind of emergency plumbing and drain cleaning services limited, but it is not recession proof as Kevin always has is very recession resistant, but we think we developed it.

And our guidance is some headwinds on demand that will be much higher than it is today. So frankly, I think it's more likely than not we are at the higher end of the roto rooter guidance, but we're guessing a little bit but I go back to the.

The great recession, and the little impacted that had on our demand and that was before we implemented water restoration with just not going to be pushing hopefully $200 million.

Hum.

Or slightly below that that is a 100% non avoidable you got standing water in some cases greater than Blackwater in your house, you are paying us to get rid of it and its insurance.

Sure, it's covered and Thursday.

And just to give a little bit more color.

Both.

Restoration and excavation are derived from additional procedures from basic small jobs and as you can see water restoration continued to grow but excavation.

I don't want to.

Be the dead horse, but.

From my perspective, I know in theory consumer demand.

Inflationary pressures and recessionary pressures have an effect on the business.

But.

Roto Rooter is such a basic business. If you ask me what has.

The effective numbers more than.

More than the financial environment.

The fact that.

In the last 18 months private equity companies have been investing in service companies first thing the service companies need as local management.

Roto Rooter is one of the go to places to hire.

Service.

Qualified service managers.

And.

If you ask me, how we're going to.

Make sure we hit our numbers is going to be doing a better job holding onto our branch managers and excavation managers, but work is the work is available.

But it is.

As a bit of an art rather than a science.

And.

Again, we have some programs now to improve our retention of those key people, but if you look over the 18 months.

It's been an onslaught and we have a couple.

Litigation matters going on that subject.

Poe.

Coaching.

We don't kind of a several people from all from one brands we have.

Some compensation plans in place, but I will tell you right now if we do a better job of that that will greatly outweigh any.

Overall.

Financial metrics.

Okay. Thanks for all the answers I appreciate it.

Thank you.

And I show. Our next question comes from the line of Ben <unk> from RBC capital markets. Please go ahead.

Hey, Thanks, guys quick question on.

On capital allocation is there any change or any anything we should consider this year regard your capital allocation priorities or balance sheet management strategy for <unk>.

Okay.

Ben This is Dave Williams.

Just slightly and that what I would say is if you look at our balance sheet and we redid, our credit facility last year, and we update $100 million.

$450 million to $550 million.

And we actually put a piece of a term loan on there of $100 million.

I think it's running $101 million to $5 million quarterly amortization on it but given the spike in interest rates.

Frankly before when it was a 30 basis point penalty, we didn't have to keep it super tight.

On the balance sheet interest rates are low how much we can invest our cash was low but now it matters. So.

Your point is a good one we actually accelerate the payment of that term debt as a matter of fact, we've given notice that we're going to tranche down $50 million by the end of this month and will probably eliminate all of the term debt.

Early into Q2.

And then we're going to triage that free cash flow probably to share repurchasing.

After we have now zero debt.

Just because I mean, the swing line, we would do would be at 775% and I think software plus 100 basis points spread which is still a great right, but that takes us to what six 5% right now so.

Screw that we're getting rid of all interest expense regarding the term debt cash outflow and then <unk>.

Capital goes to shares a mortal sit on our balance sheet for opportunistic investments.

Great. Thanks for that guys.

Thank you.

And I show. Our next question comes from the line of Mike <unk> from Oppenheimer. Please go ahead.

Good morning, Thanks for taking my call.

Majority of my questions have been answered. So I just wanted to hear can you kind of discussed earlier about the referral trends and how they continue to evolve can you discuss how that strategy has impacted your length of stay and acuity.

And where the patients that are coming in.

This process.

Yes, so without getting specific in the granular delineation of all of it.

One of the things that.

Was we needed to respond to particularly during the pandemic was.

The referral demand in many instances coming to us shorter in their disease trajectory than typically we ought to be very mindful around.

We were sending out scarce resources to not only respond and also <unk>.

On bring on service. So the demand was has always been there and continues to be there.

We referenced from a community access standpoint that we flow through our educational efforts, our emphasis efforts, but <unk>.

Clarify we are still of course and you can see it in the metrics.

Serving all of the segments of the market that we referenced and referred to externally from a pre admin standpoint.

The community, who typically refers patients and the types of patients earlier than the average.

Two to the hospice benefit that compounding effect, along with the compounding effect of staffing and clinical staff availability really yields an acceleration of ADC growth.

For the same number of admissions coming into the organization.

I hope that answers your question or not Mike, but sort of directionally.

It has made a difference it will continue to make a difference and that's part of what's inferred inside of our 'twenty three guidance.

ADC going up three 5% to 4%.

And not referencing admission guidance, specifically because it causes a little confusion.

That's good color.

And one other question I know you guys are obviously always pretty quiet on the M&A front.

Can you kind of discuss what the market looks like and where valuations are and are you seeing any changes in that.

And then the competitive landscape.

I don't think I've seen enough to actually be able to give us a thought on what multiples are going for.

The multiples have a wide wide range and it's really probably driven by who the owner is right. Because you have private equity that may expect larger multiples and it's really just.

There is one aspect on price I think the underlying piece for a lot of the providers in the space and you hear it from other public commentary as if.

If you don't have the culture.

Different than anything pre pandemic except for.

If you Werent proactively taking those steps in the middle of the pandemic to improve it you have seen an acceleration of decline.

And your operating metrics, which is going to impact <unk>.

Brawl valuation as well as the multiple someone's willing to pay.

There arent too many platform assets out there so now it is.

People plucking off individual single and regional providers that really don't have the balance sheet or scale to continue to operate.

That's what we see in this space.

Great. Thanks, very much I appreciate it.

Thanks, Mike.

Thank you.

I'm showing no further questions in the queue at this time I would like to turn the call back over to Kevin Mcnamara, President and CEO for closing remarks.

Thank you yes.

We'll finish the call. Thank you for your attention it was a nice solid quarter for us and.

Look forward to talking to you all at the end.

Into the next quarter. Thank.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect good day.

Q4 2022 Chemed Corp Earnings Call

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