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spk01: Good day and welcome to the ComEd Corporation second quarter 2022 earnings conference call. After the speaker's presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Holly Schmidt. You may begin.
spk03: Good morning. Our conference call this morning will review the financial results for the second quarter of 2022 and June 30, 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 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. A reconciliation 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.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 Westphal, President and Chief Executive Officer of ChemEd's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.
spk02: Thank you, Holly. Good morning. Welcome to ChemEd Corporation's second quarter 2022 conference call. I will begin with the highlights for the quarter, and Dave and Nick will follow up with additional operating detail. I will 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 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 healthcare professionals. I believe this industry-wide shortage of licensed healthcare workers will persist for the foreseeable future. Accordingly, VITAS has implemented a targeted hiring and retention bonus program effective July 1st, 2022. This program is focused substantially on licensed nurses, nurse managers, home health care aides, and social workers. These one-time retention bonuses range from $2,000 upwards to $15,000 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 continuous employment. The second pandemic-triggered challenge for VITAS is the disruption to senior housing occupancy and related hospice referrals. Our 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 The 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. Dated guidance anticipates continued improvement in senior housing-based census. For Roto-Rooter, our most significant challenge has been to increase manpower. Technician manpower on June 30, 2022, expanded 4.3% when compared to the average Q2 2021 headcount. Based upon current service demand levels, Roto-Rooter continues to be understaffed for skilled technicians in many of our markets. Roto-Rooter is well-positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time, 24-7 call centers, and Internet presence. With that, I would like to turn the teleconference over to David.
spk06: Thanks, Kevin. VITAS's net revenue was $298 million in the second quarter of 2022, which is a decline of 4.5% when we compare it to the prior year period. This revenue variant is comprised primarily of a 3.8% 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 approximately $5.2 million, or 1.6% 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 the revenue decline by approximately 10 basis points. In the second quarter of 2022, VITAS accrued $2 million in Medicare cap billing limitations, which is equal to the accrual in the prior year. Of VITAS's 30 Medicare provider numbers, Twenty-seven of these provider numbers have a Medicare cap cushion of 10% or greater. One of our provider numbers has 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 7.5% over the prior year. This aggregate commercial revenue growth consisted of drain cleaning increasing 8.4%, plumbing expanding 10.4%, water restoration increasing 4.1%, and excavation increasing 4.2%. Water in a 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 drain cleaning remaining essentially equal to the prior year quarter, plumbing expanding 9.3%, excavation declining one-tenth of 1%, and water restoration increasing 14%. Now let's turn to ChemEd on a consolidated basis. In June 2022, KEMAD entered into a five-year, $550 million amended and restated credit agreement. This agreement consists of a $100 million amortizable term loan and a $450 million revolving credit facility. The interest rate on this credit facility has a floating rate that is currently SOFR plus 100 basis points. As of June 30th, 2022, the company had approximately $387 million of undrawn borrowing capacity under this credit facility agreement. During the quarter, ChemEd repurchased 100,000 shares of ChemEd stock for $49.9 million, which equates to a cost per share of $498.61. As of June 30, 2022, there was approximately $125 million of remaining share repurchase authorization under this plan. Now let's turn to our updated 2022 earnings guidance. Historically, KEMED's earnings guidance has been developed using previous periods' key operating metrics, which are then 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 management's control but are somewhat predictable in terms of timing and impact on our business segment's 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 the recognition these macro issues could materially impact the company's ability to achieve this guidance. With that said, VITAS's 2022 revenue prior to Medicare cap in 2022 is estimated to decline between 4.5% and 5% when compared to the prior year. Acuity mix shift contributes an estimated 150 basis points of this revenue decline. In addition, the phase-out of sequestration relief over the first half of 2022 is estimated to contribute an additional 120 basis points of our full year 2022 revenue decline. ADC is estimated to decline 3.5% for the full year. ETAS's 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 5.5% and 5.7%, with an adjusted EBITDA margin in the range of 29.2% to 29.5%. Based upon these metrics for the operating segments, KEMED's full-year 2022 earnings per diluted share, excluding non-cash expense for stock options, tax benefit from stock option exercises, costs related to litigation, as well as the VITAS employee hiring and retention program Kevin noted earlier, and other discrete 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 15.12 million shares. ChemEd's 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.
spk07: Thanks, Dave. In the second quarter, our average daily census was 17,315 patients. a decline of 3.8% 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 14,735 patients. This is a 12.5% decline when compared to the second quarter of 2021. The vast majority of this emissions 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 20.5% when compared to the prior year period. This decline in hospital pre-admit admissions was significantly offset by our nursing home admissions increasing 5.3%, assisting living facility admissions increasing 5.6%, and home-based pre-admitted admissions expanding 0.2%. Our average length of stay in the quarter was 103.7 days. This compares to 94.5 days in the second quarter of 2021 and 104.8 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 median length of stay is attributed to the successful execution of our community access initiative I referenced earlier in my 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.
spk02: Thank you, Nick. I will now open this teleconference to questions.
spk01: As a reminder, if you'd like to ask a question, please press star 11. Our first question comes from Joanna Gadzic with Bank of America. Your line is open.
spk05: Hey, great. Thanks. This is actually Kevin Fishbeck filling in for Joanna. Hey, Kevin. So, hey. Yeah, it's been about 14 years since I've been on a call, so good to be back. But I guess a couple questions here. You know, first, I guess, Obviously, you guys had a strong Q1 and Q2. The guidance raise, though, 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?
spk06: Yeah, from a macro perspective, we basically have stronger revenues certainly running or 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 pulled things back a bit. But good tight expense management, we continue to outperform on margin. But I would say it's really just a more realistic second half of the year outlook, given the fact that there is very much potential 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's just giving us a little cause for pause.
spk05: All right, great. And I guess, you know, we've seen a few companies actually show improvement on margins in Q2 when volumes have been weak. I mean, how much of the labor improvement is because the volumes kind of came in a little bit light, making it easier to staff versus kind of actual kind of improvement that you can see as far as hiring, reduced temp labor, reduced overtime, things like that?
spk06: Well, I'll go macro and then flip it to Nick, who actually has a 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 healthcare workers.
spk02: Overly lean staffing. I mean, we'd be more comfortable if we were able to hold on and hire more workers. And, you know, it's the old build it and they will come theory. We certainly have examples of that where we cannot, you know, as I say, we don't, our admissions are down 12%, largely driven by hospital-based admissions. And, you know, we have a scarce resource labor. And as we expand that, the number of licensed healthcare professionals we have, those set admissions will first flatten out, and then we think, you know, in relatively short order, show growth.
spk07: Yeah. I mean, just, you know, Kevin, to expand a little bit further from a VITAS standpoint, it's exactly what Dave was alluding to as we were, you know, building the guidance at the end of last year and trying to project, you know, the pace in which we'd look to grow our, you know, net clinical resources over time. We've spoken about those. You know, using adjectives, as we did in the last quarter. But, you know, it's baked into the second half of the year's guidance. I commented about it briefly as it related to the prepared remarks in terms of, you know, really encouraged by what the management team has continued to do in terms of our renewed focus of both, you know, 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 and retention that launched here in July. You know, we're optimistic around the results that that could also hopefully help to produce as we, you know, finish this calendar year and launch with momentum into 2023.
spk06: Kevin, from our standpoint, we have an exceptionally strong balance sheet, obviously, and almost no debt or, what, $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 to acquire phenomenal 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 have been working pretty darn hard for the last two years on our existing base of employees. So we're putting our balance sheet and cash flow to work. And as Kevin pointed out to me the other day, part of the CARES Act money we received at the beginning of the pandemic, of the $80.2 million, we ended up using $44 million under the government's definition of lost revenue. Well, that was basically cash flow that's still on our balance sheet today. We're putting to work that $44 million of lost revenue, non-cash 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 additional staffing that we think will give us legs in 23 and 24 in terms of sustainable growth.
spk07: The last comment is the business is there from the demand of overall hospice need in all the communities in which we continue to operate. So we're just continuing to proactively prepare to fulfill that ever-growing increased demand.
spk05: The mix-up that you mentioned a few times, is that in response to a constraint on labor, saying when labor is constrained, I'd rather be growing nursing home and AL admissions, and that if you get that incremental nurse, you'd still want to be growing that? Or is it just you know, just, just the way that it's kind of happened. And when you get that incremental there, so you'll try to grow everything.
spk07: The short answer is yes. And it's very intentional, you know, that we've tried to evolve over the last few years, particularly inside of the pandemic, um, that 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 it 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 median like-to-stay numbers as well.
spk02: And let me reiterate one point, and that is our long-term plan hasn't changed. I mean, if we didn't have a very scarce resource labor, there wouldn't be quite this imbalance in effort as far as recruitment. It would be broader. We think that's good for the patients, good for the community, good for the long-range prospects of the company. We don't have the luxury at this point of being quite so broad in our approach because of the scarce resource of the licensed healthcare professionals. But our long-term view has not changed.
spk06: You think about what Nick and his team is doing, though, Kevin, is if he has one nurse for eight hours for a continuous care patient, you know, that's just a one-to-one ratio. but we're getting less of those high-acuity patients at a hospital referral, so now that one nurse can manage a pool of, what, half a dozen patients, Nick? We have a scarce resource. We're having more days of care related to hospice end-of-life care than we would otherwise. Quite frankly, it's good for the system, and it's good across the board in terms of maximizing the utilization of scarce nurses.
spk07: And the last people that really benefit from it are our clinical teams at the end of the day because we're really trying to, you know, manage through and help support them from a burnout standpoint. And so, you know, the longer patients are able to appropriately be on service with us, we're hoping that also improves their overall quality and employment experience with us.
spk02: And the proof is in the pudding, Nick. I mean, three months, you know, not necessarily significant, but actual growth in the ABC as opposed to the previous year and a half where we were just fighting a battle with the effects of the pandemic and having reduction.
spk07: That's exactly right. Very encouraged by some of the activity inside of this quarter.
spk05: Great. And I guess just to clarify the guidance, you obviously provided it at the same night that the Reg came out. So does your guidance kind of assume the proposal and that the final rule maybe came in a little bit better and potentially upside to that guidance, or how should we think about that?
spk06: Yeah, exactly. So we'd 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 X some of the private pay, and that would equate to $0.15 a share, all things else held constant. That's right.
spk05: All right, and then maybe last question here, maybe on the voter-router side. Obviously, you mentioned that the revenue guidance is down. I mean, how should we think about that business and the run rate as we enter into 2023?
spk06: Well, without a doubt, we've always been guiding to 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 of October of last year for 22. But I view it as we'll continue to have growth. Profit and margin will be strong, but I think we're going to, again, consolidate more additional market share. And I expect in 23 and 24 to even be more robust than it would have anticipated because every time we encounter these economic turbulence, think of it as, you know, 08 and 09. We emerged from it stronger. So without a doubt, we're going to take a little bit of the hair off of the growth rate we're anticipating. And it's going to result in even stronger 23 and 24 growth for Rotorooter, because our competition generally doesn't do well in these economic disruptions.
spk02: And Kevin, one thing I would add is a limiting factor for Rotorooter is the workforce. In the last year and a half, they've been extremely busy. more business than they can handle. As you lap that, the way you show revenue growth is the inflation, what your price increase is. The people you have were already fully occupied, so the growth is inflation plus the ability to add manpower. Obviously, in this environment, it's been whoever has done it but has done it at a low single-digit rate of increase, which we've done a bang-up job, but that's just life in the United States on a hiring front. Very healthy business. I mean, Roto-Rooter is not a sustainable 15%, 18% profit increase type company year after year, but again, we're very bullish on the Roto-Rooter approach to the market.
spk06: This turns out to be a recession that's somewhat meaningful. It generally spells good news for Roto-Rooter when we come out of it in terms of market sharing.
spk02: As I say, that's a key element. Roto-Rooter has to have both. They have to have the demand, and the marketing department has been providing that, but they also have to have the manpower to complete the jobs.
spk06: I love the quote for Roto-Rooter. One of my favorite ones, Kevin, is fortune favors the prepared, and I'd say Roto-Rooter is prepared.
spk05: Thank you.
spk01: Again, to ask a question, please press star 1-1. Our next question comes from Michael Murray with RBC Capital Markets. Your line is open.
spk04: Hey, thank you. This is Ben Hendrix along with Michael Murray. Just at RBC here, I think you've really answered all my questions, really, but my 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's anything structurally among your referral sources that might be permanently shifted that might kind of change your – median link to stay outlook long term as, you know, as the staffing backdrop normalizes and as we get back to normal admission declines from or admission patterns from referral services.
spk07: Yeah. I think, you know, overall structurally, and this is Nick, is the only piece if there's a silver lining from the pandemic the piece that really helps to continue to resonate that's not a surprise is the overall country's awareness around the value of providing care at home. And so I think, you know, if we think about any structural change, it may just be the recognition that that can be provided and that should have a positive impact over a multi-year 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 tailwinds to the industry as well as, frankly, to all what is primarily Medicare beneficiaries across the country over the next five, 10 years. But nothing structurally that would impact it negatively.
spk06: Once we have full staffing and we start taking in more of those Hospitals as pre-admit locations, the median will come down a bit. The average length of stay will come down a bit. So I view both of those numbers as somewhat higher based on our traditional metrics just because of the shift we had to make in terms of scarce resources and staffing.
spk07: But 17 would have still been a day or two shy of our pre-pandemic run rates.
spk04: Thank you very much. Just a quick question on the Roto-Rooter side. I noticed that the residential revenue, the water restoration component continues to be a very strong growth area and pretty much it seems like it has since your inception into that business. Just wanted to see how much room to run there is in water restoration and what's driving that continued strong growth.
spk06: Water restoration is the least discretionary of all of our segments.
spk04: So from that standpoint, there is some water restoration and kind of what's driving that continued strong growth.
spk06: Water restoration is the least discretionary of all of our segments. So from that standpoint, we expect that in any environment to hold up the best. But the water restoration, that business is 100% self-referred from sewer and drain work where we found the majority of it is from sewer and drain work from backup main lines. So that's a long way of saying this. We can't get additional water restoration unless we continue to do the core services. So it's going to come down to more match, you know, the growth rate in core services, broken pipes, and again, backed up main lines. We've built out all of our branches substantially in terms of their water restoration capability. Independent contractors, they're still building out their water restoration capability, but that won't come through a water restoration segment, just independent contractors. So that's a long-winded way of saying that is going to level off just like our overall core growth. Right.
spk02: And I would say it's mature. Something that we've seen as a good sign from day one until now is most of the water restoration work is covered by insurance. So we have the service people kind of on site saying, we can do it. And day one, Rotorua was a new kid on the block, but we had to get the insurance company to agree to pay for it. And they'd never heard of Rotorua as a provider. increasingly they're being viewed as a very, very responsible provider, very easy to work with compared to many of the competition that we run into. So the maturation level of that business will continue as we drive compliance with, as Dave said, 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 there's still some room there, but we don't want to change the characterization that it is a mature service offering at this point.
spk04: Thank you very much.
spk01: There are no further questions. I'd like to turn the call back over to Kevin McNamara for any closing remarks.
spk02: Thank you. I would just like to say that we were gratified from 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 inflationary environment, and the continuation of the program.
spk00: You may now disconnect.
spk02: And I just want to thank everyone for their attention and talk to you in about three months. Thank you.
spk00: This concludes the program. You may now disconnect. Everyone, have a great day.
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