Chemed Corp

Good morning. Our conference call this morning 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 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 these 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. Your caution 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 23rd, which is available on the company's website at ChemEd.com. I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of ChemEd Corporation, Dave Williams, Executive Vice President and Chief Financial Officer of ChemEd, and Nick Westfall, President and Chief Executive Officer of ChemEd's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Holly. Good morning. Welcome to ChemEd Corporation's fourth quarter 2022 conference call. I will begin with highlights for the quarter, and Dave 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 Rotary. This resulted in ChemEd reporting 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 $19.50. Our 2022 results were excellent given operating headwinds that developed and 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 that inflation has had on some consumer spending decisions. For VITAS, these 2022 headwinds included Medicare re-implementing sequestration, resulting in a raw revenue reduction of approximately $15 million, and an industry-wide disruption related to staffing licensed healthcare professionals. Since we implemented our hiring and retention program in July 2022, 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, or ADC. The 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 ADC. This nursing home census expanded an additional 128 basis points to 16.4% in 2022. Our 2023 guidance anticipates continued improvement in senior housing-based census. For Ritter-Ritter, higher inflation throughout 2022 did marginally impact our revenue growth on the small portion of services that could be considered discretionary. We consider the vast majority of demand for road and river services as non-discretionary or emergency-based. Water restoration is an example of 100% non-discretionary service. Water from broken or backed up pipes must be removed immediately to avoid significant mold and water-related damage to the structure. Some road and river services could be considered discretionary or potentially deferred by the customer until the problem becomes more severe. As an example, a customer's collapsed main line is a non-discretionary excavation service. The failed sewage line must be replaced for the homeowner to remain in the residence at a replacement cost of approximately $3,000 to $6,000. A sewage main line with significant tree root penetration should be replaced as well. However, a temporary fix is possible by using a rotary steel cable machine to chop clear the tree roots from the main line for approximately $400 to $700. This lower cost fix is temporary as roots grow back into the perforated main line in about 9 to 15 months. The customer will then have to pay for the solution line to either be cleaned again or permanently replaced. 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. Roto-Rooter services are primarily emergency-based and non-discretionary. Our ability to respond faster than the competition is a significant competitive advantage and will continue to provide Roto-Rooter with the ability to increase market share. With that, I would like to turn this teleconference over to David Williams.

Thanks, Kevin. VITAS's net revenue was $308 million in the fourth quarter of 2022, which is a decline of 2.5% when compared to the prior year period. This revenue decline is comprised primarily of a 2.8% reduction in our days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 3.2%. partially offset by 200 basis points as a result of CMS re-implementing the 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 contra-revenue changes negatively impacted revenue growth by 30 basis points. In the fourth quarter of 2022, 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's 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 5 and 10 percent, and four provider numbers have a trailing 12-month billing limitation liability. The fourth quarter 2022 gross margin, excluding Medicare cap, in our hiring and retention bonus program was 26.9 percent. This is 135 basis point margin decline when we compare it to the fourth quarter of 2021. VITAS has reversed the severe attrition of our licensed healthcare professionals that began during the pandemic. This is evidenced by VITAS expanding our licensed healthcare staff by 275, coinciding with the launch of our hiring and retention program beginning on July 1st of 2022. This higher staffing increased 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 189 basis points below the prior year period. Again, the adjusted EBITDA margin was negatively impacted by 200 basis points for the reimplementation of sequestration and an additional approximately 141 basis points due to the increased staffing and patient capacity from VITAS's hiring and retention program. Roto-Rooter generated revenue of $239 million in the fourth quarter of 2022, an increase of 6.1% when compared to the prior year. Roto-Rooter branch commercial revenue in the quarter totaled $58.6 million which is an increase of 8.7% over the prior year. Aggregate commercial revenue growth consisted of drain cleaning increasing 5.5%, plumbing increasing 13.8%, excavation expanding 5.1%, and water restoration increasing 27.3%. Commercial revenue is showing excellent growth in the fourth quarter. Road-roader 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 decreasing 2.1%, plumbing expanding 7%, excavation expanding 4.9%, 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 have modestly impacted the revenue growth of some of our excavation work over the past several quarters. To illustrate this, let's take a look at growth in excavation for the past five quarters compared to the equivalent prior year period. In the fourth quarter of 2021, residential excavation revenue increased 12% over the prior year. In 2022, quarterly excavation growth was 5.9% in the first quarter, a slight decline of one-tenth of 1% in the second, an increase of 9 tenths of 1% in the third quarter, and growth of 4.9% in the fourth quarter of the year. This excavation 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 excavations become bigger problems for our residential customers. Roto-Rooter's 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 adjusted EBITDA margin in the quarter was 29.0%, which is 138 basis point improvement when compared to the prior year. Can that on a consolidated basis? During the quarter, we repurchased 25,000 shares of Kemet stock for $13 million, which equates to a cost per share of $519. As of December 31, 2022, there was approximately $88 million of remaining share repurchase authorization under our plan. 2023 earnings guidance is as follows. VITAS's 2023 revenue prior to Medicare CAF 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 sequestration relief in the first half of 2022 compared to full sequestration in 23. Average daily census, or ADC, is estimated to increase 3.5% 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 one-time bonuses for hiring and retention initiatives announced last year is estimated to be 16.3% to 16.6%. And we're currently estimating $11 million for Medicare cap billing limitations in calendar year 2023. The guidance includes increased wages related to expanding our staff of licensed healthcare professionals at a rate of about 25 licensed healthcare workers per month. The 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 5% to 5.5%. 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 non-cash expense for stock options, tax benefits from stock option exercises, and costs related to litigation and the retention program, and other discrete items, is estimated to be the range of $20.75 to $21.10. Adjusted earnings per diluted share should approximate our free cash flow per diluted share. Current 2023 guidance also assumes an effective tax rate and adjusted earnings of 25.1% in a diluted share count of 15.0 million shares. I will now turn this call over to Nick Westphal, President and Chief Executive Officer for VITAS Healthcare Business segment.