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spk06: Thank you for standing by and welcome to the ChemEd first quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Holly Schmidt, Assistant Controller. Ma'am, you may begin.
spk04: Good morning. Our conference call this morning will review the financial results for the first quarter of 2023 ended March 31st, 2023. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors including those identified in the company's news release of April 26 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. Reconciliation of these non-GAAP results is provided in the company's press release date of April 26th, 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.
spk03: Thank you, Holly. Good morning. Welcome to ChemEd Corporation's first quarter 2023 conference call. I will begin with highlights for the quarter and Dave and Nick will follow up with additional operating details. I will then open up the call for questions. Our first quarter 2023 operating results released last night continue to show a return to a more normalized growth and operating results post-pandemic. For VITAS, normalization involves methodically increasing capacity by expanding our staff of licensed healthcare professionals. In the first quarter of 2023, VITAS added 200 licensed professionals, 60% of which are licensed nurses. Since we implemented our hiring and retention program in July 2022, VITAS expanded licensed staffing by 475 professionals. Nick will provide more detailed information on this issue later in the call. Although we continue to see disruption in our referral patterns when compared to pre-pandemic admissions, these disruptions continue to dissipate and reflect methodical improvement in admissions, average daily census, and key pre-admit patient locations. Roto-Rooter had a solid first quarter, increasing revenue 7.9% over the prior year. Revenue in the first quarter of 2023 exceeded our internal estimates, with January 2023 being exceptionally strong. March revenue was somewhat lighter than we anticipated, but still within normal patterns. Overall, demand for key services in both commercial and residential segments continue at levels significantly above our pre-pandemic demand. This is demonstrated with commercial revenue increasing 41%, and residential revenue expanding 73% when compared with the first quarter of 2019. Roto-Root continues to be well-positioned, 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'd like to turn this teleconference over to David.
spk02: Thank you, Kevin. ZCAS's net revenue was $310 million in the first quarter of 2023, which is an increase of 3.8% when you compare to our prior year period. This revenue increase is comprised primarily of a 3% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.9%, 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 minimal impact in the quarter when compared to the prior year revenue and level of care mix. Our combination of Medicare cap and other contra revenue changes negatively impacted growth by about 10 basis points. In the first quarter of 2023, VITAS accrued $2.75 million in the Medicare cap billing limitations. This compares to a $2.5 million Medicare cap billing limitation in the first quarter of 2022. Of our 30 Medicare provider numbers, 25 of these provider numbers have a trailing six-month Medicare cap cushion of 10% or greater. One provider number has a cushion between 5% and 10%, and one provider has a cushion between 0% and 5%. Three of our provider numbers do have a trailing six-month billing limitation liability. Our average revenue per patient per day in the first quarter of 2023 was $198.86, which is 100 basis points above the prior year period. Reimbursement for routine home care and high-acuity care averaged $173.39 and $1,042.06, respectively. During the quarter, high-acuity days of care was 2.9% of total days of care, essentially equal to the prior year quarter. The first quarter 2023 gross margin, excluding Medicare cap and the hiring and retention bonus program, was 22.5%. This is a 220-point basis margin decline when compared to the first quarter of 2022. VITAS's adjusted EBITDA margin in the quarter, excluding Medicare cap, was 15.1%, which is a 234 basis point below the prior year period. These margin declines are the result of CMS re-implementing sequestration, which reduced our gross margin and EBITDA margin 200 basis points. In addition, VITAS increased the licensed healthcare staff by 200 professionals in the first quarter of 23. The net increase of 200 professionals hired throughout the first quarter is estimated to have negatively impacted gross margins and adjusted EBITDA margin by 50 basis points. Roto-Rooter generated quarterly revenue of $250 million in the first quarter of 2023, which is an increase of 7.9% compared to the prior year period. Roto-Rooter branch commercial revenue in the quarter totaled $59.9 million, which is an increase of 10.1% over the prior year. This aggregate commercial revenue growth consisted of drain cleaning increasing 4%, plumbing expanding 10.7%, excavation increasing 26.2%, and water restoration expanding 7.4%. Road to the Branch residential revenue in the quarter was $169 million, an increase of 7.5% over the prior year period. The components of this is aggregate residential growth rate of drain cleaning decreasing 2.9%, plumbing expanding 3.6%, excavation expanding 3.9%, and water restoration increasing 27.4%. Rutter Ritter's gross margin in the quarter was 53.1%, which is a 37 basis point increase when compared to the first quarter of 2022. Adjusted EBITDA in the first quarter of 2023 totaled $71.8 million, which is an increase of 9%. And the adjusted EBITDA margin in the quarter was 28.8%, which is a 29 basis point expansion compared to the prior year. I will now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS Healthcare Business segment.
spk00: Thanks, David. As we mentioned in the past, we implemented a targeted hiring and retention bonus program at VITAS effective July 1st of 2022. This program is focused on licensed nurses, nurse managers, home health aides, and social workers. These one-time retention bonuses range from $2,000 to $15,000 per licensed healthcare professional. The total 12-month forward-looking cost of this program, including payroll taxes and government-mandated overtime calculations, is estimated at $40 million. All retention bonus payments are individually cliff-vested and paid out after the employee has successfully completed 12 additional months of continuous employment. During the first quarter, we expanded this licensed healthcare professional staff by 200 employees, bringing total licensed healthcare staffing expansion attributed to this program to 475. It is important to note the majority of this increase in staffing is for licensed nurses, including admission nurses. In the first quarter of 2023, our average daily census was 17,830 patients, an increase of 517, or 3%, when compared to the prior year, and an increase of 396, or 2.3%, sequentially. The sequential monthly ADC growth within the fourth quarter of 2022 and the first quarter of 2023 is very encouraging, given the timing lag of increased staffing following subsequent admissions and census expansion. In the first quarter of 2023, VITAS's total admissions were 16,179, This is a 2.1% decline when compared to the first quarter of 2022 and a 9.1% sequential improvement when compared to the fourth quarter of 2022. I'm very encouraged by the last two quarters of sequential growth in admissions. A primary driver for our admissions growth is a result of our increased capacity expansion derived from our hiring and retention program. In the first quarter, our nursing home admissions increased 6.6% and assisted facility admissions increased 10.6%. Hospital-directed admissions declined 4.9%, and home-based patient admissions declined 2.9% in the quarter. As compared to the fourth quarter of 2022, all pre-admit segments improved, with our nursing home admissions increasing 5.2%, assisted facility admissions expanding 13%, hospital-directed admissions increasing 8%, and home-based patient admissions improving 10.4% in the quarter. Our average length of stay in the quarter was 99.9 days. This compares to 104.8 days in the first quarter of 22 and 103.9 days in the fourth quarter of 22. Our median length of stay was 15 days in the quarter and compares to 14 days in the first quarter of 22 and 16 days in the fourth quarter of 22. To recap what our team has recently accomplished, We have now generated three quarters of sequential growth in licensed healthcare workers, two quarters of sequential growth in both admissions as well as ADC. We have developed what I believe is a very sustainable path to building back our capacity and patient base to pre-pandemic levels and beyond. With that, I'd like to turn this call back over to Kevin. Thank you, Nick.
spk03: Now is an appropriate time for considering questions.
spk06: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touchtone telephone. Again, if you'd like to ask a question, please press star 1-1. One moment for our first question. Our first question comes from Joanne Godrick of Bank of America. Your line is open.
spk05: Good morning. Thanks so much for taking the question here. So first, I guess, you don't plan to update the guidance that you typically do with this quarter, but can you talk about... how the quarter came in versus your internal expectations. I mean, you made a comment that photo was better on the reference side, but I guess how was VITAS and then when you, and how do you view the quarter on the consolidated basis?
spk02: Yeah, I'll take it on a macro basis, Joanna, and then flip it to Kevin and Nick for more detail. But no, our internal estimates, both Roto-Rooter and VITAS exceeded them. So we were very pleased on a macro basis with the quarter in both segments.
spk03: What I would say is, again, commentary on how the quarter came in. VITAS, we saw continued improvement in what has been a key aspect of what Nick's trying to do, and that is adding more licensed healthcare professionals. We're adding those. The expectation is that we want to add them faster then the average daily census comes in for a couple of reasons. We want to stay ahead of the power curve, and we want to build up a cushion for the end of the retention program. So that's going well according to plan. Rotorua capsule commentary, I'd say, very strong early part of the quarter. a little bit slower down, a little bit from those healthy odd days, a little slower in the latter part of the quarter. We get some questions. Is that indicative of the economy slowing down? Some of the activities that are less emergency, is that kicking in? Maybe to a small extent. It largely comes down to us taking advantage of the opportunities with experienced management. And we're still suffering a little bit in Rotorua from the fact that a lot of our managers have been hired away by private equity for various service offerings. I think we've done a good job in closing the door on that, but we're still suffering from some of the losses we had in the 12-month period preceding the recent quarter. So the capital commentary is overall good. Some expenses at VITAS that we knew about, dealing with the end of the relaxation of sequestration, adding the employees, and in Roto-Rooter, a little bit different business in Roto-Rooter. We want the phone to ring in Roto-Rooter And then we want to effectively respond to those phone calls. And that's a constant battle. But overall, happy with the results. Nick, anything to add?
spk00: On VITAS's end, just one level deeper, when we think about the expansion of clinical capacity, that continues to be a result, actually, of better performance, both from a hiring and turnover improvement, which is very encouraging. On the admission side, as I referenced, on sequential admissions growth compared to the fourth quarter, every segment was up high single digits to low single digits on a percentile basis. And the resulting days of care expansion are coming in line to beating some internal expectations. So really pleased with a lot of the granular pieces that result in some of the metrics we report.
spk05: On the last point on improving capacity, you know, adding the staff, it sounds like it's going faster than you initially expected. So if you continue out this space, right, does that change your view in terms of when you expect to be back to pre-COVID census levels? And I guess what's your latest view on that?
spk03: Well, let me start by saying, yes, generally, you know, it's a range. And to be very helpful, I'd say, yes, it looks like a little bit sooner rather than later. But, you know, it's hard to be precise on that. But, you know, it's not surprising that in this environment, if you have the staff, we have a better shot at getting the patients. You know, and that's all, you know, so the way we look at it is VITAS's internal metrics during the pandemic were worsening on a month-by-month basis. And, you know, it was inevitable what was going to happen to the ADC. You know, it's just we're on the other side of that. You know, it's almost just as inevitable on the improvement on ADC as, you know, as it is once you have the staff. And we have not done, I know we're not being coy, we haven't done precise calculations as far as when the, you know, when, when we're going to get back to, let's say, our pre-pandemic ADC level. But if we wanted to invest in an algorithm, it probably could come up with a pretty good estimate, but not too much use for that. But that's one of the reasons why, to compare and contrast, we mentioned about Roto-Rooter. I mean, it's such a difference. In VITAS, we're fighting very hard to get back to where we were at the start of the pandemic. In Roto-Rooter, Residential sales were up 73% from that period. So it's a tale of two cities, and people are making progress at a good, solid pace.
spk00: Directionally, if we were to say, is it faster today than what we would have anticipated four or five months ago? Obviously, I think that answer is yes. And the bottom line is, if we can continue to win... the war on talent, which is very thoughtful, and we have the demand there for that talent to admit and care for patients, which we do. It's just a question of trajectory, right, at this point. So, you know, as long as we can continue to do that, whether it's 200 a quarter, whether it's 250, whether it's 150, you know, we are right now in... many of the markets in which we operate, the teams are being very successful in that, and it has a compounding effect for existing staff and their level of satisfaction in what we're able to do for the community. So, you know, really, really excited about the compounding morale and cultural impact that comes with that.
spk05: And I guess I would like to, you know, expand on that. staff and how it translates into census to your point that you've seen this nice sequential growth. So would you characterize it as it's also been happening faster? I mean, you have a guidance, you know, for the full year, and I guess prior comments were that, you know, expect more of the census growth in the second half of the year. So this 3% growth year over year this quarter, was it better than expected or kind of... way you've been thinking previously when it comes to the full year.
spk02: This is Dave. It's gone better than I expected. As you remember, when we developed the business plan, we conservatively estimated we'd add 25 net increase in licensed health care workers per month, 75 per quarter. And obviously, we've been beating that. In all three quarters, we had the hiring and retention program almost tripled at what we did in Q1. So I guess what we're trying to avoid, but is having a line in the sand of when we get back to normal. But I'll stick my neck out a little bit and just say if the current rate of capacity expansion continues and running more like 50, 75 increased licensed healthcare workers per month, 200 plus per quarter, in 24 we'll return to our pre-pandemic census. But that's a big if the rate of expansion of capacity continues at the same pace. And David, it's interesting because
spk03: because of the lag, we'll be at a pre-pandemic licensed healthcare professional level months before with the census level.
spk02: Almost by definition, yeah. And that's what's straining our margins now is we have to build capacity before it contributes to census, and then that census is negative margin until they've been in program for about 30 days or longer, that incremental piece. So That's why we're having margin pressure today, because we're building back capacity, but that capacity, as Joanna, you pointed out, is getting to work pretty quick the subsequent quarter, much faster than we first anticipated when we put this program in place in July of 22.
spk00: So nothing changes regarding timing expectations inside of the year related to that, but really excited of getting off to a very fast start.
spk05: No, definitely a good fraction there for sure. And I guess on other topics, on Vita's side in terms of Medicare, right, so the proposal that came out calls only for, you know, 3% market basket update, which is worth in the 4% in 2023. So kind of what is your expectation there? I know on the last call you said you would assume, you know, it should be more close to like 5%. So obviously well below that, but is there a reason why you would think that the final rate update will be better, similar to what happened last year, or are we kind of back to maybe not much of an improvement and you're going to have to deal with the 3% market basket?
spk02: And what I would say, Joanna, as we talked to a number of shareholders and analysts, we put a number out in the fourth quarter of what we think the minimum should be given inflation within the hospital wage index basket and what the hospice industry is experiencing. CMS has basically been caught using what I would call forecasted data that may be historically forecast and actual turned out to be pretty similar in terms of inflation by component. But with the spike in inflation that happened over the last 18 months, it is It appears from our perspective that CMS uses forecasted data that is badly below actual inflation, and they never drew up from forecasted to actual inflation measurements as done by the Bureau of Labor and Statistics. So CMS has been caught lagging the increase, and it really hasn't been noticed, though, because forecasted and actual have been running pretty low, 2.5%, historically for, what, a decade plus. Now inflation is running through health care more significantly, and CMS, I think, has been caught not passing through true inflation. And that's why MedPAC issued two separate reports in March of 23 and April 23, frankly pointing out how badly flawed the market basket CMS is utilizing because they are not accurately analyzing measuring appropriate inflation in healthcare models. And it is a problem, and we will do just fine. We have scale, so we have leverage, so we end up with the upper quartile of adjusted EBITDA and gross margins. Most of the competitors in hospice are small, not-for-profit hospices, many in rural markets, who lack the scale to have really good margins, but to provide the needed care, they're getting squeezed, Joanna. And if CMS does not fix this issue of not passing through appropriate inflation reimbursement increases, capacity for some of our small competitors will shrink and access to hospice, in rural markets specifically, will be limited. So we are pointing out, painfully, if CMS does not start approaching hospice and giving increases in inflation, the smaller hospices will struggle and probably go out of business.
spk03: Which is also, just to add here, but no, we don't anticipate a significant change from the preliminary number at this point. And, again, it doesn't, you know, we're, this gives us our marching orders, and... In the fourth quarter, we tried to send the message out to CMS and the market as far as what we're observing as far as the inflation factor for hospice. But again, from I think some poor structure with regard to the adjustment mechanism, it comes out as probably 2.8, which is No one thinks that's what the inflation factor is in the wage market for hospitals and hospices.
spk00: The only other piece to highlight is, you know, I think it is better understood inside of D.C. now and being openly advocated for and debated not only within the hospice segment, but just as importantly within the hospital segment and those trade associations since we're a paid against that hospital market basket index, as everybody knows.
spk05: This proposal, there were other things included in there around increased service, more oversight, some questions there from CMS, and also even a higher penalty for those not submitting the quality data. you know, context. How is VDAS positioned there? Do you expect to look at some assets maybe that will be there to be acquired as they look to, you know, kind of to your point, scale up? And would VDAS kind of act on that? And I guess for these increased surveys and other things in the reg, I guess, you know, also how VDAS is positioned there.
spk00: Donna, just to speak to that, many of the things, and I'll bucket it as program integrity and We are in support of, as well as the trade associations who had made those joint recommendations on behalf of their membership, to be proactive in the way in which the government could go thinking about helping the industry and supporting longstanding mission-driven providers. The issue is more abuse. of expansion of licenses that are not providing care in local markets, heavily concentrated in four states, including California. And so some of the pieces they're talking about of expanding penalties to 4%, et cetera, first and foremost, don't have applicability to VITAS. We conform and comply with everything on day one. And some of those providers that would be impacted by it wouldn't necessarily become acquisition targets because they're not submitting the data because they're not caring for patients, therefore they have no real strategic value from an acquisition standpoint. There's some actions that can be taken to clean up optics of provider expansion that wouldn't impact members inside of the community, and I think that's really what a lot of those items are focused on, not the fact that something is wrong with the benefit or that there's quality concerns around going back to mission-focused, long-standing providers that are actually providing care in the communities.
spk05: Thanks for the call here.
spk06: Thank you. Again, if you'd like to ask a question, please press star 1-1 on your touch-tone telephone. One moment, please. Our next question comes from the line of Ben Hendrix of RBC. Your line is open.
spk01: Thank you very much. I was hoping you could give us your thoughts on the Medicare cap runway. You had shifted your referral strategy amid staffing shortages, which you noted could eventually press cap limitations. Any update on the cap trajectory overall now that hiring capacity is opening back up? Thanks.
spk02: Yeah, Ben, this is Dave Williams. Of course, during the pandemic, we were actually stayed out of any significant cap problem because although our admissions had dropped, our revenue dropped as well, and specifically a shift to less high-acuity care as we were capacity-constrained. So it's actually the drop in that high-acuity care that really gave us room under the Medicare cap building limitation liability. So during the pandemic, we were actually just fine, and many programs had actually expanded. However, there is a limitation, and we can't have length of stay go up indefinitely. And that's why we were, as we would have expected in our modeling, we actually saw our average length of stay drop below 100. What was that, 99 days? And now at 15, median length of stay, too. That's kind of been our sweet spot. We're historically pre-pandemic at average between 14 and 16. So it's a long-winded way of saying is we've avoided any Medicare cap billing limitation with a drop in admissions because we had a drop in high acuity care. Now that we're back to admissions growing, and actually now that we're back to slowly increasing our presence in hospitals as a pre-admit location of referrals, we should be back into expanding admissions and once again being or continuing to be nicely below the billing limitations. But it would have been a problem if we didn't start growing admissions with capacity expansion. That's what we've done now basically for three quarters. So I think... Medicare cap as a risk continues to dissipate except in California where we have exceptionally high reimbursement geographically, but the Medicare cap protection is a uniform rate throughout the country. So high reimbursement markets continue to run a bit of risk on Medicare cap billing. On the other hand, even with Medicare cap and the two programs we're watching, they're very, very profitable. We don't anticipate Medicare cap being a material issue. Certainly in 2023.
spk00: And just to reinforce it, I want to go back to sequential admissions growth in the hospital pre-admit segment, fourth quarter to first quarter was up 8%. So while we talk about it from a community access, we still are servicing all of our key partners in the market, including the hospital segment. That helps to provide a data point and a full agreement around the lack of concern. Correct.
spk01: Great. Thanks for that. And clearly better than expected progress on the hiring front. Any change in your thoughts on how retention shakes out on those new hires and any chance that you could re-up the retention program with more funding to address that?
spk03: So let me start by saying, let me start by saying it's, you know, we've been pretty clear that the program was to address some historical, I mean, not historical, but things that were happening for the first time in history. Again, accountants don't like to say one-time events, but we do not anticipate reinstituting a different retention program, making it permanent. Our view was for one moment in time, and it seemed to, we put it in, we waited for an inflection point, We put the system in at that point. It's had great success, but it's, you know, I think at a certain point it becomes self-propagating. I mean, there's an element that Nick said. You know, to the extent that you have more staff, everyone who's on your staff is happier and thinks that the company is doing a better job and people are not wrapped around the axle. So, yeah. To the extent that you have those forces working with you, we do not anticipate continuing it. Now, having said that, I can't imagine any set of circumstances where we'd continue it. I don't want to sound doctrinaire on the point and say if there was some reason that made abundant sense to reinstitute another program, we would do it, but we don't see those facts lining up to be in the realm of possibility.
spk00: Just a little more color with that been don't don't see that as a need, while we talk about it on these calls as though it's a singular item driving it, there is a large subset of well north of a dozen plus other complimentary pieces. That also contribute to you know a lot of the metric improvement and obviously we track both you know hiring turnover satisfaction on a bunch of different layers. And all those things are directionally improving. And so that tells me the program itself has been very beneficial. But in the same regard, you know, getting back to a lot of our more, you know, normalized pieces, but also making sure there's sufficient time being spent, you know, recognizing, rewarding, celebrating employees, highlighting the mission of why People join hospice, but also what makes VITAS special in that situation is all a real compounding effect that's helping these things in a substantial way and makes it sustainable. That's why I can use the word confidently sustainable on a go-forward basis.
spk01: Thanks for the comments, guys.
spk06: Thank you. I'm showing no further questions at this time. I'll just turn the call back over to Kevin McNamara for any closing remarks.
spk03: Well, I just wanted to thank everyone for their kind attention, and we're very comfortable with the results, and we'll get back about three months from today and report on what's going on presently. Thank you.
spk06: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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