Good morning. Welcome to Oppenheimer's 35th Annual Healthcare Conference. I'm Michael Wiedehorn, the Healthcare Services Analyst. It's my pleasure to introduce Chemed Corporation and CEO Kevin McNamara, CFO Mike Witzeman, and CEO VITAS Nick Westfall. Welcome.
Thanks, Mike.
Thanks, Mike. Great to be here.
Thanks, guys. Thanks for attending virtually. Always appreciate it. As we, you know, are in the middle of, you know, coming out of Q4 into Q1 here, you know, can you, you know, talk about what you're seeing from Vitas coming out of Q4?
Sure. I mean, I think overall, it's pretty consistent in line with how we, you know, what we expected when we put together our full year guidance for 2025. You know, overall volumes are still continuing in line with the relative range in which we predicted, and all the other variables that are going in are falling in nicely as we sort of, you know, continue to operate on what we've deemed as our new normal on a go-forward basis. I think the only other piece that has changed, which isn't operating metrics, but some, you know, positive news and recognition on the regulatory front with, you know, acknowledgment by CMS that they have effectively pulled the special focus program for this calendar year.
For all obvious signs, it'll go back into sort of a rulemaking discussion and hopefully get it right for the industry long term. Steady as she goes, consistent with what we had forecasted, and, you know, full steam ahead.
Yeah, Mike, we continue to be pretty, you know, optimistic about the prospects for Vitas in 2025 and beyond. I think we're happy with how Vitas is operating at the moment.
You've been seeing really strong emission trends of recent. Where do you think, you know, volume growth settles out over the next 12 to 18 months?
I think for the most part, it's right in line with the census guidance in which we provided, you know, 8.5-9%. From an admissions trend standpoint, we'll see a slightly different mix that we've been talking about for six to eight months with probably a higher percentage overall of patients coming from hospital, from a pre-admitted segment across our entire enterprise. Traditionally, and on average, those will have shorter length of stay. It adds a little bit of compression to a 2024 volume growth rate. All in all, it's, you know, 8.5-9% ADC supported by the right complementary admission trends and, you know, leading us into our overall guidance of, you know, 10.5-11.3, I think, top line blended from a revenue standpoint.
If you see, you know, I think the 8.5-9% is still significantly above our historical average. So, we're, you know, we're very happy with that level. And as Nick said, the difference between the 2024 and 2025 growth rate may be something you might get to, but specifically relates to the Medicare cap. And absent that one specific limiting factor, we could probably still get to that 2024 growth rate, but that's a limiting factor for the whole industry. So, 8.5-9%, I think, is a sort of a repeatable sort of long-term look at where we think we can grow sustainably.
Yep. What do you think, you know, obviously, like you said, the numbers have come up, the growth numbers have come up. What's been driving that? What do you think, you know, kind of when we think about the industry from a whole, is it, is there more understanding of the benefit, just the aging of the population, you're taking share, kind of what's, you know, what's, you know, I think the drivers behind this?
It's going to be the combination of all things. Like in many cases, it typically is. The overall demographic shift obviously is in the industry's favor when you just look at, take the baby boomer generation and particularly where they are from an average age standpoint. And hospice, as I think everybody will know on this call, tends to bring patients on service in the early '80s. That's a primary driver. You know, there's a recognition of the benefit and understanding of the benefit. MedPAC just released their latest numbers on Friday that illustrates, I think it was 51, 51.7 total beneficiaries, you know, elected the hospice benefit and most recently completed 2023 cap year. So, you have the normal drivers around acceptance.
I think the thing that excites us for the next 10 years is not just that demographic, but earlier access into the benefit and the recognition now that earlier access into the benefit not only means better quality outcomes for patients and families, but elevated savings for the Medicare Trust Fund. From a policy standpoint, that becomes just so critical and has rebaseline, particularly with the new administration that's looking for ways to improve healthcare, but do so that's accretive to the overall Trust Fund as well as, you know, bending that cost curve. Hospice sits squarely in the right place for that discussion. We hope that, you know, policy awareness, all small tweaks will move in favor of more hospice, earlier hospice across the country.
That makes a lot of sense. From a Trump 2.0 administration, you kind of see this as kind of not under a dark cloud here. You think you're very well positioned. You don't see potential areas for, you know, cuts or, you know, obviously Medicare continuing to be in the crosshairs of conversation.
I think like everything, there's always the potential for misunderstanding. I think from a consistent positive messaging and general acceptance and belief of what we just stated around the hospice industry being one of the solutions for the Medicare Trust Fund, it's in a really good place. There was a, you know, Ways and Means Subcommittee meeting on post-acute last week. All the commentary from all of those committee members was, frankly, very positive towards hospice as it related to the overall post-acute segment.
We think as an industry, the advocacy work that has gone on for the last three to five years in particular, the new consolidated trade association, all those things hopefully allow the industry to be much more proactive and confident in all the dialogue that's supported with independent data to put us in a really good spot as an industry over the next, you know, decade plus.
I think, Mike, our only hesitation or our only concern is, if you remember in 2013, if, you know, there was a 2% sequestration across the board on Medicare. If, you know, if the DOGE or something happens and they take a hacksaw to Medicare versus a scalpel, that could affect us, but we do not hear anything that causes us concern on that front at the moment.
Perfect. Thank you. You mentioned, you guys kind of mentioned cap earlier. You know, can you kind of, you know, obviously you're getting, like you said, more short length of stay, emissions and so on. Can you discuss the cap pressures you're seeing in Florida and, you know, what you were kind of mentioning on what's the plan to increase emissions at these programs and how should we think about cap exposure across your entire portfolio?
In Florida, I think it's been a bit of a progression. We start with in the pandemic, the longest length of stay patients were the ones we were losing because we didn't have access to those pre-admission locations in many instances. During the last two, two and a half years, Nick and Kevin, we've talked a lot about the community access program that was specifically designed to start taking in those completely appropriate patients from those pre-admission locations. We were intentionally increasing our length of stay. In 2024, we knew, we saw, you know, early in 2024 that we were going to have to moderate that a little bit.
That got exacerbated to some degree by the rate differential that we talked about that came out, I think in April, maybe April or May last year, where there is almost a 200 basis point difference between the cap protection number increase versus our rate increase in Florida specifically. That made the issue a little more urgent for 2025 than we had originally anticipated. That is sort of the progression of where we are. As you say, we have talked about it, but we need to take in, you know, more hospital admissions. It is not a huge sea change. We had last year roughly 45% or 46% of our pre-admission location admissions were from hospitals. That just needs to get back to its more historical 50% or 51%.
It is not a huge change, but it will compress the growth trajectory we saw in 2024 to still an above-average growth trajectory for sure, just not quite the record level of 2024.
Yeah. Mike, on the admit side, we've been very encouraged by the fact that in the last three cycles, we've got additional CONs in Florida, which obviously there's some time in developing them, but Vitas has a history of hitting the ground running on those and was providing a lot of room for growth as those develop and, you know, from a standing start, let's put it that way. That is very encouraging. The only thing to probably button it up all around is just as a reminder, every year, the ongoing balance and management of Medicare cap in every market with unique CVSAs is part of our ongoing forecasting standpoint and our analysis.
I purposefully and intentionally made some comments on the last earnings call that just sort of highlighted how the Medicare cap in general, and this is still just philosophical, when it was put in place in 1983, you know, when the benefit got enacted to just try to protect what was intended to be a desirable benefit, you know, it was 100% cancer patients at that point. Now, as we can all see, the hospice benefit has really expanded access and understanding across the board for every diagnosis.
When you look at earlier access or longer length of stay into the benefit for every disease state, as evident in the NORC study, that saves and elevates the total cost of care savings for the Medicare Trust Fund, it is sort of counterproductive to put a limiting factor like Medicare cap in place for providers where, you know, the argument is the earlier access, the more money it saves the Medicare Trust Fund. Why try to put something in place that limits that earlier access or on a total weighted average? It is also one of the things that has been in place for, you know, 40-45 plus years at this point. Every provider is used to managing through it.
One year, maybe the circumstance in which we're talking about, the next year, the price increase for that CVSA may be lower than the overall national average. Therefore, it generates a cap cushion on October 1 just because of the math associated with the national cap rate compared to the individual markets. It's a year-to-year evaluation, but it's minor in terms of just shifting strategies on a market-by-market basis.
I think you also asked about the trajectory everywhere else. I think it's steady as she goes. The place we've historically had cap is in California. That's just a difficult rate environment. There's just fewer days that you can bill in California based on the higher reimbursement rate there, based on the higher cost of living. That will always be a tougher cap environment. That's sort of steady as she goes. That's what we've been, as Nick said, managing for years now. Everywhere else is pretty steady. It's Florida that's really the focus of what we're looking at.
Kevin, you mentioned the CONs and de novo actions in Florida. Kind of, you know, kind of take us, you know, kind of the ramp up there and economics of these locations. How's that going? Kind of, you know, just give us a kind of a, you know, status of where that's at.
Ramp up wise, I'll keep using the new normal term. The last five years, we've really looked at elevating our ramp up performance and entry approach on a market-by-market basis in every new market. Florida is where the vast majority of the de novos have lifted up. It's been extremely successful. The point is we'll have teams in place months before we effectively get the authorization, building relationships, building awareness. In Florida, where there's better and broader brand awareness, it just really helps to, the lesson we learned is we tend to have far more demand than we ever anticipated on day one. We better have all the team members and clinicians to care for those patients. We've matched those two things up.
It has really led to a ramp up in our last few CONs that are, you know, every one is a new record setter from the last one. Where we are currently, you know, we have Pasco County that has just been recently lifted up. That is going well. Every market has its own, you know, unique opportunity embedded inside of it. We are moving forward with Marion County that has full clearance and authorization that has occurred since our last earnings call. We are excited to get into Marion County over the next few months. We think that one is very attractive because we serve all the surrounding counties around Marion County. We get a lot of patients already that leave Marion County going into the territories in which we are, you know, they go home, right? They are crossing the county lines and we are caring for them today.
We think that is, that's a very exciting one for us for the second half of 2025 and into 2026.
Including the, expect The Villages.
Yeah, the village, everyone's pretty familiar with The Villages, the largest, you know, retirement community, at least in the country, if not the world. Yeah, The Villages are smack dab in the middle of Marion County. We are very excited about it. Ramp up time and curve and how it translates economically, you know, we do not think it would be substantial to overall earnings from an EPS standpoint in 2025. As we go back to Medicare cap as an example, every, you know, every Medicare admission that we are receiving for the most part there is a first-time Medicare admit without any census related to it. It is very accretive as it relates to generating Medicare cap cushion for the first, you know, three years of any new CON.
For guidance, Mike, and Nick touched on it, neither of them are going to be material from a top line perspective for 2025. They both will probably have some level of operating loss in 2025, not material there either. That is all sort of worked into the guidance. It is probably 2026 before we maybe see them turn profitable. As Nick said, for 2025, by far the largest impact is going to be Medicare cap.
Right. Perfect.
The ramp up, the ramp up costs were already assimilated into our budget for 2025. The costs were there. It was just an expectation on volume, like I mentioned, because we would have, whether we open in, you know, May or June or whether we open in September, our ramp up cost piece looks very similar as we get the teams prepared, hired, offices set up, leases, et cetera, just to be off and running on day one.
Perfect. Just to be fair on time here, I'm going to move over to Roto-Rooter, even though I can continue to ask another 15 minutes worth of questions on hospice. You know, obviously Roto-Rooter has been a little bit, you know, uneven over the last 12, 18 months. You know, definitely some pressure over there. Can you kind of give me your updated thoughts on, you know, the positioning in 2025 coming out of last year, kind of where you're at at this point in time?
You see from our guidance, Mike, we're encouraged by certain recent develops. And by way of summary, you know, starting in the second quarter of last year, what we saw developing at Roto-Rooter was really a sales problem, a top line problem. You know, we've talked a lot about what caused that, you know, the recovering from the pandemic, having home services being so good during the pandemic that drew a lot of private equity money into it. We saw a very uncertain market for bidding for space on Google. All those things happened. We saw a significant decline in the number of calls that Roto-Rooter was getting, you know, quarter on quarter. We took a number of steps to combat that. In addition to that, we saw that Google has evolved, you know, over the last several months.
That is, you know, they had a loss leader program, which is to attract more people onto the network called LSA, where they basically, it was a bargain price. Just slowly over the last three quarters, that slowly, I mean, the cost of that has more than doubled over the period. Again, a little less competition there. The bottom line is that we have, you know, we observed for really the first time in the whole time we've owned Roto-Rooter since 1980, a top line problem. Normally at Chemed, the number one focus is margin and profitability. We had to shift gears a little bit and say, you know, we had to have the creek rising and that we had to focus more on sales.
To the extent that I would say stage one for us is improving the top line, which Roto-Rooter is doing. Over the last couple of quarters, we've said, we've had some comments saying, yes, but your margin is not as high as it previously was. That is the case. That is kind of stage two for us, improving the margin. Also, part of it is part and parcel of the fact that part of our focus has been on commercial. Commercial has always been a little lower margin, a little tougher competition, a little situation for bigger jobs. You almost get second and third competing bids. Roto-Rooter, again, you know, based on our guidance we've made, has encouraging results for us, not out of the woods compared to the healthy days of the pandemic. I know I'm encouraged. Mike, what would you say?
Yeah, Mike, I would say there's, I think there's a fundamental difference maybe with the guidance we gave for 2025 versus what we had talked about for the guidance in 2024 around this time last year. I think the guidance last year was based at least somewhat on us thinking that the economic environment was going to improve. That didn't turn out for us. This year, the guidance in 2025 is much completely based on some of the things Kevin talked about, specific management programs that we've put in place in 2024 that are showing results. Kevin talked about commercial specifically, and commercial is going to be the outsized driver for revenue growth in 2025.
The other thing that we've talked about is conversion rate from the calls we do get for residential, converting those into water restoration and excavation jobs when appropriate, just a higher rate of conversion there. We have seen some improvement there in the latter half of 2024. Our confidence in 2025 comes solely from the fact that the improvements we saw, say, in the fourth quarter were driven by management programs and initiatives specifically. Said another way, baked into the 2025 guidance is really no expectation relating to improvement in the market itself.
Okay. Yeah, it sounds like obviously commercial business is coming back faster than the residential business. You know, can you discuss what you, you know, kind of, you know, kind of the, I guess, the seasonality or the cadence of that, of the commercial versus the residents? I guess, you know, also on another part, I saw, you know, part of the rebound was, like you said, you saw improvements in the water restoration business. Are there further opportunities there as well? Are there similar practices that might, you know, be able to help other locations in addition to what you did previously?
Commercial is probably less dependent on seasonality. Those are, you know, large apartment complexes, McDonald's, you know, multiple McDonald's franchises. And they're going to use this multiple times a year based on issues they have. I would say commercial has some dependence on seasonality, but not nearly as much as residential. Residential has seasonality, of course, in cold weather months. Fourth quarter and first quarter are usually our highest revenue quarters. Cold weather and wet weather is good for us. Ultimately, that tends to sort of even out over time. We're encouraged at the overall strength of the underlying metrics more so than specific seasonality issues. Talking about water restoration, that's where we were talking more about residential.
Essentially, if you remember, Mike, earlier in the year of 2024, we talked about a specific initiative we took in commercial where we looked at eight underperforming branches and really focused on those and tried to pull through some specific actions in each one of those eight underperforming branches. Roto-Rooter went through a similar playbook then early in the fourth quarter on water restoration for residential in eight branches they saw that were underperforming from a conversion standpoint. Water restoration is almost exclusively determinant based on first to the customer's door. We want to get there before they call their insurance company. If we can do that, we are very, very good at closing the deal. If they call the insurance company first, it is much less likely that we will get the work.
There was a specific management process undertaken for eight underperforming branches, and those really improved in the fourth quarter and continued to show positive momentum in the first quarter of 2025.
Mike, one thing, just to put in perspective, we talk about how we improve the business without the macroeconomic situation changing or even the competitive landscape on, you know, on Google. I'll just use this as a basic example. You know, something that Roto-Rooter has not done and has not a lot of emphasis on has been commercial excavation. One of the reasons is that it's highly competitive. They're bigger jobs. In other words, some are huge jobs and not necessarily the bread and butter of Roto-Rooter's excavation business. Just order of magnitude, what we view as a lead, that is where our technician has, through camera work or what have you, determined that this is a possible excavation job. The, you know, the conversion rate for those type of jobs historically has been about 8%.
In other words, it's a tough market to get those. Through this emphasis, you know, over the last six months, it's been 11%. In other words, you know, we've been looking at the margin. We've been more competitive on our bids, but we're having significant improvement in that type of thing. We still have a long way to go. I mean, just out of single digits, there's no reason why, you know, in time we can't approach our, you know, the same conversion rate that we see on the residential side. That's an area where, you know, that's the method by which we're pulling ourselves out of the situation.
By virtue of the size of those commercial excavation jobs, it's much more likely that a potential customer would go out and get three bids and those sorts of things. We have had to really look hard at, as Kevin mentioned, the pricing of those jobs and maybe, you know, give in a little bit on our premium pricing model, a little bit, not hundreds of basis points, but, you know, give in a little bit to get that job.
We're getting the job.
We're being more successful getting those jobs.
Perfect. One more question on Roto-Rooter. You know, you talked about private equity, you know, in the past, you know, being more competitive, continuing to ramp up their spending. Is that starting to slow down? What are you seeing from that perspective from a competitive environment, you know, from the PE shops?
Let me give you one example. We recently did a secret shopper, just so that as confirming this, but there seems to be in many cities almost a price war for the basic drain cleaning. An example in Cincinnati, at least three businesses, usually HVAC businesses, which have been purchased by private equity and they've expanded into plumbing or been in plumbing, but dramatically increased their emphasis on it. We see these companies basically bidding more than Roto-Rooter for placement, you know, on Google. We look at our placement costs and we see that, you know, we're middle of the road. We shoot to be number three, two or three in the bidding. We're happy if we're on the first page. You know, coupled with the name recognition of Roto-Rooter, that usually serves us well.
We pay in excess of $90 per click, okay, for our placement, which is third. It usually takes us, quote, a click and a half, you know, to get a job. Okay? We know what our Google costs are. Our competitors are advertising that they'll clean any drain, and there are three of them in Cincinnati, and it varies from $78 to $99. We had somebody who had an actual, you know, drain problem. They contacted one of our competitors and they came out and they cleaned the drain for $99, or excuse me, for $91. I mean, obviously they paid more, and it was a Google click. You know, they got the job by base, you know, from Google. We say, that does not sound like sustainable competition to us.
You know, they're obviously looking to establish a name in Cincinnati, but if they paid, you know, in excess of $100 to Google for the job, paid a service person to come out and do the job and hope to report profit on it, I mean, again, that gives you some indication of the level of competition. Is it ruinous competition? Is it a race to the bottom for them? I think it may be, as you know, like over the years, we do not advertise price. We don't give price over the phone. Somebody contacts us, they say, how much is it? We say, look, we said something we don't know. We have to analyze the situation. We'll go out, we'll examine it. We'll give you a written free estimate. You're under no obligation. If you want us to do it, we'll do it.
I mean, that's how Roto-Rooter has conducted business, you know, for their entire existence. We feel that, you know, especially on the residential side, that it has a dampening effect on Roto-Rooter's residential business to have, you know, that typical, you know, that type of competitor out there advertising and providing service at a loss. You know, it's heartening for us too in that if that's the best they can do, that is compete with us by making no profit or operating at a loss, we think we'll be fine. It's just a matter of how much, what the investment horizon, if they really think they can sell the business based on a multiple of top line, more power to them. Ultimately, you have to make a profit and provide the service.
One last question here. We got like 30 seconds. You know, always a good question for you guys, capital deployment. You know, that's always been something, you know, I always kind of watch what you guys are doing. You guys have always been very intelligent in terms of the use of capital. Just kind of your last, you know, thoughts on that.
The playbook that Kevin and my predecessor, Dave, put together on capital deployment, that has not changed. You saw in the fourth quarter, we saw a dip in our stock price. We saw interest rates coming down on the cash we had on the balance sheet, and we took a bigger swing at buybacks. As always, our first priority would be accretive acquisitions like we did at VITAS with Covenant last year. We will always do some level of share buyback on a quarterly basis. We think that's the right thing to do from a free cash flow standpoint.
Essentially at the moment, no matter what the stock price is, we're bullish enough on both of these businesses over the next 12 to 24 months that it's going to look like a good deal from a return standpoint on a risk-free basis, essentially no matter what price we buy at at the moment.
Perfect. We're out of time. I appreciate your time today. Always participating and love hearing a story. It sounds like everything's on track. Like I said, thank you. Thanks again for all your time.
Thanks, Mike.
Thanks, Mike. Kevin Goodwin.