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Chemed Corporation (NYSE:CHE) - A Comprehensive Look at the Leading Provider of Hospice and Plumbing Services
Published on September 24, 2024 | Ticker: CHE

Chemed Corporation is a diversified healthcare company that operates through two wholly-owned subsidiaries - VITAS Healthcare Corporation and Roto-Rooter Group, Inc. VITAS is a major provider of end-of-life care, while Roto-Rooter is a leading commercial and residential plumbing and drain cleaning service provider.

Business Overview

VITAS Healthcare Corporation is one of the nation's largest providers of hospice care, offering daily hospice services to patients with severe, life-limiting illnesses. The company's focus is on making the terminally ill patient's final days as comfortable and pain-free as possible. VITAS provides a range of services, including medical, nursing, home health aide, social work, spiritual and grief counseling.

Roto-Rooter, on the other hand, provides plumbing, drain cleaning, water restoration, and other related services to both commercial and residential customers primarily in the United States. Roto-Rooter operates through a network of company-owned branches, independent contractors, and franchisees.

Financial Performance

In the fiscal year 2023, Chemed reported annual revenue of $2,264,417,000 and net income of $272,509,000. The company's annual operating cash flow was $330,299,000, while its annual free cash flow stood at $273,445,000.

For the second quarter of 2024, Chemed reported consolidated revenue of $595,880,000, up 7.6% from the prior-year period. Net income for the quarter was $70,887,000, an increase of 32.5% year-over-year. The company's diluted earnings per share (EPS) for the quarter was $4.65, up from $3.51 in the same period of 2023.

VITAS Segment Performance

VITAS, the company's hospice care segment, reported net revenue of $374,558,000 in the second quarter of 2024, an increase of 16.7% compared to the prior-year period. This revenue growth was primarily driven by a 14.4% increase in days-of-care and a 2.5% rise in the geographically weighted average Medicare reimbursement rate.

The segment's adjusted EBITDA, excluding the impact of Medicare Cap, totaled $67 million in the second quarter, an increase of 77% year-over-year. The adjusted EBITDA margin, excluding Medicare Cap, expanded by 613 basis points to 17.8% during the quarter. This significant margin improvement was partly attributable to the expiration of the licensed healthcare worker Retention Bonus Program in 2023, which had negatively impacted the prior-year period's results.

VITAS' average daily census (ADC) increased by 14.4% to 21,036 patients in the second quarter of 2024, while total admissions grew by 11% to 17,334. The company's teams have demonstrated the ability to consistently expand the clinical workforce and patient capacity, with eight consecutive quarters of sequential ADC growth.

Roto-Rooter Segment Performance

Roto-Rooter, the company's plumbing and drain cleaning segment, reported revenue of $221,322,000 in the second quarter of 2024, a decrease of 5.0% compared to the prior-year period. This decline was primarily driven by a 6.1% decrease in call volume and lower demand across both the residential and commercial sectors.

Roto-Rooter's residential revenue declined by 1.6% year-over-year, while commercial revenue decreased by 8.2%. The company attributed the weaker commercial performance to the same overall demand issues experienced in the residential segment, as small business owners tend to behave similarly to residential customers.

To address the challenges in the commercial business, Roto-Rooter has implemented several initiatives, including adding more commercial sales staff, enhancing customer relationship management capabilities, and conducting targeted improvement programs at underperforming branches. Management believes that the process of retraining managers and re-emphasizing the commercial business will require multiple quarters to take full effect.

Despite the revenue decline, Roto-Rooter's adjusted EBITDA in the second quarter of 2024 was $59.8 million, representing a 9.2% decrease from the prior-year period. The adjusted EBITDA margin for the quarter was 27.0%, a 120-basis point sequential improvement from the first quarter of 2024, primarily due to lower internet marketing costs.

Guidance and Outlook

For the full year 2024, Chemed has provided the following guidance:

VITAS:

- Revenue, prior to Medicare Cap, is estimated to increase 16.3% to 17.3% compared to 2023. - Average daily census is expected to increase 13.3% to 14.4%. - Adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 19.3% to 19.7%. - The company is currently estimating $8.5 million in Medicare Cap billing limitations in 2024.

Roto-Rooter:

- Revenue is forecasted to decline by 4.0% to 5.0% compared to 2023. - Adjusted EBITDA margin is expected to be 26.5% to 27.0%.

On a consolidated basis, Chemed's full-year 2024 earnings per diluted share, excluding non-cash expenses for stock options, tax benefits from stock option exercises, costs related to litigation, and other discrete items, is estimated to be in the range of $23.55 to $23.80. This guidance assumes an effective corporate tax rate on adjusted earnings of 24.3% and a diluted share count of 15.25 million shares.

Liquidity and Capital Structure

As of June 30, 2024, Chemed had total cash and cash equivalents of $222,903,000 and no current or long-term debt on its balance sheet. The company has a five-year, $450 million revolving credit facility, with approximately $404.8 million of unused borrowing capacity available as of the end of the second quarter.

During the second quarter of 2024, Chemed repurchased 100,000 shares of its stock for $55.8 million, at an average cost of $557.68 per share. As of June 30, 2024, there was approximately $225.9 million of remaining authorization under the company's share repurchase program.

Risks and Challenges

Chemed faces several risks and challenges that could impact its future performance. These include:

1. Regulatory changes in the hospice care and plumbing/drain cleaning industries, which could affect reimbursement levels and procedures. 2. The current shortage of licensed healthcare workers and plumbing/drain cleaning technicians, which could hinder the company's ability to meet demand. 3. Dependence on patient referral sources, which could be impacted by changes in the healthcare landscape. 4. Potential litigation and regulatory actions related to the company's operations. 5. Macroeconomic factors, such as inflation and interest rate changes, that could affect consumer spending and demand for the company's services.

Conclusion

Chemed Corporation is a well-diversified healthcare company with a strong presence in the hospice care and plumbing/drain cleaning industries. The company's VITAS segment has demonstrated impressive growth, driven by its ability to consistently expand its clinical workforce and patient census. While the Roto-Rooter segment faces some near-term challenges, the company has implemented initiatives to address the issues and position the business for long-term success.

With a solid financial position, a history of shareholder-friendly capital allocation, and a promising outlook for its core business segments, Chemed appears well-positioned to continue delivering value for its shareholders.