Chemed Corporation (NYSE:CHE), the parent company of VITAS Healthcare and Roto-Rooter, has reported its financial results for the fourth quarter of 2023. While VITAS experienced an increase in admissions and patient census, Roto-Rooter saw a decline in call volume due to weaker consumer sentiment.
Despite the mixed performance, Chemed provided a positive outlook for 2024, with expected revenue growth in both subsidiaries. The company's recruitment and retention strategies, as well as educational approaches, are anticipated to contribute to its future performance.
Key Takeaways
- VITAS Healthcare admissions grew by 7%, with a patient census increase due to successful recruitment and retention strategies.
- Roto-Rooter faced a decrease in call volume by 18.7% but mitigated some losses through improved close rates and technician conversions.
- Chemed forecasts revenue growth for VITAS and Roto-Rooter in 2024, estimating increases of 9% to 9.8% and 3.5% to 4%, respectively.
- CEO Nick Westfall highlighted six quarters of sequential growth in net headcount additions and average daily census for VITAS.
- Chemed executives are confident in their competitive advantage and market positioning, expecting steady growth and solid performance in the coming year.
Company Outlook
- Chemed predicts a continued rise in VITAS' patient census and improvements in Roto-Rooter's demand trends.
- The company expects to achieve incremental margin expansion, leveraging efficiencies gained during the pandemic.
- Executives forecast a predictable earnings pattern for the year, with guidance seen as achievable.
Bearish Highlights
- Roto-Rooter experienced a significant drop in consumer demand, evidenced by the reduced call volume.
- Chemed fell short of its hiring targets in the fourth quarter due to holiday-related hiring challenges.
Bullish Highlights
- VITAS surpassed its pre-pandemic average daily census high, indicating strong growth potential.
- Chemed's recruitment, retention, and educational strategies are expected to drive market share gains.
Misses
- Despite overall growth, the company faced challenges in meeting its hiring goals for the fourth quarter.
Q&A Highlights
- Executives discussed challenges such as wage compression and rising wages but remain optimistic about offsetting these pressures.
- The company emphasized its confidence in sustaining revenue growth of 4-6% in the future for Roto-Rooter.
- VITAS margins are expected to increase in the fourth quarter due to reimbursement rate increases.
In conclusion, Chemed Corporation has provided a positive forecast for 2024, with strategic initiatives in place to drive growth in both VITAS Healthcare and Roto-Rooter. The company's focus on recruitment and retention, along with its educational strategies, is expected to enhance its competitive edge and market share. Despite some challenges in consumer demand and hiring, Chemed remains optimistic about its future performance and ability to achieve its financial targets.
InvestingPro Insights
Chemed Corporation (CHE) has demonstrated a resilience that is reflected in its financial metrics and analyst expectations. According to real-time data from InvestingPro, Chemed boasts a market capitalization of approximately $9.44 billion, underscoring its significant presence in the healthcare and maintenance industries. The company's revenue growth over the last twelve months as of Q4 2023 stands at 6.06%, indicating a steady upward trajectory in its financial performance.
InvestingPro Tips reveal that Chemed has a strong tradition of rewarding its shareholders, having raised its dividend for 15 consecutive years, a testament to its financial stability and commitment to shareholder returns. Analysts have also revised their earnings upwards for the upcoming period, signaling confidence in Chemed's future financial performance. This aligns with the company's positive outlook for 2024, as highlighted in the article.
While the Price/Earnings (P/E) Ratio is not applicable, the adjusted P/E Ratio for the last twelve months as of Q4 2023 is 34.56, suggesting that investors are willing to pay a premium for Chemed's earnings potential. Additionally, the company's Price/Book ratio stands at 8.5, which may indicate a higher valuation compared to its book value. These metrics, coupled with the company's revenue growth, paint a picture of a company that is valued for its future growth prospects.
Investors looking for more in-depth analysis and additional InvestingPro Tips can find them at https://www.investing.com/pro/CHE. The platform offers a total of 14 InvestingPro Tips for Chemed, providing insights into various aspects of the company's financial health and market performance. Interested readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, further enriching their investment research with valuable data and expert analysis.
Full transcript - Chemed Corp (CHE) Q4 2023:
Holley Schmidt: [Call Starts Abruptly] Financial Results for the Fourth Quarter of 2023 ended December 31, 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 February 27 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 February 27, 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; Mike Witzeman, Chief Financial Officer of Chemed; and Nick Westfall, Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.
Kevin McNamara: Thank you, Holley. Good morning. Welcome to Chemed Corporation's fourth quarter 2023 conference call. I will begin with highlights for the quarter, and Mike and Nick will follow-up with additional operating details. I will then open up the call for questions. Our fourth quarter 2023 operating results released last night reflect continued improvement in our VITAS' operational metrics. In the quarter, our admissions increased 7% over the prior year period. These strengthening admissions continue to drive higher patient census. In the fourth quarter, our Average Daily Census, or ADC expanded 1,918, an increase of 11% when compared to the prior year quarter and 2.6% when compared to the third quarter of 2023. During the fourth quarter, we surpassed our pre-pandemic ADC all-time high. VITAS' continued improvement in operating metrics is a result of our 12-month retention and hiring program launched in July of 2022. This program was designed to stabilize turnover in our tenured staff and expand clinical workforce capacity. This 12-month retention program generated an aggregate increase of 784 licensed healthcare professionals, the majority of which are licensed nurses. The retention bonus program ended in the second quarter of 2023. However, in the second half of 2023, we continued to expand our licensed staff and related patient service capacity. VITAS' net bedside headcount increased by 157 licensed professionals in the third quarter and 84 in the fourth quarter. The fourth quarter increase was below our internal target, but the lower number was not wholly unexpected as hiring around the holidays is more challenging due to individual schedules and vacation plans. Our 2024, VITAS guidance assumed strong ADC growth driven by continued successful hiring and retention of licensed staff. Now let's turn to Roto-Rooter. As discussed over the past few quarters, Roto-Rooter continues to manage through what can only be described as ongoing headwinds in the consumer sentiment and consumer spending within our sector of the economy. Overall, our call volume is down 18.7% when compared to the prior year quarter. The last week in the fourth quarter of 2022 was significantly impacted by a nationwide deep freeze. Excluding that one week in 2022, call volume is down 13% during the fourth quarter of 2023 compared to the same period as 2022. This decline is comparable to the call volume declines we have been experienced the second and third quarters of 2023. Roto-Rooter has offset a significant portion of this softening demand with improvements in close rates. Our call center's conversion rate, the rate at which a call is converted into a technician scheduled ticket has improved 5.4%. Our ticket void rate, which is the rate of canceled jobs before a technician can be dispatched, improved 1.8%. Our technician conversion rate, the percentage of time a tech arrives at home or business and converts the scheduled ticket into billable work improved 1.3%. Commercial revenue at Roto-Rooter declined 7.9% in the fourth quarter of 2023 compared to the same period of 2022. We've noticed that some of the same demand issues with our commercial business as we have experienced with our residential business. For example, as our large big box commercial customers have struggled with demand issues, we have been approached with requests for significant decreases in prices. We've walked away from this type of business. There's our belief that when demand issues abate, this type of customer will return to Roto-Rooter for its consistent, high quality, reliable service. We continue to see overall stabilization of demand in our weekly revenue. Our guidance assumes improving demand trends starting in the second quarter of 2024. To summarize, I'm pleased with the accelerated improvement in VITAS post-pandemic. Our increased growth in licensed healthcare professionals, strong admissions and corresponding growth in patient census have returned VITAS to normalized operating conditions. Roto-Rooter is well-positioned in spite of economic headwinds on the consumer spending in our sector; we anticipate continued expansion of market share by pressing Roto-Rooter's core competitive advantages in terms of excellent brand awareness, customer response time, 24/7 call centers and aggressive Internet presence. With that, I would like to turn the teleconference over to Mike.
Mike Witzeman: Thanks, Kevin. VITAS net revenue was $350 million in the fourth quarter of 2023, which is an increase of 13.6% when compared to the prior year period. This revenue increase is comprised primarily of an 11.0% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.3%. The acuity mix shift negatively impacted revenue growth 38 basis points 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 increased revenue growth by approximately 61 basis points. Average revenue per patient day in the fourth quarter of 2023 was $201.33, which is 200 basis points above the prior year period. Reimbursement for routine home care and high acuity care averaged $177.62 and $1,058.60, respectively. During the quarter, high acuity days-of-care were 2.70% of total days-of-care, a decline of 6 basis points when compared to the prior year quarter. Adjusted EBITDA excluding Medicare Cap totaled $83.3 million in the quarter, an increase of 61.6%. Adjusted EBITDA margin in the quarter excluding Medicare Cap was 23.7%, which is 705 basis points above the prior year period. The fourth quarter adjusted EBITDA margin comparison was positively impacted by a number of items. The expense attributable to the retention bonus program in 2022 resulted in a 406 basis point improvement in the 2023 margin. As Nick will discuss further, VITAS reverted back to its pre-pandemic vacation policy, which resulted in an estimated 135 basis point improvement. Finally, the lower than anticipated hiring rate in the fourth quarter previously discussed by Kevin, provided less drag on the adjusted EBITDA margin from onboarding and training costs. Now, let's turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $235.9 million in the fourth quarter of 2023, a decrease of 1.1% when compared to the prior year quarter. Roto-Rooter branch commercial revenue in the quarter totaled $56.8 million, a decrease of 7.9% over the prior year. Roto-Rooter branch residential revenue in the quarter totaled $162.5 million, an increase of 2% over the prior year. Adjusted EBITDA in the fourth quarter of 2023 totaled $64.9 million, a decrease of 6.4% compared to the prior year quarter. The adjusted EBITDA margin in the quarter was 27.5%, which is 154 basis points below the prior year period, largely driven by an increase in Internet marketing costs. Now, let's discuss our 2024 guidance. VITAS' 2024 revenue prior to Medicare Cap is estimated to increase 9% to 9.8% when compared to 2023. ADC is estimated to increase 6.5% to 7%. Full year EBITDA margin prior to Medicare Cap is estimated to be 17.8% to 18.3%. This compares to the 2019 full year adjusted EBITDA margin prior to Medicare Cap of 17.7%. As discussed previously, we believe that a return to pre-pandemic margin was likely once the industry stabilized. The 2024 guidance assumes we are able to successfully offset continued marginal compression headwinds caused by above average hiring and retention levels along with wage increases outpacing our reimbursement in 2024. We are currently estimating $9.5 million from Medicare Cap billing limitations in calendar year 2024. Roto-Rooter is forecasted to achieve full year 2024 revenue growth of 3.5% to 4%. Roto-Rooter's adjusted EBITDA margin for 2024 is expected to be 28.7% to 29.1%. Due to the nationwide deep freeze in early 2023, we believe that the first quarter of 2024 will be a difficult comparison for Roto-Rooter resulting in slight declines in revenue and profitability. Our guidance then anticipates modest demand growth for the remaining three quarters of 2024. The January 1, 2024 price increase implemented by Roto-Rooter averaged approximately 3.5%. Based upon the above full year 2024 earnings per diluted share, excluding non-cash expense 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 $23.30 to $23.70. This 2024 guidance assumes an effective corporate tax rate on adjusted earnings of 24.2% and a diluted share count of 15.2 million shares. Chemed's 2023 adjusted earnings per diluted share was $20.30, including $1.04 per share for costs associated with the 2023 portion of the retention program. I will now turn this call over to Nick Westfall, Chief Executive Officer of our VITAS Healthcare Business segment.
Nick Westfall: Thanks, Mike. As previously discussed our 12-month retention and hiring bonus ended on June 30, 2023. This program was very effective in stabilizing and expanding our patient capacity. I am also very pleased that we've continued to expand our workforce and patient capacity in the second half of 2023 without this retention program. While the fourth quarter net headcount addition was below our internal expectations, we are confident that was caused by the circumstances of the holiday season and not any issue related to our ability to hire and retain the appropriate level of licensed bedside employees. While it's only two months into the New Year, to further reinforce this confidence, we have seen a return to hiring and retention levels we anticipate for 2024. In the fourth quarter of 2023, our average daily census was 19,352 patients, an increase of 11% when compared to the prior year and an increase of 493 or 2.6% sequentially. VITAS has generated sequential ADC growth over the last five quarters. Kevin mentioned in his opening remarks, we also achieved a milestone when we surpassed our pre-pandemic all-time ADC high during the fourth quarter of 2023. I'm particularly proud of the team for this achievement as it was accomplished faster than we originally forecasted when we began 2023. In the fourth quarter of 2023, total VITAS admissions were 15,867. This is a 7% increase when compared to the fourth quarter of 2022. In the quarter, our nursing home admissions increased 1.7%, assisted facility admissions expanded 16.4%, hospital directed admissions increased 0.5%, and our home-based patient admissions expanded 15.2% when compared to the prior year period. Our balanced community-based strategy continues to be successfully executed by our team as illustrated by the consolidated 13.9% admissions increase in those segments during the fourth quarter. Our average length of stay in the quarter was 105.9 days. This compares to 103.9 days in the fourth quarter of 2022 and 103.1 days in the third quarter of 2023. Our median length of stay was 17 days in the quarter and compares to 16 days in the fourth quarter of 2022 and 17 days in the third quarter of 2023. As Mike previously mentioned, our fourth quarter 2023 EBITDA margin was positively impacted by a number of factors. While we were slightly disappointed with our net headcount additions in the fourth quarter, the positive side effect is that there were less unproductive labor onboarding and trading costs than anticipated. Additionally, during the pandemic, we increased the amount of paid time off or PTO our employees could carryover from year-to-year from 40 hours to 80 hours. This was designed to allow for our workers to better manage burnout and be able to quarantine as was prescribed at that time without worrying about whether they would be paid for that time. In August of 2023, we announced that the carryover policy was reverted back to the historical 40 hours at the end of the year. As a result, we experienced higher levels of PTO taken in the fourth quarter than normal. Additionally, the amount of forfeited PTO at the end of the year was higher than historical levels. We anticipated -- we estimate that this one-time PTO change added approximately 135 basis points to the fourth quarter EBITDA margin. To recap what our team has accomplished, we've now generated six quarters of sequential net growth in licensed healthcare workers and five quarters of sequential growth in ADC. We now have a sustainable and predictable approach to continue methodically building our clinical capacity and patient base that has taken us past our pre-pandemic levels and catapulted us forward into 2024 and beyond. I want to thank our entire team as these accomplishments over the past few years were a result of the unwavering commitment, dedication and focus each VITAS team member has towards fulfilling our mission in every community we serve. We got here together and we are very excited for what 2024 and the future has in store for VITAS. With that, I'd like to turn the call back over to Kevin.
Kevin McNamara: Thank you, Nick. I will now open this teleconference to questions.
Operator: [Operator Instructions]. Our first question comes from the line of Joanna Gajuk of Bank of America (NYSE:BAC). Your line is now open.
Joanna Gajuk: Hi, good morning. Thanks for taking the question. So I guess first on VITAS, since this was the last topic, but the guidance calls for VITAS revenue to grow 9% to 10% on census, growing 7% again. So that's above, I guess, the kind of long-term growth outlook that you talk about in the past for the industry to grow mid to high-single-digits. So I guess the two part question is what gives you confidence you can grow volumes high-single-digits again? And I guess with that, what is the long-term outlook for revenue growth I guess in the segment after 2024; do you expect continuation of it? Is there something to be said about aging demographics or people accessing hospice earlier? Any dynamics that maybe imply the growth, this accelerated growth is sustainable? Thank you.
Nick Westfall: Maybe just to take the two parts, Joanna, this is Nick. Short answer for 2024 and beyond is yes. We think the volume growth rate combined with the pricing pieces is sustainable beyond 2024. The other factors that you're referencing, whether it is aging demographics, people traditionally going into the age range where they access the hospice benefit, that's very favorable from a tailwind standpoint. I think the biggest unknown is hopefully, and I think we will continue to see the momentum in the industry for people continuing to access the benefit earlier, which could drive overall days of care growth. And I realize there's a lot of things contributing to that. You could get to federal government overall understanding through things like the NORC study that earlier and longer access is beneficial to the Medicare trust fund as well as to patients and families. And then you can take other pieces that are very favorable, like President Carter's (NYSE:CRI) continued journey on the benefit. He reached his one year milestone on February 18 and me and everybody else in the industry can't provide enough praise to him and his family for the dialogue that has sparked across the country about what hospice is and what it can be. So I think there's a lot of favorable tailwinds about for 2024 and beyond around overall understanding of the hospice benefit acceptance and the fact that it is a really sustainable and high quality program for the country.
Kevin McNamara: And Joanna, I think that for people building a model and referring to past periods for VITAS, you have to build in what Nick has described various forums as a mix shift with community access. I mean when you have to -- when you look at our average length of stay going from high 90s to 105, that's basically driven by the fact that fewer of our referrals are coming from hospitals, which still a very substantial largest [ph] source, I mean, don't get me wrong, but referrals from other sources tend to have longer lived census. And so that mix shift makes some comparisons to past periods less relevant.
Nick Westfall: In the overall healthcare demographic of people seeking care outside, more and more of acute four-wall hospitals and facilities, I think helps to contribute to that for where we would see referrals coming to us.
Joanna Gajuk: So I guess if I may follow-up on the comment around mix into the community access strategy and increasing length of stay, how does it -- I guess what's your I guess strategy when it comes to dealing with Medicare Cap when it comes to these lengthening stays for some of these patients?
Mike Witzeman: No, the strategy itself doesn't change as it relates to it. We'll continue to manage it accordingly on a market-by-market basis. And we feel very comfortable that that balanced approach and I specifically used the word balanced in my opening remarks is what's needed and necessary. And so while there is a broader expanded access, don't want to discount the importance of our hospital partners and how that's going to continue to be critical for us as an independent hospice provider in every community in which we operate.
Nick Westfall: And we still have a pretty high level of hospital-based admissions which help with the Medicare Cap. We don't anticipate any real material Medicare Cap problems in the near-term for sure.
Kevin McNamara: Let's put it this way, our Medicare Cap issues that we talk about really plot against occur in California, and that's not driven by high average length of stay, it's driven by very high reimbursement with a static nationwide level of cap measurement. So suffice it to say we're knocking on wood here, but in the short and mid-term outlook, cap is unlikely to rear its ugly head.
Joanna Gajuk: Okay. That's helpful color. If I may say, on VITAS on the margin side, so clearly you talk about some items that help to bring margins 23% versus kind of we talked about three months ago that Q4 guidance implies a little bit less than 2022. So I guess to explain the benefits of that. But I guess also your guidance calls for margins expanding, which is good. And there were some comments on the last call around like VITAS margins normalizing up 19%. So I guess you still to your point, the margins guidance 2024 call for margins to be above 2019 levels. But should we still think about going forward that there's potential for more margin expansion towards this 19%? Like you said, if you continue to grow top-line high-single-digits, is there opportunity for -- of getting closer to 2019? Thank you.
Nick Westfall: So the short story is the guidance and the range that we provided for 17.8% to 18.3%, we think is very reasonable from a bottom up budgeting standpoint. Forecasting around how much headwinds there is on marginal compression given pricing lagging and never catching up to real cost of operating the business is impossible to forecast what that means out multiple years at this point. But I think the one thing you'd say uniformly is we're -- our reference point up until the last call was coming back to marginal levels that were pre-pandemic and then seeing how it shakes out as we get to a very sustainable and predictable growth rate as well as overall profit contribution rate, and we'll see what the marginal contribution then blends out to be that we feel very confident in and that comes out in that 17.8% to 18.3% range for 2024.
Mike Witzeman: Joanna, I think it's important that the components of how we got back of 2019 are a little bit important, as Nick mentioned. So we have seen a significant amount of wage compression and issues and -- issues with wages going up faster than our reimbursement. But we've been able to effectively keep a lot of the efficiencies that Nick and his team at VITAS were able to garner through the pandemic and telehealth and those sorts of things. So we've offset some of those wage pressures with other efficiencies. I think we think there's some opportunity for future margin expansion, but it's not going to be any big bang kind of expansion. There's going to be incremental, methodical increases, call it 2025 and beyond.
Nick Westfall: And everything we're going to do is focused on continued sustainability of the business, not maximizing short-term, near one quarter marginal contribution.
Joanna Gajuk: No, I appreciate that. Thank you. Thank you for those comments. And I guess the similar question on the Roto-Rooter, so sounds like for 2024, your guidance calls for, I guess, maybe a little bit less than what you described in prior calls when it comes to long-term growth. So I guess a similar two part question. What gives you confidence you can grow faster I guess 2024 versus 2023, and it sounds like pricing, I guess, is the driver there. But then how do we think about growth after that? Like is it fair to assume that kind of 4% growth is sustainable growth, or should it kind of snap back to something a little bit higher in years after, when the economy, I guess, sees in a different spot? Thank you.
Kevin McNamara: Yes. I just make a couple of comments about Roto-Rooter. I mean it's tough. We've really never had a period where the telephone has stopped ringing so suddenly. We think there's reasons for that. I mean basically, if you said what I really think the reason is driving it is that we had a sustained period where inflation was far above wage gains in the country and that environment has shifted. It's going to take some time to recover from that. But that's macroeconomics. I mean, we're small company in Cincinnati, I mean so that's for the economists in the areas of Chicago to flesh out. What our belief is that it's a tough patch. I mean, the good thing about that is when we say that we're seeing this throughout the industry, certainly our system with regard to franchisees and contractors and whatnot. The good news is I think it's going to give us an opportunity to buy some franchises, to be honest with you, because that's the time when they become available. So that's the silver lining. Now with regard to looking out for the future, I think that when all the dust continues to settle on Google (NASDAQ:GOOGL) marketing, which is a problem now, because in this tough sales environment, we're spending a lot more on Google marketing than we were a year ago. But when the dust settles, we have such a competitive advantage, and that is each call for service in this industry, because we have a broad service line that is plumbing, drain cleaning, excavation, water restoration each call is more valuable to us and we will be able to afford to pay more for those leads. And I guess when the dust settles and there's a proper pipe setting mechanism for that, we're going to have a huge comparative advantage. So we feel very good when you talk about sort of I mean our relative position is very good in the industry as it improves. Now, the question of how high is up for the industry? You got to remember that we provide services to houses and apartments and small businesses generally. So the question is what are the formation rates for those three sectors? They're not 10%, they're less than that. So we have a -- we'll be providing services to a fairly stable, patient, patient of us, fairly solid customer base and we'll just be hoping to take market share with the continued aging of the blue collar workforce. So steady as she goes on Roto-Rooter, but very -- very -- continues to be a very solid business. The first quarter of last year was through the roof, largely caused by very unusual. We don't like to talk about weather issues, but January of last year -- December and January of last year were just very unusual weather events. And so we've mentioned it a lot just to warn everybody that it's going to be a tough comparison, certainly through December and January, but as we get to the rest of the year, it's much easier comparison.
Nick Westfall: Joanna, I think from a 2024 perspective, we've -- the guidance we've given is pretty straight down the middle. I think we think it's achievable, but it definitely assumes a level of improved consumer sentiment and consumer demand sequentially as the year goes on. So we're thinking a little demand volume improvement in the second quarter, a little more in the third, a little more in the fourth. So we have definitely assumed some improving economic indicators and economic performance towards the end of the year and then as far as 2025 and beyond. I would think somewhere in that 4% to 6% revenue range is probably a fairly sustainable path when you think about price increases. And then as Kevin mentioned, some demand improvement given our positioning in the industry and our positioning with Google Advertising and those sorts of things.
Joanna Gajuk: And the very last question, just to tie all these things out when it comes to the margin outlook for that segment, for the Rooter. So the guidance implies some improvement year-over-year in 2024 because I guess you assume top-line is growing. So how should you think about margins going forward in the Roto-Rooter if you grow, like you said, 4% to 6%. Is this enough to kind of drive margins higher over time? Thank you.
Mike Witzeman: I think it'll drive margins higher. But again, if there's not going to be any big bang jump, 200 or 300 basis points are going to be methodically improving as we obtain leverage on that top-line growth.
Kevin McNamara: Keep on the Google marketing, I mean, we're spending $1 million a month more on that. I say when we say the dust settle on that, it's a short-term jolt to we think it's all accretive, but it's on a comparative basis, it's a little bit of a jolt to margin. And the kind of singles and doubles that Mike is talking about as far as the improvements does first have to overcome that jolt.
Mike Witzeman: Sure.
Holley Schmidt: Thank you so much for the questions.
Operator: [Operator Instructions]. Our next question comes from the line of Ben Hendrix of RBC Capital Markets. Your line is now open.
Michael Murray: Hi, this is Michael Murray on for Ben. Just double clicking on Roto-Rooter, you saw a pretty sizable deceleration in commercial growth in 4Q. I wanted to see if you could expand upon that. And what do you expect for commercial demand in 2024 and what's your expectations for residential growth as well?
Kevin McNamara: Well, let me just start by saying, our commercial sales in Roto-Rooter in the fourth quarter were below our expectation. There were a couple of factors that we think are a couple big commercial customers that we thought had effect on it, but even generally, it's not where we want it to be. It's an area of renewed focus and emphasis at Roto-Rooter. And again, it's -- we think that there's no reason it won't mirror a lot of our experience on the residential side. But it didn't in the fourth quarter.
Nick Westfall: And the 3.5% to 4% growth that we're projecting for 2024 comes fairly evenly across both segments and across each service offering within those segments. There's a little bit of variation, but we don't see a huge increase in commercial and a decline in residential or anything. It's fairly stable across both business segments.
Michael Murray: Okay. And just a follow-up. What gives you confidence that what you saw in 4Q commercial won't continue into 2024?
Kevin McNamara: Well, the thing gives me confidence is, I see and know the increased emphasis that Roto-Rooter is making with each of its branch managers. And so the concept I have over the years, just seeing that that type of emphasis and effort usually in Roto-Rooter yields results.
Nick Westfall: We've seen this before, maybe not quite to this magnitude, but there are from time to time local area managers at some of these big retailers for instance that get the idea that they can manage their plumbing needs on a mom-and-pop basis, on a store-by-store basis, and they quickly figure out that that's not very manageable. And they come back to us not saying that's necessarily this case, but we have had many instances in the past where we've lost that business for a small period of time and the figure -- our customers figure out that managing it on a store-by-store basis is not very easy, and then they come back to us. So there's no guarantee in this instance, but we think that there's probably a potential for that as well.
Michael Murray: Okay. That's really helpful. And switching to VITAS, so you're continuing to see solid ADC growth and you're expecting that to continue? Well, some of your peers have had softer ADC growth coming out of the pandemic. Obviously, you had your retention program, but is there anything else in your competitive strategy that may explain some of your outperformance compared to peers?
Kevin McNamara: Yes. So the thing we've been pretty rather consistent on probably over the last year-and-a-half was, of course, the recruiting and retention program served as a catalyst. That catalyst, though, had a lot of other tactful things. And I'll put it under the overall umbrella from a cultural standpoint, that really had a compounding effect around improvement of retention at each local, each one of our programs. And that combined with some very strong hiring, continued to allow us to meet and not turn away any of the unwavering demand that we continue to see from our referral sources. And when we have that on a market-by-market basis, compared against some of our competitors, who would either not respond with the same degree of commitment to those referral sources or not be able to provide the full complement of services that they expected before the pandemic started, I think is really allowing us to and we can see it in our metrics expand market share on an account-by-account basis, but in the same regard, enter of new relationships with certain accounts that may not have taken our call, but the circumstances have helped to reinforce that. So that’s always that combination we feel very confident in, as well as helps provide confidence in our 2024 guidance and beyond. So not to oversimplify it, but focusing on recruiting and retention, as well as continuing to lean into all of our educational approaches out on the market are proving to be a very effective strategy for us.
Mike Witzeman: And there's a bit of a waterfall effect, right? So if we have -- we feel like in a program we're fully staffed from an admission nurse standpoint, right? We can get to the referrals maybe faster than some of our competitors that don't have the staffing levels that we do. And that's one of the key factors in being able to admit the patient. So it's sort of a waterfall, not just with nurses providing the care, but it starts at the admission nurse level to begin with.
Kevin McNamara: And while we don't report them publicly, we continue to see very strong strength in referral growth, and that gives us great confidence that there continues to be share to be gained, and the only impediment would be staffing, which we feel very comfortable about continuing to methodically build.
Michael Murray: Okay. That's really helpful. Just the last one for me. Do you have any comments regarding cadence of earnings throughout the year? Anything that we should keep in mind? And do you expect VITAS margin to ramp through the year like you saw this year?
Nick Westfall: Yes. I think VITAS margin, it always spikes in the fourth quarter because we get our reimbursement rate on October 1, and essentially that increase falls to the bottom line in the fourth quarter because we haven't seen the inflation that goes along with that. So we definitely think VITAS, particularly the fourth quarter is going to ramp. There's definitely a ramping as well at Roto-Rooter as we talked a little bit before is sequentially, we think demand, hopefully, in our opinion is going to increase and improve as the year goes on. So there's a little bit of ramping at Roto-Rooter, but that's a little more stable. VITAS certainly the fourth quarter will be the best quarter.
Kevin McNamara: Yes. And from a modeling standpoint, if you go back at the last full year, that was uninterrupted by the pandemic, which would be 2019. That type of sequential building is probably the easiest one to look at on a quarter-by-quarter basis because there's other things that go into play, like at the end of the second quarter, we award and distribute our entire merit increase to our workforce. Things like that are already forecasted in all of our modeling for the entire course of the year. But between that and the fourth quarter pricing are very predictable things that we have built into our earnings equation throughout the calendar year.
Operator: Thank you. I do not see any other questions from the queue at this point. I would now like to turn the conference back to Chemed President and CEO, Kevin McNamara, for closing remarks.
Kevin McNamara: Just want to thank everybody for their kind attention. We thought we had a good solid quarter. I think our guidance represents a solid blueprint for this year. I think it's -- obviously, we think it's achievable. And I guess I'll have more information for you in about three months from this day. Thank you.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
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