Chemed - Q2 2023

Transcript

Operator (participant)

Good morning. Our conference call this morning will review the financial results for the second quarter of 2023, and to June 30th, 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 these projected by those forward-looking statements as a result of a variety of factors, including those identified in the company's news release of July 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. A reconciliation of these non-GAAP results is provided in the company's press release dated July 26, 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 Healthcare Corporation subsidiaries. I will now turn the call over to Kevin McNamara.

Kevin McNamara (President and CEO)

Thank you, Holly. Good morning. Welcome to Chemed Corporation's second 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 second quarter 2023 operating results, released last night, reflect significant improvement in VITAS's operational metrics post-pandemic. In the quarter, our admissions increased 5.9% over the prior period. These strengthening admissions continue to drive higher patient census. In the second quarter, our average daily census, or ADC, expanded 1,077, an increase of 6.2% when compared to the prior year, and 3.2% when compared with the first quarter of 2023. VITAS's improving operating metrics are a direct result of our retention and hiring program, launched July first of last year.

This program was designed to stabilize turnover in our tenured staff, as well expand patient capacity. Since July 1st, 2022, our staffing has methodically increased on a sequential basis over this 12-month period. This increase in staffing and related patient capacity has been converted into increased admissions and census. The retention program has generated an aggregate increase of 784 licensed healthcare professionals, the majority of which are licensed nurses. Over the last four quarters, VITAS has increased bedside professionals on a net sequential basis by 172, 103, 200, and 309, respectively. The majority of the expanded capacity from the 309 net hires in the second quarter of 2023 is forecast to benefit admissions and census growth in the second half of the year.

June 30th, 2023, our end of the month census was 18,542 patients. This compares to our June 30, 2022, ending census of 17,360, for a net increase of 1,182 patients. This raw patient increase translates into $84 million of annualized billable revenue. Our revised guidance does assume sequential ADC growth to moderate in the second half of 2023 when compared to the first six months of the year. Let's turn to Roto-Rooter. By all indications, Roto-Rooter is encountering what I can only describe as headwinds on consumer spending. As noted during our first quarter teleconference call, in the last few weeks of the first quarter, we observed an increase in weekly revenue volatility, indicating a potential softening in consumer demand.

Since March, we have observed increased weakness in weekly call volume and revenue. This weakness has continued throughout the second quarter. Overall, call volume is down approximately 13% when compared to the prior year quarter. Although call volume is a crude measurement, it does indicate consumers are moderating their behavior in terms of discretionary plumbing and drain cleaning services. Roto-Rooter has offset a portion of this softening demand with material increase in close rates. Our call center's conversion rate, the rate at which a call is converted into a technician-scheduled ticket, has increased 230 basis points. Our technician conversion rate, the percentage of time a tech arrives at the home or business and converts a scheduled ticket into billable work, has increased 160 basis points. These improved conversion rates have materially reduced the impact of softening consumer demand.

We have seen some recent signs of improvement in overall demand over the last few weeks. Our guidance assumes Roto-Rooter continues to be modestly impacted by consumer spending headwinds for the remainder of the year. I am pleased with the accelerated improvement in VITAS post-pandemic. Our increased growth in licensed healthcare professionals, strong admissions, and corresponding growth in patient census has positioned VITAS to return to normalized operating metrics in early 2024. Roto-Rooter is well positioned in spite of economic headwinds on consumer spending. 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. I would like to turn this teleconference over to David.

Dave Williams (EVP and CFO)

Thanks, Kevin. VITAS's net revenue was $321 million in the second quarter of 2023, an increase of 7.8% when compared to the prior year period. This revenue increase is comprised primarily of a 6.2% increase in our days of care, a geographically weighted average Medicare reimbursement rate increase of approximately 2.7%, partially offset by 100 basis points from sequestration. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by 10 basis points in the quarter. Average revenue per patient per day in the second quarter of 2023 was $197.02, which is 178 basis points above the prior year period.

Reimbursement for routine home care and high acuity care averaged $172.91, and $1,031.58, respectively. During the quarter, high acuity days of care were 2.8% of total days of care, essentially equal to the prior year quarter. The gross margin and adjusted EBITDA for VITAS were both negatively impacted by CMS reimplementing sequestration, which reduced these margins by 100 basis points when compared to the prior year quarter. Gross margin in the second quarter of 2023, excluding Medicare Cap and the retention bonus program, was 22.7%, a 143 basis point increase when compared to the second quarter of 2022. Our adjusted EBITDA, excluding Medicare Cap, totaled $50.7 million in the quarter, an increase of 1.4%.

Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 15.7%, which is 101 basis points below the prior year period, really, all of which is attributed to sequestration. As Kevin noted earlier, VITAS increased the licensed healthcare staff by 309 professionals in the quarter. This results in total licensed staff increasing by 784 professionals since the inception of the retention program on July 1, 2022. The increase of 309 net professionals hired during the quarter of 2023, think of it as basically underutilized labor capacity, is estimated to have negatively impacted margins in the second quarter by approximately 80 basis points. Now let's turn to Roto-Rooter.

Roto-Rooter generated revenue of $233 million in the second quarter of 2023, which is a decline of 0.2% when compared to the prior year quarter. Roto-Rooter's branch commercial revenue in the quarter totaled $55.5 million, which is an increase of 1.3% over the prior year. The aggregate commercial revenue growth consisted of drain cleaning revenue declining 3%, plumbing increasing 5.4%, excavation increasing 2.9%, and water restoration increasing 9.7%. Roto-Rooter's branch residential revenue in the quarter totaled $158 million, which is a decline of 1.1% over the prior year period.

The aggregate residential revenue growth consisted of drain cleaning decreasing 8.6%, plumbing declining 2.8%, excavation expanding 3.8%, and water restoration increasing 2.5%. Roto-Rooter's gross margin in the quarter was 52.3%, which is an 89 basis point decline when compared to the second quarter of 2022. adjusted EBITDA in the second quarter of 2023 totaled $65.9 million, a decrease of 4.5%, and the adjusted EBITDA margin in the quarter was 28.3%, 128 basis points below the prior year period. Now, let's take a look at our guidance. VITAS's 2023 revenue, prior to Medicare Cap, is estimated to increase 8.5%-9.5% when compared to 2022.

VITAS's forecasted full-year revenue growth is negatively impacted by 75 basis points as a result of the sequestration relief in the first half of 2022, compared to a full year of sequestration in 2023. ADC is estimated to increase 6.5%-7.5%, and full year adjusted EBITDA margin, prior to Medicare Cap and accrued bonuses related to our retention program, is estimated to be between 16.5% and 17%, and we're currently estimating $11 million of Medicare Cap billing limits in calendar year 2023. Roto-Rooter is forecasted to achieve full year 2023 revenue growth of 1%-2%, and Roto-Rooter's adjusted EBITDA margin for 2023 is expected to be between 28% and 28.5%.

Based on this discussion, our full year 2023 earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, costs related to certain litigation settlements in our retention bonus program, is estimated to be in the range of $19.90-$20.10. Current 2023 guidance assumes an effective corporate tax rate on adjusted earnings of 24.7% and a diluted share count of 15.2 million shares. For comparison, Roto-Rooter's 2022 reported adjusted earnings per diluted share was $19.75. I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS Healthcare business segment.

Nick Westfall (President and CEO)

Thanks, David. As Kevin discussed, we implemented a targeted retention and hiring bonus program at VITAS, effective July 1st of 2022. This program was focused on licensed nurses, including admission nurses, nurse managers, home health aides, and social workers. These one-time retention bonuses range from $2,000-$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 $43 million. All retention bonus payments are individually cliff-vested and paid out after the employee has successfully completed 12 months of continuous employment. From an economic perspective, approximately $37 million of this retention program was to maintain existing staffing levels. The additional $6 million is estimated retention bonuses represent bedside capacity expansion.

This additional $6 million in retention bonuses has helped to contribute to ADC increasing 1,182 when comparing the month of June to its prior year. On an annualized basis, this 1,182 increase in patient census will generate annual revenue of approximately $84 million. During the second quarter, we expanded our licensed healthcare professional staff by 309 employees, bringing the total licensed healthcare staffing expansion attributed to this program to 784. In the second quarter of 2023, our average daily census was 18,392 patients, an increase of 1,077, or 6.2%, when compared to the prior year, and an increase of 562, or 3.2% sequentially.

The sequential monthly ADC growth in the fourth quarter of 2022, the first quarter of 2023, and now the second quarter of 2023, is very encouraging, given the timing lag of increased staffing which then generates subsequent admission and census expansion. In the second quarter of 2023, total VITAS admissions were 15,611. This is a 5.9% increase when compared to the second quarter of 2022, and a 5.3% improvement when compared to the fourth quarter of 2022. In the quarter, our nursing home admissions increased 13.7%, assisted facility admissions expanded 3.9%, hospital-directed admissions increased 4.5%, and our home-based patient admissions expanded 3.8% when compared to the prior period, all four segments increasing positively.

Our average length of stay in the quarter was 99.5 days. This compares to 103.7 days in the second quarter of 2022, and 99.9 days in the first quarter of 2023. Our median length of stay was 16 days in the quarter, in comparison to 17 days in the second quarter of 2022, and 15 days in the first quarter of 2023. To recap what our team has recently accomplished, we now generated four quarters of sequential growth in licensed healthcare workers and three quarters of sequential growth in ADC. We have developed what I believe is a very sustainable path to building back our capacity, patient base, and overall operating performance to pre-pandemic levels and beyond. With that, I'd like to turn this call back over to Kevin.

Kevin McNamara (President and CEO)

Thank you, Nick. I will now open this teleconference to questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Ben Hendrix of RBC Capital Markets.

Speaker 5

Hi, this is Mike Marion for Ben. Starting with Roto-Rooter, could you remind us of your mix of discretionary versus nondiscretionary jobs? Do you believe this deferred maintenance could become a tailwind in 2024, or do you think more people are doing the jobs themselves?

Dave Williams (EVP and CFO)

Well, Ben, Mike, the definition here, the definition of discretionary is in the minds of the consumer. With that said, well under 10% of our volume, we consider discretionary, well under. Again, it's up to the consumer to decide. What we have seen is an increase, though, in nondiscretionary jobs to discretionary jobs on a relative basis. What we're doing is, the more severe phone calls are still coming in, again, that's well over 90% of our volume. The customers are clearly self-selecting on the annoying toilet that's constantly running in the upper tank because of a bad seal or valve. Those are the things that you could defer or attempt to do yourself. The small, annoying projects.

We actually have seen an increase in bigger jobs over really the last six months. Very little is discretionary, or were a grudge purchase in the first place. No one gets this, you know, purchase satisfaction of getting your house back today where it was two days ago. The fact is, people call us because of necessity, and that's just down, just a hair.

Kevin McNamara (President and CEO)

I would say, Dave, that what you have is, we describe as, you know, discretionary or putting something off. It's putting something off a couple months, you know, not permanently, you know. But it's hard to say. You're getting at a question, which is a tough one. When you look at it, a drop in call volume, like we had, I mean, again, our best thinking on it is that, you know, we had a period of 18 months where wages was not keeping pace with inflation, and, you know, there was a significant gap. That had, I think, an outsized effect on consumer decisions. We take comfort in the fact that that's turning around at this point.

You know, we have a very, you know, a very basic business in Roto-Rooter. There's no sense in any way that we're losing market power or share. Our close rates are higher than they've been, not surprisingly, because people are more incentivized to push for every sale. It's something that, you know, we look at. We look at the softness as being not confined to one region, which suggests to us that it's, you know, it's, you know, it's an issue that's outside of our control. The soft is not due to having turnover at a couple of big branches. It's more pervasive than that.

At the same time, what Dave is really suggesting is to the extent when, when you have these really nondiscretionary problems, it's gonna take somebody to fix it eventually. There's no reason for us to believe that they're any less likely to call Roto-Rooter.

Dave Williams (EVP and CFO)

I, I just have to say, call volume is up significantly from pre-pandemic levels. I mean, obviously, double digit, but it does look like the consumer is a little exhausted. I think this has happened a couple of times in the last 20 years. I think I can point to kind of post the Great Recession in 2010, and there was some disruption around 2001. This doesn't happen very often, and it does take kind of it takes a very, very broad geographic kind of disruption, and I think that's what we're seeing in all four of our, our regions throughout the country. The softness is everywhere.

Kevin McNamara (President and CEO)

Yeah, that, that's true. Another thing, a question you haven't asked, is it seemed like it came on pretty quickly. I mean, obviously, from our previous call three months ago, we said we noticed it in the last month of the first quarter. It was many of the effects were probably already starting to land for Roto-Rooter. However, it was covered up by unusual weather patterns, which basically had business, you know, going through the roof the first two months of the first quarter. You know, it's something some of these forces that we see at work, you know, are more than... You know, they didn't just pop up in the second quarter. They were probably already having some effect by the first quarter.

Again, some unusual weather in the first quarter, you know, kept everybody, you know, working around the clock then. When the weather moderated, you know, we had a fairly severe difference. Again, we're. One good thing about having the Roto-Rooter business, it's got, as Dave Williams indicated earlier, great brand awareness, you know, great marketing position. One thing we haven't said is that one of the, one of the biggest limitations to Roto-Rooter's business is workforce, and, you know, our workforce has never been stronger. We're prepared for an uptick. You know, we probably have two larger workforce given the current call volume. Again, there's been a lot of effort and expense in developing that workforce. You know, we've good ground regularly in that regard.

You know, we're not alarmed in any respect with the Roto-Rooter business.

Dave Williams (EVP and CFO)

Ben, to your question on a tailwind, the answer is probably these jobs will come to us. In light of what we've seen, call it, you know, in March and then in the second quarter, we have gotten conservative on the Roto-Rooter guidance. We're actually guiding to. You know, typically, we see seasonality, where Q3 tends to be, all the quarters are relatively significant, but Q3 tends to be down a couple points from Q2. Q4, actually, on average, has been up by as much as 7% for seasonality from Q3 to Q4. We're also very conservative, and we guided that sequential growth from Q3 to Q4 of this year to be only up a little under 3%, because we don't know what's happening with the consumer spending. We think we put forward conservative but realistic guidance for Roto-Rooter.

We're encouraged by what we see in July relative to our guidance. With all that said, I, we're waiting to see a sigh of relief in other consumer spending categories to say, this is just an anomaly. Ben, we haven't seen that yet. Right now, we're going under the assumption that consumer is a little exhausted, and they're gonna avoid spending on Roto-Rooter to the extent they can. Like I said, 90%-95%+ of our volume is unavoidable.

Speaker 5

Okay. Thank you. Just to follow up to that, how does the magnitude of the decline in call volumes compare to past consumer cycles? In those instances, how quickly did it take for demand to return?

Dave Williams (EVP and CFO)

We've never seen call volume with the kind of spikes we've had, so actually, this is actually an unusual drop. We've never seen weakness in demand go beyond 12 months.

Nick Westfall (President and CEO)

I mean, that's an outside.

Dave Williams (EVP and CFO)

I'm just throwing one out there. Yeah, it's, it's always been a very short-lived cycle, and it doesn't happen often, but it does happen. Like I said, the Great Recession and, and 9/11, and then kind of the dotcom blowup in 1999, 2000 as well. Those are the ones that come to mind, but it doesn't happen often.

Speaker 5

Okay. All right. Thanks for the color. Just real quick, shifting to VITAS. You just hit the one-year mark on your hiring and retention program. Have you seen a pickup in turnover for the tenured employees so far? Then on the flip side of that, has hiring slowed materially since the retention program ended?

Nick Westfall (President and CEO)

Mike, this is Nick. The answer to both of those answers is no. We have not seen a material pickup to turnover. What I will say, we're still in the first month related to it, so, you know, we always like to say one month never makes a trend, but we feel good about it. For all prior commentary, all the things that weren't relegated to just the financial payment, but cultural enhancement, other items that tend to keep people with an organization, is what was the driving force for some of those confident comments in the prior quarters about the expiration of the program.

In regards to hiring, the hiring rate has, you know, we've been able to hire successfully where we need to on a market-by-market basis, and so we feel confident in our ability to do that going forward.

Dave Williams (EVP and CFO)

Mike, nothing stops Nick, where it's appropriate to have a small retention program in a market for certain disciplines. It's just not gonna be necessary to carve it out or even call it out. At this point, we believe we can do it, where necessary on a very small basis that you guys won't even see.

Speaker 5

Okay. All right. That's helpful. Thank you. Just one final one. Given the repayment of your debt during the quarter, how are you thinking about share repurchases in the back half of the year?

Dave Williams (EVP and CFO)

We still think share repurchase is what appears to be the best way to return capital to shareholders. At the same time, with what the Fed did yesterday, we're now getting about 5.5% pre-tax on our overnight money. From that standpoint, it's no longer the 10 basis points of nothing we used to get two years ago. We actually aren't penalized by sitting on cash because of the overnight return. That's basically right now, all kept with JPMorgan Chase. Share repurchase is a continued part of our capital deployment.

Nick Westfall (President and CEO)

We'll do so.

Dave Williams (EVP and CFO)

Yeah, every quarter, we anticipate it.

Speaker 5

Okay. All right. That's all I had. Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for our next question. Our next question comes from Joanna Gajuk of Bank of America. Please proceed.

Joanna Gajuk (Equity Research Analyst)

Yes, good morning. Thank you so much for taking the questions here. I guess first on VITAS, clearly, things are going there pretty nicely, and you raised your guidance and now expect a 9% revenue growth call it year-over-year. How should we think about this growth going forward? Is it a sustainable growth rate? Also with, you know, this growth at that rate when it comes, especially for census, right? If census returns to 2019, which seems like you're already very, very close to that, how should we think about margins, you know, if that was to happen?

Dave Williams (EVP and CFO)

Regarding margins, very, very encouraged, with where we are now. If you actually think about the headwinds we created by excess capacity, unutilized labor, because that'll be utilized in Q3 of this year, the 309 people we hired. Actually, it does look like we're gonna get to our target, fairly comfortably to that, call it, that 17.5% adjusted EBITDA margin we enjoyed in the fourth quarter of 2019, seems very achievable, within 2024. I don't want to get too optimistic beyond that, but it's encouraging. Regarding our guidance for the second half of the year, we actually assume census growth moderates, the second half of the year compared to the first, where we'll add about 75% of the census we added in the first half.

We're assuming in our guidance we add pro rata throughout the second half of this year. We expect the momentum to continue, but we conservatively estimate it to slow a little bit from the first half. Nick, anything else we should add on that?

Nick Westfall (President and CEO)

No, I don't, I don't think so. Just as a reminder, if you start comparing pre-pandemic to exiting pandemic dynamics, there's a lot of different variables inside of it, right? Just not to recap it, but it's about a three-year window. One of the other aspects, and you can see it through the distribution of pre-admit institutions, while we continue to service the entire community of where we're at, the community access initiative will continue and is effectively baked into our approach on a go-forward basis in every market. We'll see what that translates into, you know, for 2024 and beyond, but it puts us at a good, it should put us at a good jump-off point at the end of the year.

Dave Williams (EVP and CFO)

I'd also say as we've talked about this in past quarters, when we look at census, we actually follow it in, in buckets, and we look at it as, as tenured buckets. How many patients have been with us zero to 30 days, 31 to 60, 61 to 90? We do that all the way out. Obviously, during the pandemic, when we had weak admissions, you know, the 13% of our patients who live past six months, that actually got bled off during the past three years or really two years. Really, over the past three quarters, Nick's and his team have really started material growth in all of those aged-out buckets.

The path that we're returning on, you know, we lose money on half of our patients, 13% or so make it past six months, we are doing a great job of refilling the statistical outlier buckets of beyond 180 days. That's another indirect way of saying the momentum we've picked up in the recovery is on a really, really solid foundation of census.

Nick Westfall (President and CEO)

Last comment, just to relay why that's important, not only for VITAS, but the overall industry and also for the Medicare Trust Fund is, you know, there's recent independent literature. We're out on the Hill today continuing to educate, and what it helps to further illustrate is, for the entire hospice industry, there's a need for earlier access, and the more there's earlier access, there's more total cost of care savings to the Medicare Trust Fund, including past 12 months with, you know, almost 11% cost savings. I bring it up because hopefully that trend continues consistently for the overall industry because it's significantly beneficial for the Medicare Trust Fund.

Joanna Gajuk (Equity Research Analyst)

Right, I guess if I may, just to follow up on that point, right? The Medicare rate update, the proposal, right, it came out with, you know, this pushback from the industry clearly arguing there should be, instead of, you know, a one-time adjustment for the market basket out there being below cost inflation the prior two years. I guess two things, you know, any traction on having CMS actually act on it, or do you need Congress to do something along these lines, and what do you expect in the final regulation that should come out any day?

Nick Westfall (President and CEO)

I think the commentary with it, we'll see. It's fully within CMS's authority to do so. There's all indications the final rule itself will be issued in the very near future, as opposed to speculating, we'll sit back and see. You know, the ongoing calculation, as we've alluded to, significantly lags reality. Since it's pegged against the hospital market basket index, it impacts more than just the hospice industry, right? It impacts the hospitals by definition as well. Time will tell.

I think the important piece, going back to the value of the study is, you know, the fact that hospice is one of arguably the only industry that is, returns money to the Medicare Trust Fund inside of healthcare is one that we hope CMS hears and our congressional leadership hears, so that they continue to support, you know, ongoing reimbursement because the value of the benefit for the overall country and to the Medicare Trust Fund.

Dave Williams (EVP and CFO)

Joanna, your point's a good one. Our association estimates with the proposed rule that CMS put out a couple of months ago, they've held back on a little over 5% of increase based on an inflation measurement on the market basket. Obviously, that impacts the entire industry, but it's existential for the small players who lack scale, which is over 50% of the provider numbers out there. Frankly, one of the reasons we are picking up licensed healthcare staff and expanding our census is because our small mom-and-pop competition, which exists in every market, they're truly struggling because they lack scale, and that 500 basis points of inflation is kicking their butt.

Right now, CMS, by holding back on reimbursement, is creating opportunities for the players who have scale to expand market share, and that's what we're gonna do. We really wish CMS would true up the inflation. We'll take the share. It's a tough way to get it.

Joanna Gajuk (Equity Research Analyst)

No. I guess it begs the question, would you be interested in buying out some of these providers, or I guess at this point, you're just saying that it's cost-effective or more cost-effective to just hire weighted workers?

Dave Williams (EVP and CFO)

Massively more cost-effective. As Kevin said in our prepared remarks, It costs us $6 million incremental in this retention bonus to expand our workforce, and that creates... Based on just on the expanded census we've enjoyed through today, that's $84 million of revenue that it costs us $6 million to acquire. If we had, under pre-pandemic, we would have paid anywhere from $100 million-$120 million for $84 million in revenue, which obviously we didn't do because we thought those were crazy valuations. Right now, we're getting it through competition.

Kevin McNamara (President and CEO)

The problem with buying the hospices is they're almost always too small, you know, to be profitable based on what we think is, we think it's tied to quality, but to the extent that we're a big public company, we have to have safeguards and, you know, provide, you know, all levels of service and whatnot in the, on a too low a census base, that's just not economically feasible.

Dave Williams (EVP and CFO)

Acquisitions aren't off the table, Joanna. We could see doing a footprint that gets us in an area we're not in, and it would even pay a multiple for that, but then we have to average down that multiple by basically increasing the size of whatever we acquire through market competition.

Kevin McNamara (President and CEO)

Any county in Florida that we're not in.

Dave Williams (EVP and CFO)

Yeah, actually, California and Florida typically are very successful in that regard. We're not opposed to it, but at the same time, you know we're very serious about protecting shareholders' capital. If we put it at risk, there better be a commensurate return.

Joanna Gajuk (Equity Research Analyst)

Right, for sure. That makes sense, obviously. I'm sure, before you alluded to it, and obviously, sitting on the cash is not a bad idea, I guess, as of now. Just switching to, you sent me the Roto-Rooter, so I appreciate the comment there that, you know, you assume this, you know, weakness, I guess, continues, but I guess sounds like July may be indicating some changes there. Yeah, what would have to happen, I guess, in your mind, for kind of, you know, the call volume, I guess, to return or, or kind of reverse this trend? Kind of what are you looking out there in the market to kind of be able to say, like, "Oh, this is, this is happening, or it will happen soon?

Kevin McNamara (President and CEO)

Well, this is a tough one. That's a tough one. It comes down to, you know, why does the phone not ring? Sometimes we know why the phone does ring, because it's, you know, there's raining in some part of the country and whatnot, and causing all sorts of havoc, which, you know, is good for the Roto-Rooter business, but tough on the people. Generally speaking, why does it ring? Why does it not ring? The only thing we can point to is, you know, let's say, internet marketing. That drives the, that drives the sales that we have, to the extent that we have, you know, various measures.

You know, I mean, of course, I don't want to get too far in the weeds, but, you know, there's the natural search, which is free, which, you know, you hope Roto-Rooter pops up, and that's tied to their algorithm, and there's all sorts of things that you do. You have bricks and mortar more bricks-and-mortar stores to get better coverage. You do well on that. There's paid search. There's one measure of paid search, which is you wanna make sure that you show up on the first page more frequently. The vexing thing is that we're doing better than that, than we ever have. In other words, we're showing up on the first page of paid search more often. We're just continuing to refine that and hope to even improve that.

You know, to the extent that search to the entire category is, we believe, down substantially, it's, you know, it's the, it's the reverse of the converse of the phrase, you know, the rising creek covers a lot of stumps. The creek is, in the whole category, is down for people look, you know, starting the search. You know, to answer your question, one thing we can do is we can have our fingers crossed and hope the economic conditions improve so that there's more people searching for plumbing and drain cleaning, number one. Number two is something that we continue to do, and we've had some success with, based on some of our quoted metrics, being better placed on the internet to capture more of the eyes to consider Roto-Rooter.

Your question is a tough one. It's vexing to Roto-Rooter, I say with some trepidation, that if it comes down to running a business that involves keeping your fingers crossed and hoping demand comes back, that's a tough way to run the business. We're putting that aside right now and doing what we can on the marketing side.

Dave Williams (EVP and CFO)

You certainly can't ignore the significant increase in call center close rates and technician close rates at the residents has, like you said, materially offset the weak call demand, but not completely.

Kevin McNamara (President and CEO)

No, that just shows that we've said. You know, in Roto-Rooter, Roto-Rooter's been around for a long time. They have good management. They have good management that extends right to the field. If you'd said, if you said to us six months ago, which you did, "What are the issues in Roto-Rooter?" We said, "You know, we had an unprecedented 18-month period where, you know, we had some of our top branch managers hired away by private equity." Now, that's largely stopped for a variety of reasons. We said at the time, our, you know, softness really, you know, the fact that we had new managers in a number of locations, an unusually high number of new locations where we had new managers.

Again, time has helped settle that, but, you know, the softness we see is more pervasive, more tied to overall economic conditions. We think, based on, you know, kind of our research, that some of the factors that cause that are ameliorating. But we don't kid ourselves. When we're talking about big economic conditions, it's, you know, it's hard to draw too many conclusions based on, you know, what almost by definition is insufficient data.

Joanna Gajuk (Equity Research Analyst)

The last question here to that end: would you expect cost-cutting? Are you doing anything differently given the call volume being down? I guess, yeah, what are-

Kevin McNamara (President and CEO)

No.

Joanna Gajuk (Equity Research Analyst)

What can you do, right?

Kevin McNamara (President and CEO)

You gotta remember, see, one, the thing about Roto-Rooter is we do not quote a price over the phone. We don't advertise a price. I mean, the way that. You know, in other words, somebody calls us, they have no idea what Roto-Rooter's gonna charge for the issue. We send somebody out, they give a written estimate, you know, for what it costs. That's the first time that the customer sees the price. Actually, as Dave said, our close rate, once First of all, when somebody calls, or the close rate, the conversion rate by the, you know, the person on the phone is higher.

When we send the technician out, who mentions price for the first time, those close rates are going higher. No, the cost-cutting side, we're, you know, we think an important aspect of Roto-Rooter is make sure that we protect margins, and especially in inflationary periods, we make sure we get price increases that reflect the inflation. That, again, that's another success area. We think we have gotten that price increase. Price cutting doesn't really work for Roto-Rooter. We don't advertise, you know, some plumbers advertise, "You know, we'll fix any drain for $99." That's not the case. I mean, then they find out that there's a $50, you know, charge for this and a $50 charge for that, and they say, "Well, and not your drain.

No, your drain's an exception." we don't do that. cost-cutting on the Roto-Rooter side would only come from something I referred to earlier, and that is, we've built our workforce through a lot of training and expense, and we're probably a little too high, given our current call volume. To the extent that we're not, we're not gonna lay anybody off or cut anybody, but to the extent that there's turnover, we would be a little less aggressive in filling those spaces caused by the termination? Probably. I mean, if you said, if our workforce was up 4% year-to-date, attrited down to being up 1% or 2%, I think that would be very reasonable, and that would be the cost cutting.

Of course, you know, a company like Roto-Rooter, labor is everything, so that would have the effect of cost cutting, but it would be passive rather than active.

Dave Williams (EVP and CFO)

Generally, it's semantics, but I mean, our approach on cost cutting is we don't cut costs, we reengineer costs out of the system. What can we do for less money or hopefully less money and do a better job doing various things? Reengineering is the sustainable way to drive down your expenses, not just, you know, through stress, you start whacking expenses. That usually, you know, helps in the short term and hurts you in the long term. We're much fans of three, six, nine months engineering various costs downward, but not just whacking them.

Joanna Gajuk (Equity Research Analyst)

I appreciate the call. Thank you so much for the question.

Operator (participant)

Thank you. At this time, I'd like to turn the conference back to Kevin McNamara for closing remarks.

Kevin McNamara (President and CEO)

Okay. My remarks are limited to thanking everyone for your kind attention. We'll continue to work and again, make a recovery from an unusual, unusually tough quarter for us. Again, we think we're still on a winning wicket. Thank you, everyone.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.