Chemed Corporation (CHE) CEO Kevin McNamara on Q3 2021 Results - Earnings Call Transcript

Oct. 29, 2021 3:07 PM ETChemed Corporation (CHE)
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Chemed Corporation (NYSE:CHE) Q3 2021 Earnings Conference Call October 29, 2021 10:00 AM ET

Company Participants

Sherri Warner - IR

Kevin McNamara - President and CEO

Dave Williams - EVP and CFO

Nick Westfall - President and CEO-Chemed's VITAS Healthcare Corporation Subsidiary

Conference Call Participants

Joanna Gajuk - Bank of America

Frank Morgan - RBC Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Chemed Corporation Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]

I would now like to turn the conference over to your speaker host today, Sherri Warner, with Investor Relations. Please go ahead.

Sherri Warner

Good morning. Our conference call this morning will review the financial results for the third quarter of 2021 ended September 30, 2021.

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 October 28, 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 October 28, which is available on the Company's website at chemed.com.

I would now like to introduce our speakers for today Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation Subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin McNamara

Thank you, Sherri, and thank you, Sherri, for your services over the years. Sherri's retiring at the end of the year, and this is her last introduction to our quarterly conference call, but we do want to thank her for all her efforts.

Good morning. Welcome to Chemed Corporation's third quarter 2021 conference call. I will begin with highlights for the quarter and Dave and Nick will follow up with additional operating detail. I will then open the call up for questions.

Our third quarter 2021 operating results released last night reflect very solid performance for both VITAS and well Roto-Rooter. On a go-forward basis, I would like to share with you some of the macro issues we are dealing with as we approach the end of the second year of the pandemic.

For VITAS, the most important issue we are managing is labor. Staffing of licensed professionals has been exceptionally challenging to ensure an adequate mix of licensed healthcare workers on a market-by-market basis.

This is particularly challenging during the pandemic as we deal with dynamic fluctuations in patient census in every market. Turnover within our licensed staff remains above our pre-pandemic rates, but we are seeing indications of normalization, as we continue to expand our hiring and retention initiatives in many markets.

Beyond managing our staffing levels, we are observing increasing pressure on salaries and wages. To date we've managed these pressures with increased paid time off, or PTO. We view it as inevitable that healthcare wages will increase if we continue to have a nationwide and systemic imbalance in supply and demand for licensed healthcare professionals.

Fortunately, for VITAS, and the hospice industry, there is a natural hedge against the inflationary pressures on costs, specifically labor. The annual increase in the Medicare and Medicaid hospice reimbursement rates is based primarily on inflation in the hospital wage index basket as measured by the Federal Government's Bureau of Labor Statistics.

Typically, the annual inflation measured as of March 31, is used to determine the following October 1 reimbursement increase. This should give the hospice industry a reasonable stability in operating margins in an inflationary environment, albeit with a six-month lag from the inflation measurement to the actual reimbursement increase.

The second critical challenge for VITAS is the continued disruption to senior housing occupancy and the latent hospice referrals. Our recent admission data suggests senior housing is in the process of recovery. Pre-pandemic, nursing home-based patients represented 18% of our total average daily census, or ADC. The nursing home ADC ratio hit a low of 14.3% in the first quarter of 2021.

In the second quarter of 2021, nursing home-based patients increased 16 basis points to 14.9%, and in the third quarter of 2021, our nursing home patients represented 15.6% of our total ASC. Our updated 2021 guidance anticipates sequential improvement in senior housing-based patients in the fourth quarter of 2021, with acceleration in senior housing admissions anticipated in 2022.

For Roto-Rooter, our most significant challenge has been to increase manpower. We've expanded technician manpower by 8% in 2021. However, based on our current demand levels, we continue to remain understaffed in many of our markets. Technician compensation plays a role in recruiting new employees, as well as retention of our existing employee base. Our average 2021 technician and field sales force compensation is over $81,000 per year.

Most of our technicians are paid on a commission basis on revenue generated, as a result pricing for our services is a critical component in increasing technician wages. We are anticipating passing to inflationary price increases in all our markets in the fourth quarter of this year.

Demand for plumbing, drain cleaning, excavation, and water restoration services remain at record levels. I want to give additional color on the depth and breadth of this increase in demand. Let's compare Q3 2021 revenue to Q3 2019, excluding the HSW acquisition, which was completed in September 2019.

Under this unit-for-unit comparison, residential services have experienced incredible growth. In aggregate residential branch revenue increased 46.2% over this two-year period. On a service segment basis, residential plumbing revenue increased 37.1%, drain cleaning expanded 36%, excavation increased 65.6%, and water restoration increased 48.1%.

Commercial demand has been more challenging, however. Commercial revenue has experienced a significant recovery since the 40% decline in commercial demand noted in April 2020. Overall commercial revenue declined 3.1% over this two-year period.

On an individual service segment basis, commercial plumbing service declined 4.9%, drain cleaning expanded 1.8%, excavation declined 10.2%, and water restoration increased 7%. We anticipate continued strengthening in commercial demand in the fourth quarter of 2021 as well as throughout 2022.

Over the past 20 years, the country has faced 9/11, the Great Recession, and now a global pandemic. In each of these crises, Roto-Rooter remained operating and materially increased market share, revenue, and operating margin. Just as important, post-crisis Roto-Rooter held on to these increases in revenue, market share, and margins. Roto-Rooter is well-positioned post-pandemic and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time, 24/7 call centers, and Internet presence.

With that, I would like to turn the teleconference over to David.

Dave Williams

Thank you, Kevin.

VITAS' net revenue was $317 million in the third quarter of 2021, which is a decline of 5.8% when compared to the prior-year period. This revenue decline is comprised primarily of a 5.3% decline in days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration of approximately 1.2%.

Our acuity mix shift had a net impact of reducing revenue approximately $3 million, or nine-tenths of 1% 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 negatively impacted revenue growth an additional 80 basis points.

VITAS accrued $100,000 in Medicare Cap billing limitations in the quarter. This compares to $4.1 million reversal of Medicare Cap billing limitations in the third quarter of 2020. Of our 30 Medicare provider numbers, 27 of these provider numbers currently have a Medicare Cap cushion of 10% or greater, one provider number has a cap cushion between 0% and 5%, and two of our provider numbers have a fiscal 2021 Medicare Cap billing limitation liability.

Roto-Rooter generated quarterly revenue of $221 million in the third quarter of 2021, which is an increase of $30.1 million, or 15.7% when compared to the prior-year quarter. Roto-Rooter's branch residential revenue in the quarter totaled $151 million, which is an increase of $22.2 million, or 17.2% over our prior-year period. This aggregate residential revenue growth consisted of drain cleaning increasing 11.7%, plumbing expanding 17.4%, excavation increasing 14.1%, and water restoration increasing 28%.

Roto-Rooter branch commercial revenue in the quarter totaled $52.3 million, which is an increase of $4.7 million, or 10% over the prior year. The aggregate commercial revenue growth consisted of drain cleaning increasing 17.6%, plumbing increasing 9.3%, and commercial excavation declining 1.3%. Water restoration also increased 9.4%.

Now, let's turn to Chemed on a consolidated basis. During the quarter, we repurchased 350,000 shares of Chemed stock for $164 million, which equates to a cost per share of $467.80. As of September 30, 2021, there was approximately $148 million of remaining share repurchase authorization under this plan.

Chemed restarted its share repurchase program in 2007. Since that time, Chemed has repurchased approximately 15.2 million shares aggregating approximately $1.7 billion at an average share cost of $113.04. Including dividends over the same period, Chemed has returned approximately $1.9 billion to shareholders.

We have updated our full-year 2021 guidance as follows: VITAS' 2021 revenue prior to Medicare Cap is estimated to decline approximately 5% when compared to the prior-year period. Average daily census in 2021 is estimated to decline 5.5%, and our full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 18.8%.

We're currently estimating $6.6 million for Medicare Cap billing limitations in calendar year 2021. Roto-Rooter is forecasted to achieve full-year 2021 revenue growth of 17.3%. Roto-Rooter's adjusted EBITDA margin for 2021 is estimated to be between 28.5% and 29%.

Based on the above, full-year 2021 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, cost related to litigation and other discrete items is estimated to be in the range of $19 to $19.20. This compares to our initial 2021 adjusted earnings guidance per diluted share of $17 and $17.50. This revised 2021 guidance assumes an effective corporate tax rate on adjusted earnings of 25.1%. This compares to Chemed's 2020 reported adjusted earnings per diluted share of $18.08.

I'll now turn this call over to Nick Westfall, President and Chief Executive Officer of our VITAS subsidiary.

Nick Westfall

Thanks, Dave.

In the third quarter, our average daily census was 18,034 patients, a decline of 5.3% over the prior year and 0.2% increase when compared to the second quarter of 2021. This year-over-year decline in average daily census is a direct result of pandemic-related disruptions across the entire healthcare system since March of 2020.

Our hospital-generated admissions have largely normalized to pre-pandemic levels. Referrals from senior housing, specifically nursing homes and assisted-living facilities, continue to be disrupted. During the third quarter, we've seen admissions stabilization and pockets of improvement in senior housing admissions. However, it remains too early to accurately project the pace and time-line for senior housing admissions to fully return to pre-pandemic levels.

In the third quarter of 2021, total VITAS admissions were 17,598. This is a 1.9% decline when compared to the third quarter of 2020 admissions and a 4.5% sequential increase when compared to the second quarter of 2021. In the third quarter, on a year-over-year basis, our hospital-directed admissions declined 0.8%. Total home-based pre-admit admissions decreased 8.3%, nursing home admits declined 0.2%, and assisted living facility admissions declined 8.6%.

When you compare our third quarter 2021 admissions to the second quarter of 2021, we generated solid sequential improvement with hospital-directed admissions improving 2%, total home-based pre-admit admissions increasing 16.3%, nursing home admits expanding 8.9%, and assisted living facility admissions increasing 5% sequentially.

Our average length of stay in the quarter was 96 days. This compares to 97.1 days in the third quarter of 2020 and 94.5 days in the second quarter of 2021. Our median length of stay was 13 days in the quarter and compares to 14 days in the third quarter of 2020 and is equal to the second quarter of 2021.

Before I turn this call back over to Kevin, I want to thank our VITAS team members for their ongoing commitment and all hands on deck approach throughout the third quarter and all of 2021 as we continued to successfully navigate the daily challenges Kevin spoke about earlier on the call.

With that, I'd like to turn this call back over to Kevin.

Kevin McNamara

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Joanna Gajuk with Bank of America. Your line is open.

Joanna Gajuk

Good morning. Thank you for taking the question here. So first I guess on the hospice and on VITAS, in terms of the better margins this quarter and the guidance implying that margins are actually expected to maybe improve in the fourth quarter. So can you talk about what's driving that, especially in the context of the broad-based labor shortages and labor pressure?

Nick Westfall

Yes. Joanna, the primary difference between the third quarter and the fourth quarter is, October 1, the Medicare price increase takes effect. And so that's a primary driver related to the marginal increase that has always occurred going back forever from the third quarter to the fourth quarter. All the other dynamics we spoke about regarding labor pressure, managing through it, all those will continue through and are identified, not only in our fourth quarter but will be forecast when we release our 2022 projections.

Joanna Gajuk

So in terms of you managing down the labor pressure, can you flush out what steps did you take or are you taking that allows you to have this very favorable retention rate given we're hearing a lot about a lot of turnover? And I guess in the context, also seems like you do not really rely on contract labors. So can you talk about whether there is any change there? Thank you.

Nick Westfall

Yes. Sure. So from a retention and a turnover perspective, as Kevin alluded to in his remarks, we're still running at turnover rate that's higher than our pre-pandemic levels. So it's something that we are absolutely continuing to focus on and improve upon. So I, obviously, pay attention to the numbers everybody else references with it, but we're down in and focused on continuing to try to improve that. And we are at level is today, is not where we want to be. We want to continue to improve it.

As it relates to continuing to manage through inflationary wage pressure, as well as all sorts of other inflationary pressure related to it, the team has done a fantastic job and would expect us to continue to do a fantastic job. But with that being said, we're being very intentional and focused on a market-by-market, community-by-community basis to respond appropriately for specific staff and specific staffing levels.

And when needed and when necessary, we're also looking for opportunities for offsets to that inflationary costs, whether it's becoming more efficient or thinking through how we want to structure the way in which we're servicing that market. So the team has done a fantastic job in the third quarter and for the last 19 months with that. And we are - it is the number one thing we are doing on a day-to-day basis and it's what I referred to in terms of the all-hands on deck, everybody rolls up their sleeves, and let's continue to navigate through this.

Joanna Gajuk

And if I can follow up, when you talk about wage pressure in some markets, seems like you have to respond appropriately. But can you, can you give us kind of a sense of the magnitude of things, what wage inflation do you expect next year in terms of year-over-year, overall increases that you would expect that you would have to implement?

Dave Williams

Joanna, we're still assessing the impact of all of those pressures. So, we're really not prepared to project that out for next year at this time.

Joanna Gajuk

Okay. I guess what I was getting at with that is that margins are very strong this quarter and into next quarter and then I guess sequestration is coming back next year, but just thinking high level - I understand that you are still working through the numbers and projections, but can you, I guess, maybe refer to your prior comments about normalized margins for VITAS post-pandemic of 17.5% to 18%? So given all these things of sustainability and expectations, do you expect to be in that range or below that range for next year.

Dave Williams

So what we said - so if you go back to the last full year we had before the pandemic started disrupting things, that was the range of adjusted EBITDA margin we were generating. And our expectation is post-pandemic, in a normalized environment, and you can debate when that happens, is it 2022, start of 2023, but whenever that normalization of senior housing occupancy, hospital occupancy, referrals, and all the mix is normalized, that's that 17.5% and 18%, which also is predicated on us running about a 4% to 4.5% of our days of care or high acuity.

But when that happens, that's still uncertain to us. We thought up until the variant started nagging in this country or really globally, we really thought Labor Day 2021 would have been the beginning of true accelerated pace of normalization, and obviously, that's been pushed off into next year.

So I'm not trying to be evasive by any means but we don't know the guess. We're guessing when will normalization occur. It's clear 2022 is going to be impacted by the pandemic still. So at this point, to forecast out margins and impacts on wages, it's too early. How much of the wage pressure right now, say for outside contracting services, is transitory versus permanent? That's all unknown. What will be the level of our licensed healthcare professionals in terms of that supply for the needs of the country?

If people return to the workforce, who have exited, who were in those positions pre-pandemic, things will return to normal quickly. We see a shortage of staffing, then it's going to be wage pressure.

Kevin McNamara

And it really starts with - this is just to summarize what Dave said. The pandemic has laid bare one very clear fact, all admits are not equal and to the extent that the most important admit source, that is senior housing, was so disrupted and directly disrupted by the pandemic, just totally upended the hospice market. And you can't dig yourself out just by getting hospital admissions. And the thing that is - in the Nick's presentation, that is most helpful is the fact that that referral source seems to be coming back fairly strongly. And that is a rising creek that lifts all metrics, let us put it that way.

And as far as the timing and pace of that, as Dave said, we'll do a little bit deeper dive on it as we go through the budget process in the next month and a half. And when we give guidance in February, when we release the annual earnings, we will have guidance that's based on that budget. And at least, at that point, it will be a guess, but it will be an educated guess. At this point, we haven't gone through the process.

Dave Williams

That's right. And it's a bottoms-up approach, Joanna. So the ranges you're referencing, are very unique on a market-by-market basis and on a discipline-by-discipline basis as well based upon all the factors going on in states and communities.

Joanna Gajuk

Okay. Thank you. And I guess I'll go back to the queue.

Operator

Our next question is coming from the line of Frank Morgan with RBC Capital. Your line is open.

Frank Morgan

Good morning. Just thinking about your different buckets of referral sources, given the uncertainty around the recovery - the timing of the recovery and normalization, is there any thought about just kind of strategically rethinking the balance of your referral sources? Does it make sense to allocate resources to some of these other areas or is it just still too attractive to stick with the senior housing, the long-term care, and the assisted living segment?

Nick Westfall

So, Frank, this is Nick. You've hit on a key piece that we have moderated on throughout the course of 2021 very intentionally and as Kevin alluded to, and it's something we talk about internally. Our mission, all lives are created equal, but where we're deploying our time and really trying to extend relationships has really intentionally shifted as Kevin alluded to. So we are often executing. You can see some of that inside of the third quarter and some of the third quarter compared to the second quarter inside of my comments that I mentioned as well and would anticipate that continuing for the rest of the year and into '22.

Kevin McNamara

And Frank, you can imagine, the cap year starts October 1, we are - the VITAS is going now for election for admits in every market to build cap cushion. Okay. And so it's almost when we talk about reallocating resources, it's always hard to take resources away from, let's say, the hospital market because those are fertile source of admits which you never know how many you need. But it's - as Nick said we, to the extent that that picture becomes clearer during the course of the year, but it's clear more resources are put to the areas that are more likely to lead to expanded stay.

Kevin McNamara

Frank, the only other comment that drives towards that, and it's been consistent throughout the pandemic, when you think about environment where we continue to have staffing pressure not only from our admissions teams responding but from our care teams, we're being - we need to be much more selective and intentional around where we're allocating our time because, I will use the metaphor of the phone ringing to equate to our sister-friends at Roto-Rooter, but the phone's ringing off the hook in terms of demand for hospice appropriate referrals on a market-by-market basis. And so we're really just ensuring we are prioritizing our time and responding and building relationships on a market-by-market basis.

Frank Morgan

Got you. And I guess the margins held up remarkably well considering the wage pressure. Is productivity - I mean how much of that is productivity, is there any change in visits per case per week or is there anything else in there that's driving that? And then, maybe some color about specifics on the use of contract labor and how does that affect productivity?

Nick Westfall

Yes. So absolutely, our productivity has increased and I would anticipate us looking for all opportunities not only from a productivity perspective but also from an efficiency perspective. And when I reference efficiency, what I mean is ensuring we are either eliminating or streamlining all activity that would have taken our team members in an administrative function, not in a patient-facing function, and trying to make those as efficient as possible.

And so, we measure productivity based upon the time they're at the bedside and that's continued to increase. And so, it was already part of our strategic initiative, right for the last few years, but we have just continued to accelerate and push that and that's helped us. But in the same regard, we need to continue to retain our team members and we've been successful in our ability to recruit, but you need to be able to recruit and hire and retain, and that will continue to stabilize our staffing levels on a go-forward basis.

For contract labor, we use it selectively. The biggest impact on contract labor inside of certain states is our continuous care deployment for our select disciplines and it is very competitive, particularly with some extreme pricing and wage inflation. We've been very selective so that we're not out just paying contracted rates.

That is a losing proposition from a hospital hospice perspective because those rates are heavily influenced by hospital systems and other organizations. And if it goes up 300%, we're not going to be renewing those contracts, obviously. So it's not a huge influence. We don't use a ton of contracted labor but it really just impacts our continuous care service line for the most part.

Frank Morgan

Got you. Last one, maybe a Dave question or an everybody question, when you think about sort of the return of the sequester next year, could you kind of remind us what the gross impact there is, and then, maybe the net of your expected market basket update? And then on the market basket update, can you talk a little bit about how long you think it takes for that to catch up and reflect all the labor pressures that you're seeing? Thanks.

Dave Williams

Sequestration, just round numbers, call it $6 million a quarter, or $24 million, is the benefit, maybe slightly less than that. So that would be a significant headwind if they put sequestration back in place January 1.

Kevin McNamara

Which we haven't given up on by the way,

Dave Williams

But that is - it is scheduled to - that this is scheduled to sunset but there is some talk about it being extended, the benefit. So that's probably the biggest headwind we have for next year.

Nick Westfall

And for the pricing market basket, impact is 2.2%, Frank, what we're anticipating,

Dave Williams

But your question - so the Bureau of Labor and Statistics measures the inflation by CBSA, core-based statistical area, but basically, they use the information from April 1 through March 31, is the measurement, and then the following October 1, is when that rate increase actually gets put in place.

So really from the full measurement period, which ends March 31, then six months later that goes into your reimbursement increase and that's the lag Kevin referred to in his prepared remarks earlier. So about a six-month lag where you could see margin squeeze next year if this inflation in wages isn't transitory but it's permanent and that's the issue we're currently addressing now. But in the end, these things tend to work its way out.

Right now, hospice is - the industry is in a pretty good position where the government acknowledges how labor-intensive we are and the increase we get is based upon hospital wages for these licensed professionals. So there really should be a hedge, but with a six-month lag.

Nick Westfall

For next year, for the October 1.

Kevin McNamara

And long-term Dave - obviously, things are changing by the minute but longer-term basis, in the budget blueprint there is a lot of money being suggested for nurses and hospice services.

Dave Williams

Yes. There is actually talk of as much as $20 billion going towards training for hospice license personnel. Now, this is the framework analysis, which seems a little fluid at the time, but without a doubt, we see strong indications that the government continues to invest in the hospice industry.

Kevin McNamara

And realizes the pricing pressures.

Dave Williams

Yes.

Dave Williams

Any additional follow-up, Frank?

Kevin McNamara

Okay. I think that that - is that the last question in the queue?

Operator

[Operator Instructions] We do have a follow-up from Joanna of Bank of America. Your line is open.

Joanna Gajuk

Yes. Thank you. So I guess I just want to move to the Roto-Rooter segment, because I guess the strength there continues to be impressive, both on the top-line and bottom-line. So can you talk about kind of the margin situation there? I mean I guess it's the opposite of what was just discussed in terms of Medicare rate increase, how you have to wait for this to play out here I guess. Can you talk about your ability to put prices in the market? I guess you mentioned inflationary price increases you planned for Q4. So can you give us a sense of the magnitude of those increases that you might consider?

Dave Williams

So yes, we do have pricing power within the Roto-Rooter business, within that industry, if you define the industry as same-day, next-day, predominantly emergency, plumbing, and drain cleaning services. We have the pricing power and we price based market-by-market, procedure-by-procedure.

So what we pass through in a price increase for plumbing is different than drain cleaning and different lines within those segments, but we can't give you anything more granular, Joanna, because we're still developing it. But we absolutely will pass through inflation increases, if not inflation plus a little bit more, because frankly, that's the way our technicians get increases in their wages.

And our employees are feeling the pressures of inflation in terms of fuel, housing, all those costs that are going up significantly at 5%, 6%. They're paying those fees to feed their family, put fuel in their trucks that they predominantly own. So that is, they're more receptive of price increases and our employees are very comfortable selling the price increases to our customers, because that's how they earn their money, that's how their wages go up. But the exact amount of the increase, we will do a weighted average analysis at the end of the year, and we'll give you more color in early 2022 on those increases.

Kevin McNamara

But one comment I'd like to make before leaving margins at Roto-Rooter. What we've observed is, generally speaking, historically, we've developed our fixed costs to support the plumbing and drain cleaning business, which was the first business. And we've seen over time, as we've added substantially to the ancillary services, that is excavation, the water restoration, that has significantly leveraged our margins and up to the point where it's - I mean, I thought - I used to think 20% was good. Now, we're pushing 30%.

It's that strength and the reason we're seeing that improved margin is, of course, the additional services, but you got to remember that when there is strength in the underlying core business that comes from those fixed costs, the rest are add-ons. So very little acquisition costs for the business.

And to the extent that the underlying core business is strong, we know that the service lines of the other businesses will continue to be strong and then support that margin. So it hasn't been - the margin has increased I guess by saying not by just taking price increases. The focus has been more on the leverage of not just the cost of the fixed business but the underlying core businesses in and of itself.

Dave Williams

Kevin brings up a key point on that, Joanna. It's not that the margins for water restoration and excavation are so high, quite frankly they're not that much materially different than our core business, but as Kevin pointed out, after those costs, we don't increase the cost to operate a branch at all or certainly not materially. So more of that incremental revenue and what I'd call, raw contribution margin just drops straight to the EBITDA line. So the growth in revenue is really resulting in the accelerated EBITDA margin increase.

Joanna Gajuk

Thank you. So two follow-ups on this last point in terms of adding these ancillary services that allows you to leverage some of these branch-level costs. So are there other additional ancillary services that might make sense too? I know you have kind of already covered all the bases there.

Kevin McNamara

We keep trying and we have at least one additional service that we're testing out and seeing if we can find the winning formula. But over the years, we've tried just about every service that involves having a person or a technician in a truck going out to make emergency service and a consumer.

And we've had successes, we've had failures, but we continue to look at that. In fact, water restoration really came about following a new look at it, where we said, look, we're going to forget all the former failures and look at everything with fresh eyes, and that's where Roto-Rooter came up with the water restoration really from that process. And that process is ongoing, where we're saying, look, we've tried pretty much everything, but let's continue to look for something we could flow into this very powerful.

I mean, again, when I think about Roto-Rooter, it's big and a very scattered industry and so it has a lot of advantages on the Internet and it's got a great service mark, and again, we keep turning the pancake over. But again, I wouldn't - from an analytical standpoint or analyst standpoint, I wouldn't say - again, the way we would get involved in it would be slow, methodical. So I wouldn't think that any of those projects that I'm vaguely referring to are likely to reflect earnings or sales over the next year or two.

Joanna Gajuk

No, I understand, but I was just curious whether there are considerations. So it's good to hear there are some. My other follow-up was in terms of the Roto-Rooter, I guess, staffing level. So we have clearly increased manpower nicely. I think you said 8% this year, but I think I want to say is that something that the demand level in some markets at least it feels that there is some under-staffing there. So can you talk about that, whether there is more difficult to find the manpower to provide a service, and how do you expect this to play out into next year?

Dave Williams

Without a doubt, the manpower right now - if we can grow in manpower, we could expand our revenue base even more significantly. And the type of people we're looking for are self-starters as well because typically our technicians own their own work truck.

Kevin McNamara

Which is an issue.

Dave Williams

We can't get vans now. That has been an issue as well. But without a doubt, the pandemic has made hiring more difficult, retention is fine, but hiring is more difficult. And it is a market-by-market issue. Again, we suspect as we get the pandemic behind us and we see increased, more full employment on that key age category of people between 30 and 50, which is our sweet spot, we expect to see manpower expanding as the pandemic wanes in 2022.

Kevin McNamara

Let's put it this way, the phone is ringing, the service technicians are making more money, $81,000 is a high watermark.

Dave Williams

And that's an average among all of our technicians in the field. If you actually look at the folks with three or more years of seniority with us, the number is even higher. So we offer an incredibly viable career path for trades-people who don't feel there is obligation to go college, but want to work with our hands. We have a very, very viable training program and we can give them a career with great retirement benefit.

So there is a lot selling, but it's hard to find people who are willing to get their hands dirty in this day and age. We've been very successful in the past. A little bit of a limitation during the pandemic, but we're still pleased with the 8% growth in manpower And we certainly look at 2022 as an opportunity to further expand our manpower, but we don't kid ourselves. Right now, in this environment, it's exceptionally difficult.

Joanna Gajuk

But it's definitely good to hear about successes there to get people, I guess, involve in jobs, and there is definitely demand. Last question on Roto-Rooter, HSW, I guess we haven't really talked about how things are going there because, obviously, things were good with the pandemic, but any updates in terms of that transaction and your plans in those two markets to make some changes? Thank you.

Kevin McNamara

Okay. I can respond top-line. We are happy with it. We made a - when we make a purchase, we submit it to our Board, we make a request for capital authorization, we make various projections justifying the expenditure of funds. And let me say that we are running ahead of those projections. So it's been - from a financial standpoint, it's been a good one for us, that is despite the fact, as we've talked about it, it had a significant commercial aspect to its business as opposed to our typical Roto-Rooter branch that's more residential. Right - shortly after the acquisition, the pandemic closed a lot of - type of commercial establishments that they would call on.

But with that - and with that and with the transition to a normalized Roto-Rooter branch, they have done well. There is still an upside, a big upside associated with them. There are some great very populous markets and that's going to be a significant part of the growth of Roto-Rooter over the next several years undoubtedly. So yes it's going well. Anything you'd want to say on that question, the HSW, Dave?

Dave Williams

No. I said like, if you had told us that pandemic was going to hit, I would have said there is no chance of hitting those RCA projections, but the Roto-Rooter management team did a phenomenal job of quite frankly accelerating some of the changes at the HSW locations or many of them during the pandemic. So they took advantage of the disruption to accelerate improvement. And I would say, all of the locations with the exception of two, we are exceptionally pleased with, and the other two are works in progress, but in aggregate, they're now exceeding our expectations.

Joanna Gajuk

Definitely. Good to hear that. And my very last question at the Chemed level in terms of capital deployment priorities, including you spent a good chunk of your cash flow this quarter and your cash I guess on the share repo. So kind of how do you think about capital deployment going forward? Thank you.

Dave Williams

I'd say we're staying with the same thesis we have on capital deployment. We love to do acquisitions, but acquisitions compete with share repurchase on a risk-adjusted return basis. And we still look at share repurchasing as a macro item having a better return for lower risk for shareholders. But we are always looking at acquisitions. We just don't pull the trigger because share repurchasing is more attractive. But we look at that on a regular basis. I would even say as more often than quarterly there is a constant conversation with the Board as well.

But we anticipate continuing with the dividend, of course, and a methodical increase into that dividend and share repurchasing. We're not opposed to putting cash on the balance sheet but at the current share price, we consider our free cash flow yield exceptionally attractive in an environment where LIBOR is at 9 basis points.

Kevin McNamara

Well, and not only that, implicit with what Dave is saying is, one of the big advantages of both Roto-Rooter and VITAS is they are very good cash-generating operations. And so the real question comes down, like any company, that's, how are you taking - best use of that advantage. And it's been pretty clear, as Dave mentioned, since we've purchased VITAS, we've taken $1.7 billion and returned it to the shareholders, and it's not tied up in goodwill of questionable acquisitions. And there is lot of very accepted theories of value, and that is, the value of an asset is determined on what it returns to the owner and we've had very substantial returns that we can demonstrate.

Joanna Gajuk

Thank you for that color. And thanks for taking all the questions.

Dave Williams

Thanks, Joanna.

Operator

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Kevin McNamara for any closing remarks.

Kevin McNamara

Thank you. We are pleased with the quarter, the results, and thank you for your kind attention.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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