Hello, and welcome to Chemed Corporation's Second Quarter 2025 Earnings Conference Call. I would now like to turn the conference over to Holley Schmidt. You may begin.

Good morning. Our conference call this morning will review the financial results for the Second Quarter of 2025 ended June 30, 2025. 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 July 29 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 29, 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; and Mike Witzeman, Chief Financial Officer of Chemed. I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's Second Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike will follow up with additional details. I will then open the call for questions. While the performance of both operating units did not meet our expectations in the second quarter of 2025, we remain confident in the overall fundamentals, growth potential and strategic direction of both businesses. Admissions at VITAS during the quarter totaled 17,545, which equates to a 1.2% improvement from the same period of 2024. However, it is important to remember that over 600 patients transferred into VITAS in the second quarter of 2024 as a result of our April 2024 acquisition of Covenant Health, excluding those transfers, admissions increased 4.9% in the second quarter of 2025. Our average daily census or ADC expanded to 22,318, an increase of 6.1% when compared to the prior year quarter. In the quarter, Hospital directed admissions increased 9.1%. Home-based patient admissions declined 6.2%. Nursing home admissions declined 2.9% and assisted living facilities admissions declined 1.4% when compared to the prior year period. We currently estimate that the consolidated Florida program will end the 2025 Medicare cap year with a $19 million billing limitation. As was discussed in our June 27 press release, we were on track to mitigate the Florida Medicare billing limitation risk as of the end of the first quarter of 2025. Admissions in Florida were weaker than anticipated in April and May. Accordingly, our Medicare cap projection was revised. June and July admissions in Florida are within our expected range, but will not be enough to offset the overall billing limitation for the 2025 cap year. Management does not expect a significant level of Medicare cap billing limitation in our Florida program for the 2026 cap year. There are a number of initiatives underway that contribute to that expectation, including continued efforts on admitting short-stay patients, mainly through higher hospital admissions, quick ramp-up of the CON start-up locations in Marion and Pinellas counties and other cap management strategies. The current projection for the 2026 cap year assumes that the rate differential that occurred for the 2025 cap year does not recur. The detailed rate information related to the reimbursement increase in Florida for the 2026 cap year will become available during the third quarter. We intend to update our assumptions regarding rates and overall outlook for the 2026 Medicare cap year in Florida in the third quarter earnings release. Now let's turn to Roto-Rooter. Roto-Rooter revenue increased 0.6% in the second quarter of 2025 compared to the same period of 2024, falling short of our internal expectations. Branch revenue, in particular, was softer than anticipated, with less than a 1% growth compared to the prior year. We continue to execute on the strategies implemented in 2024 that resulted in improved fourth quarter of 2024 and the first quarter of 2025 revenue trends. Despite these efforts, April and May were particularly weak. Other large consumer-facing companies have discussed the chilling effect that the Liberation Day tariff announcement had on consumer confidence and consumer spending in April and May. We believe that Roto-Rooter suffered from that issue as well. June and July residential revenue has rebounded to a level that is much closer to our internal expectations. Total leads were down 7.2% in the second quarter of 2025 compared with the same period of 2024. This is a slight improvement compared to the trend we saw in the first quarter of 2025. While the second quarter of 2025 resulted in disappointing operating results, we remain optimistic about the overall prospects for both businesses. VITAS is in the process of adjusting their patient mix in Florida to ensure Medicare cap issues do not persist past 2025. This will cause some disruption in VITAS' operating metrics, but position them to return to a consistent higher growth rate for the long term. Roto-Rooter remains the most recognized brand in the plumbing and drain cleaning industry. We remain confident that the competitive advantages enjoyed by Roto-Rooter will return its financial performance to a steadier growth trajectory. With that, I would like to turn the teleconference over to Mike.

Thank you, Kevin. VITAS net revenue was $396.2 million in the second quarter of 2025, which is an increase of 5.8% when compared to the prior year period. This revenue increase is comprised primarily of a 6.1% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 4.2%. The acuity mix shift negatively impacted revenue growth, 71 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 negatively impacted revenue growth by approximately 379 basis points. The $16.4 million Medicare Cap billing limitation accrued in the second quarter of 2025 is comprised of three components. First, a catch-up entry of $9.5 million was required to recognize the Medicare Cap billing limitation in Florida related to the first six months of the 2025 Medicare Cap year, which includes our fourth quarter of 2024 and first quarter of 2025. Second, $4.8 million was recorded related to the Medicare Cap billing limitation for the current quarter of 2025 related to our Florida combined program. Third, $2.1 million was recognized for the current quarter of 2025 related to all other VITAS programs, mainly in California. The amount recognized for all other VITAS programs is in line with the historical run rate for these programs and our original projections for 2025. Average revenue per patient per day in the second quarter of 2025 was $207.3, which is 350 basis points above the prior year period. During the quarter, high acuity days of care were 2.5% of total days of care, a decline of 15 basis points compared to the prior year quarter. Average length of stay in the quarter was 137.1 days. This compares to 100.6 days in the second quarter of 2024. It is important to remember that length of stay statistics are calculated based on discharged patients, not active patients. This increase in average length of stay between quarters represents the effect of the patients admitted during our community access initiative, which was designed to identify appropriate patients earlier in their disease trajectory being discharged. Our median length of stay was 20 days in the same quarter of 2025, compared to 18 days in the same period of '24. Adjusted EBITDA, excluding Medicare Cap, totaled $66.8 million in the quarter, which is essentially flat with the second quarter of '24. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 16.2%, which is 163 basis points below the prior year period. The lower EBITDA margin in the quarter reflects the impact of admitting more short-stay patients. While this is the right thing to do to mitigate Medicare cap billing limitations, it has the effect of slowing revenue growth and reducing overall margin. VITAS management is currently reviewing expenses at all levels of the organization to reduce costs wherever possible to help offset the lower EBITDA margin. Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $156.4 million, an increase of 0.9% from the prior year period. The residential revenue increase was driven by a 16.9% increase in water restoration, offset by declines in drain cleaning, plumbing and excavation revenue. Roto-Rooter branch commercial revenue in the quarter totaled $53.2 million, an increase of 4.4% from the prior year. The commercial revenue increase was driven by a 24.4% increase in excavation and an 11.7% increase in water restoration, offset by slight declines in plumbing and drain cleaning revenue. Revenue from our independent contractors declined 4.4% in the second quarter of '25 as compared to the same period of 2024. Our independent contractors are generally smaller operations in middle-market cities. In most instances, they do not have the capability to perform the add-on business that is currently the primary driver of revenue growth at Roto-Rooter branches. Adjusted EBITDA at Roto-Rooter in the second quarter of 2025 totaled $48.6 million, a decrease of 18.7% compared to the prior year quarter. The adjusted EBITDA margin in the quarter was 21.8%. The second quarter adjusted EBITDA margin represents a 517 basis point decline from the second quarter of 2024. The EBITDA and EBITDA margin decline was the result of a number of factors. Based on the improved revenue results seen in late '24 and early 2025, Roto-Rooter began to selectively increase its productive workforce in certain high-performing branches. With the sudden weakness in residential revenue seen in April and May, margins suffered from inefficiencies within the labor force, as technicians were sitting idle more than expected. This has a few effects in addition to the impact of inefficient labor use. First, when a technician knows they may only have one or two opportunities for commission on a daily basis, they are more likely to provide discounts to secure the paying job. Second, Roto-Rooter routes jobs to its highest performing technicians first. The highest performing technicians generally have higher commission rates. As a result, commissions as a percent of total revenue were higher than they have historically run. These issues should moderate as revenue rebounds in the third quarter. Higher casualty and workers' compensation costs negatively impacted margins by approximately 220 basis points due mainly to actuarial estimates, assuming significantly increasing costs of settling claims. Finally, as discussed in prior quarters, our cost per click for Internet marketing leads has continued to decline. However, a much greater percentage of our leads are currently coming from paid searches compared to unpaid searches. Paid searches in the second quarter of 2025 represent over 50% of all leads during the quarter. Paid searches have historically represented closer to 40% of all leads. This has the effect of increasing costs as a percentage of revenue for our Internet marketing program. Roto-Rooter management is also reviewing expenses at all levels of the organization to reduce costs wherever possible to help improve EBITDA margins going forward. Now let's turn to the revised guidance for the remainder of 2025. VITAS full year 2025 revenue prior to Medicare Cap is estimated to increase 7.5% to 8.5% when compared to 2024. Full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 18.2% to 18.7%. We are currently estimating $28.2 million in Medicare Cap billing limitations in calendar 2025. This is comprised of $19 million related to the Florida combined program and $9.2 million for all other VITAS programs. There's no Medicare cap billing limitation in the fourth quarter included in the guidance related to the Florida combined program. This expectation assumes that the rate differential that occurred for the 2025 cap year does not recur in 2026. The detailed rate information related to the reimbursement increase in Florida for 2026 will become available during the third quarter. We intend to update our assumptions regarding rates and the overall outlook for the 2026 Medicare Cap in Florida in the third quarter earnings release. Roto-Rooter is forecasted to have a 1.25% to 1.75% revenue increase in 2025 compared to 2024. Roto-Rooter's adjusted EBITDA margin for 2025 is expected to be 23.5% to 24.5%. Based on the above, full year 2025 earnings per diluted share, excluding noncash 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 $22 to $22.30. This guidance assumes an effective tax rate of 25.3% and a diluted share count of 14.7 million shares. Chemed's previously issued 2025 guidance range was $24.95 to $25.45. Chemed's 2024 reported adjusted earnings per diluted share was $23.13. I will now turn this call back over to Kevin.

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

Our first question comes from Brian Tanquilut with Jefferies.

Maybe Mike, first question, as I think about your comments on the cap, right? It sounds like we shouldn't see any impact or carryover of that after Q3. So if you can walk us through the levers you're pulling to ensure that, that happens. And then maybe how you're thinking about the carryover impact of that in 2026 and margins of the growth rate and VITAS revenues?

Mike, why don't you start with some of the technical aspects.

From a leverage perspective, we are focusing on hospital admissions, prioritizing short-stay patients over long-stay patients. This is our primary objective. Additionally, the community access program we implemented in 2022, 2023, and part of 2024 has led to an increase in long-stay patients, which will inevitably decrease over time due to the nature of our services. As time passes, this increase in long-stay patients will moderate. Therefore, the focus on shorter-stay patients and the gradual reduction of the long-stay patient bubble from the community access program will benefit us in the long run. Regarding EBITDA margins, while we haven’t finalized our estimates, I anticipate they will be lower than what we achieved in 2024, which was slightly over 19%. My speculation is that for 2026, a range of 17.5% to 18.5% seems reasonable. However, we are still in the process of formulating these figures.

I'd just like to reiterate some of the things Mike said regarding why we have a cap problem this year. It started with the fact that the natural rate for hospitals went up approximately a little over 2% last year, which contributed to the cap limitation. If the cap percentage goes up to that number, that differential is about $22 million. We started the year with the fact that the same base of reimbursement we were currently getting would result in about $22 million higher than the cap limitation we are going to face in the 2025 cap year. We started last year with a cushion of just over $15 million. So we said, we've got to make changes. And it turns out that we were on track to make those changes. Two terrible months with regard to admissions occurred in April and May. That was enough to knock us off the trend we were on. Given the fact that we were starting with approximately $22 million holding it out of explains why 2025 is so unusual. And the other point I want to make regarding this bubble of patients we are going through. The bubble is getting smaller. During the pandemic, we saw a change in the patient types. Many super elderly patients with COVID did not survive. The patients that came out were a bit tougher and tended to have a very long stay, particularly in Florida. Those conditions are abating. These are two significant levers driving our outlook. VITAS is also investing a lot of effort into obtaining a good start on the new CON property. This alone should positively impact our results. Overall, we are very confident that we won't run into major cap issues going forward.

That makes sense. Maybe, Kevin, just to follow up on that comment about the COVID impact. Is that what's driving the relative underperformance? I'm just curious your thoughts.

Well, I think that's powerful. But I think the biggest issue is that all of Florida averaged a 5% increase for this plan year. That put pressure on hospices everywhere in Florida to avoid a cap. Some dynamics for attracting short-stay patients changed, making it harder to fight for those numbers. So, to summarize, the 4.9 instead of 6.9 as part of the increase is a reflection of that dynamic. We're not pushing for more community access orientation, but we want to avoid providing services without reimbursement.

I think the proof is in the pudding. As Kevin mentioned in his prepared remarks, hospital admissions in the quarter were up over 9%. The issue that brings that down is that we are admitting fewer patients from long-stay preadmission locations like ALS. And that's intentional for the Medicare Cap. In total, the 4.9 is less than the admissions we've had in the past, but there's some intentionality to that since we're focusing on hospital admissions.

Our next question comes from the line of Ben Hendrix with RBC Capital Markets.

I appreciate the commentary around those post-COVID demographic factors. But I want to talk a little bit about the assumption you made for 4Q this year and in the next about the spread between the wage adjusted or wage index rates and the cap and your assumption that, that doesn't persist. Can you talk a little bit about kind of how you're thinking about that ahead of the final rate and kind of what's informing your view?

It's a good thing if it's higher. As far as we're concerned, we want it to be as high as possible. We will manage the business as though it was the same as the national average. In other words, if it comes in at 5% and the national average at 2.1%, this comes at 4.1% for Florida, that would be favorable. All we're saying is that probably in the first month or the first quarter, you'll see an assumption of cap in Florida equal to that difference, but we will manage as if we're just getting a 2.1% increase. We will reserve any amount over the national average. If the admissions come in okay, they will all fall to the bottom line. We're not reliant on a continuation of a positive trend.

Absolutely. That's very helpful. I appreciate that color. On the Roto-Rooter side, I think you mentioned in recent quarters that there were local management issues driving some weakness. So, I was wondering if there's a link between local management efforts and some recovery you've seen in June and July?

I don't think we're fully past the management issues we talked about earlier. A lot of those issues were due to private equity taking our management staff. I believe that situation has stabilized. However, I feel that our management team in the field is significantly less experienced than it was before the pandemic, but we are now entering a more typical cycle regarding management.

If I were to summarize the current issues at Roto-Rooter, the first issue is related to heightened insurance costs. Roto-Rooter comp costs tend to rise as revenue decreases. The second issue is that our call volumes are not as high as before. We are facing increasing competition for plumbing jobs, especially online, where customers encounter rival advertisements for plumbing services. This has forced us to adjust our marketing strategies. We're confident in our ability to succeed in the long-term, but we have to address these immediate challenges.

Without a doubt, the private equity competition is impacting us, especially in the drain cleaning and plumbing segments. The number of jobs in those segments is declining slightly. While we're taking steps to combat this, we've been able to bolster revenue through our water restoration and excavation services, which many of our private equity competitors do not provide.

Our workforce is solid. We're successfully identifying and converting add-on sale opportunities. Our conversion rate is significantly higher than the historical average, which provides a silver lining to our current challenges.

I appreciate that color, guys. Last thing for me, just if you could comment on the tax rate favorability you saw in the second quarter. I just want to see if that's a timing issue or what was behind it?

It's somewhat of an accounting issue. We receive a larger tax deduction when stock options are exercised compared to the recorded expense. The fluctuations in our stock price affect the timing of these exercises, which is why we experienced this decline in effective tax rate.

Our next question comes from the line of Joanna Gajuk with Bank of America.

First on VITAS, the comment around the weaker admissions in Florida, why did this weakness appear later when the cost situation started earlier?

Our confidence in securing a higher mix of short-stay patients stems from June and July's trends. Although April and May were disappointing, the trends seem to indicate recovery. Our models for 2025 predict a $19 million number for our expectations. Excluding any impact from rate issues, we anticipate 2026 will not pose any cap problems.

We need admits, and we need to be proactive about attracting them through our established reputation. The emphasis on improving our approach and how we respond to leads is crucial. Even minor improvements can significantly affect our overall results.

Our new CON properties give us additional time to adjust the patient mix. We are optimistic about navigating the challenges posed by the current reimbursement rate and market dynamics.

We believe there's a significant revenue opportunity with our new properties. However, our projections do not include potential revenue from Pinellas County.

We will not be including projections for the new county in future forecasts. Our focus will remain on improving core operations and achieving better patient mix adjustments.

What are your thoughts on the insurance accrual in the quarter? Do you see this persisting?

The increased insurance costs impacted the second quarter, but we're focusing on safer practices to improve outcomes. We don’t expect these costs to become a regular issue.

We have prepared for an increase in these costs going forward, but we believe our proactive measures will stabilize them. We don't want to be caught off guard again, so we've included these costs in our guidance.

There's no change in strategy regarding acquisitions. We're continuously monitoring opportunities but only at appropriate valuations. We can balance share buybacks and acquisitions.

I would now like to turn the call back over to Kevin for closing remarks.

I want to thank everyone for their attention. We've experienced a tough quarter for our operating units, but we're on the path to improving our outlook, and we'll see you in our next report in three months.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.