Chemed - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a clean, modest beat: revenue grew 9.8% to $646.9M and adjusted diluted EPS was $5.63 vs S&P Global consensus $5.55; strength at VITAS offset lighter Roto-Rooter margins as mix skewed to commercial jobs and targeted price cuts in excavation. EPS est. from S&P Global; see Estimates Context.
• VITAS remained the growth engine (net revenue +15.1%, ADC +13.1%), while Medicare cap management tactics (higher hospital-based admissions) intentionally moderate margin expansion near term; management reiterated FY25 guidance commentary and will formally update with Q2 results.
• Roto-Rooter revenue rose 1.8% with commercial +7.3% and residential +1.7%; excavation surged on selective price reductions, pressuring segment EBITDA margin to 24.7% (–108 bps YoY); management will refine pricing to balance growth and margin.
• Liquidity/capital returns intact: $173.9M cash, no debt, ~$404.5M revolver capacity; repurchased 50K shares for $29.8M ($595/sh) in Q1; quarterly dividend of $0.50 declared in Feb.
• Near-term stock catalysts: sustained ADC momentum with cap cushion management, Florida market expansion (Pasco live, Marion admissions starting mid-May), and evidence that Roto-Rooter pricing optimization stabilizes margins while sustaining revenue growth.

What Went Well and What Went Wrong

What Went Well

• VITAS volume and revenue momentum: net patient revenue +15.1% to $407.4M; ADC +13.1% to 22,244; admissions +7.3% to 18,139; adjusted EBITDA ex cap +15.9% to $70.3M with 17.2% margin.
• Strategic cap management underway with clear narrative: “Hospital referrals... result in shorter length of stay... moderating both revenue growth and margin growth, but also provide additional cap cushion,” and hospital-based admissions reached 49%, highest since pandemic.
• Roto-Rooter revenue growth returned: total +1.8%, with commercial +7.3%; execution on commercial initiatives and faster response times for water restoration supported growth.

What Went Wrong

• Roto-Rooter margin pressure from mix and pricing: adjusted EBITDA margin fell to 24.7% (–108 bps YoY) due to more commercial work and reduced pricing on large excavation jobs to drive volume; management plans further pricing refinement in Q2.
• Working capital timing masked cash generation intra-quarter: AR step-up tied to $48M OAS audit refund reclass to short-term and timing of a $57M PIP payment received early Q2; management emphasized timing, not collections issues.
• VITAS cap dynamics continue to cap margin expansion near term: although revenue/day improved to $207.58, cap considerations and acuity mix temper margin expansion relative to elevated 2024 run-rate.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Chemed Corporation First Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Holley Schmidt, Assistant Controller. Please go ahead.

Holley Schmidt (Assistant Controller)

Good morning. Our conference call this morning will review the financial results for the first quarter of 2025 ended March 31st, 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 April 23rd 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 adjust EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated April 23rd, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation, Mike Witzeman, Chief Financial Officer of Chemed, and Nick Westfall, Chairman and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Kevin McNamara (President and CEO)

Thank you, Holley. Good morning. Welcome to Chemed Corporation's First Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike and Nick will follow up with additional details. I will then open up the call for questions. VITAS continued its strong operating performance during the first quarter of 2025. Admissions during the quarter totaled 18,139, which equates to a 7.3% improvement from the same period of 2024. Our average daily census, or ADC, expanded to 22,244, an increase of 13.1% when compared to the prior year quarter. These historically good metrics were positively impacted by the $85 million acquisition of Covenant Health, which was closed on April 17th, 2024. To the end of the first quarter, the Covenant Health acquisition is meeting all of our internal financial projections developed at the time of the acquisition.

As Nick will discuss further, VITAS management continues to successfully execute the strategies required to navigate the Medicare cap at certain of our locations. A major part of that strategy is to increase our hospital-based admissions. Admissions from hospitals generally come to us later in their disease trajectory. These short-stay patients put a limiting factor on our ability to grow revenue in the EBITDA margin but do provide additional Medicare cap cushion. Despite this headwind, VITAS continues to achieve above-average growth in revenue and EBITDA. Our new programs in the Florida counties of Pasco and Marion are also a key part of mitigating Medicare cap issues in 2025 and beyond. We continue to grow admissions in Pasco County. We anticipate taking our first admission in Marion County in mid-May. Now let's turn to Roto-Rooter.

We are happy to report that Roto-Rooter generated a total revenue increase of 1.8% in the first quarter of 2025 when compared to the prior year quarter. Gross branch revenue increased 3.1%, consisting of branch residential revenue increasing 1.7% and branch commercial revenue increasing 7.3%. Total leads were down 7.8% in the first quarter of 2025 compared to the same period of 2024. The revenue improvements during the first quarter of 2025 are the consequence of the variety of initiatives undertaken during 2024. As we discussed throughout the course of 2024, those initiatives include a more focused sales approach for our commercial business, maximizing opportunities from the leads we do receive, and an emphasis on quicker response times to residences with possible water restoration opportunities. To summarize, the strong results at VITAS continue.

VITAS management has consistently demonstrated the ability to hire and retain licensed healthcare professionals at an appropriate pace. This has translated into an extended period of strong growth. Two new locations in the state of Florida provide a nice growth opportunity for the next few years. We continue to work diligently to expand our operating scope within Florida, as well as the other states that have some form of certificate of need restrictions. We are pleased with Roto-Rooter's turn towards a revenue growth trajectory. We are confident that Roto-Rooter maintains its core competitive advantages in terms of excellent brand awareness, customer response time, 24/7 call centers, and aggressive internet presence. With that, I would like to turn this teleconference over to Mike.

Mike Witzeman (CFO)

Thanks, Kevin. VITAS net revenue was $407.4 million in the first quarter of 2025, which is an increase of 15.1% when compared to the prior year period. This revenue increase is comprised primarily of an 11.9% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 3.2%. The acuity mix shift negatively impacted revenue growth 112 basis points in the quarter. The combination of Medicare cap and other contour revenue changes increased revenue growth by approximately 112 basis points. Average revenue per patient day in the first quarter of 2025 was $207.58, which is 221 basis points above the prior year period. During the quarter, high acuity days of care were 2.6% of total days of care, a decline of 22 basis points when compared to the prior year quarter.

Adjusted EBITDA, excluding Medicare cap, totaled $70.3 million in the quarter, an increase of 15.9%. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 17.2%, which is 13 basis points above the prior year period. The financial results just discussed include the impact of the Covenant Health acquisition, which positively impacted revenue, adjusted net income, and EBITDA by 3-4%. Now let's turn to Roto-Rooter. Gross branch revenue increased 3.1% in the first quarter of 2025 versus the first quarter of 2024. Roto-Rooter branch residential revenue in the quarter totaled $167.2 million, an increase of 1.7% from the prior year period. The residential revenue increase was driven by a 3% increase in excavation revenue and a 12.5% increase in water restoration. Roto-Rooter branch commercial revenue in the quarter totaled $57.7 million, an increase of 7.3% from the prior year.

The commercial revenue increase was driven by a 38% increase in excavation and a 14% increase in water restoration. Offsetting the 3.1% gross branch revenue increase, revenue from our independent contractors declined 6.4% in the first quarter of 2025 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 first quarter of 2025 totaled $59.2 million, a decrease of 2.4% compared to the prior year quarter. The adjusted EBITDA margin in the quarter was 24.7%. The first quarter adjusted EBITDA margin represents a 108 basis point decline from the first quarter of 2024.

The 7.3% increase in commercial revenue and the slight decline in EBITDA margin during the first quarter of 2025 were driven by the same factors. Overall, commercial business is generally performed at a slightly lower margin than residential business. Additionally, Roto-Rooter management received feedback from our commercial sales force that we could potentially drive additional excavation work if we priced that work less aggressively. Commercial excavation is one of the most price-sensitive aspects of our business, as they are some of our largest jobs, frequently exceeding $50,000 per job. Due to the size of the job, it is more likely that a commercial customer will get quotes from multiple vendors. In the first quarter, Roto-Rooter management reduced the price structure for selected large commercial excavation jobs. This is a key factor that led to the 38% increase in commercial excavation revenue.

However, due to the reduced pricing, those jobs were done at a slightly lower margin than our other business. Roto-Rooter management intends to refine its excavation pricing model during the second quarter until a balance between revenue growth and EBITDA margin is achieved. The financial results in the first quarter of 2025 are well within our expectations and related guidance for both VITAS and Roto-Rooter. We anticipate providing updated earnings guidance as a part of the June 30th, 2025 earnings press release. I will now turn this call over to Nick.

Nick Westfall (Chairman and CEO)

Thanks, Mike. I'm pleased with our start to 2025, which is in line with our guidance and on the heels of the strong operating performance of the past few years. In the first quarter of 2025, our average daily census was 22,244 patients, an increase of 13.1% when compared to the prior year period. VITAS has generated quarterly sequential ADC growth over the last 10 quarters. In the first quarter of 2025, total VITAS admissions were 18,139. This is a 7.3% increase when compared to the first quarter of 2024. In the quarter, admissions increased in all four of our pre-admit location types. Our nursing home admissions increased 3.9%, hospital directed admissions increased 12%, home-based patient admissions expanded 4.2%, and the assisted living facilities admissions increased 5.2% when compared to the prior year period. Our average length of stay in the quarter was 118.7 days.

This compares to 103.9 days in the first quarter of 2024. It's important to remember that length of stay statistics for the industry are calculated based on discharged patients, not active patients. The 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. I believe we continue to successfully manage our exposure to Medicare cap in 2025. Our median length of stay was 16 days in the first quarter of both 2025 and 2024. Additionally, our median length of stay in the quarter decreased sequentially from 16 days from 18 days in the fourth quarter of 2024, which illustrates the intended impact of increased hospital admissions. As Kevin mentioned, the primary Medicare cap management strategy is to increase hospital-based admissions in select locations.

Hospital referrals traditionally come later in a patient's disease trajectory and therefore result in shorter lengths of stay. This has the overall effect of moderating both revenue growth and margin growth, but also provides additional cap cushion in those key locations. In the first quarter of 2025, hospital-based admissions represented 49% of our overall admissions, which is our highest level since the pandemic. Hospital-based admissions increased 12% compared to the first quarter of 2024. With current Medicare cap rules, this is the right thing to do for the company to ensure long-term sustainable growth. As Kevin also mentioned, we're excited to be providing services in Pasco County and soon in Marion County, Florida. We believe our entry into these two territories is a win both for the people we will serve and for the future growth potential of VITAS.

These new locations also provide Medicare cap cushion in the near term. To quickly recap what our team has accomplished, we've now generated 11 quarters of sequential net growth in licensed healthcare workers and 10 quarters of sequential growth in ADC. Last year, we demonstrated the ability to partner with and successfully integrate other providers through acquisitions to ensure communities continue to receive the best possible care. As a result of these efforts, VITAS continues to achieve higher than historical averages in ADC growth, revenue growth, EBITDA growth, and EBITDA margin. We are optimistic about the ability for VITAS to maintain above-average growth both organically and through creative acquisitions in 2025 and beyond. With that, I'd like to turn the call back over to Kevin.

Kevin McNamara (President and CEO)

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

Operator (participant)

As a reminder, if you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Ben Hendricks with RBC Capital Markets.

Ben Hendricks (Vice President and Senior Equity Analyst)

Hey, thank you very much. I just wanted to ask a little bit more, go into a little more detail about the longer-term cap management strategy. I know that you have rate updates that are wage index. The cap is not, and it makes sense that you're focusing selectively on these shorter-stay patients. Just wondering how that plays out over time and how we would expect that to evolve as we kind of go in through different rate-setting cycles and how that resets every year. If this is something that's just going to continue to accelerate and that we're going to see continued cap pressure for the intermediate term or if we're going to see a reset in the near term. Thanks.

Kevin McNamara (President and CEO)

I'm going to have Nick answer this question, but let me just start by giving you very generally. I mean, ideally, you would like cap cushion to be zero. You want to take advantage of all the opportunities available by your level of admits. There are a couple of things that Nick's going to talk about that I keep in mind. During the pandemic, when our staff was short, our emphasis from hospital admissions was necessarily changed a little bit just because of the acuity levels that a lot of the hospital-based admissions, the acuity levels that the patients come with. It had the effect of increasing our real average length of stay. It was just out of necessity, just based on the staffing levels we were able to maintain.

Nick knew that was going to cause some mid-course corrections as we expanded into the coming years. He's been doing that. The second thing is if you look at the reimbursement that you made reference to for Florida for this year, for this government plan year, in Florida, it was a little bit higher than we anticipated. That's good. That's more profitability. Use a little bit more of our cushion. We're talking about it a little bit more. I'm just saying, very generally speaking, it's a good thing. If you ask me, it's a good thing to have no cushion at the end of the year. It's a bit of a high-wire act, but that's how you take best advantage of the opportunities provided to the business. Nick, why don't you talk?

I just want to give that overview and just say, in a sense, we meant to do this. Nick, why don't you just talk about the kind of programs that things you are doing and you will be talking about over the next 6 to 12 months?

Nick Westfall (Chairman and CEO)

Yeah. I mean, I think then the most important piece is that this is all part of normal business and has been for the last decade plus of running and operating VITAS and any hospice provider. Yeah, from a year-to-year basis with five, six years ago, a regulatory change that dislocated the annualized rate impact compared to the individual market rate adjustments, you may see an acceleration or a reduction over a 12-year window based on the differential between that national wage rate and the local market components. All it ultimately means at the end of the day is a mature hospice provider that's looking at it, evaluating it, and monitoring it on a month-to-month basis has a fiduciary responsibility just to manage and think out about the future trend. It's not anything that materially changes anything in the near term or the long term.

Quite frankly, one of the reasons I think we've been talking about it a little bit more over the last six to nine months is answering some of the questions when we have outsized top-line and bottom-line growth as to why our guidance, which was above historical average, did not have marginal expansion necessarily inside of it. That is sort of the underlying factor. While you have a huge queue of active existing patients and constantly admitting new patients with a median length of stay of 16 days, there is a long tail to all these things. I think we've just tried to be more proactive in talking about those different factors, all of which should have minimal to no P&L impact in the near term, as you can see from 2025 guidance or in the mid and long term.

It's a function of the industry from a rule that got put in place when the benefit was enacted in 1983, when almost every patient was a cancer patient with a very predictable prognostication and outlook.

Mike Witzeman (CFO)

Ben, the only thing, this is Mike. The only thing I would add is, sort of as Kevin mentioned, we knew that the growth path that 23 and 24 looked like was probably higher than what was sustainable for the midterm and long term only because of the Medicare cap. I think that if you're looking 26 and beyond, the operating metrics that we're showing in the first quarter and have sort of guided to for 25 is probably the more sustainable growth trajectory versus what we saw in 23 and 24, again, only because of the Medicare cap.

Ben Hendricks (Vice President and Senior Equity Analyst)

Great. That makes perfect sense. Thank you for that color. I guess, Mike, staying with you for a second, just wondered if we could get a little bit more color, any details you can offer on cash flow dynamics, particularly working capital. It looks like we had a step up in AR. I just wanted to get your thoughts there. Thanks.

Mike Witzeman (CFO)

Sure. There are two things that really affected cash flow and working capital at the end of the first quarter, 25. First one is, and Nick can talk in great detail about it if you want, but we have disclosed in the past, we had a strange case with the OAS where they did an audit of a very select few patients, extrapolated it across some crazy three-year window, and said that we needed to refund $48 million. We had refunded the $48 million, I think, two years ago. We found out in the first quarter of this year, we were getting it all back.

Plus except $8.

Yes.

Except for $8 that we had to pay. Otherwise, we were getting it all back. Over the last two years, that $48 million has been sitting as a long-term receivable because we actually got the cash back, I believe, on April 1st. It got moved to a short-term receivable in the first quarter. Receivables are $48 million higher because of that. The other thing that always affects our cash flow is the timing of the PIP. We got a PIP three days into the quarter this year, or into the second quarter. The PIP payment that we got at the end of the first quarter in 24 did not come until the beginning of the second quarter in 2025. That is $57 million.

Ben Hendricks (Vice President and Senior Equity Analyst)

Those are the two things that are affecting both the receivable balance as well as the cash flow during the quarter.

Operator (participant)

We have the cash now.

Mike Witzeman (CFO)

We have the cash now. Neither of those are any indication of cash flow collection problems or anything like that. It's just timing.

Ben Hendricks (Vice President and Senior Equity Analyst)

Great. Thank you very much, guys.

Operator (participant)

Our next question comes from R. Prakesh with Bloomberg. Bloomberg, your line may be on mute. I'm showing no further questions in queue at this time. I'd like to turn the call back to Kevin McNamara for closing remarks.

Kevin McNamara (President and CEO)

Thank you. Thank you for your attention. I thought I just want to congratulate both our operating units for exceeding our internal projection from which we provided guidance. We maintain that guidance. Looking at the stock price, it seems to be a bit of a dislocation in the market for our stock for some reason. In any event, I want to thank everyone for their attention, and we'll renew these discussions three months hence. Thank you.

Operator (participant)

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