Thank you for standing by and welcome to the Chemed Corporation Second Quarter 2024 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. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Holley Schmidt. Please go ahead, ma'am.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2024 ended June 30th, 2024. 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 24th 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 for EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated July 24th, 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.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's second quarter 2024 conference call. I will begin with highlights for the quarter where Mike and Nick will follow up with additional details. I will then open up the call for questions. We continue to be pleased with the excellent operating metrics at VITAS, coupled with a strong start for our Covenant Health acquisition. In the second quarter of 2024, admissions totaled 17,344, which equates to an 11% improvement from the same period of 2023. Our average daily census, or ADC, expanded 2,644, an increase of 14.4% when compared with the prior year quarter. These historically good metrics were positively impacted by the $85 million acquisition of Covenant Health, which was closed on April 17, 2024. Nick will provide further insight on the positive impact of the acquisition on these metrics. These operating metric improvements and related financial impact would not be achievable without VITAS's continued strength in hiring and retaining clinical staff. We're also pleased that in the second quarter of 2024, VITAS was awarded the Certificate of Need to provide hospice services in Pasco County, Florida. This represents an opportunity for VITAS to begin service in a vibrant and growing community in Florida. Now let's turn to Roto-Rooter. Roto-Rooter generated quarterly revenue of $221.3 million in the second quarter of 2024, a decrease of 5% when compared with the prior year quarter. Overall, our call volume was down 6.1% when compared with the prior year quarter. Closed rates at the call center at the time of dispatch and when our technician reaches the customer location remain consistently strong compared to historic levels. Residential revenue at Roto-Rooter declined 1.6% and commercial revenue declined 8.2%. Residential demand is significantly impacted by consumer sentiment and consumer spending, which continues to be depressed,…

Thanks, Kevin. Before discussing VITAS results, it is important that we discuss the methodology used in determining the impact of Covenant Health's acquisition on VITAS overall results. As you may remember, we already had significant operations in two of the three Florida locations we acquired from Covenant Health. Those locations require that we estimate the Covenant Health impact as once the operations are integrated, there are not separate results. For instance, there are non VITAS-specific referral sources versus Covenant-specific referral sources in these locations. It is very likely that referral sources in the area have historically referred to both VITAS and Covenant. We have used historical operating trends in these locations to determine what is legacy VITAS activity. All activity above these historical operating trends have been attributed to the Covenant Health acquisition. Of course, we have included the specifically determined impact as it relates to new operating territories acquired. Based on the above, the following discusses the range of impact that Covenant had on the overall VITAS operating metrics. The Covenant Health acquisition contributed $8.2 million to $8.7 million of revenue in the second quarter of 2024. This revenue translated to net income of approximately $1.6 million to $1.8 million. Adjusted EBITDA on the quarter attributed to Covenant Health is between $2.2 million and $2.4 million. As we already had operations in two of the acquired programs, we did not need to add significant infrastructure to absorb the additional activity. This results in higher overall margins for these two programs and for the acquisition as a whole. VITAS net revenue was $374.6 million in the second quarter of 2024, which is an increase of 16.7% when compared to the prior year period. This revenue increase is comprised primarily of a 14.4% increase in days-of-care and a geographically weighted average…

Thanks, Mike. I'm very pleased with the continued sustainable expansion of our workforce and patient capacity through the second quarter of 2024. As Kevin mentioned, excluding the personnel who transitioned over as part of the Covenant Health Acquisition, we expanded our bedside headcount by 234 licensed professionals during the quarter. The second quarter of 2024 marked our eighth consecutive quarter of expanding our clinical workforce capacity in disciplines identified as part of the retention program. In the second quarter of 2024, our average daily census was 21,036 patients, an increase of 14.4%. VITAS has generated quarterly sequential ADC growth over the last seven quarters. In the second quarter of 2024, total VITAS admissions were 17,334. This is an 11% increase when compared to the second quarter of 2023. As previously announced, approximately 680 of those admissions are the result of the Covenant Health patients at the time of the acquisition. In the quarter, admissions, excluding the one-time admissions related to the acquisition, increased in each of the top four pre-admit location types. Our nursing home admissions increased 13.2%. Assistant facility admissions expanded 15.7%. Hospital-directed admissions increased 6.3%, and our home-based patient admissions expanded 8.3% when compared to the prior year period. Our average length of stay in the quarter was 100.6 days. This compares to 99.5 days in the second quarter of 2023 and 103.9 days in the first quarter of 2024. Our median length of stay was 18 days in the quarter and compares to 16 days in the second quarter of 2023 and 16 days in the first quarter of 2024. Our teams remain hard at work integrating the operations of Covenant. To date, the integration has gone better than expected. The Covenant transaction could not have been accomplished without the unwavering commitment, dedication, and focus each VITAS…

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

Certainly. [Operator Instructions] And our first question comes from the line of Ben Hendrix from RBC Capital Markets. Your question, please.

Great. Thank you very much. Maybe a question for Nick here on VITAS. Just curious if you can provide some more information on kind of that long-term runway for census growth and how you're thinking about the capacity that you could open up over the intermediate term given the hiring activity, retention activity, and what we're seeing across what seem to be a lot of your community referral sources in terms of occupancy improvements and skilled nursing and senior housing, to the degree to which that could continue to open up census opportunity, how you think, where that growth could go over the next handful of years? Thanks.

Absolutely. So just to reiterate, right, our revised full-year census guidance for this year, which I realize is part of the question, but not full part of the question, is 13.3 to 14.3 on '24 as compared to '23. When we think about the algorithm into '25 and beyond, which of course, we don't guide to, but just from a commentary standpoint, we think the pace and cadence and all the factors that go into what we built as demonstrated thus far throughout '24 and into the latter half of '23 are sustainable. And so as we think about the markets in which we operate in as well as the markets in which we are targeting to also operate in, and we think this combination that's inferred in our '24 guidance is something that could be achievable on a go-forward basis. And as we point out, the underlying pinpoint is the demand in the market is not changing or waning. However, as long as we continue our successful track record of retaining and attracting staff into all the locations in which we operate, that would be the only limitation. But as we've tried to illustrate over a year plus now with the retention program being behind us, we think we have a really sustainable culture and approach towards methodically building that. And we don't see any headwinds from a demand standpoint for hospice services across the country and in particular in the markets in which we operate.

Appreciate that. And just on the M&A front, can you or any comments you can offer about your pipeline of opportunities to acquire more covenants out there, maybe opportunities where you don't already have a presence and could attain a Certificate of Need? Thanks.

Yes. So I guess the comment we'd make is it is an active pipeline and a very targeted and focused one as we've commented on in the past in states as well as in counties, particularly those that are restricted, because we think they operate very efficiently and help to service the needs of all those communities. So, we have a lot in active discussion, but time will tell. And depending on the provider, obviously there's a bunch of different catalysts of things that would lead towards that strategic interest, whether it's single site, regional focused providers with the ongoing headwinds from a reimbursement, a reform standpoint. And then there's other assets out on the market that are long in the tooth in their ownership cycle for some other private equity firms and others that may create interesting opportunities for us as well. So, we're looking to put our balance sheet to work if it makes sense for our shareholders and as you guys can see in the covenant side of it also from a valuation standpoint in markets which we want to operate. So we think we're well- positioned.

And one thing I'd add is, we've seen in Florida a bit of a blurring in the line between acquisition and new startup through CON. I mean, that I'm speaking about in Florida. The pace of growth that VITAS has been able to achieve has sped up geometrically. In other words, we used to say it took two years to get to about 100 census on a new program starting from scratch and VITAS has blown that out of the water in the last several CON. So I'm just saying that you put your finger on one thing is, yes, there's geography in Florida that we are precluded from being in. VITAS has shown that once they have the legal right to be there, they've grown very fast. So whether we get there by CON or acquisition, as I say, that differentiation is blurring a little bit in our mind. But I think there is opportunities in both those categories for expanding our footprint in Florida.

No, that's a really excellent point by Kevin. Very happy and proud of the efforts our team has put into place to really accelerate impact in each of those markets that wouldn't have been the same years back. So taking a very intentional approach there so that everything is lined up, whether it's through acquisition or whether it's through new start de novo to really penetrate, make an impact and service as many patients as quickly as we can in the markets in which we operate. So that impacts that growth algorithm as well.

Thank you very much for that. And just the last thing for me, I was just getting a lot of questions about the longer term growth algorithm for Roto-Rooter, given the headwinds that we've seen on the commercial side. I appreciate the commentary about the multi-quarter retraining opportunity to turn around those locations. But anyway, we should think about kind of the longer term growth trajectory for this business. Any thoughts on this point? Thank you.

Well, let me start by saying that we've owned Roto-Rooter for 44 years. And during that period, of course, we always say it's recession resistant. It's been a very consistent, strong, but consistent, but grinded out type grower. We have had cyclical periods where it's been up a little more or down a little bit more. Clearly, we're in what I think is one of those cyclical periods where calls are down 6% of the quarter. I mean, it's down. And when you're on that slope of the line, you kind of look at it and say, does this slope continue to go down forever? How quickly does it turn? Historically, it's turned pretty quickly. I would say that the way we look at it is there's nothing substantially changed in the business. I mean, when I look at what we call the macroeconomic trends, those could turn on two Fed rate cuts. I mean, that's not something we worry about on anything but the short term to the extent that the home services sector went through a period during the pandemic of just explosive growth. It attracted a lot of private equity money into the field. I think that's disrupted the market a little bit. What we always say is those competitors, they're running a sprint. We're running a marathon. Their number one priority is growing top line and building a brand. We have a brand and we're out to build net income first and foremost and then top line. So it's just a bit of a mismatch. But I guess to answer your question, we view it as just kind of the normal yin and yang, the cyclical period that we're on the question, the negative side of that question. But Mike, anything to add there?

Sure. On a longer term basis, I think, your question, we view probably the long term potential for Roto-Rooter to be in the 5% to 6% range top line growth and the way you would build that up is we're always going to pass along a price increase at the beginning of the year based on inflation and hopefully a little bit higher than inflation. That's not only good for our top line, but because all of our technicians are generally commission based, we need to at least pass along price increases so that their commission stays up with the price of inflation and real rates. So we'll always have a price increase at the beginning of the year. We always talk about, and it's a very crude measure, but new home formation is sort of how the demand will increase over the years just in the whole sector itself. So call that a couple percent. So if we pass through a 3% price increase, a couple percent demand increase, that's where you get to 5%, 6%. On top of that, if we were to start thinking about growing on a long term consistent basis higher than that, we would be adding acquisitions, which we think are a very, very good possibility over the next 18 to 24 months, and then we would start developing and looking at new lines of businesses that are within the plumbing sort of sector, and we're constantly looking and exploring those kind of different services. So 5% to 6% with add on from acquisition and new potential lines of business.

Really appreciate it, guys. Thank you.

Thank you. And our next question comes from the line of Joanna Gajuk from Bank of America. Your question, please.

Good morning. Thanks here for taking the question. So maybe since we finished on water [ph], I'll continue that topic first. So the business, I guess, sounds like it did worse than your internal expectations, I mean, clearly worse than our model. And you made it sound like things were kind of, you know, when it comes to these headwinds, similar to Q1, but the revenues did decline sequentially, but I assume there's some seasonality because Q1 tends to be busy quarter there. But then when I look at the last few years, obviously, things are skidded by the pandemic. So is there any historical data you can share, kind of organic basis, like typical seasonality Q2 from Q1? And can you flag, was there any new issue or kind of how would you describe the reasons for why it was a little bit worse than what you were initially expecting?

Sure. On a sequential basis, the first quarter and the fourth quarter every year Roto-Rotor's best top-line quarters. There's freezing, there's more precipitation, those things help our demand. Generally, overall, I would tell you that first quarter to second quarter, sequentially, the decline is roughly 4% to 5% of revenue. That's normal. We're going from a really cold period into a more mild period, and so that just that happens every year normally. From third -- second and third quarter, then are generally comparable to each other. Fourth quarter, then generally goes up 5% to 7% based on weather, as well as the idea that during the holidays, people are home more, they're doing more things around the house, they're getting their house ready for, you know, holiday festivities and things. So that helps pump up our demand. So there's a bit of a dip historically in the second and third quarters as it relates to revenue.

Okay. And when I look at the different, oh, sorry.

I was going to say, just to answer one question about issue, why was, kind of it's an overarching question. Why were sales lower than we expected in the quarter? And again, I'm reiterating the many things we've said in our press release and then in our earlier presentation. But generally, I would say it could be two things. I mean, commercial sales were lower than they really should have been. They were lower than we expected. There's no reason for, in our view, for them to be quite that low. I mean, we expect those couple percentage point improvements so that just through blocking and tackling. The other aspect of the question is really relates more to the residential and that is, you know, go on Google and open up plumbing services. You'll see there is a cacophony of service offerings and much more so than past years. It's a very complex issue. All firms are fighting that. We're fighting that through not only our top locations, but all our contractor operations and our franchise, our hundreds of franchise operations. I mean, I have a feeling that of all the companies in that sector to figure it out, historically, it's always been Roto-Rooter to get on top of changes on the marketing side. So we're not there yet. But if you answer your question as far as why is it lower? It's those two issues. Getting the calls on the residential side and doing a better job dealing with the commercial market.

Thank you. And I guess for a later question, because I was trying to say, the breakdown you gave in terms of the different elements, inside residential, commercial, and the water restoration was down year-over-year, I guess more than -- more in commercial. It was down like 5% year-over-year. Because I thought this would be sort of the most need-based business, right? So you because obviously talk about residential being more like macro-driven, consumer confidence and I guess, just economy, really speaking. So I thought, but that will be the business, I don't know whether there was anything year-over-year, or how would you describe kind of the need-based sort of core business versus the sort of the more discretionary elements, how those are tracking?

So, so the water restoration business is dependent on the severity of the issues that we find when we get to the job site. So it's difficult to say why or how it varies on a quarter-to-quarter, sequentially or over year-over-year. What I can say with some definition or some definity is that our conversion rate on calls that we received that we think had the water restoration possibility are at close to all-time highs. So we are converting the calls that we get that we think have water restoration possibilities at a higher rate than we have in the past. But how those calls come in and why they may or may not come in is a hard question to answer, really. It generally goes with our plumbing and sewer drain revenue, though, as you point out. So, we're converting the jobs we're getting. I can say that with certainty.

All right. And I guess, the last question on Roto-Rooter around, so your guidance assumes revenue declines four to five, but I guess it was a bigger decline in first half, so kind of implies second half is still down, but maybe less than the first half. So can you talk about maybe the trends exiting the quarter and into early Q3, how are things tracking in that business?

We are projecting some sequential improvement, third quarter and fourth quarter, on a year-over-year comparison basis. So obviously, if we're down, roughly 5.5% year-to-date, and we're only guiding the 4% to 5% down, there's going to be some improvement in the second half of the year. The other thing I can say is, and I don't want to make too big of a deal out of this, but sequential improvement, intra-quarter in the second quarter, particularly on commercial revenue on a monthly basis, our commercial revenue comps improved each month during the second quarter. I don't want to make too big of a deal out of that, that's just a couple months of activity, but we think that there's some positive momentum for the second half of the year, going in the right direction.

Okay, that's helpful. And if I may, so, because to that end, you kind of said in your remarks around the management team of Roto-Rooter kind of anticipates several quarters for kind of the actions to represent themselves in results, I guess. So is it fair to assume, like headed into '25, there may be still, like, revenue declining, but I guess, status quo, or, you know, assuming the economy doesn't change much either direction, you would think that '25 could be a growth year. And it sounds like it's probably not growing as fast, maybe your long-term, the 5% to 6% you described, but is it somewhere kind of approaching that into next year?

We haven't done any real analysis for '25 yet, Joanna, so I would hesitate to say that we're going to be at a 5% to 6% growth rate in '25, but I think we think we're moving in that direction.

Okay, thanks for that. And maybe switching gears to VITAS. So you raised guidance there with quite a bit, obviously, the DRA [ph], but just small fraction, and I guess the Medicare Cap is lower, but some of our key area of census is much higher, so that's where it is. But the last piece I want to ask and clarify comments around Medicare rate update, so we've seen the proposal, so what do you assume for Q4 for the Medicare rate update? And how much, I guess, it helped your guidance versus, say, your original expectations?

Yes, sounds good. So let me provide what we have baked in, and of course, while I believe it's an OMB getting finalized as we speak, the construct of it is locked and loaded. So we believe, the impact in the fourth quarter that's embedded in our estimate that should come to fruition when it's finalized is about 3.5% net across the entire company, which is better. You know, we then do better, of course, than the national stated blended rate of 2.6, so that's great. In tide of our original estimate, I think, I can't recall totally off the top of my head, but this is slightly better than our original estimate related to it, and it really comes down to as you point out, some of the key markets in which we operate in saw higher price increases than we anticipated, which is good. And then the other real underlying driving factor is the government continues to recognize in that wage rule that high acuity services, particularly continuous care are an area of focus. And so, continuous care happened to have the largest price increase of all four levels, with GIP being the lowest, but it's really reflective of a continued decrease of providers in the hospice space, providing continuous care, and we continue to provide all four levels, and we think that's a differentiating offering not only for our partners, but more importantly for patients and families as we're able to provide services, keep them at home, and help them through a period of crisis. So, that's how it all weighs in.

Right. And the bigger piece seems to be the census grow rate, and you mentioned that you continue to hire capacity, which doesn't address census, but it sounds like you just essentially hire these nurses or workers from others, so I guess I think I know the answer, but I would like to hear you talk about the competitive environment? And for how long, I guess, you can grow at rate and kind of, I guess, continue to take market share?

Yes, I mean, we believe there is -- we feel we're confident in what we've proven over the last effective two years, right? You have seven quarters of ADC growth, two years of clinical capacity, and we've been referencing just the five disciplines associated with the retention program, and that trend is consistent with all the other clinical disciplines we need to provide full comprehensive care. As it relates to talent in the marketplace, that predictability and culture and ability to really provide comprehensive care to patients and families continues to resonate with clinicians. We believe that as a differentiating proposition for them to come to us and come to us with a fantastic cultural and local family that they're joining. So, whether those individuals are coming from other healthcare settings, whether it, we're also seeing a combination of strength of people either coming back into the workforce or a much more reliable and predictable pattern of resources available out there, that's really encouraging, that's what we're experiencing, and that's what gives us further confidence, not only in this year's remaining growth rate at 13.3 to 14.3, but as you point out, all of our revised guidance is volume driven, and we anticipate that to continue going forward, and we'll provide those details once we get into the '25 planning process.

So I guess you're saying, like, you offer culture and better work, but I guess it must be some monetary, I guess, advantages you guys have versus your competitors, right?

Yes, we're going to continue to play a prevailing market rage, rich benefits, all the things that attract, but as we've spoken about over the last two years, it's not just money that drives people to make a choice, one, to come either into hospice, it is also the ability and confidence they have to fulfill that mission and calling that typically bring people into our industry. And we think we're, you know, obviously, I have a slighted view, but we think we're the best place in the market to do so, and we're trying and have evolved our targeted marketing evaluation strategies. The pandemic forced us to elevate our game appropriately, and we've done that. So that's what the last two years, I think, have helped illustrate and we're well past the year's worth anniversary of the retention program being behind us, we've completed the last payment. I mean, we have a proven track record right now of a year plus of being able to do this in the environment which we're operating right now.

Well, thanks for that. And I guess, if I may, on the new CON, so it sounds like this is pretty close to compa [ph]. So can you remind us, when was the last time you added new CON, it sounds like those CONs that you've added in Florida went much better than you had expected. So anyway, to kind of size up opportunity in this new territory, so maybe not this year but, like, as we think about, say, next year?

Yes, we'll provide some of the sizing embedded in our guidance in '25 and beyond. It's one of the things I want to hesitate doing right now, I'd have to go back because I don't want to do it off the top of my head as to when the timing of a few of the last CONs went into place, but what Kevin was alluding to, whether it's CON entry or whether it's acquisition entry, our teams, we've refined our approach and have really found great performance in deploying resources immediately pre-day one and on-day one and being successful at penetrating the markets and for the CON pieces. It just helps to further reinforce the underserved population which drove to the identification of need and we found that demand to be substantial. And so it -- we basically threw away all of our other historical growth algorithms because they were grossly under, we were outperforming all of that. And we anticipate that here in Pasco once we enter.

And Joanna, another big benefit of a new CON like that, a fast growing CON like that, is the Medicare Cap protection that it provides is in the early years almost more important than the contribution to the top or bottom line, but it's good to get them I guess, we don't take them lightly.

Yes. And our latest one, the performance of it is so substantially off the charts compared to anything else historically, that's why I'm hesitating to reference it right now. I don't think that's what we would attribute in the Pasco entry to be, but it was substantial.

Okay. That's good to hear, I guess that, so well, but very last one and thank you for that. On the length of stay metrics, the median is higher, 18 versus 16 last year and I guess 16 last quarter, but then the average length of stay, I guess, been declining. So I guess it kind of peaked almost at like 106 days, but now it's like a little bit about 100 days. So should we expect this average length of stay to continue to decline? Because I guess you had a pretty good growth in the hospital admission, so I assume that's where it's being reflected, but then the median is higher, so I'm trying to reconcile that too? Thank you.

Yes. I wouldn't put too much credence in quarter-over-quarter movement of any of the average length of stay components. I think what you could anticipate is it will remain relatively consistent with where the first half of the year has been. The median length of stay at 18 days, I find very encouraging, whether it was 16, whether it's 18, it may not sound substantial, but to me it really becomes the accurate representation of how well we're doing out in the communities with our healthcare partners of educating them around earlier identification of hospice appropriateness and it begins to translate through that way. And so while one day of movement doesn't meaningfully drive a whole lot, it is something we look at because it becomes a good barometer of how good of a job we're doing with that education cycle and how every day matters in a patient and family's experience here. And that's what we always remind all of our team members and the quarter represents a positive trajectory. But whether it's 16, 17, 18, or 19, that's probably the range we'll operate in. We reference it in a pandemic when we hit an all-time low of 11, but that was more of the healthcare system being completely disrupted, patients coming to us at the real extreme end of life, and we were trying to forecast at that time what it was going to mean over time for a census, and so we're encouraged by 16 to 18 range.

Great, thank you so much. Thanks for taking the question.

Absolutely.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kevin McNamara, CEO, for any further remarks.

Thank you, everyone, for your questions and your kind attention, and we'll reconvene about three months from today. Thank you.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.