Executive Summary / Key Takeaways

• Chemed Corporation operates a unique dual-segment model, combining the stable, growing demand of hospice care (VITAS) with the essential, cyclical nature of plumbing and drain services (Roto-Rooter), offering investors diversified exposure.
• VITAS continues its strong growth trajectory, driven by successful clinical staff recruitment and retention, strategic acquisitions like Covenant Health, and expansion into new Certificate of Need (CON) territories in Florida, though growth is strategically managed to mitigate Medicare cap limitations.
• Roto-Rooter is showing signs of a turnaround, with commercial revenue gaining momentum and initiatives in place to improve residential demand and marketing effectiveness, aiming for a return to growth after a challenging period.
• The company maintains a strong financial position with robust cash flow generation, ample liquidity, and a commitment to returning capital to shareholders through dividends and share repurchases while managing debt prudently.
• Key factors to watch include VITAS's execution of its Medicare cap management strategy, Roto-Rooter's ability to sustain revenue growth amidst competitive online marketing dynamics, and the potential for future accretive acquisitions in both segments.

A Diversified Foundation in Essential Services

Chemed Corporation stands as a distinctive entity in the market, operating through two wholly-owned subsidiaries that serve fundamentally different, yet essential, needs: VITAS Healthcare Corporation in the hospice and palliative care sector, and Roto-Rooter Group, Inc., a leader in plumbing and drain cleaning services. This dual structure, built over a history dating back to 1970, provides a unique blend of defensive characteristics, tapping into the consistent demand driven by aging demographics and the non-discretionary nature of home and commercial property maintenance. The company's operations are predominantly focused within the United States, leveraging established brands and extensive service networks.

Broad industry trends underpin Chemed's business. The demand for hospice care is steadily increasing with the aging population, while the need for plumbing and drain services persists regardless of economic cycles, although the mix between emergency and discretionary work can fluctuate. Navigating the complex regulatory environment of healthcare and the competitive landscape of home services are ongoing challenges that shape the company's strategic and operational focus.

Competitive Arenas and Strategic Positioning

Chemed faces distinct competitive dynamics within each of its segments. In hospice, VITAS competes with large national providers like Amedisys (AMED) and Encompass Health (EHC), as well as diversified healthcare giants like UnitedHealth Group (UNH) and numerous regional and local players. While precise, directly comparable market share figures for all niche competitors are challenging to ascertain, VITAS holds a significant position, particularly noted as preeminent in key states like Florida. Competition centers on the ability to attract and retain skilled clinical staff, build strong relationships with referral sources (hospitals, nursing homes, assisted living facilities), and effectively manage the complex Medicare reimbursement system, including the per-beneficiary cap. VITAS differentiates itself through its comprehensive team-based care model, ability to provide all four levels of hospice care, and a demonstrated track record of consistent clinical workforce expansion. This operational capability functions as a key competitive advantage, enabling VITAS to meet growing demand and take market share where competitors may struggle with staffing.

Roto-Rooter operates in a fragmented market competing with national franchises, regional chains, and local independent plumbers. Its primary competitive advantages lie in its strong brand awareness, extensive service network covering over 90% of the U.S. population, 24/7 call centers, and rapid response times. The competitive landscape has intensified, particularly in online marketing, with increased investment from private equity-backed players. Roto-Rooter views these competitors as focused on rapid top-line growth, contrasting with its own focus on profitable growth and net income. While direct quantitative comparisons with all private competitors are challenging to ascertain, Roto-Rooter's established brand and operational scale provide a significant moat, allowing it to maintain a dominant position in its branch markets despite fierce competition for online leads. The company is actively working to enhance its digital marketing effectiveness and commercial business focus to counter competitive pressures.

Operational Strengths and Strategic Initiatives

Operational excellence and strategic initiatives are central to Chemed's performance. For VITAS, a critical operational strength is its consistent success in recruiting and retaining licensed healthcare professionals, achieving sequential net growth in licensed workers for 11 consecutive quarters and sequential ADC growth for 10 quarters as of Q1 2025. This capability is foundational to meeting the increasing demand for hospice services. Strategically, VITAS is focused on both organic expansion through securing Certificates of Need (CONs) in underserved or growing markets, such as Pasco and Marion counties in Florida, and accretive acquisitions like the $85 million Covenant Health deal in April 2024. The Covenant acquisition, which integrated hospice operations and an assisted living facility, has positively impacted VITAS's recent financial results and is meeting internal projections, demonstrating successful integration capabilities.

A key strategic focus for VITAS is managing the Medicare annual per-beneficiary cap. With the Medicare reimbursement rate increasing faster than the cap amount in recent periods, the cap cushion has been reduced. Management's strategy involves increasing hospital-based admissions in select locations. These patients typically have shorter lengths of stay, which helps provide additional cap cushion, although it can temporarily moderate revenue growth and margin expansion compared to longer-stay patients. Management views this as a necessary and normal part of operating under current regulations to ensure long-term sustainable growth.

Roto-Rooter's operational focus is on service delivery efficiency and lead generation. The company leverages its 24/7 call centers and dispersed technician network for rapid response. Recent strategic initiatives aim to improve revenue trends, particularly in the commercial sector, which lagged post-pandemic. These include adding commercial sales staff, enhancing customer relationship management (CRM) capabilities, and implementing targeted improvement programs in branches with weaker performance. The company is also refining its pricing strategy for large commercial excavation jobs to balance volume and margin. A significant initiative involves optimizing its online presence and lead generation through a new search engine marketing (SEM) provider, a process that involved ramp-up costs and contributed to margin pressure in Q3 2024 but is expected to yield positive results going forward. Roto-Rooter also utilizes technology like cameras for diagnosing plumbing issues, which helps drive higher-value excavation and water restoration work.

Financial Performance and Liquidity

Chemed's consolidated financial performance in Q1 2025 demonstrated solid growth, with service revenues and sales increasing 9.8% year-over-year to $646.9 million. This was driven by strong performance at VITAS, which saw revenue climb 15.1% to $407.4 million, primarily on 11.9% days-of-care growth and a 3.2% rate increase. Roto-Rooter also contributed positively with a 1.8% revenue increase to $239.5 million, fueled by growth in excavation and water restoration despite declines in core plumbing and drain cleaning and a decrease in independent contractor revenue.

Consolidated gross margin in Q1 2025 was 33.5%, a slight decrease from 34.6% in Q1 2024, mainly due to a margin decline at Roto-Rooter (24.7% vs. 25.8%), while VITAS's margin remained relatively stable (23.2% vs. 23.2%). Adjusted EBITDA, a key profitability metric, increased 6.2% consolidated, with VITAS adjusted EBITDA (excluding Medicare cap) up 15.9% to $70.3 million (17.2% margin) and Roto-Rooter adjusted EBITDA down 2.4% to $59.2 million (24.7% margin). The Roto-Rooter margin decline was attributed to lower commercial margins and strategic pricing adjustments for large jobs. Net income for Q1 2025 was $71.8 million, resulting in diluted EPS of $4.86. Adjusted net income was $83.1 million, or $5.63 per diluted share, compared to $79.8 million and $5.20 in Q1 2024.

The company maintains a healthy liquidity position. As of March 31, 2025, cash and cash equivalents stood at $173.9 million. Accounts receivable saw a significant increase, partly due to the reclassification of a $47 million OAS deposit that was subsequently refunded in April 2025. Net cash provided by operating activities was $32.7 million in Q1 2025, lower than the prior year primarily due to changes in accounts receivable and accounts payable timing. The company has a $450 million revolving credit facility, with approximately $404.5 million available as of March 31, 2025, after accounting for letters of credit. Chemed is in compliance with all debt covenants. Capital allocation priorities include funding operations, strategic acquisitions, quarterly dividends (most recently $0.50 per share declared in February 2025), and share repurchases. The company repurchased $29.8 million of stock in Q1 2025 and had $225.6 million remaining under its authorization as of March 31, 2025.

Outlook and Forward Strategy

Chemed's outlook for 2025, as provided in the Q4 2024 earnings release, anticipates continued growth, albeit with segment-specific dynamics. For VITAS, revenue prior to Medicare cap is estimated to increase 10.5% to 11.3%, with ADC growth of 8.5% to 9%. The full-year adjusted EBITDA margin prior to Medicare cap is projected to be 18.4% to 18.9%, a slight moderation from the 2024 peak (19.1%), reflecting the strategic shift towards shorter-stay hospital admissions for cap management. A Medicare cap billing limitation of $9.5 million is estimated for 2025. Management expects VITAS to maintain above-average historical growth rates (above the pre-pandemic 4-6% volume growth) organically and through acquisitions.

Roto-Rooter is forecasted to achieve revenue growth of 2.4% to 3% in 2025, a positive turn after declines in 2024. This is expected to be driven by continued momentum in the commercial business and stabilization in the residential sector. The EBITDA margin is projected in the range of 25.7% to 26.3%, similar to 2024 levels. Management believes the initiatives implemented in 2024 are starting to yield results, but the full impact may take multiple quarters. Long-term, Roto-Rooter's top-line potential is viewed in the 5% to 6% range, driven by price increases and market demand (new home formation), with potential upside from acquisitions and new service lines.

The overall 2025 earnings trajectory is weighted towards the second half of the year, anticipating accelerating performance at Roto-Rooter and easier year-over-year comparisons, while VITAS's growth and margin may be temporarily moderated by cap management strategies in the middle quarters. Full-year 2025 adjusted EPS is estimated in the range of $24.95 to $25.45, representing solid growth over 2024's $23.13. This guidance assumes a 24% effective corporate tax rate on adjusted earnings and a diluted share count of 14.8 million.

Risks and Considerations

While the outlook is positive, several risks warrant investor attention. Regulatory risks in the healthcare sector, particularly concerning Medicare and Medicaid reimbursement and compliance audits, remain significant for VITAS. Although the recent favorable ALJ ruling on the OAS audit reduced a specific liability, ongoing scrutiny is inherent to the business. The Medicare cap limitation requires active management and can influence growth strategy and margins. Concentration risk exists with government payors representing a large portion of VITAS's receivables. Reliance on single vendors for pharmacy services and medical supplies could pose operational challenges if disrupted.

For Roto-Rooter, macroeconomic factors like consumer sentiment and spending can impact residential demand. Competition, especially for online leads, is intense and requires continuous investment and adaptation in marketing strategies. The effectiveness of recent initiatives to improve commercial business and residential demand trends is key to achieving projected growth. Tariffs on materials and increased vehicle costs could pressure margins if not fully offset by pricing actions. While not expected to be material in 2025, these factors could impact future profitability.

Conclusion

Chemed Corporation offers investors a compelling narrative built on the foundation of two distinct, yet resilient, service businesses. VITAS provides a stable growth engine fueled by favorable demographic trends, operational excellence in workforce management, and strategic market expansion through acquisitions and CONs, even as it proactively manages regulatory constraints like the Medicare cap. Roto-Rooter, while facing cyclical and competitive headwinds, appears to be turning a corner, with management implementing targeted initiatives to reignite growth, particularly in the commercial sector.

The company's strong financial health, characterized by robust cash flow and ample liquidity, provides flexibility for continued strategic investments and capital returns. While challenges remain, including regulatory complexities for VITAS and intense competition for Roto-Rooter, Chemed's established market positions, operational capabilities, and strategic focus position it for continued above-average growth. Investors should monitor the execution of VITAS's cap management strategy and Roto-Rooter's success in driving sustainable revenue growth as key indicators of the company's ability to deliver on its promising outlook.