CHE - NYSE

Hello, and welcome to Chemed Corporation's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 CapEx do not persist past 2025. This will cause some disruption in VITAS' operating metrics, but positions 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 3 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 6 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, 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 1 or 2 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 as 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.

[Operator Instructions] Our first question comes from the line of 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.

Sure. So from a leverage standpoint, we're still emphasizing hospital admissions, long -- short stay patients over long-stay patients. That's, I think, job #1 in the levers we're pulling. I think the other thing to keep in mind is the community access program that we ran in 2022, 2023 and some part of 2024 has created a bubble of long-stay patients. And those patients will just by definition of what we do, will attrit over time. So that bubble is going to moderate just with the passage of time as well. So I think shorter-stay patients, I think the moderation of the bubble we essentially created with the community access program will certainly help over time. As far as EBITDA margins, I think, probably -- and we haven't put pen to paper, so I'm speculating a little bit, but they're going to be below, say, what we were in 2024, which is a little over 19%. So I am guessing and again, we haven't really put pen to paper, but I would suggest maybe 17.5% to 18.5% is probably a pretty good range for '26. But again, we're coming up with those numbers as we speak.

I'd just like to just reiterate some of the things Mike said that with regard to why it was that we have a cap problem this year. I mean it started with the fact that the natural rate for hospitals went up approximately a little over 2% last year. That's what the cap limitation. If cap percentage goes up to that number, okay? So that differential, I said 2%, 2% delta, we got 5% in Florida that 2% is about $22 million. In other words, we started the year with the fact that the same -- the base of reimbursement, we were currently getting that was going to be $22 million higher than the cap limitation that we're going to face in the [ 2025 ] cap year. We started the last year 2024, with about a cushion of about $15 million, a little over $15 million. So we said, okay, we've got to make some -- we have to make some changes. And it turns out that we're on [indiscernible] to make those changes. Two terrible months with regard to admissions for whatever reason, occurred in April and May. That was enough to knock us off the trend that we were on and again, given the fact that we were starting with approximately $22 million holding it out of, that explains why 2025 is so unusual. And the other point that I was going to make with regard to this bubble of patients that we're going through. The bubble is getting smaller at this point. But I mean, I think, and this is going into something very subjective. But during the pandemic, we saw a change in that in the type of -- we're talking about super elderly patients. A lot of those super elderly patients with COVID perished, okay? The ones that came out the other end were a little bit harder, okay, and tended to have for us, a very long look as say, our average length of stay went up substantially, particularly in Florida. Those conditions are abating. So I mean, that's -- that's -- those are 2 significant levers. But the other thing is not to be discounted is something that VITAS is spending night and day working on is getting a good running start on the new CON property -- properties for our programs. And again, I think that, that's -- that should -- that almost a loan is enough to carry the day. But be that as it may. Yes, we are very confident that, I don't know run rate basis, we're not looking at any -- we're projecting surplus back here, let me put it that way. I would also say that we've always been attuned to cap in Florida, but we've never had a cap in Florida. So I mean, yes, the organization starting at the Chemed level is -- has changed its orientation and its attention levels to this issue, and we're confident we will keep it under control. I mean in other words, internally, we say, it's 19 going to 0, not 19 going to 40. We're pretty confident on that.

That makes sense. Maybe, Kevin, just to follow up on that comment you made about the COVID impact. I mean is that you think what's driving the relative underperformed there have been kind of like a strength below average on admissions. I mean, 4.9 pretty good number but still below trend. Just curious what your thoughts are. I mean is that just the flow-through of hospital admissions being soft as we look at the HCAs and tenants of the world putting up lower admission...

Well, I think it's powerful. But I think the biggest issue in that is, remember, all of Florida, basically all of Florida averaged this 5% increase for this plan year. That put pressure on hospices everywhere in Florida to avoid a cap. Okay? Some of the dynamics for attracting particularly short-stay patients changed. So here it is, the answer to your question is, why do we -- why is it 4.9 instead of 6.9 as part of increase. You might say, well, a little bit harder to fight on the short-stay patients. And again, we're -- we don't have the community access orientation, we're not pushing to -- we could admit a lot more patients and have a lot more revenue. But the #1 thing we're trying to avoid is providing service for free and not giving any reimbursement.

I think the proof in the pudding is that, as Kevin made in his prepared remarks, hospital admissions in the quarter were up over 9%. The thing that brings that down is that we are admitting fewer patients from all the long-stay preadmission locations like ALS. And that's intentional for the Medicare Cap. So in total, in aggregate, you're right, the 4.9 is a little bit less than the admissions we've had in the past. But there's some intentionality to that because the hospital admissions are the ones we're really focused on and we have to take in fewer admissions from those long stay things to rightsize the patient mix in our portfolio in Florida.

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

I appreciate the commentary around those post-COVID demographic factors that point to a more stable cap environment next year. 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 that, that might not persist?

Here, but let me start by saying, it's a good thing if it's higher, okay? As far as we're concerned, we want it to be as high as possible, okay? 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 I mean, if the national average comes in at 2.1%, this comes at 4.1% for Florida. That would be a good thing. Okay. We would -- all we're saying that probably the first month or the first quarter, the first number you'll see will probably assume that there'll be cap in Florida equal to that difference, but we will manage the business as though we were just getting a 2.1% increase. In other words, we've had it in the sense of reserve, okay? We would reserve anything over that national average. And to the extent the admissions then, in fact, came in okay? They would all fall to the bottom line. I mean it was -- it would -- but we wouldn't get in the position we're in this year, which is being dependent on a continuation of a positive trend, for instance. I mean, so it's a good thing if it's higher. And the answer to your question, I think it will be a little bit higher, okay? Just because you look at the factors that we look at that are informative on a prediction of rate suggests that Florida is higher than the national average. So -- but it will be a good thing if it's higher, but we'll manage differently this year than last year. Does that make sense?

Absolutely. That's very helpful. I appreciate that color. On the Roto-Rooter side, I think you noticed in your mentioned in recent quarters that -- there were some local management issues at some of the locations that had driven some weakness. So I was just wondering if there's any linkage between efforts you've made or initiatives you have at the local management level and some of the recovery you've seen in June and July?

I don't think -- I think we're pretty much past the management issues that we've talked about in the past. I think a lot of those were caused by people, particularly private equities poaching some of our management, not only general managers, but also the next level down where we have water restoration managers. I think that's pretty much abated. I do think that, in general, if you look at our management team in the field, not at the corporate level but at the field, it's probably the 10 year is a lot less than it would have been, say, pre-pandemic. But I don't think -- I think we're passed that now. There's always going to be we have 51 branches, all with general managers, all with excavation managers. There's always going to be a subset of those that are going to be on some sort of performance improvement kind of plan, but I think we're more in a normal cycle as it relates to managers. So I don't think that's a huge factor.

No, I would say if I was to summarize just for the sake of [indiscernible] to answer your question, if I saw 2 issues currently at Roto-Rooter, they're big -- and they're not small. The small one is that what Mike mentioned is we had a new insurance program for basically general casualty last year. I mean it was also covered workers' comp and whatnot. But Roto-Rooter comp costs tend to go higher as revenue goes down, employees are more likely to take time off for injuries, that type of thing. And that was a little bit higher than -- it's usually a credit for us because we're pretty conservative in our accounting for that. So it's usually a credit when they did the -- and on the casualty side, we had -- it came as a surprise because when you look at the number of car accidents and the severity of car accidents -- they were reduced. They were lower than the expectation. So you might say, when we expected the outside firm to analyze our exposure given the fact that there were some differences in our ultimate coverage for those assets. We expect a credit, it came out to a big negative was half of our decline a bit the margin Roto-Rooter. So do we expect that to recurred now, okay? I mean, we're continuing to work on the safety. And our actual results with regard to the number of accidents and severity is getting better. So I think that -- but that's an issue that rep the second quarter in many respects for Roto-Rooter. Their sales were -- that's tied to the fact that they also had a bad April and May. No question about it. They're there. But I would put all the other issues at what's the problem at Roto-Rooter, why is it underperforming? It's not management, it's not the labor force. The labor force has good close rates. We have good retention. I mean, that's -- as Mike said, the outflow of managers, the private equity firms, if anything, is reversing. I mean they're realizing trees don't grow to heaven and they're coming back or attempting to come back, some of the managers. But the biggest issue is the phone is not ringing like it did in the past. And one answer for that, and that is that most -- currently, and this is changing. We're in the process of some groundbreaking changes with AI and whatnot. But I mean, the phone is not ringing as much. where potential customers go, they go to the Internet, they go to Google. If you were to type in Roto-Rooter plumbing in Google, before you even see the word Roto-Rooter, there'd be probably 4 other advertisements for rival plumbing. I mean it's just -- Google does an excellent job monetizing that monopoly position. It's changing. We're making adjustments. Mike made a reference that to the fact that we used to get 60% basically of [ offer ], we used to get 40% of our calls from paid search. Now it's 50%. And the reason that is because the free ones where we used to appear on maps on the Google the Google entries, it don't appear anymore. They don't -- they're saying if we can get money from making them pay for advertisers, we'll make sure they don't show up in the free areas. We deal with it. It's a bit of adjustment for us. I think we ultimately will win that battle. We're doing better, I think, at this point, every month. But it all relates to what's the problem with Roto-Rooter, the phone isn't ringing as much as we'd like it to. Plain it simply, we've got the workforce. We've -- our development of water restoration and the continued refinement of our excavation business. I mean, we're as much of an excavation and water restoration business as we are plumbing and drain cleaning at some point. I mean it's -- one business feeds the other. But I mean we -- a lot of our services are those ancillary services. But we have no worry with regard to the long-term persistence of success at Roto-Rooter. Bigger problem right now, no question about it. We have to say that we've really had some tough issues at Roto-Rooter, but it's not nearly as many on the horizon. Mike anything [indiscernible] that's off the top of my head, but what's your reaction to that?

Yes, I would say there's no doubt, as we've talked about in the past, the private equity competition is hurting us, particularly on the drain cleaning and the plumbing side, the number of jobs we do in those 2 segments are continuing to decline slightly. We would love to see those increase. But we're doing everything we can to combat that. And one of the things you see in the results specifically is, as Kevin mentioned, we are doing a much better job at identifying and converting add-on sale opportunities. So we've really supported the revenue at Roto-Rooter with water restoration and excavation which a lot of our private equity competitors do not do. And so we're never going to be in a place where we offer $77 or $88 drain cleaning. That's just -- we view that as a race to the bottom, and we're not going to engage.

They're doing that for air conditioning business really is why they're offering that.

We're doing everything we can then to combat that, get around that. We've talked a lot about the app. We've talked about the service agreements that we've started selling. And then like I said, we're -- our conversion rate is higher now than it's ever been. In the second quarter, we converted almost 50% of our leads to paying jobs, which is significantly higher than the historical average. So I think we're doing a great job when the calls come in. We would like to have more calls, but I think we're -- from an operating standpoint, I think we're doing a really good job at Roto-Rooter making sure that every opportunity is converted to a paying job.

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 that looks like about 120 basis point sequential decline in effective tax rate. And just -- that's it for me.

We -- it's a bit of an accounting thing, but we get -- when people -- when people exercise stock options, the company gets essentially a larger tax deduction when the stock option with what they realize compared to what we've recorded as the expense. And it's just a function of how the accounting works. Obviously, with where our stock price is, we haven't had too many stock option exercises in the quarter. And so that really drives the change in the rate. When we get a credit in our expense, and we have a lot of exercises, it drives down the rate, and we didn't have as many exercises in the second quarter, and that's really the big driver.

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

So I guess, first on VITAS, the comment around the weaker admissions, especially the short space in Florida, why I guess that came at the time versus earlier if you're saying that everyone was chasing, so to speak, these shorter-stay patients. So like why did it show up kind of later versus, say, when the cost situation started already in October of '24. And then what gives you confidence in being able to get this higher mix of short-stay patients going forward.

I think the -- our confidence in the higher things going forward is really that we've seen a trend. April and May were pretty bad. Before that, I think we were on track and June and July seemed to be back on track. I can't tell you exactly why April, May weren't that well that strong. What I can tell you is when we model out the current operating statistics that we have for June and July, we are pretty confident in the $19 million number for 2025. And we're also pretty confident excluding the impact of the rate issue that 2026 will not have a cap problem.

But let's say this. We need -- we like admits, number one. We like all admits. We want the mix to be right -- how do you get a lot of admits. Well you have good reputation. You keep doing what we've been doing. We could get -- I'm picking a number, we could probably have 5% higher admits right now. If there was no Medicare cap limitation just by snapping your fingers. I mean it's more than doable. How do you get the right mix is really your question, Joanna. And the answer is, well, it's by what we have historically said pulling the right levers and -- but it's emphasis. It's where your salespeople are calling. It's how fast you respond to -- how fast you respond to a lead where somebody expressed a interest in having a meeting or discussion, you make sure that with regard to the hospital referral, you make sure you're there within an hour. You just -- it's that type of emphasis, which could put this over the top. And just so you know what we're talking about, we're talking about small changes. We're talking about small improvements affecting the results by 1% or 2%, which is more than what we're talking about as far as the issues we're facing. I'll just say that one of the things -- the point that I made the point is the type of things we've done in the past when we wanted to emphasize more short-stay admissions were a little less -- they were a little more unveiling just because other people were doing the same thing. They were following our lead. And so we just had to refine our efforts. And as Mike suggested, the results of those refined efforts are suggested to be more than adequate. And we'll continue those and we'll continue to refine them.

Right. And then the other piece, right, when you were talking about the your confidence in not having the comp issue right is the new counties that you're entering in Florida. So can you talk about the ramp-up there? And is there a way to think like how much assets could come from, from that growth in Florida?

Well, let me put it this way. We think it's tough. I mean, because we're new in one, and it's been a big success. Pinellas County is one that we got most recently. It's big, I mean, I'd just give you an order of magnitude, Mike, what do you say there's 8,800 admits.

Yes, 8,600 admits in 2024.

And if you multiply that number by $36,000 you see maybe $350 million for coverage for Medicare cap billing. I mean it's -- the opportunity is there. Now with regard to, let's say, Pinellas County. We just have awarded it. There's elements of finalization and dealing with appeals that we have to do in our projections where I said we're projecting no cap in the fourth quarter or anything significant cap next year. That has does not depend on Pinellas County.

None of our projections include any projection for Pinellas County.

Now if you ask me, will we be operating and thriving in Pinellas County the next government plan in the year, I have no doubt we will -- but that's not the basis. Our basis is just making slight improvements in the state as well as a whole. But those are -- we mentioned those regularly for the next -- it begs the question, what about the next year? The answer is Pinellas County for one should be booming by them, let's put it that way.

Yes. I mean, ultimately, the new CONs will buy us a little bit of extra time to rightsize the patient mix, which is what we're doing and which is what we've talked about for the second half of '25 and all of '26.

Right. And I guess you alluded to the ideas of like you don't know for sure in the Florida rate update yet, right, because we didn't see the details yet, but it sounds like you -- based on some other data points where you're thinking that it's likely that it's going to be some of that issue repeat, but it sounds like you think it's smaller, right? So I guess you're saying that despite the fact that you think that there is a consideration that there could be the gap that there's, there's enough of these other things you could do in terms of the mix and then potentially that's not even going to consider the new countries. Right?

Right. So our current models, which show that we have somewhere in the -- we are projecting $15 million to $20 million cushion next year in Florida, but that does not include any potential credit we could get in Pinellas, but it also doesn't include any of the rate differential. I think the -- we've done some analysis on what we think the hospital wages look like in Florida. We think it is going to be above the national average. Having said that, what we saw in '25 was a wider spread than we've ever seen in the 20 years we've owned VITAS. We would expect that to continue. But even if it does, we will manage to that number either way. We want it to be as high as possible. We'd like a 3% delta. I mean give us -- but we would reserve it. In other words, all we're saying in that case, if they get -- if there was a 2% delta, we got -- we got 4% in Florida and 2% nationwide, Medicare Cap limitation went up 2%. The first month what we would do in our results until proven otherwise, we would take. We would then say we have "Florida Medicare billing limitation" until we take the money we've got from the government, we've set it aside knowing we're probably going to have to give it back unless we -- unless the advents came in the door, the additional admin. So it's a heads you win, tails, you don't lose situation if the cap is high. If the increase in reimbursement is higher in Florida national average, it's good.

Ultimately, what we're trying to say, Joanna, is that our current operating model and the current trends that we're on will not result in any cap in 2026. There's an unknown with the rate differential. We'll deal with that when that comes. We'll let you know what it is when it comes, but our current operating model will suggest that we will not have any cap. If we try to put into the model some sort of rate differential, it would purely be a swag. And we don't think that, that makes sense to do. When we're trying to essentially portray that the 19 is going to zero, not 19 to 50, as Kevin mentioned.

I guess what you'll see next year, and I'm putting myself in your position. You say, okay, what should we do for estimates and expectations. For Florida, you should assume that the Medicare Cap limitation will go up in a sense, the national average, anything above that ignore, because we will. It will be like California for us. In other words, we know right now, California is very profitable or not. We make all our estimates. We say, okay, there's going to be about $8 million of cap in the state. If we got an increase, if it was 2%, if it was 2% higher than national average, we'd say, well, technically, we're going to come in exactly where we thought, but we will have a Medicare cap reporting of in Florida in that case. All things being equal, but let's say, $20 million, okay? We would know that, we would state that on the day that we had the information from the Florida reimbursement, what it was. And we will ignore that internally. We suggest analysts kind of ignore that and just say, they may have to give $20 million back to the state of Florida, but there's a good chance we'll do better than that and have to give less or none back to the federal government. I mean, we'll see how it comes, but it's not a big issue to us. Our view is we're not holding our breath waiting for that number. The bigger it is, the better upside for us. But we're going to try and make it next year for everyone, for people whose job it is to predict and analyze the results of the company, a non-entity -- something that does not affect the ultimate task that you're doing. Does that make sense, Mike, I have a -- I mean it's kind of a tough one because it sounds like a bogey Medicare cap, but it wouldn't surprise me at all, if it's different. I mean, what are the odds is going to be exactly the same.

All right. Maybe just quickly on the other business, just to clarify. So you called out this higher insurance, I guess, accrual in the quarter. And I think you did something about -- you don't think it can persist, but you did raise your -- or sorry, lowered your margin for the segment -- for the Roto segment by 200 basis points. So do you assume that the issues you [indiscernible] to persist for the rest of the year?

Well, here's the point. First of all, there's a catch-up element to it. I mean it's more than the expense we took is more than what we took in -- effective in the quarter is more than one quarter's result impact, number one. And number two, the point that if Roto-Rooter can continue to do a good job reducing the number of accidents and the severity of them, it's got nowhere to go, but down. Now let me start by saying that we had a new -- based on the insurance market, there -- we have a new policy, different deductibles, different elements. There's some adjustments we have to make as far as managing it. But no, we don't expect big surprises in the -- on the Roto- Rooter expense side in that regard. And so when I say don't persist, there's no magic bullet other than it was a lot to take in, in one quarter, number one. And number two, we're going to do a better job managing and predicting it. But ultimately, the answer to your question Joanna, is just that our emphasis on safety and reducing those type of expenses, doing a much better job monitoring the insurance adjusters who are settling these claims, that type of thing, that's where we're going to see the improvement. So if you combine it with good experience and much more emphasis on what happens after the accident occurs, there's a lot of confidence on our part that, that level of expense you saw and the level of deterioration in the margin that you saw in the second quarter will not persist.

And as Kevin mentioned, in the almost $5 million extra hit we took a -- there's at least -- there's some of that, that is out of period. But just so you know, when you're doing your model, Joanna, we did include an increase in those costs of $4 million in total for the second half of the year. We didn't want to be caught short again, not at least considering those costs in the guidance we put out. So...

But the improvements I'm talking about will take some time to put it.

So in the guidance that we've put out, Roto-Rooter has baked in $4 million or $2 million in each quarter of additional expense for this issue. Could it be better than that? -- we think it could be, but it's hard to say, but we don't want to be short of that.

regardless of the cash or what's on no debt on the balance sheet, we're not going to just buy things to grow. They had to be at the right valuation. They had to be at the right place in the right location. And I would also tell you, there's no change in the idea that because [Operator Instructions] I'm showing no further questions in the queue. I would now like to turn the call back over to Kevin for closing We don't have a hard data until the next report by the outside auditing firm.

All right. That's helpful. And if I may, a last one on capital deployment, right? So cash flow pretty good. I know that, yes, there's issues in one business and the other. Do those things change your view of things because I want to say you did this hospice acquisition. And at that time, you kind of were alluding that there could be more like that. So can you kind of refresh your commentary around that? Like is there any change in that thought process around maybe there's some consolidation analysis to be done?

There's no change in strategy, Joanna. We would love to make acquisitions that are at the right valuation on the VITAS side in the right location. We continue to monitor and have those conversations. It's a bit of a long lead time because we're contacting people. We're contacting organizations, essentially cold calling them in some instances to see their appetite for making such a transaction. of our strength of our balance sheet, significant share buybacks and acquisitions are not mutually exclusive. We can do both. And that's why we've kept the balance sheet the way it is. So I would expect some movement in the third quarter, probably on a share buyback perspective. But otherwise, there's no change to our overall strategy.

remarks.

Well, I just want to thank everyone for their kind attention, and we've got a tough quarter for our operating units, and I think we're well on the way to improving the outlook, and we'll see in our next report 3 months from now. Thank you.