Chemed Corporation. We've got Kevin McNamara, Chief Executive Officer. We've got Nick Westfall, President and Chief Executive Officer of VITAS Healthcare, and Mike Witzeman, VP and Chief Financial Officer. Thanks so much for participating in the conference again this year, guys. Chemed is rather unique, and I always wonder whether the business model, including Roto-Rooter, VITAS, everyone has a sense of it. So just not to spend a lot of time on this, but you want to give a high-level view of the overall company strategy, growth targets, and so forth for people that might be new to the Chemed story.
Sure. I'll turn it over to Mike, but generally speaking, five minutes, we came together in an interesting manner. Chemed was a public company formed in 1971, subsidiary of W. R. Grace & Co. Had specialty chemical companies. Around 1980, bought Roto-Rooter for $18 million, which proved to be a good acquisition, and built and sold a number of companies. Had a healthcare group that had spun off as Omnicare in 1981. Has had a number of companies. Had a public company in National Sanitary Supply that it sold off. We got to where we sold DuBois Chemicals, which was our largest subsidiary, but we got to 2004, and at that point, we had an investment in VITAS, which, again, we tried to take it. We tried to buy it. It wasn't available. We said it was a good investment. We had Roto-Rooter. We had cash.
We had the opportunity to buy VITAS. They said they found a buyer for it. We said, "What price?" We said at that price, we'd rather be a buyer than a seller. We bought it. We said at the time, "Look, we have two very different companies. We'll try and be very transparent. We'll release a lot of internal details on the company so that each shareholder can do their own sum of the parts. To the extent there was some kind of conglomerate discount, the market would take care of it." I think, generally speaking, even though we get a lot of comments like, "Well, don't you want to sell it? Don't you want to separate them?" The answer is, if it made sense and created value or prevented a distortion in value, the answer is yes. That hasn't occurred.
So it turned over to Mike. I mean, basically, what I'd say is our goal is we have two companies that have they're both service companies that are both leaders in their industry, and they throw off a lot of cash. They don't have a lot of capital needs. They're service businesses. We've bought well over $1 billion in our own stock back. We've reduced our shares outstanding from about 27 million to 15 million, and I guess steady as we go, but Mike, any other thing as far as goals and financial aspects?
No, I would just say from a growth strategy perspective, we think that Roto-Rooter is a great grind-it-out, mid to high single-digit kind of growth company, and fairly predictable. It's in a bit of a lull at the moment, but it's fairly predictable over time, and then VITAS is really the opportunity for above-average growth on a year-to-year basis, particularly as we look out over the next maybe three to five years.
Okay. Great. Thanks. So we're 11 months into this year. The company did, with the recent quarter, tweak down slightly the EPS guidance outlook with a range $23-$23.15. How would you just sort of characterize what's developed this year? What have been the positives? What have been some of the challenges?
Well, I'll turn over to Nick for the bright spots. But basically, we've overperformed our guidance on VITAS side, underperformed on Roto-Rooter. I mean, I think it's important to note that on a net basis as far as adjusted net income, we're still expecting to be up 13%, 14% for the year. So it's not a turnaround situation. We're in a distressed asset situation, but a little we don't like any deviation with regard to Roto-Rooter, and we're still fighting that. It's largely a demand-side issue, but it's one that we think we have our hands around. We've owned Roto-Rooter since 1980. We have seen some situations in 1999 and 2009 where Roto-Rooter had three or four tough quarters in a row.
But given the value of their service mark, their market dominance, as it were, in other words, dominant compared to a lot of small competitors, we have confidence that we will reach that equilibrium and get back to our, as Mike suggested, grind-it-out, same-store growth. But on the positive side, we have VITAS, and we have Nick here. What do you want to have to say about this year, Nick?
This year, as you can tell from a raised guidance halfway through the year, we outperformed our own internal expectations that we were very optimistic about when we started the year. So I think the key theme with that, and we're getting more questions, and we haven't finalized guidance for next year. We'll talk about that in February, is coming out of the pandemic. We did some things both internally at VITAS as well as the industry has some real tailwinds behind it as well. And so now we have nine quarters of sequential growth, building net bedside clinical capacity that we have a sustainable culture and model for. And the correlated piece of that is two years or eight full quarters of sequential volume growth from a census standpoint. And so as we exited the third quarter, we're caring for well north of 22,000 patients every single day.
We did do a tuck-in acquisition to begin the year. A tuck-in, it's our largest acquisition, but it's $85 million, and it has performed just as well as what our opportunistic thought process was, and so we had a lot of things going for us, and as we finished the year, the team's done a great job of not only executing on it, but from a volume standpoint, I think in the third quarter, volume was about 15.5% census growth. That was higher than our optimistic expectations to start the year, and from a contribution standpoint, adjusted EBITDA ex-cap grew almost 33% with 200-plus basis points of marginal expansion, so the team's done a wonderful job of ensuring we're continuing to invest to meet this increasing demand, and we'll continue to do so. We have the team members. We have the proven sustainable path to now do that. As we exit the year, we feel great about revised VITAS guidance. We're excited to talk about 2025 and beyond, not only for VITAS, but the overall hospice industry as well.
That's great. That's great. Well, I want to spend time on both. I guess I'll continue on the positive one first. So in VITAS, that underlying growth is volume growth is striking. I mean, we've heard about excess mortality coming out of the pandemic, but that's sort of normalizing now. What do you think is driving? Is it just the availability of more clinicians or labor that's helping you? That demand was always there, and now you can service it? Or what do you think it is?
Yeah, so let's talk the industry to begin with, and then we'll get to VITAS specific because it's really a combination of both of those things. I'm a firm believer in draw-through of mortality through the pandemic. I think time will prove that demand never waned. People access the hospice benefit later in their disease trajectory because of the disruption to the healthcare system. So the strength of the industry going forward is still very positive. And from a demographic standpoint, particularly when you start looking out over the next 10, 20 years, and all independent studies help to support this, you're looking at high single-digit, low double-digit volume growth expectations across the country. That's first and foremost, I think, the most encouraging piece. We operate in states where people are moving to that are in that aging population. That's another benefit.
But the bigger picture item is the hospice industry has always been known to improve quality of care. But the other thing it's highlighted over the last few years, which has gotten a lot of support up in DC, is it actually saves money for the Medicare Trust Fund. And it could and will save more money, not only with more people accessing the benefit, but people accessing the benefit earlier in their disease trajectory, which was a misconceived notion that somehow it was costing the system money when, in fact, it was actually saving the system more money. So there's ample opportunity through a variety of different channels to build earlier access. So when you combine that plus just a very upward trajectory of the number of people that will access the benefit, that's what's exciting for the industry long term.
For VITAS, we're obviously very proud of who we are, being one of the original founders of the benefit, but have really leaned into what makes hospice unique inside of the healthcare system, which is people join a hospice company as a calling, typically. It's a mission-focused, mission-aligned business, and so we've really leaned into that. That's always been who we are, but coming out of the pandemic and doing some things that really celebrated that culture and elevated that culture, we have been able to attract and retain more clinicians in our markets, some from our competitors, some that want to get out of a hospital setting and go into hospice, those types of things, and the demand has always been there.
And so the combination of those two things is what gives us the excitement around the growth trajectory, the predictability, and frankly, what we're defining as our new normal expectation going forward from a volume standpoint, which is higher than everything we would have alluded to pre-pandemic from a growth.
I know this has been a point of debate for the last decade, but obviously, there are policymakers saying, "Hey, hospice benefit's something we support. It saves the system money," like you just said. Where are we at on that spectrum? I always get asked, have we taken advantage of that, or is there still a long way to go? I know sometimes people throw out different statistics. I don't know if you have anything about how people that could be on the benefit that aren't, and also how early they're getting on the benefit.
I do. I would say we're early innings, and I wouldn't argue it as taking advantage. I think it was building broader awareness related to it because taking advantage could be perceived as something negative. Before the pandemic, about 51% of all Medicare decedents accessed the hospice benefit for at least a day. That waned down to 47%. It's back up to 49%. More often than not, that's what people focus on, of how many people are getting one day of care or not. Keep in mind the denominator is growing from Medicare decedents, as well as the numerator is growing the whole way through. The thing that sometimes gets underappreciated is that will move the needle if you go from 51 to 55.
If the existing 51% access the benefit one week or two weeks earlier on average, or a month earlier on average, it has exponential growth and quality of care and economic impacts for the Medicare Trust Fund as well as for every provider. That really is the thing that excites me. It's not moving it from 51% to 55%. It's taking the existing 51% and saying their median length of stay on the benefit was 15 days last year. If we move that to 30, instead of saving the Medicare Trust Fund $4 billion on a $20 billion reimbursement, it will save it, ballparking this. There might be a study coming out that helps to support it. It'll double the savings. Okay? What it also helps to highlight is a historical false preconceived notion that there's a six-month requirement.
President Carter is approaching almost a two-year window in the next few months of being on the hospice benefit, appropriately receiving wonderful care. That is the journey we all preach inside of the industry, and what those studies help to highlight is when a patient's been on the benefit and exceeded their original prognostication of six months or greater, it saves the Medicare Trust Fund as opposed to 3%, 11-plus% every disease diagnosis. That's the exciting piece where we can actually be part of the solution for healthcare in the country, and I would say if we're using a baseball metaphor, we're still in the first or second inning of broader awareness, and I'd like to amplify one point Nick made, and that is part of where we are. Florida is a great state for hospice. The demographics are great.
Hospice is very well known and understood, both by the referring physicians and by the patients and their families. I think as a direct result of the fact of that knowledge and the appreciation of the value of the benefit, look at the average length of stay that we have in Florida. It's about 40% higher than the national average. Okay? So I'm just saying, I won't say they correlate point by point, but that's just what the difference by just that knowledge and appreciation of the value of hospice can mean in how soon a patient gets, a very eligible patient gets on the if you say half our patients are with us well under 20 days, they've been terminal probably for six months in a medical sense very often. So it tells you how high it's up in many respects.
And to put a point on Kevin's 40%, to translate it, we're talking six to seven days in total from a median standpoint. And what may not sound like a lot, but seeing and hearing it firsthand, that extra week starts to be profound. The most universal thing I have heard in 12 years of being directly affiliated with VITAS is, "Wow, what an experience." I wish me and my family knew about this earlier, and I wish, because we didn't get to experience as much of it as possible. It might be the best care my loved one who has passed received, we perceive, received in the last five years of their life.
So I understand the benefit to the family, and I understand the benefit to the healthcare system of having someone go on earlier to hospice. I've also understood that the costs tend to be heavily skewed that you incur toward the early days and are on hospice and toward the latter days. And so if you can stretch out that middle part, it's.
The secret sauce.
Yeah, beneficial. I was going to say to you, but maybe you can expand on that a little bit more if possible.
Yeah, sure. So just to clarify, we're not measuring profitability by patient or anything like that. That doesn't align with our mission. But by definition, we are incurring about $1,400-$1,500 of cost through a variety of different activities before we ever get to evaluating a patient independently. And with a flat capitated reimbursement system, right, by definition, it may take a few weeks before we'd ever perceive of being break-even or not losing money. But that's not how we operate at the end of the day. What I would offer by expanding those pieces, yes, it's more beneficial to us. But if you think about where we are as a country, hospice was, while it's still a per diem reimbursement, we're taking full risk on patients. We're responsible for almost all the cost.
And so since 1983, we were the first experiment of a value-based reimbursement system that has proven to have a return. Now that we're moving the rest of the country in that way, it's one of those things where it allows us to not get into attempting to play God in any way, shape, or form. Let's try to align what's right for the patients and families, provide the care accordingly with it. And I'll tell you, we would take risk all day long on every patient in which we're bringing on as long as there was coordination because we know it will elevate quality, reduce overall cost, and that's what almost every hospice provider can say universally.
We hope inside of the framework of prognostication, they're on with us as long as possible because that alignment, it goes to show how much inappropriate waste is delivered in the last 12 months of life, usually for a lot of patients, that hospice and a complementary pre-hospice community-based palliative care offering could really help elevate over time in a more costly environment.
Okay. You alluded in the opening comments to Covenant Health acquisition you did. Can you maybe give us a little more on that deal and what is the overall pipeline? We've obviously got chatter at this conference that the Trump administration might be a little more friendly on the antitrust side than what we've seen in the current administration. Would that be something that might open up more opportunities to you?
I think the answer to that is yes. We'll comment, ask Mike too, as well around, "Hey, what we're seeing." As it relates to Covenant, it has gone consistent or even slightly better with what our forecast was. Mike alluded to what it has meant year to date from a performance standpoint. The cultural integration and the thoughtful execution of acquiring a long-standing, like-minded, mission-focused nonprofit hospice is not insignificant for our industry or us. It goes to show, "Hey, when you take things that become distractions, like taxation status aside, two companies can come together and do something much grander and broader." I once again think we're in the early innings as an industry of a lot of those things continuing to occur, and that's good, and that is necessary at the end of the day.
Scaled providers that can use scalable workflows, call centers, support centers, etc., are able to extend the Medicare dollar further than someone who doesn't have that scale at the end of the day. And I think that'll be a common trajectory that maybe the new administration helps to also support going forward. But the reality is it's such a small and fragmented industry. I don't think we'd butt up against much antitrust stuff to begin with as the industry continues to figure out the way to service the company better. Any other thoughts on Covenant for anything further?
I think we are fairly optimistic on a pipeline of potential Covenant-sized deals, but there's a few hurdles from an internal perspective that we would certainly want to keep in mind. First is we like CON states or states where there are restrictions on barriers of entry. The second would then be locations that, generally speaking, have some size to them. That's important, obviously, from patient flow perspective, but also from a staffing perspective. And then the third thing, of course, is valuation. We did the Covenant deal at six to eight times EBITDA, which to us is a great valuation. We would love to do more deals at that level, but it could be a higher multiple, and we would still definitely be interested and excited about a deal like that.
I'd also like to add that in Florida, a near-functional equivalent of an acquisition is getting a CON. Okay? Now, obviously, with an acquisition, you hit the ground running. The cost of the CON is just basically the preparation costs and the normal buildup cost of the business. But we have found that as far as our pace of growth, Nick, because we've recently, it's been unprecedented as far as what you've been able to do with the growth of a new CON. So I understand that there's territory in Florida that are highly valuable, highly prized. They're regularly come up for review for more hospice awards. And Vitas and Nick have done a very good job in being right at the forefront of either getting it or being considered the best or second-best candidate. So that's another equivalent way of expanding geography in Florida.
So if we summarize it, industry growth is great, seems to have a lot of support from a macro healthcare standpoint inside of DC. VITAS' organic operating metrics, the team is doing great related to that. And then there are a lot of other avenues where we could thoughtfully, with prudent financial discipline, leverage our balance sheet, whether it is expanding into new markets or expanding into contiguous counties like in Florida and other places as well that give us that confidence over the one, three, five-year time horizon around the outlook of the business.
Okay. I'm going to, as a healthcare analyst, venture into the other side of the business where I might get myself in trouble, but I'll try to ask some coherent questions here. So Roto-Rooter tends to hum along pretty well. This year, there's been a couple of challenges. Is the commercial just the ebb and flow of the business? Is that what you're seeing there? And then it seems like there's more specific stuff on the residential to ask you about. But just give us.
Let me make a digression, which answers certainly the commercial side of that question. Digression is just to say, how did we get here? During the pandemic, people were in their homes. They had nowhere else to spend money. Home service companies went to the roof. Everyone wanted every little thing fixed in their homes, whether it's HVAC, whether it's plumbing, electrical, whatever. Companies boomed. That drew a lot of private equity investment. Okay? We saw that. We saw it, and first showed up with us was the fact that it seemed like we couldn't hold on to our branch managers. They were being hired by these PE firms. That is professional managers. It was one of the go-to places to plug in a plug-in manager. We dealt with that. We dealt with that issue, which I won't bore you with, and that has abated that pressure.
However, we still have a lot of additional private equity-backed competitors. Well, the first question on the commercial, okay, so here it is, it's the pandemic. We have more business than we can handle. Okay? What do we do? Human nature. We dealt with the business residential that took less hand-holding. I mean, the commercial, you got to call on them. You got to sometimes negotiate prices. You got to be there at a moment's notice. The easier business was the residential. And there was more than enough of that to go around. Our commercial approach did suffer. Okay? So the first issue is that now we get to the end of the pandemic. Things are getting tighter. Competition is stronger and more intelligent. That is much more active in the marketing side on the Google front. You can't flip a switch and get commercial going.
We said the first thing we said, we talked about it a couple of quarters ago. We've got to get our commercial sales up. We have to have our effort on the commercial side dramatically increased. And I think we've been successful in starting that process. Mike, any comments on the commercial side in the last two quarters?
One thing I would say is, and you referenced it, but we see some real momentum in the commercial side. We think that that's something that we have the ability to impact more quickly with some management techniques and things we've been doing. So we see some momentum in that building already here in 2024 and expect it to continue in 2025. It's more repeatable business. If you're an owner of a large apartment complex or something, you're going to need us multiple times. So we consider the commercial business like the foundation of each of our branches because it's a little more repeatable, a little more predictable. So we're.
So you're showing sequential growth now on commercial.
Commercial, right.
And commercial. When does that translate to year-to-year growth, do you think?
We would expect 2025.
'25.
And let me jump ahead to talk to your question, but I think you need to beg the question in a sense. So we have this situation where we, because of the pandemic and some of the consequences, one of the consequences is we had left this effort directed towards the commercial side. Another consequence is these PE firms. PE firms, as we said, have job one is first make a name for yourself, grow the top line, worry about profitability secondarily, certainly shortly before a flip of the business. But they had to go from very little to something in order to increase value. And what we saw that was much more competition on Google, net effect on our Google advertising, which is a substantial part of where we get our leads, the costs associated with that have more than doubled since the start of the pandemic.
They also developed a new service offering called LSA or Local Service Agencies, and I would say that that was introduced as a kind of a loss leader forum, drew a lot of people into the Google advertising world, but they've doubled the cost of that as well. They're bleeding. Google's kind of bleeding these private equity firms dry. That is very, they need the top line. They need the sales. We have firms with three or five trucks in a city bidding as much for jobs as we bid for 50. I mean, so it's a tough operating environment. Now, we think we're in it for the long run. We assume they are as well, but we think the situation, if you really follow the Roto-Rooter, I won't get into it in the time we have available, but we've tried.
We've gone through a situation where we're saying, "Okay, we will try throwing money at the issue. We will try and match them dollar for dollar on this kind of almost unsustainable, ruinous doubling of the marketing price." And Mike, did you say that our cost per lead has gone from?
Yeah. You mean since we started this or?
With the new.
Our new marketing firm that just started in July, our cost per lead was roughly $125 previously. Without losing any position, it's gone down to $95. We've started operating that program a lot more efficiently.
We're kind of throwing money at it. We didn't see it working, okay? So we tried that. I can tell you our competition is still throwing money at it, and just to give you a perspective, there's a firm, this is a specific firm, but it's in Cincinnati. They have billboards that advertise. We do any drain job for $99, okay? They advertise on Google. I checked yesterday. They were above our ad, so they're bidding more than we were bidding. We were paying about $180 for a lead, so they were bidding more, and I assume if they got their leads through Google, they were paying $180. How are they going to make money at $99? Well, the answer to the question is they're going to bait and switch. They're going to say, "Oh, there's also a trip charge. And oh, that's in the basement.
We didn't know it was in the basement." But still, you can see there's a lot of bait and switch just to get to break even, just for your marketing cost. Is that sustainable? Probably not. But anyway, it gives you an indication of what Roto-Rooter is dealing with. Again, begging the question is, "Well, what are you going to do? Wait until they all dry up and blow away?" No, we're a public company. We're worried about next quarter, first half of next year. There's a race in the industry to say, "What can you do outside of Google?" If you're dependent on Google for a lion's share of your business, you're a captive. Okay? So the goal has been, "What can you do outside of Google?" And we've already said, emphasis works very nice on the commercial because the commercial is not dependent on Google.
Commercial, if you have enough salespeople out there, you have enough people calling, you have enough emphasis with the commercial side, they know that they can get in touch with you on numbers that they don't have to go to Google for. Okay? So think of what that saves per job. I mean, the ability, what Roto-Rooter has, what they can put into that effort. That's another one. And then there's another one which I won't bore you with. Two minutes. Things like apps. Okay? We can get a Roto-Rooter app on our customer's phone. Over 50% of our customers are repeat customers. At the time of service, we can get them to put that app on and we say, "Push the app. You're a VIP. You get a $25-$50 discount. Why wouldn't you put the app on the phone?
Why wouldn't you push the button on the phone rather than go to Google?" Again, just that's one of several efforts we have to get away from the dependency on Google, which is tough because they're a monopoly in the service area.
The residential, similar dynamic with how people are getting access to you guys is coming through Google as well?
Almost, yeah. 80% of our residential leads come from Google.
That's up about five percentage points from pre-pandemic.
Okay, and so the strategy for the residential is basically the same to try to.
Get an app.
That was the strategy.
Get an app. In other words, commercial, we wanted to have our number to call it, have the app also. But we wanted a new venture on the residential side, which doesn't really become fully operational until January 1. Push the app. Get the app on their phone and push the app rather than check through Google.
Okay. It sounds like you think the residential will take a little longer to turn than the commercial.
Yes.
Yeah. How about capital deployment? That's been a big part of the story. How do you prioritize? I know you've been active still on the buybacks, even with a little bit of a volatility this year.
Yeah. So we will always do some level of buybacks on a, as Kevin says, a programmatic basis on a quarterly. Both businesses generate so much free cash flow that we think it's the right thing to do for investors to return some of that sort of on a routine basis quarterly. But times when our stock price is down and maybe the interest rate on the cash we're getting is down, we'll be more opportunistic on that front. With our balance sheet, we have no debt. We have $250 million of cash on the balance sheet. So those stock buybacks won't impede our ability to do any M&A.
Yep. That's great. I think we're out of time, but I really appreciate once again, Chemed, participating at our conference. And next up in this room is ZimVie. And thanks, everyone, for attending.
Thanks, AJ.