Yeah, it was.
All right, thanks, everyone. This is going to be Chemed. We're very happy to have them participating in our conference again this year. We've got Kevin McNamara, Chief Executive Officer of the company, Mike Weitzman, Vice President and Chief Financial Officer, and Joel Worley, CEO of VITAS. We're 10 months into the year. Ups and downs—it's a year that's had a lot of ups and downs in it. Maybe just give us a little bit of a thought about how the year has progressed for Chemed. What have been some of the positives? What have been some of the challenges?
Sure. I think, at the moment, I think we're very positive and optimistic about the future. The second quarter, particularly this year, was a rough quarter for both VITAS and for Roto-Rooter, from a VITAS perspective. We can get into it, but we're extremely confident that we're not going to repeat the Florida Medicare cap issues that we had, you know, in 2025. Roto-Rooter is a little more difficult story. They've had some intense competition over the last few years, but we think we're getting to a point where we can see the light at the end of the tunnel. The competitive environment seems to be getting a little better, and we're going to take advantage of that over the next 12-18 months.
Okay. Just for—I mean, we always get a lot of people trying to just get up to speed on Chemed's unique and diverse business model. You've already referenced it: VITAS on the hospice provider, Roto-Rooter. Give us just your high-level overview of the company, the overall growth strategy, and maybe the earnings algorithm as we think about that.
Yes. I would say that, I'd characterize Chemed as, from the point we purchased VITAS, which was 2001, just going forward to the pandemic, we had two businesses, two service businesses that are very disparate, obviously, in the service they provided. They were similar in that they both were grinded-out businesses, grew by largely organic growth rather than acquisition. They both were excellent cash flow businesses. They grew their net income within a percentage point of each other for a 20-year period, which was very consistent, between 11% and 12% per annum.
The growth algorithm was to take that consistent growth, the free cash flow is about equal to the reported net income, and Chemed used that to purchase well over $2 billion of Chemed stock, reducing the share count of, of Chemed from about 27 million to just under 15 million shares outstanding. Through the magic of that leverage, over the 20-year period, Chemed stock price grew at about 18% per annum. Again, that was—when you risk-adjust that, it seemed better because it was not dependent on flashy acquisitions or a lot of putting a lot of goodwill on the books. It was just, as I say, two grinded-out, predictable businesses. The pandemic hit, which was kind of interesting, in that it immediately decimated VITAS in that 20% of its workforce quit.
A good percentage of potential patients were not available either in nursing homes where there was no access allowed or failure to go to doctors and hospitals to get a terminal diagnosis. So, you know, no question VITAS was wildly disrupted. On the opposite standpoint, with everyone confined to their home, Roto-Rooter, like most home services companies, boomed and, you know, had EBITDA margin of in excess of 29%, growing the top line in excess of 10%. Balanced out the two companies maybe a little bit, but one thing it lost was our consistent growth at both. Following the pandemic, we saw the reverse. VITAS was able, in time, to replace its workforce, to grow back from a—trying to think of the number from, Joel, your low end in census was?
17,000. Just a little over 17,000.
Just over 17,000, you know, back to its pre-pandemic levels. Roto-Rooter, on the other hand, faced some issues. The boom times in the home services attracted a lot of private equity investment, and that disrupted the Roto-Rooter business. No question about it. The initial stage was they hired a lot of our Roto-Rooter managers. We were able to stem that outflow. One thing that was a consistent issue following that was on Google. Google advertising, Roto-Rooter went from pretty much the only game in town to bidding with multiple private equity-backed companies across the Google platform in every city in which we operate. We have been dealing with that for about two years.
Again, I think we're getting on top of it, but I guess one way to say it is our algorithm for growth is two consistent grinded-out businesses, good cash flow, reduced shares outstanding. We're getting back to that now. We're hitting an equipoise with both companies now. I'd be remiss if I didn't say that, you know, VITAS's biggest problem this past year was a Medicare cap limitation in Florida, which is complicated. All I can say is, if I reduced it to two sentences, I'd say we saw it coming. We gave a warning. It was about $19 million—ended up being $18.9 million of money we had to give back to the government, just not because of, you know, billings that were not correct, but just due to this above-our-limitation.
It probably took 100 points out of the Chemed stock price and well over a billion dollars. Again, we're returning to normalcy. We've already given, you know, adequate information to suggest that we're not looking at a limitation this year, that it was a one-time event. Again, that's when we talk about our strategy, it's just to get back to the pre-pandemic level and get back to that, you know, earnings profile that we had previously. Maybe again for people that are trying to get up to speed, maybe just spend a little—a minute on the cap issue, why it was sort of a unique thing that you don't think is going to repeat itself. Joel?
There are several fronts that came together, in the first quarter of the 2025 Medicare cap year, which actually is the fourth quarter of the 2024 calendar year. Starting October 1, we had an outsized revenue increase, which is the annual increase that each of the providers received. In the state of Florida, it was significantly higher than the average across the United States. That was one component to it. The other component was during the pandemic, and as Kevin mentioned, given the staffing headwinds that we had faced, we had to prioritize where we were able to deploy our resources, where to focus, and more importantly, from a clinical standpoint, how are we going to care for those patients?
We did that, shifting to what we call the Community Access Initiative, which moved us away from hospitals as a pre-admit location, which typically generate a shorter length of stay patient that also is at a higher acuity and requires more touches. Prioritizing the staff we had available, we focused on the community access or non-hospitals as a pre-admit environment. As we moved through 2024, we continued to see a census improvement, at record levels. While at the same time, going into October of 2024, we were faced with a couple components, one of which was a big rate increase. We had census increase, days of care increase, rate increase. We also were coming off two hurricanes in the state of Florida. We had a lot of disruption in our business, and we saw our admissions not track at the same level as our census.
And not to get too deep in the weeds on how Medicare billing for hospice is calculated, that put us in a position in that first month of the cap year that we had to then try to dig out from, essentially in a very simplistic way, we grew too much and we exceeded the billing limitations. So we had to try to get out from underneath that all year in 2025, which we were in a positive trajectory. We just could not do it enough to overcome the hole we put ourselves in, in that fourth quarter. We have been focused strategically on our mitigation efforts to ensure that we were not going to be in that situation with a headwind going into Medicare cap year 2026.
We have moved in a positive direction and feel we're in a very good position to ensure that for the Florida provider number in 2026, we do not anticipate any liability whatsoever.
What is, as you're describing it, what is the mitigation factors that you can employ to?
Yeah.
I mean, a lot of that doesn't sound like it's necessarily in your control, but.
No, there's multiple strategies, actually, and refocusing and shifting our selling priorities back towards hospitals as a pre-admit environment, shifting away or not focusing as much on nursing homes and ALFs, that typically yield a longer length of stay patient. So those after.
The key variable is you got to balance the length of stay. You let the length of your referral sources lead to length of stay being.
Another important issue is that, anyone that follows us closely, our length of stay metrics came down significantly in the third quarter. Those bubble of long-stay patients that we created during the Community Access Program, they're all still hospice-eligible, completely appropriate patients.
Right.
We knew that would moderate over time, and it did moderate in the third quarter. We enter the first quarter of this cap year in a much better position as well.
Right. What I was going to add is you, I guess, intimated the one issue. It's pretty predictable. If we look at hospital versus non-hospital, we can, it's very predictable to say what their length of stay is going to be.
Right.
With longer length of stay, are with you longer, there is more reimbursement during a plan year. As Joel mentioned, just basically out of necessity, our percentage of our admits from hospitals falling from our traditional rate of, let's say, 42-45, 46% to as low as just under 39%, okay, of our admits were coming from hospital. When you—one of the accommodations you make is you make sure you do some of the things that Joel just said, but you make sure that on a run rate, your hospital admissions are in that 42-45% rate. We have already seen that. I guess what I say, what gives us so much confidence going into this year? Two things. Number one, we are at that rate and have been for the whole calendar year of 2025, okay?
That's, we have 20 years' experience saying, you know, makes it pretty easy to predict what type of patient we're going to get from that referral metric. And again, going back to say this, fairly significant, the reimbursement that we got, the Medicare cap total goes up by the national average. In the previous year, we got a reimbursement in Florida that was 200 basis points higher than that. Our reimbursement went up 200 basis points more than the Medicare cap limitation went. That did not repeat. In other words, we ran all of 2025 to date with running a positive surplus for Medicare cap. We awaited the reimbursement increase, and it was in kind of what we thought a sweet spot. In other words, the national average went up only 40 basis points less than what we're getting in Florida.
We're getting more than the national average in Florida, but 40 basis points, not 200, coupled with our current run rate and the current run rate of billing and run rate in referral network. That is.
Right.
You know, 42% plus rather than 39%. It's allowed us to say and maybe hopefully reassure the investing public that that Medicare cap limitation was Florida was $18.9 million on its way to zero, not $18.9 million on the way to 100.
Yeah. Okay. and I'm going to come back to hospice, but in the meantime, you also highlighted on, Roto-Rooter the issues around increased competition, some challenges there. That's in the Google dynamic. That's something that's been a couple of years, I think, in,
No question about it. See, the money first on the competitive level, first private equity, you know, came into the sector, disrupted our then current operating models. By that, I mean, we were spending, depending on market, between $40 and $60 per click for getting referrals on Google for sponsored ads for paid search. Paid search at that time probably was about 40%-45% of our leads were coming from paid search. The rest were coming from the natural or free search on Google, okay? Two things happened. If I really summarize what ends up being a longer discussion when we're in the private meetings, but two things happened. Number one, private equity came in and started bidding a lot more for placement in the paid search. We had to pay more.
They were paying a lot, they were paying much more, let's say $100, $120, $130 per click, okay? Initially, we matched them, paying a lot more. That's a margin issue. We saw that even with matching them, there were just so many of them that we went from a preeminent position to a less than preeminent position and actually had significant decreases over each of the last two years in telephone calls, like the rates for the last two years and declines, double-digit—we're talking about double-digit declines in actual phone calls we received. On the positive side, what we said is the disruption caused by private equity, that is, the real disruption was in the number of paid search leads we were getting.
In other words, last year we tried, we paid more per click and got less, fewer clicks or few, you know, fewer calls. What we've seen the last two quarters is we've held constant at a reduced level of pay per click. We've paid, we've gotten more clicks, so our actual spending has been up, but we've gotten more from it. You know, last year we paid more and got less. This year we're paying more and getting more, which I think is a pretty good indication that the competitive levels caused by the largely private equity, advertising competitors has abated, the competition has abated somewhat. I think we're on top of that. You know, it's always something.
The other thing, if you followed our results, we've said that the other thing we're dealing with is Google is not that excited about giving free advertising to people who otherwise would pay for it. They have been changing their algorithm gradually, but most recently about halfway through the second quarter of last year, to pretty significantly exclude larger competitors from what's known as the map portion of the natural search, okay? I think the most important part of the, of the natural search. And, you know, so that effect is we're getting more jobs from the paid search, paying a little bit more for them, but getting more, and getting fewer, you know, jobs from the free search. I mean, as order of magnitude, there's been a switch. You know, it's gone from 55, 45 to 45, 55, okay?
Mm-hmm.
You know, that's the, in our meetings so far today, people have said, "What's our, what's our body language for Roto-Rooter?" I guess what we've tried to say is we're not out of the woods.
Yeah.
We've got a lot of good things going for us. We have a lot of negatives that are no longer negatives, but we're still dealing, you know, on the marketing side. We're still dealing with some issues with Google. On the executional side, we've been pretty happy with our close rates and, what we're doing when we actually do get the phone call, let's put it that way.
So you're getting the more hits, is that, can you really see the competition's dropped out in that?
Let's put it this way. Mike, was it last two quarters our paid search were up 9, 9%?
They're up, a little lower, a little below 9% each of the last two quarters. We also know we do studies. Our SEO has done a study. The private equity competitors who were bidding.
Right.
They're not showing up on the unpaid section either, right?
Okay.
Because they're willing to pay. We're still bidding the exact same dollar amount per click, but we're getting a lot more clicks. I think the only conclusion can really be that the competitors are bidding less, bidding less often, because they're not showing up on the unpaid search just like us.
When you think about the economics of the business, are they at a point where they're not making money against their.
I don't think.
Segments of their money. Keep in mind that a lot of them are treating plumbing as a loss leader, okay? It's, to answer the question, as they're competing with us, they're not making much money. I'll give you an example of not an outlier, not a big outlier. They pay for a click. Let's assume that, you know, 45% of their clicks are paid, okay? For that paid click, they're paying on average $120, okay, for a job. They are doing that job for $80, okay? They're also paying a plumber, you know, to go out and do it. I mean, their thinking behind it is, I mean, I think, you know, every business school would, you know, say this is a good idea.
I don't necessarily agree with it, but they'd say all they're looking at is the acquisition cost of somebody who could be a lifetime customer of their HVAC business as well. So they're saying it's a small price to pay. That's a, you know, that's a pretty theoretical,
Right.
Approach to a dollars and cents, grinded out industry. We'll see how it works out for them. The only thing we can say is that we noticed that transactions in the sector are much fewer and far between. In other words, fewer mom-and-pop plumbing companies are being purchased by these HVAC, these private equity-backed HVAC companies. Also, we don't see the exits from, you know, from those put together. I don't know what their investment horizons are, but some of them started a good four, four and a half years ago.
Yeah. They started in 2021, generally speaking.
Yeah.
From some of the folks we've talked to in the industry and things, you know, 2026 is going to be the year that they need to probably figure out what to do with these businesses. We knew, or we kind of theorized all along, at some point they were going to have to go from customer acquisition, top-line growth, and translating that into actual income to be able to dress them up for sale. I think we're starting to see that. It's not unexpected. As Kevin always says, we are running a marathon. They're running a sprint. We're in this for the long term. I think that, you know, 2026 is going to prove to be a much better year for us.
Is there enough, lost leader? I mean, you have your own history of experience there. Is doing what they're doing make sense? Because we follow on that.
No, at the, we tried it. I mean, we go back to the 1990s. Roto-Rooter was fairly active in purchasing and starting HVAC businesses, thinking that they were compatible.
Right.
We did not see the symbiotic relationship develop between the two businesses. I mean, we tried it in different fashions. We tried it under the Roto-Rooter service mark. We tried it under a new service mark. We tried it under keeping the original names of the acquisitions. We tried it in, you know, different sectors of the country. Our conclusion at that time, based on how we were doing it, and we think we had skilled operators handling it, we just did not see it. We did not see the long-term benefits from it, and we got out of all. We sold them all.
Right.
Our experience suggests the jury is still out at best.
Okay. The idea of you trying to go in and consolidate this is not kind of appealing?
Let me ask. I think that's a good suggestion. We've had that a couple of times today. There are areas, okay? Just because we failed at it once doesn't mean that it's an idea that'll never, you know, come, put it this way. There are areas throughout the Southwest, particularly, where air conditioning is a big business and is still, maybe there's still enough because of the, not necessarily a desert, but there's still good plumbing businesses. I'm using Phoenix in my mind as an example, where, you know, we would have an open mind to, at the right price, buying one of these aggregators that maybe is tired of it, but they would still have, you know, one of the most important elements you have. That is plumbers, you know, to the extent that, you know, they hired a good group of plumbers.
We could usually find work to keep them busy, usually. Would air, air conditioning be antithetical to us? No. We do not kid ourselves. We would probably have to buy expertise. We do not have the internal expertise to think we can do everything. Let's put it that way.
What type of return profile would you look for if you're going to do a deal like that?
One that had a substantial amount of plumbing, okay? It could not just be, it could not just be an add-on. You know, the one thing we have seen with our plumbing businesses, we would want them to have, on the plumbing side, the possibility of doing ancillary services. Every plumbing company can do, under the right circumstances, water restoration. Hard to imagine in this day and age to have a big success without excavation, at least the way we do it. On the HVAC side, we would like, we would like businesses that were a business at least 10 months a year, okay? We are not in the business, we have not been in the industry of managing part-time employees or seasonal employees.
Right. So that keeps you in the Sunbelt basically.
Yeah. On the, going back to, the hospice, since we are a healthcare company.
Yep.
The total emissions were up, I think, 5.6% year to year, and through Q, ADC was up 2.5%. It seems like we're basically back to a nice trajectory for hospices. That put aside the cap issue, do you think we're sort of, all the pandemic volatility is pretty much done and we're, I mean, it seems like most of the people that have exposure to hospice are showing pretty good trends here?
Yeah. I think the fourth quarter, as we've indicated multiple times today, fourth quarter is really going to be a strong indicator for us, but we do believe that we had purposely managed the census growth so that it was not at the previous year's growth rate and that we could then work on mitigating strategically the cap liability. We feel we've met that point, plateaued, and are beginning to be able to responsibly begin to grow that Medicare census again.
Admissions exceeding ADC in the third quarter, like you mentioned, that was specifically, as Joel said, as a response to making sure we balance the Medicare cap.
Okay.
Going forward, I think we'll see admissions and ADC growth going more hand in hand.
What is the market growth now, roughly, do you think?
Overall growth, I think we have no concern returning back to previous growth rates in the 4-5% range. However, again, the fourth quarter is going to be a key indicator for us to determine really, where we can focus on in 2026 from a growth rate expectation.
Here's what I'd like to build on, you know, how we build that up. You know, we look at what has been the model for the previous 20 years for VITAS before the pre-pandemic.
Right.
Okay? We've gotten price increase of 3-4%. Let's say, you know, 3%. You, we have average length of stay trending up a little bit. Let's use, we don't like significant increases in that, but good ratable increases of a couple percent, okay? Which helps ADC, and you grow admins at 4-6%. You put those all together, you're at high single-digit, top-line growth. Not only is that sustainable, given Medicare cap limitations in the various programs, it's a healthy, it's a healthy growth rate. I say, given its cash flow characteristics and Kevin being a public company, that's kind of all you need, you know, for what is good. I mean, in Kevin's case, as I've already made reference to it, a 20-year period, the stock price was up 18%, pretty consistently. 18%.
Right.
you know, per annum and without taking a risk.
Right.
Over the longer term, you know, CMS has indicated that hospice probably from a demand standpoint is going to grow 8-10% a year because of the baby boomers.
Right.
There's a chance we could even outpace our historical averages. It's just, again, we need to make sure we balance the short-stay and the long-stay patients because we can't get out of balance there. We could grow top-line, like Kevin said, high single digits, maybe even low double digits for the foreseeable future.
What about the availability of the labor for that? What's happening with that and what's your wage increases looking like and so forth?
During the pandemic, we faced significant headwinds from a labor perspective. We, as Kevin indicated, had turnover in the high 20s, instituted multiple strategies to improve that, and going back to March of 2023, were able, unlike a lot of our competitors, to add clinical capacity every single month. We have now begun to manage that down a little bit because of the circumstances associated with Medicare cap, but we are facing no headwinds from a labor perspective. We've absorbed the increases associated with what the pandemic brought forth, but we're seeing those high levels come back to a more reasonable amount. We do not anticipate a labor headwinds for 2026.
Your turnover rate, your new hires, those are all sort of consistent with what they would have been pre-pandemic?
Correct.
Turnover rate, I think, is a little better than pre-pandemic.
Okay.
I think some of the things that Joel mentioned that we did to address the labor shortage, we continue to do, and I think turnover is an. They were good practices.
Good employer, employee practices. We've just maintained them. The average wage increase is something like 3%-ish or something, or?
Yeah. This previous year, we were in the three to mid-threes.
Okay.
as an increase, and we've, we're selected as a best workplace in 2025, in the healthcare setting. So, feel like we're in a good position, looking at retention. And where we go then, in 2026.
We, going back quickly on Roto-Rooter, on the residential versus the industrial, anything to call out there, or,
Commercial, I think, is a real opportunity for us. We're hiring commercial business managers whose only job is to focus on that. One of the things we like, as Kevin had talked about, is some of the pressures with Google and with competitors. Our competitors really do not focus on that space. As a commercial business customer of ours, you're going to get either our general manager's direct dial phone number or our salesperson's phone number. They do not go to the internet to try and find us. We are doing all kinds of things on both the commercial and residential side to avoid people going to the internet. Ultimately, we feel like commercial is something we can control.
Right.
With our management activity. Residential, again, we were more optimistic now than we have been, I think, from a competitive standpoint on the residential side. Commercial, I think, has some definite upside in the near and medium term.
Would you look at potentially broadening out the offering there as well, or, like you're talking about in the residential, or stay focused on what you're already doing?
The thing we're broadening out is we only, at the moment, we have commercial business managers in about 15 of our 51 owned branches.
Okay.
We're going to spend the next year, you know, expanding that program to pretty much, I think, almost every branch. The difference between the 15 branches that have commercial business managers, the revenue over the last couple of quarters has been up 20%. In those 15 branches, it's been basically flattish in the other 30-36. We're going to expand that program quickly, taking advantage of that. I think there's some upside, obviously, at least some upside in 2026 as we put more of those business managers on our reticle.
Is that a significant investment, or is that just hiring people?
It's hiring people, but it's hiring the right people.
It's hiring the right people. I mean, you might say it sounds like the results are good enough. You should do it next week.
Right. The reason it's been successful is because we've first identified the markets that we think, you know, they're more likely to succeed. We spent some time getting the right people, and it's been a big success.
We spend a month or two training them so that we do not just send, you know, 40 people out to, to do something that, you know, 20 are successful and 20 are not.
Right.
But it's, I mean, it's not a huge investment. It's maybe $100,000 a person, and then obviously some commissions on top of that and things. But.
You get asked this periodically, but you know, it was always described like you did at the beginning that the two businesses are grinded out, blocking and tackling businesses. There has been some divergence here in the last couple of years. Does that make you take another look at whether it makes sense to have these two businesses together?
The answer is we always have an open mind, okay? If it creates value, that's fine. I think that, you know, number one, from one perspective, during the pandemic when Roto-Rooter was, you know, when VITAS was struggling, Roto-Rooter was booming. We get.
Right.
We get some hedge. We get, now we get the reverse. Now this year we had a tough one because even though VITAS was booming, it boomed a little too much. It had a Medicare cap limitation, okay? Overall, that, that's a balance. The question is, does the fact that, does that create any, you know, is there a loss of value because of the connection? Something we look at very carefully. One of the things we mentioned, you know, early day when that question was asked, I, I said, look, it's hard to look at comparable valuations for two reasons. Number one, both of these businesses for their sectors are huge, okay? It's a huge standalone hospice company. Roto-Rooter is huge, and the only national plumbing drain care company.
Somebody getting involved, it's drinking from, getting a drink from a fire hose in some respects. They're very big. It's hard to look at the multiples paid for a concatenation of smaller programs and carry out the same multiple. The other thing, as I said, I made reference to the fact that we had a major issue with the warning on the Medicare cap limitation. Stock price fell 100 points. It's over $1 billion taken out for something that looks like a one-time event. I guess my point is now is probably the wrong time to assay the respective, you know, valuations and what have you. Having said that, if somebody came in and offered enough money for either company, this is capitalism, at least in this state. We're,
Okay.
We'd be all for it.
All right. With that note, I guess we'll wrap it up. I appreciate Kevin being part of our conference again, and I hope everybody has a great afternoon.
Thanks, AJ.