Chemed Corporation (CHE) Earnings Call Transcript

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Chemed Corporation Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to your host, Ms. Holly Schmidt.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2026 ended September 30, 2026. 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 the by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 27 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, tax, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated October 27, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed and Joel Wherley, President and Chief Executive Officer of Chemed VITAS Healthcare subsidiaries. I will now turn the call over to Kevin McNamara.

Thank you, Holly. Good morning. Welcome to Chemed Corporation's Third Quarter 2026 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions. VITAS continues to perform at a very high level. The combination of ADC growth and cost containment, particularly with respect to central support costs. drove significant revenue and income growth at VITAS during the third quarter of 2026. VITAS revenue increased 12.2% during the quarter compared with the third quarter of 2025. And adjusted net income increased 44.7% over the same period. Admissions in VITAS during the quarter totaled 18,995 which equates to a 7.2% improvement from the same period of 2025. Hospital admissions as a percent of total admissions for our Florida combined program were 42.3% during the third quarter of 2026. As we've discussed previously, an appropriate balance for sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions to come from hospitals. Equally as important, as Joel will discuss in greater detail, admissions from all other preadmission locations increased 11.1% compared to the third quarter of our 2025 in our Florida combined program. We ended the 2026 Medicare Cap year with a cushion of more than $34 million in the Florida combined program. We do not anticipate any Medicare Cap billing limitation for the Florida combined program in the 2027 Medicare Cap year. Additionally, as a result of strong admissions, our Medicare cap billing limitation related relating to all non-Florida programs ended the 2026 year, approximately $3 million below our original projection. Now let's turn to Roto-Rooter. In the third quarter, we're very pleased with the revenue growth generated by Roto-Rooter. Total revenue grew 7.5% during the quarter compared to the third quarter of 2025. Revenue grew across all major service lines in both our residential and commercial businesses. Mike will further provide information on the impact of our recent acquisitions. However, it is important to note that our same-store revenue increased 5.5% during the third quarter of 2026, which exceeded our internal expectations. Similar to the total revenue growth metrics we saw strength in all service lines from same-store sales. Our Commercial business manager program continues to perform at a high level. There were 36 productive commercial business managers in place for the entire quarter, contributing to a commercial revenue increase of approximately 10.9% in their respective branches. This compares to a commercial revenue increase of 4.8% and in branches without a commercial business manager. Centralization of the water restoration billing and collections function continues and has resulted in improved collections. Total write-offs improved by $2.9 million during the third quarter of 2026 compared to the third quarter of 2025. Equally as important average price per job in the water restoration business increased 2.8% over the third quarter of 2025. This is a reversal of the multi-quarter downward trend in average water restoration price per job. Lead generation and the resulting cost of customer acquisition remained a challenge in the third quarter. Total leads during the third quarter of 2026 were essentially flat compared to the third quarter of 2025. Consistent with trends observed in prior quarters, free leads generated from Internet searches declined 11.8%, while paid leads increased 5%. Of all these generated during the quarter, approximately 60% were paid compared to 56% in the third quarter of 2025. This change resulted in increased marketing spending of $4.3 million in the quarter compared to the third quarter of 2025. Roto-Rooter is building revenue growth momentum through improved operations, supplemented by strategic acquisition activity. Roto-Rooter continues to explore every opportunity to contain and potentially moderate marketing costs. Roto-Rooter has demonstrated a long history of growing margins through cost containment so long as revenue growth is stable. We fully anticipate Roto-Rooter to return to that historic pattern through 2027 and beyond. We are very happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond. The combination of the two business units drove an increase in total Chemed revenue of 10.6% and an increase in adjusted diluted earnings per share of 28.1% in the third quarter of 2026 as compared to the same period of 2025. Additionally, over the first 9 months of 2026 the consolidated business generated cash flow from operations of more than $229 million, which, along with minimal leverage, allows us the flexibility to pursue strategic acquisitions and meaningful share repurchases as the opportunities arise. With that, I would like to turn this teleconference over to Mike.

Thank you, Kevin. VITAS net revenue was $457.4 million in the third quarter of 2026, which is an increase of 12.2% when compared to the prior year period. This revenue increase was driven primarily by a 9.4% increase in days of care in a geographically weighted average Medicare reimbursement rate increase of approximately 2.2%. The acuity mix shift negatively impacted revenue growth, 25 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 positively impacted revenue growth by approximately 85 basis points. In the third quarter of '26 VITAS accrued $828,000 in Medicare Cap billing limitation. This compares to a Medicare capital limitation recorded in the third quarter of 2025 of $6.1 million. Average revenue per patient day in the third quarter of 2026 was $209.11 which is 196 basis points above the prior year period. During the quarter, high acuity days of care were 2.2% of total days of care, a decline of 5 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $92.5 million in the quarter, an increase of 31.4% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 20.2%. Now let's turn to Roto-Rooter. Roto-Rooter branch commercial revenue in the quarter totaled $59.9 million, an increase of 9% from the prior year period. All lines of business in the commercial sector had increasing revenues during the quarter. Roto-Rooter branch residential revenue in the quarter totaled $158.8 million, an increase of 5.2% over the prior year period. Again, all lines of business in the residential sector had an increasing revenue during the quarter. Adjusted EBITDA in the third quarter of 2026 totaled $48.2 million, a decline of 2.5% when compared to the third quarter of 2025. Adjusted EBITDA margin in the quarter was 20.6% and which represents a 213 basis point decline from the third quarter of 2025. As Kevin mentioned, cost of customer acquisition continues to put pressure on Roto-Rooter's margin. Additionally, during the third quarter of 2026, fuel costs increased approximately $1.4 million compared to the third quarter of 2025. We anticipate both cost headwinds to persist in the fourth quarter. During the third quarter of Roto-Rooter reacquired multiple franchise territories in California for approximately $62.5 million. Collectively, these territories encompass a population of over 12 million people. Prior to the acquisition, this business had annual revenue of between $50 million and $55 million. Slightly over half of the revenue associated with acquired territories will become part of our owned and operated branch locations. Two new branches will be established in Sacramento and San Diego, while other territories will be absorbed by existing branches. The remaining locations will become part of our independent contractor operating model. In 2026, the company has spent $96 million to reacquire Roto-Rooter franchises, primarily in Texas and California. It is important to note that these acquisitions do not have the same high margin profile as our own operated Roto-Rooter branches. The franchisees acquired operate at a much lower EBITDA margin often in the single digits. While we see a rapid increase in revenue from acquisitions over the next several quarters, it is a 12- to 18-month process to implement the full Roto-Rooter operating model. rapidly increasing revenue from the acquisitions, coupled with lower EBITDA margins at these locations immediately post acquisition will result in lower overall margins at Roto-Rooter in the short term. However, acquiring territories with significant and growing population characteristics is the right thing to do for the long term at Roto-Rooter. Turning now to Chemed. During the quarter, the company repurchased 125,000 shares of stock for $66 million, which equates to a cost per share of [$528.24]. Over the trailing 12 months, company has repurchased 1,235,000 shares of Chemed stock at an average price of $427.62 per share. As of September 30, there was approximately $73.7 million of remaining share repurchase authorization under the company's plan. Finally, based on the company's financial results through September 30, 2026. We expect to finish the year at or slightly above the high end of our full year 2026 adjusted EPS guidance discussed in our second quarter 2026 earnings press release dated July 28, 2026. The contribution of each operating unit to that overall EPS level will likely differ slightly from the guidance given at the end of the second quarter. However, we are very comfortable with the overall adjusted EPS guidance given at that time. I will now turn the call over to Joel.

Thank you, Mike. In the third quarter of 2026, our average daily census was 24,428 patients, an increase of 9.4%. In the quarter, hospital directed admissions increased 5.7%, home-based patient admissions increased 6.3% and assisted living facility patients increased 8.1% and nursing home admissions increased 9.8% when compared to the prior year period. The continued high level of hospital admissions allows us to also take a high number of admissions from other preadmission locations. We expect this pattern to continue for the remainder of 2026 and all of 2027. . High admissions in both hospital and nonhospital settings allows us to responsibly grow revenue while also balancing the patient mix needed to manage Medicare capital. With respect to the workforce, full-time equivalents ran below our estimated totals for most of the quarter. However, to address continued ADC growth we ramped up hiring in September of 2026. As a result, at the end of the quarter, we are in line with our overall budgeted full-time equivalent metric. We monitor each location very carefully and ensure that staffing is adequate to provide high-quality care for our patients and their families as well as maintaining a healthy work-life balance for our caregivers. We have not experienced issues with our ability to hire and retain qualified caregivers over the past few years. Our average length of stay in the quarter was 103.5 days. This compares to 109.7 days in the third quarter of 2025. Our median length of stay was 17 days in the third quarter of 2026, a decline of 1 day from the third quarter of 2025. Our adjusted EBITDA margin, excluding Medicare cap, in the third quarter in 2026 was 20.2%. We are able to achieve that high margin level through a continued focus on cost control at every level of the organization. As mentioned above, we have been able to operate for most of 2026 at staffing levels below our budgeted levels. This was achieved mainly through enhanced electronic staffing tools which allowed our managers to more closely manage and flex daily staff levels. Equally important, selling, general and administrative costs declined $2.1 million in the third quarter of 2026 compared to the same period of 2025. We have worked hard to establish a culture, particularly related to back-office processes which ensures every dollar spent is necessary to support our overall goal to provide high-quality care to patients and their families. We believe VITAS is exceptionally well positioned to capitalize on future growth opportunities. We look forward to executing our strategy for the remainder of 2026 and beyond that will translate into high sustainable growth while providing the best possible care to our patients and their families. With that, I'll turn the call back to Kevin.

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

[Operator Instructions] Our first question or comment comes from the line of Brian Tanquilut from Jefferies.

Maybe, Joel -- I appreciate your comments on staffing. So maybe I'll start there. As we think about the nursing, environment today. What can you share with us in terms of the ability to recruit nurses and increase capacity as demand has been strong in the VITAS side? And also, what are you seeing in terms of wage inflation in light of we're seeing increases in orders for temp nurses on the hospital side just seems like just curious what you're seeing on your side of the business?

Yes, absolutely. So two things. One, we're not experiencing difficulty in hiring. There may be specific pockets or a specific program that has a greater need than another, but none of which have reached a level of concern associated with our ability to recruit and retain those key clinical positions. In regards to inflationary pressure or wage pressure, certainly, I think everyone is experiencing an impact of the inflationary situation that we're facing nationally within the United States. That's no different in health care. However, it is not in any way impeded our ability to hire and certainly not restricted our ability to grow across the organization. So the Short answer is no issues in hiring and no significant wage pressures that we're concerned about at this time.

And I'd just like to add that when you observe this over time, you noticed that the market for hiring nurses is highly segmented. And that is -- we do not compete generally with the higher nurses away from hospitals on the basis of salary. I mean if you want to make more money as a nurse, you can make it outside of hospice. Hospice nurses have tended to be a special calling we compete largely with other hospices for nurses that are familiar with this segment and every hospice has to have strict discipline. We're -- the price increase is always a couple of percent. And regardless of what inflation is doing in the short term. And the market for hospice nurses have lived with that reality for some time. And Joel has done a great job in bringing that -- it basically is iron law of hospice. If you look at VITAS over time, the field level expenses are in the mid-60s as a percent of total reimbursement, and you live within that or you die. And Joel done a great job doing that.

Yes, Brian...

Go ahead, Mike.

I just think that we've lived with, I think, for 5-plus years, the fact that wage increases overall for nurses are higher than the reimbursement we get back. which is, I think, why Joel and his team have really stressed cost containment, particularly in the back office. It helps maintain, if not expand the EBITDA margin a little bit even though the reimbursement isn't necessarily keeping up with our wage inflation.

That makes sense. And then maybe, Kevin, as I think through Roto-Rooter, obviously, seeing some inflection here, nice growth, nice same-store -- and also, you've had some acquisitions there. When I think of the pipeline for franchise acquisitions, what does that look like? And then maybe for Mike, just related to this, you touched on how we should be thinking about margins and the ability to grow revenues for these acquired franchisees. If you can just walk us through that dynamic.

Yes. Let me just start with the pipeline. We always try and deemphasize that because most of the major metopolitan areas Roto-Rooter has already repurchased. And there's a few out there. It has surprised us a little bit, but that given what's going on in the market, I mean that's what it's made it possible to make these acquisitions on Roto-Rooter. But generally speaking, we're where the action is in the smaller markets, participants in our contractor -- independent contractor program, smaller locales that are added to an existing branch for Roto-Rooter. We don't like to emphasize the pipeline other than say, it's I just signed of RCA for another one, another good size one today. I mean that -- again, when I say a good size at an independent contractor operation. So not that significant. I don't think that as a significant acquisition. But they're still out there, but it's the type of thing that as you saw, we were pretty active and made a big one, and it was what might in acquisition costs, et -- for the full year, Yes. But that was big. That was beyond our expectations and not -- you shouldn't extrapolate that and expand that in the future at that level.

A few years ago, Brian, we had done a study -- and we estimated at the time we could have spent -- if all of the acquisition -- franchise acquisition candidates we would be interested in all became available we could have spent $200 million to $250 million at the time. So by virtue of the fact that we spent $96 million this year, we've eaten into that sum, but there's still a handful of, as Kevin said, bigger acquisitions we'd be interested in. And then the rest of them are smaller, either tuck-ins or contractor operations. Your question about revenue and margin, I'll just I'll just give you from the California acquisition we just did. Our first year estimated revenue is somewhere in the $30 million to $35 million range. but their EBITDA margin was sub-10% when we purchased them. So we'll add $30 million to $35 million to the top line, say, in '27 million but it will add less than $4 million in EBITDA. It will start growing and we'll start integrating it into the Roto-Rooter operation and getting it into that model, but that takes a little time. And that's how most of these acquisitions work. Top line growth is immediate and then the EBITDA margin comes. But we're very excited to have franchisee that had 12 million of population and population density as well, which is important in locations like San Diego and Sacramento. So I think it's definitely a good long-term acquisition for the company, just in the near term, it will mute overall margins a little bit.

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

So maybe just to first clarify things on your guidance change. So you expect now to be at the high end or slightly above your EPS, but you did not specifically commented on the segment -- so maybe you can kind of give us color. Is it fair to assume that this guidance raise is largely the FDA our performance and there's also the rotor franchisee acquisitions. So how much it's adding to the guidance, can I help us bridge to that EPS guidance based on the segment outlook now? .

Okay. I'm going to turn it over to Mike. He handles this. But I'm going to start by saying, obviously, we -- the last 2 quarters, we increased guidance. I mean we're trying to get out of the business of increasing and changing the guidance every quarter. But Obviously, we're trying to send the signal Yes, we had -- we outperformed in the third quarter compared to when we came up with that, the number for the last two quarters. We're obviously running ahead, but we tried to make -- try to give the indication that, yes, things are going well. We don't expect a slowdown, for instance, but we're not -- we don't want to be too specific and get in the business of guiding every quarter. But Mike, why don't you go ahead answer -- we do have some questions, some specifics -- but with that proviso, Joanna, just remember we're trying to get out of that business.

Joanna, as -- certainly from just purely a math standpoint, right, we gave guidance at the end of the second quarter. We beat the third quarter by about [$0.30]. Even if we hit the fourth quarter, just meet the guidance that we've issued for the fourth quarter, will be at the top end or near the top end of the range already, right? So saying that we're going to be at the top end doesn't necessarily need to signal any huge outperformance in the fourth quarter. What we're signaling is, as Kevin said, that given that we beat the third quarter by $0.30, we didn't want to signal that we might miss the fourth quarter by $0.30 to get to the middle of the range. We wanted to make sure to signal that we're on track in the fourth quarter for meeting the guidance that we've given. And so that was the whole point. And I think as you can see from the third quarter results, Roto-Rooter, from an income -- purely from an income standpoint came in a little lower than what our guidance was and VITAS came up higher. And so when we say that the components of how we might get to the top end or above the top end of the range are going to change a little bit. I think that's fairly obvious from the third quarter results. And so that's all we were trying to signal is, and as Kevin said, we didn't feel the need to necessarily regurgitate all of the components and all of the metrics around each one of the operating units.

Now I understand this, but I guess this latest purchase acquisition in mid-September, is going to add, I guess, a little bit in fourth quarter. When it comes to EBITDA but you said maybe less than $4 million for the like annual, maybe that's less than $1 million in Q4 is a great number to think about. Okay. So now I guess on the [Protos] segment, Actually, so just a follow-up on the comment in prepared remarks that being used something along the lines of you expect to return to historic growth in '27. So are you talking about, I guess, what kind of growth are you talking about -- and is it excluding the impact of the recent acquisitions that's all inclusive, Help us understand like how are you guys thinking about 2027 growth in the Roto-Rooter? .

Don't have a budget yet for 2027. They're still working on that. So that is more of a high-level comment, so I can't give you specifics on 2027. The comment relates to the fact that over a long period of time that we've owned Roto-Rooter, if they can consistently grow top line they're very good at cost containment and making sure our EBITDA margins is consistent, if not growing slightly quarter-to-quarter, year-to-year. So that's what we were talking about there. We weren't giving any specifics. I think it's important to note that given the marketing headwinds that we're seeing, the fact that we can find other places to get leverage and margin with consistently growing revenue at Roto-Rooter. We'll be able to overcome some of those marketing costs in '27 and beyond. .

Joanna, let me also add a comment that really springs from some of the -- some of the questions we've had just since yesterday afternoon when we released earnings. I mean when you look at the Roto-Rooter numbers and the margin, we're saying, "Oh, yes, margin -- I mean the margin has been affected yes, every company that has people on the road has fuel costs. I mean, that was $1 million -- over $1 million in the quarter. . But generally speaking, it's marketing expenses. And what we're seeing is that the kind of double barrels. So compared to previous periods, we're paying Google more per lead the bidding is going up for the lease. So it's just the price per lead is going up. But also there's a shift that when Google first came into existence, everything was free. Every lead was free. So we've gone from 0 to under 40% of the leads we get are free. I mean that's a big transformation. -- that begs the question of where do you go from here? What do you expect as far as erosion in that percentage of release. I mean that's a big question. And I think it came through with a number of questions by people who commented on our earnings release. And all I can say is we have good thoughts on that. Over 50% of our Roto-Rooter customers are repeat customers. In other words, they come to the Internet looking for Roto-Rooter largely. They're coming looking for the telephone number, half of them maybe. And -- it's because -- and it really comes down to the strength of the Roto-Rooter service market. So that's a natural floor to the let's say, the percentage of natural leads that we get, we think. I will say that we had recently this quarter, we've seen a when I say a flattening, we've actually had -- we had an improvement in natural leads compared to the prior year's period. So we have a pretty good thought on that question. But and some good hopes. But I guess that really the answer to your question, Joanna, if that is over the next 12 months, a flat or improving situation, yes, I don't see marketing having a continued negative effect on our comparative margins. Mike, do you agree with that?

Yes, I agree with that completely.

Okay. And I guess, we're hearing from some national brands in the residential services sectors. They just simply calling out some negative impact as the consumer is using the tools like GPT and such to find just a solution to an issue of the house partner. So is that part of what you're seeing already -- and I guess, is there a risk to vote a brand because of that? Because I guess there's a couple of things that happens when people use those newer tools because, first of all, they can get a first labor or sell type solution, right? And I guess price transparent. It might be also needed when those models look for information. So can you comment on that? Is that something that you've already been seeing in your search in the lead process I guess generation?

I would say, Joanna, that's a little bit speculative, but I would say that from a Roto-Rooter specific standpoint, given that we focus on emergency level work, when we get called, it's the much more complicated issues where there's sewage backing up in the basement, somebody needs something to be out there immediately. We don't our bread and butter business is not changing out a toilet or fixing a leaky faucet, -- those are the things I think people try and do DIY chassis PC kind of searches. That's not our bread and butter. So if that's a trend that really continues or really expands could it hurt us on the margins. It could certainly hurt us on the margins, but that's not the bread-and-butter job that we do. And so it's a little bit speculative, but we don't see that as a huge headwind going forward.

And Joanna, the question also touches on the subject at First of all, it pet subject to the fact that our average job is something very different than what you're describing. Average job is $1,500. I mean we're talking about some job that involves plumbing -- half our revenue comes from excavation and water restoration. I mean it's a different type of job than what you're getting involved in bed -- do it yourself. But let me also say, but when I say it touches an important point because I think our way out of the conundrum and problems associated with marketing is not so much Google going out of business. We think that Google strangle hold on the market will abate with AI emerging and is moving strongly. But the -- when you look at the effect of $1,500 on marketing and if you look at our average price per job, as that price goes up significantly, marketing becomes less of a factor. I mean to the extent that it wasn't too many years ago, our average price per job was -- and so I think we can outgrow a lot of the pernicious effects of Google stranglehold. And I'll tell you right now, there's also litigation across all facets of the service industry with Google with regard to some of their predatory activities. But I think the real answer is we're growing our average price per job, that will be how we handle the marketing issue.

That makes sense. And if I may, last question on that segment. Like you said, you find the franchise fees, and you see margins are well below average. So can you help us understand specifically these other owners fail to do? Or kind of how do you plan to bring these margins to the average in terms of vague examples.

Yes. I would -- I mean it's across the entire organization that we acquired. The they were not as sophisticated as we are as it relates to Internet marketing, for instance. So they spent a significant amount higher percentage of their revenue on Internet marketing to get the business that they got. They did not do any water restoration. And so that obviously comes at a good margin for us. And so there's just a number of things that had pretty significant back-office staff that we really don't need to replicate. And so there's just... .