Chemed Corporation Third-Quarter 2026 Earnings Conference Call - CHEMED CORP

Financial Performance:

• Consolidated revenue increased 10.6% year-over-year to an unspecified total, driven by 12.2% revenue growth at VITAS (reaching $457.4M) and 7.5% growth at Roto-Rooter.
• Adjusted diluted EPS rose 28.1% year-over-year; the company expects to finish 2026 at or slightly above the high end of prior full-year adjusted EPS guidance after beating Q3 by ~$0.30.
• VITAS adjusted EBITDA (excluding Medicare cap) grew 31.4% to $92.5M with a margin of 20.2%; Roto-Rooter adjusted EBITDA declined 2.5% to $48.2M with a margin contraction of 213 basis points to 20.6%.
• Operational cash flow for the first nine months of 2026 exceeded $229M, supporting minimal leverage and a capital structure favorable for acquisitions and share repurchases.
• Roto-Rooter total write-offs improved by $2.9M year-over-year, and average price per job in water restoration rose 2.8%, reversing a previous downward trend.
• The company repurchased 125,000 shares ($66M) in Q3 2026; $73.7M remains in authorization, with 1.235M shares bought over the trailing 12 months.

Guidance and Future Outlook:

• Management expects to return to Roto-Rooter's historic pattern of growing top-line revenue with stable or expanding margins through 2027 and beyond, pending the integration of recent acquisitions.
• Full-year 2026 adjusted EPS is projected to meet or slightly exceed the high end of the Q2 2026 guidance range.
• VITAS forecasts sustained high admissions in 2027, with hospital admissions expected to remain within the 42-45% optimal range to manage Medicare caps; no Medicare cap limitations are anticipated for the 2027 calendar year in Florida.
• Roto-Rooter anticipates that marketing cost headwinds (higher paid lead costs and declining organic leads) will persist in Q4 2026 but aims to offset them through operational leverage and higher average job prices in 2027.

Business Segments and Product Lines:

• VITAS: Admissions totaled 18,995 (+7.2% YoY); hospital-directed admissions rose 5.7%, while home-based, assisted living, and nursing home admissions grew 6.3%, 8.1%, and 9.8% respectively. Days of care increased 9.4% due to acuity shifts and reimbursement rate increases.
• Roto-Rooter: Same-store revenue grew 5.5%; commercial revenue jumped 10.9% in branches with dedicated managers vs. 4.8% without. Residential revenue rose 5.2%.
• Acquisitions: Roto-Rooter spent $96M in 2026 reacquiring franchises, including a major $62.5M California transaction covering 12M+ people; these territories will add ~$30-35M in 2027 revenue but initially compress margins due to lower franchisee EBITDA profiles (sub-10%) vs. owned operations (~20.8%).
• Operations: VITAS maintained a 20.2% EBITDA margin by reducing SG&A ($2.1M savings) and utilizing electronic staffing tools to keep FTEs below budget while ramping hiring in September to match demand.

Market and Competitive Landscape:

• VITAS believes market trends favor its consolidation as referral sources migrate from "mom-and-pop" providers to larger, compliant entities amid increased regulatory scrutiny on fraud and abuse.
• Roto-Rooter is gaining market share from smaller, less sophisticated competitors who are reportedly "panicking" over rising Google ad bids and failing to navigate the digital marketing landscape effectively.
• Google remains a dominant force in lead generation; organic leads are dropping while paid lead costs are rising, though management notes a recent improvement in organic lead trends due to strong brand recognition.
• Industry-wide trends show increased regulatory audits; VITAS expects higher write-off levels due to this activity but maintains a superior compliance track record.

Risks and Challenges:

• Marketing Headwinds: Roto-Rooter faces elevated customer acquisition costs as free organic leads have dropped 11.8% YoY, necessitating a 5% increase in paid leads, which increased marketing spend by $4.3M in Q3.
• Cost Pressures: Rising fuel costs (+$1.4M in Q3) and wage inflation continue to pressure Roto-Rooter margins, though management does not anticipate significant wage inflation pressures at VITAS relative to reimbursement.
• Regulatory Environment: Increased federal and state audits on Medicare hospice claims are driving temporary increases in contractual allowances and write-offs, requiring significant administrative resources to navigate.
• Acquisition Integration: Recent franchise acquisitions will depress consolidated EBITDA margins in the short term (12-18 months) due to lower base margins compared to owned branches.

Management Commentary and Tone:

• Management tone was confident and optimistic, particularly regarding VITAS's operational execution and Roto-Rooter's long-term market share gains despite short-term margin pressure.
• Kevin McNamara emphasized that Roto-Rooter's resilience is tied to its high average job price (~$1,500) which makes marketing costs a smaller percentage of revenue compared to the historical $600 average.
• The company is explicitly moving away from providing quarterly segment-specific guidance, focusing instead on the aggregate annual outlook.
• Management expressed skepticism regarding the impact of AI tools (like ChatGPT) on Roto-Rooter's business, citing that their core services (emergency plumbing, sewage) are less likely to be DIY solutions compared to minor repairs.

Analyst Questions and Answers:

• Staffing & Wages: Analysts asked about nurse recruitment and wage inflation; Management confirmed no hiring difficulties and that wage pressures are manageable due to the specialized nature of hospice nursing and strict cost containment.
• Acquisition Pipeline: On Roto-Rooter franchise acquisitions, Management clarified that major metropolitan areas are largely owned, with future activity focused on smaller markets and contractor operations; no specific 2027 budget exists yet.
• Marketing Strategy: Management detailed a multi-channel strategy to reduce Google reliance, including their mobile app (300k+ downloads, 1,000-1,500 weekly leads), commercial managers, and organic search optimization, while acknowledging AI search is growing but difficult to track.
• Market Share: Both segments indicated they are picking up share from smaller competitors; Roto-Rooter's 5.5% same-store growth exceeds historical industry averages, and VITAS is benefiting from a migration to trusted providers in Florida and California.
• Future M&A: While focused on reacquiring franchisees, management left open the possibility of a "third leg of the stool" (new business line) but noted a high bar for entry, with potential interest in HVAC in specific geographies being more likely than a totally new sector.

Other Key Points:

• VITAS ended the 2026 Medicare cap year with a >$34M cushion in Florida and a $3M surplus relative to projections in non-Florida programs.
• Roto-Rooter's commercial business managers program drove 10.9% revenue growth in covered branches compared to 4.8% in others, validating the staffing strategy.
• Management highlighted that over 50% of Roto-Rooter customers are repeat customers, providing a "natural floor" for organic leads.
• The company is actively engaging with CMS to shift the narrative from "waste, fraud, and abuse" to "access" for the 50% of Medicare deaths currently not receiving hospice benefits.