UBS Global Healthcare Conference - CHEMED CORP

Financial Performance:

• ChemEd Corporation maintained a 21-year CAGR of ~11% for both VITAS and Roto-Rooter, with KEMBED earnings growing ~18% annually and stock price appreciating ~20%.
• VITAS reported strong segment performance with 12% revenue growth and 9.4% ADC growth year-to-date; the Florida Medicare cap position ended with a $32 million cushion, indicating ample headroom for further growth in the state.
• Roto-Rooter experienced a revenue increase of 7.5% in the most recent quarter, but this was offset by a significant margin compression due to marketing expenses rising from 7% to 9% of sales, driven by Google's algorithm changes removing free leads.
• Management noted that high-acuity patient days increased to 2.2%, generating six times the daily revenue per day compared to standard days, though this shift was driven by medical necessity rather than margin optimization strategies.
• Capital deployment included $96 million in franchisee buybacks at Roto-Rooter in the current year and a reduction in share count from roughly 27 million to 13 million over the past two decades.

Guidance and Future Outlook:

• Management anticipates VITAS to continue strong top-line and margin growth in 2027, though specific 2027 volume/growth guidance is expected to be more conservative than the 9% volume/12% revenue growth seen in 2026.
• Roto-Rooter faces persistent headwinds from increased digital marketing costs in 2026 and 2027, with the primary goal being the stabilization of marketing spend and proving a "new normal" without further deterioration.
• The company projects continued strong 2027 performance across both businesses, citing the "silver tsunami" demographic trend (1 in 5 Americans over 65 by 2030) as a long-term tailwind for hospice demand.
• No acceleration in share buybacks is projected beyond current levels; the company intends to maintain regular quarterly buybacks, small dividend payments, and selective franchise acquisitions.

Business Segments and Product Lines:

• VITAS (Hospice): Successfully rebalanced referral sources to manage Medicare caps, shifting focus from short-stay hospital referrals (target 42-45%) toward longer-stay sources including nursing homes (9.8% mix), assisted living (8.1%), and home admissions (6.3%).
• VITAS is preparing to manage capacity for nearly 25,000 daily patients and is addressing high-acuity needs to prevent patients from returning to expensive curative care, thereby saving the Medicare trust fund.
• Roto-Rooter: Relies heavily on Google for 90% of sales leads; the business model has shifted from 60% free leads to 40% as Google's map algorithm prioritizes diversified, smaller competitors over established brands like Roto-Rooter.
• Roto-Rooter maintains a strong service brand with over 50% of jobs coming from repeat customers, though it faces competition from private equity-backed firms using plumbing jobs as loss leaders.

Market and Competitive Landscape:

• Hospice: 52% of Medicare decedents still do not access the hospice benefit, representing a massive unrealized market opportunity. The industry faces scrutiny regarding fraud, with CMS suspending over 800 provider numbers nationwide (nearly 600 in California).
• Roto-Rooter: The home services market is stable but not high-growth; competition has intensified with new entrants aggressively bidding on paid search to capture market share, driving up CPCs.
• Google's algorithmic changes have fundamentally altered the digital marketing landscape, disadvantaging established leaders in favor of smaller competitors in the "map pack" free lead section.

Risks and Challenges:

• Roto-Rooter: Continued elevated marketing costs and the inability to control Google's advertising algorithms pose a significant threat to profitability in the near term.
• VITAS: Regulatory risks include the Medicare reimbursement cap and potential program integrity enforcement; while currently holding a large cap cushion, the company must carefully manage patient mix to avoid breaching limits.
• Operational: Wage inflation pressures exist but are estimated around 3% (exceeding the 2.3% market basket adjustment), though management reports strong labor retention and adequate staffing capacity.
• Fraud Scrutiny: Broad regulatory sweeps, particularly in California, create operational friction, though ChemEd asserts their compliance is robust and views these measures as necessary to protect the benefit for legitimate patients.

Management Commentary and Tone:

• Management expressed high confidence in the long-term strategy of maintaining the dual-business structure, citing 22 years of consistent growth as proof that the model is "not broken."
• The tone regarding VITAS was optimistic, describing the business as an "aircraft carrier" that, once moving in the right direction, is difficult to change, with a focus on executing strategic resource deployment.
• Tone regarding Roto-Rooter was more cautious but resilient, acknowledging the "unusual situation" of Google targeting its best customers while emphasizing the company's ability to absorb costs and maintain market position through brand strength.
• Leadership emphasized a "vocation" culture in hospice, noting low turnover among staff who stay beyond one year, countering narratives of widespread labor shortages.

Analyst Questions and Answers:

• Q: What is driving VITAS volume gains?
  • A: Strategic rebalancing of referral sources away from high-acuity short stays toward longer-stay patients from nursing homes and assisted living, allowing for increased ADC without breaching the Medicare cap.
• Q: Is the fraud crackdown impacting VITAS?
  • A: No significant financial impact; however, there is a slight "flight to safety" in California. Management supports program integrity but opposes broad-brush approaches that restrict access to legitimate care.
• Q: How are high-acuity patients affecting margins?
  • A: High-acuity care generates significantly higher daily revenue (6x) but has lower margins; however, it is critical for patient outcomes and prevents costly emergency room visits, ultimately saving the Medicare trust fund.
• Q: What is driving Roto-Rooter's marketing cost spike?
  • A: Google's removal of free map leads for established brands, forcing a shift to paid search where bidding prices are rising due to aggressive competition from PE-backed rivals.
• Q: What are the capital allocation priorities?
  • A: Continued share buybacks, dividend payments, and Roto-Rooter franchise buybacks; VITAS remains open to acquisitions but notes the market is currently tight.

Other Key Points:

• VITAS co-founded the Medicare hospice benefit in 1983 with three of the original 16 federal architects, positioning the company as a long-standing industry leader with deep regulatory expertise.
• The company highlighted that high-acuity care utilization is actually lower for the Medicare trust fund than standard care because it prevents "sentinel events" and subsequent expensive curative treatments.
• The Florida Medicare plan year ends September 30, with the current $32 million cushion providing significant room for growth, though management prefers to end within $5 million of the cap to be conservative.
• 2025 was identified as a challenging year for both segments due to external factors (Google algorithm changes for Roto-Rooter and aggressive cap management for VITAS), but the company expects a return to "winning wicket" status in 2026-2027.