UBS Global Healthcare Conference - CHEMED CORP

Explicit Guidance:

• FY2027 Revenue & Growth: VITAS projected to deliver "strong growth" in 2027 with top-line expansion, though specific guidance for FY2027 is expected to be lower than the FY2026 run-rate of 12% revenue and ~9.4% volume growth, likely settling at "high single digits." Roto-Rooter is expected to maintain strong growth, though margins are anticipated to face headwinds from elevated marketing costs.
• VITAS Cap Management: Florida business holds a $32 million cap cushion for the government plan year ending September 30; management indicates this allows for up to $32 million in additional sales in Florida alone.
• Roto-Rooter Marketing Costs: Marketing expenses are expected to remain elevated in 2027, having shifted from 7% of sales to 9% during the current year due to Google algorithm changes; management aims to demonstrate a "new normal" with no further deterioration.
• Capital Allocation: Commitment to continue quarterly share repurchases and annual dividend increases; Roto-Rooter targets continued franchise acquisitions following $96 million spent in the current year.

Business-Segment Outlook:

• VITAS: Growth strategy relies on balancing referral sources to optimize patient length of stay (LOD) while managing the Medicare per-beneficiary cap. Target hospital admission mix remains 42–45% to manage short-stay volumes, with a strategic shift toward home, assisted living, and nursing home referrals to drive longer LODs and higher Average Daily Cash (ADC).
• Roto-Rooter: Sales volume remains robust (7.5% growth in Q3) driven by market demand, but profitability is pressured by increased paid search costs. The business is transitioning to a "paid search first" model as free Google leads have dropped from 60% to 40% of total leads.
• Operational Efficiency: VITAS has successfully rebalanced its portfolio in late 2025 to mitigate cap issues, resulting in a "powerhouse" of short-stay hospital referrals combined with a strategic push into longer-stay environments.

Market and Competitive Outlook:

• Hospice (VITAS): Benefiting from a "silver tsunami" demographic shift; by 2030, one in five Americans will be over 65, and one in four in Florida. Only 52% of Medicare decedents currently access hospice, representing significant untapped market potential.
• Hospice Competition: Regulatory crackdowns on fraud in California (800+ provider suspensions, ~600 in CA) are expected to drive a "flight to safety," benefiting compliant, larger providers like VITAS. Management opposes "broad brush" regulatory approaches that restrict patient access.
• Plumbing (Roto-Rooter): Industry is stable but increasingly crowded due to private equity entrants (HVAC companies) using loss leaders (lower-margin plumbing jobs) to gain market share. Google's algorithmic changes have disrupted the traditional "free lead" model, forcing a shift to higher-cost paid acquisition to maintain "first page" visibility.

Macro / Industry Outlook:

• Demographics: The "super elderly" population is a key tailwind for the hospice sector, with the average hospice patient age at 80.
• Labor Market: Wage inflation is anticipated to be moderate, estimated around 3% or slightly higher. Reimbursement rates are set federally (2.3% market basket adjustment effective Oct 1), with the company managing to offset higher wage costs through retention and operational efficiency.
• Regulatory Environment: CMS is actively suspending provider numbers for fraud; while VITAS supports program integrity, they warn against restrictions that limit patient access. High-acuity care utilization is critical for Medicare trust fund savings, as it prevents costly readmissions to curative medicine.

Strategic Initiatives:

• VITAS Resource Deployment: Continued daily monitoring of referral sources to maintain the 42–45% hospital admission target and shift resources toward non-hospital pre-admit environments (home, assisted living, nursing) to extend LOS.
• Roto-Rooter Franchise Rebuy: Continued acquisition of franchisees to consolidate ownership, with $96 million deployed in the current year.
• M&A: VITAS management remains open to acquisition opportunities, though the hospice industry presents higher barriers to entry compared to previous years.

Risks and Headwinds to Outlook:

• Google Algorithm Volatility: Roto-Rooter faces a structural risk from Google's shift to prioritize diversified/smaller competitors in map results and reduce free leads, necessitating higher marketing spend.
• Regulatory Uncertainty: Continued "broad brush" regulatory scrutiny or fraud allegations could impact the hospice market, particularly in California, though VITAS claims minimal direct financial impact so far.
• Medicare Cap Exposure: While Florida has a cushion, management notes the risk of exceeding per-beneficiary caps if patient mix (LOD) is not strictly managed.
• Competitive Pricing Pressure: Private equity-backed competitors in the home services market may sustain lower margins via loss leaders, forcing Roto-Rooter to absorb pricing pressure.

Management Tone on the Future:

• Confidence: Management expresses high confidence in VITAS's execution, describing the company as an "aircraft carrier" that maintains its trajectory once set.
• Caution on Roto-Rooter: Tone is cautious regarding margins for 2027 due to the Google marketing headwind, characterized as a "tough" surprise that may take time to normalize.
• Strategic Stance: "If it's not broken, don't fix it," with a decision to maintain the dual-business model despite past investor preference for pure plays.

Miscellaneous:

• Financial Metrics: FY2004–2025 period saw combined growth of >11% per annum with share count reduction from 27 million to 13 million; earnings grew 18% and stock price 20% over 21 years.
• Patient Mix Data (Q3): Hospital admits 5.7%, Home admits 6.3%, Assisted Living 8.1%, Nursing Homes 9.8%.
• High Acuity Impact: High-acuity patients generate 6x the daily revenue of standard patients and are required by Medicare conditions of participation to prevent costly readmissions.