Chemed Corporation ($CHE)

Welcome to Oppenheimer's 36th Annual Healthcare Conference. I'm Mike Wiederhorn, the health care analyst. It's our pleasure to introduce Chemed today, and we have Joel Wherley, President and CEO of VITAS; Mike Witzeman, Chief Financial Officer. Today will be a fireside. Thank you guys for joining us this morning. Let's just...

Hello, Mike.

So I'll start right away, kind of kick in here. Can you discuss your guidance and your comfort level with each segment? I know it's a little open-ended, but we'll obviously get more into this, but just from a high-level perspective.

Yes. I'll start, and Joel can add some color at least on the VITAS side. I would say, if you break it down, we're very comfortable with the VITAS guidance. We think that there's probably some conservatism in it. We are working towards, as you know, balancing the patient mix, going back to a more balanced mix of short- and long-stay patients, and that provides some upward potential as we get through 2026. We're confident, fairly confident in the Roto-Rooter guidance. Obviously, the last couple of years have been a little rough there, and we've missed particularly the beginning of the year guidance by quite a bit by the time the end of the year comes. We feel like -- and I know we'll get into some details, but I feel like we're moving in the right direction on a number of fronts at Roto-Rooter. And honestly, there -- our guidance is about half of what they have done from a budgeting standpoint on a growth rate internally. So we've taken their budget and essentially taken the growth rate for revenue and EBITDA to about half of what they expect to do. So we wanted to build in a bit of conservatism there as well.

Perfect. All right. So let's just move over, focus on VITAS here. How should we be thinking about VITAS coming out of Q4 in terms of the underlying volume trends? And if we set aside some of the mix shift as well, can you give us some color also on the Florida market versus the other markets?

Yes. So we were pretty upfront in our discussions in the fourth quarter that, that really was going to be an important barometer for us to look at how the rest of '26 might go. We had to ensure that, that first quarter, the Medicare Cap year, which, as you know, is the fourth quarter of the calendar year that we came out strong, that we came out far ahead of where we were at last year and we delivered on that. We're in very good position from a volume perspective coming out of the quarter, which, as we indicated in the fourth quarter, was what was going to really guide us as far as our overall growth potential and when that census could really reasonably begin adding back up. When you look at Florida as compared to the rest of the country, Florida, because of its unique nature, the CON environment, which is probably one of the best CON environments in the entire country, puts you in a circumstance where you can grow quickly. And so we've been able -- and we'll talk, I'm sure, a little bit later on about how our new starts have gone, but our growth trajectory in Florida has gone very well. The rest of the country, and again, given the circumstances depending on the geography, we know a lot of Dr. Oz's focus has been on waste, fraud and abuse and talking about California. We feel and welcome the focus on waste, fraud and abuse. We know we do things the right way, but it has put a -- certainly an increased focus on the individual marketplaces in California. As we look at the rest of the markets, we are happy to see our Northeast business segment back in a growing mode, which we have struggled for some time in that environment. So all in all, feel good. Growth rates outside of Florida, don't compare, but that's the nature of the market in Florida as compared to other places in the country.

And we've grown ADC pretty much. We track it weekly, of course, and we've grown ADC pretty much every week of the new year -- of 2026 so far. So I would say, we are currently -- it's only 2 months of -- 2.5 months. So I don't want to say it's a trend necessarily, but we're a little bit ahead of schedule on ADC growth here in the first couple of months of the year.

Perfect. So obviously, we saw some of the mix impacting last year. So do you think that's easing in 2026? And do you -- should we think about you have enough -- it looks like you have enough cap cushion to unwind maybe some of the restrictions that you made in the second half of last year and maybe start seeing increasing length of stay starting to move up again. Is that kind of how should we be thinking about it?

Yes. And actually, Mike, we've already done that. We've implemented those strategies towards the end of December, feeling more comfortable about our Medicare cap position, especially in the Florida CCN. As Mike indicated, we have grown our Medicare ADC census every single week in '26 in the Medicare -- in the Florida CCN, which is a direct result of us beginning to ease that focus specific to just short length of stay, high acuity hospital-based patients and expand that back to a more reliable and comfortable Medicare ADC growth.

So in terms of the -- I think you came in with 45% in terms of hospital admissions last quarter. How should we be thinking about that? Should that be going back to lower 40s? What's the target? Where or how is that...

Yes. We've been pretty open about -- the sweet spot seems to be 42% to 45% in that range. We finished the quarter, as you indicated, around that upper 44% to 45% range. We've been able to bring that down a little bit. And the most important thing as we monitor that on a very, very close basis is the fact that we want to drop that percentage down while increasing overall volumes, which we've been able to demonstrate throughout the beginning of '26, our ability to do. We feel like we're in a very good position right now with our Medicare -- and have no concerns about a cap liability in Florida CCN.

And just sort of order of magnitude, Mike, a couple of percent change in that number can have a pretty significant impact. For instance, when we talked about for a couple of years, community access, that ratio went from the 42% just only down to 38% or 39%. And that's -- so a few percentage points within the 42% to 45% range can have a pretty significant impact.

Yes.

So it sounds like you definitely seem comfortable with your cap position here in '26. How should we be -- longer term, how should we be thinking about Florida? Is this something that we -- is this something we should be worried about year-to-year? Or is this something that you feel like you have long-term control over? And then also, any color on California. I mean California has always had run, I guess, $7 million, $8 million or $9 million in cap. So that's -- and obviously, there's the wage issue there. So...

The thing that gives us the comfort, and I'll let Joel talk, but the thing that gets most covered, I think, in Florida is the hospital base of patients is available. There is more than enough availability to be able to balance our patient mix for the long term. So we don't believe that we have a long-term issue in Florida. And you know, Mike, that you've followed the hospice industry for so long. Some of our competitors back in the 2009, 2010 time frame had issues that they couldn't get out of. But if you really look into what happened there is they are in more rural locations that don't have the hospital patient base availability to be able to make sure that, that patient mix is appropriate. So we feel pretty comfortable about Florida, but...

Yes. Absolutely. I think, Mike, one of the most important things is monitoring where we deploy our resources and our focus. We can't control, whether a patient is coming from a hospital setting, nursing home setting, ALF or physician's office. But what we can control is where we deploy our resources to talk about the benefit or the value that VITAS brings to a potential patient and their loved one. And so ensuring that we're constantly looking at where that mix is sitting, specific to where we then deploy our resources. I want to go back to, however, how we got in the issue last year, which actually was fourth quarter of '24, first year of the '25 cap year. Remember, we got over a 5% rate increase in the state of Florida as an aggregate. That was unusual and certainly far exceeded what had been the norm specific to our rate increase. So we also have that influence on top of a very successful campaign of growing our longer length of stay or community access patients. We're also continuing to monitor a newer KPI for us, which is an imputed length of stay, which really gives us a better view of our length of stay specific to our live patients and isn't influenced by discharge patients or death, which is typically ultimately what we know ends up with a hospice patient. So we feel very good about the longer-term outlook, and we'll continue to monitor and manage that appropriately.

And one more question on Florida. I guess, obviously, you referred to it earlier about the expansion to new markets there. I remember Manatee, Pinellas. Kind of -- you can kind of give us some color on how is that contributing to organic growth? And besides the cap benefits of those new areas, can you remind us what the time line is to profitability for one of those locations?

Yes. I'll start with the profitability side. We expect those locations. And again, I want to be clear, this is in a Florida environment, in that CON environment. It's different outside of that. But we would expect profitability where it used to be 12 to 18 months. We are now at 12 months or a little bit below that. Specific to their overall influence in our organic growth, there's no question, again, given the circumstances, the environment in Florida, the aging population, the fact that by 2030, 1 in 5 individuals will be over the age 65 and in many areas of Florida, it's down to 1 in 4. Their growth is certainly an influential impact on our organic growth and represent a high percentage of that number. We've been extremely successful in lifting up the new starts, which are Pasco, Marion and Pinellas. Pasco being the longest, September of '24, opened within a hurricane, but we were able to quickly turn that around and get it lifted up. Then came Marion April of '25 and Pinellas mid-November of '25. All 3 are exceeding expectations, specific to on their track to profitability, but also caring for more and more patients every single day and exceeding our expectations from an admission and a census growth projection.

In the guidance and embedded in everything we've done, we estimated roughly 500 admissions from those new start programs during '26. And I think we're ahead of that pace at the moment.

Perfect. I'll ask one more question here on VITAS and then we'll switch over to Roto-Rooter since -- due to time. But margin perspective on VITAS, kind of what -- obviously, it's been moving around. We've seen it go higher. We've seen it obviously getting compressed with the short length of stay and the cap issues. What do you think is a comfortable level what you should be targeting or we should be thinking about from an investor perspective long term?

So great question. There is no doubt, and we've openly talked about the fact that a higher length of stay, shorter length of stay, higher acuity patient creates margin compression. We're touching the patient more often. The patient is on our service for a shorter length of time, so you don't have an opportunity over a period of time to balance out that cost. I think we will return to pre-pandemic percentages. And as we have indicated, we are more backloaded from our overall contribution back to the organization, primarily because of what it takes to begin moving that focus from a longer length of -- or a shorter length of stay to a more balanced length of stay patient. However, I will tell you, we are ahead of expectations. And so far in '26, we have been able to impact and have good expense management, good labor management while continuing to focus on expanding that margin. So I think we're in a good position. We're ahead of where we expected we would be this time of the year and anticipate continued improvement marginally throughout the rest of the year.

And I would say, Mike, from a -- if you're modeling out years, I would think 18% to 18.5% margins is probably around the -- where I would project it. We can get leverage if we're growing top line like we expect, which is high single digits. We can get leverage from that, mainly off of back office costs. So we can grow margins from the 18% to 18.5%, but it's going to be a slow build over time based on leveraging back office costs there. I don't foresee any big bang that's going to take our margins up to 19.5% or 20%. We could maybe eventually get there over time by leveraging the back office, but 18% to 18.5% is probably a comfortable range at the moment.

Perfect. Okay. Let's shift over to everyone's favorite subject matter, Roto-Rooter. Can you -- you talked about your confidence on the guidance for Roto-Rooter for 2026. What are some of the puts and takes that get you to the bottom end and top end of the ranges in your opinion?

Yes. So if you sort of model out how we got to top line growth of 3% to 3.5%, we're anticipating. We talked a lot about the issues we had with water restoration write-offs, which has both top line and bottom line impacts. It was $11 million headwind last year. We're projecting it to be better by half this year or said another way, a tailwind of $5.5 million. That's probably 60, 70 basis points of improvement. The lead volume in the first couple of months has been pretty good. So we would expect at least a little bit of volume growth, call it, 1% to 1.5%. And then we passed through roughly 1.5% price increase at the beginning of the year. So if you add those things up, that gets you to the 3% to 3.5% range. Obviously, the biggest issue on top line will be leads, making sure that we continue to be successful on the paid lead front and then to the extent possible, get more natural leads than we have gotten in '25. And I think we're on track for that. As far as then if you get to the EBITDA line, by far, the biggest issue there is the marketing costs, as I think we've been pretty clearly talking about for a while. And I don't see that moderating from the '25 level. We're hoping to -- we're making sure to -- that it doesn't continue to grow and doesn't grow out of control to the best we can. But we need to generate leads. As you well know, as I know you've heard the story many, many times, we're being forced to pay for more leads. It's not that they're picking on Roto-Rooter or anything. They're doing it to anyone in the industry that's willing to pay for a lead. It makes sense to force us to pay for leads instead of giving them to us for free. And we expect that trend to continue. I think that the elevated costs we saw in '25, we've put into the guidance again in '26. I don't anticipate it getting worse from here, but we don't expect it to necessarily get much better, at least in the short term.

Okay. So on the leads, if I remember correctly, I think in Q4, it increased by what, by $3 million, I think $12 million annualized, I guess, for 2026. So you're saying -- do you feel comfortable with those levels going forward? Is there a plus or minus? Is there -- in the guide, is there an expectation for another increase from there? Kind of just from an investor standpoint, how should we be -- just to more granularize that?

Yes. We expect it to moderate -- or not moderate, we expect it to level at this $3 million a quarter extra cost, and that's what's in the guide. And ultimately, we feel good about where the paid leads are. As we talked about at the end of the -- with our fourth quarter press release, we hired a new search engine optimization company. They have very preliminarily seen pretty decent results. We're showing up more on the natural search sections than we were before they started their work, and they're only 2 months into the work. I think we're optimistic that they can move the needle some. I don't expect it to go back to '23, '24 levels necessarily. But we feel pretty comfortable that the marketing spend is under control. It's going to be elevated, but it's not going to balloon out of control either.

Okay. Let's move over to water restoration you spoke about earlier. Can you talk about some of the challenges on the collection side of that side of the business and how that should impact the business going forward? And then we'll drill down more into that.

Yes. I mean we started water restoration in 2013. We had -- at the time, we made the decision that each branch -- we have 51 branches. Each branch was going to do billing collections in the branch itself. It wasn't going to be a central function. As you might imagine, we have 51 groups of people doing it 51 different ways. Some are better than others. And so it has grown now to a size that you can't have that level of variability with 51 groups of people doing it in 51 different ways. And so that's why we talked about centralization. It will ultimately reduce head count, but it also -- it's a very specialized business, right? We're billing insurance companies, and it's the only business that Roto-Rooter does billing insurance companies. So it's a specialized skill to know how to bill, how to collect, negotiating with insurance adjusters. And so we think that now is the time, it's the right time to centralize. There will be a little bit of overlap of costs, but we're well on our way to getting that done. And we anticipate the collection rates to get better as the year goes on.

And you talked about duplicate costs, how much should we be expecting in the first half?

It's not huge. It's maybe $1 million at most.

Okay. I think you guys spoke about the use of technology also to mitigate some of the issues. Is there any -- can you talk a little bit about that and the related costs on that as well?

Yes. So I'll give you a very specific example of something that we are testing right now. When we get to a customer's location from 2013 until about 3 months ago, our technicians did hand measurements with tape measures and things like that of measuring the area, sort of judgmentally deciding where to put fans and dehumidifiers. There is technology. They would call it AI. I don't really know that it's AI, but everyone wants to call it AI these days. But it's essentially a camera that you put in the middle of the room that has had the flood and it takes a 360-degree scan of the room. It takes all the measurements automatically. It tells you where the fans and the humidifiers, things need to be placed. And as you might imagine, that is significantly better documentation for insurance companies than is our handwritten notes. We're testing that technology now. It doesn't cost anything to buy the camera, the company that does -- provides the service and the technology that give you the camera, but then it's $40 for every job that it essentially performs. Water restoration jobs are $5,000-plus jobs, and so $40 is a pretty minimal cost to get documentation significantly improved. Because as you know, through the health care industry, if you don't get the documentation right upfront, you are not going to get paid.

Yes, that's a lesson well learned. Exactly. How should we be thinking about the reduced pricing on the water restoration side? Do you expect that to firm up as soon as the collections improve on the centralized -- being centralized? Or do you think there was maybe historically it is too aggressive?

I think we were a little aggressive, but our collection rate historically has been roughly 90% or we've had a 10% roughly write-off rate on all water restoration billing. And you don't want to be overly aggressive, you want to be slightly aggressive because if you don't bill it, you definitely won't get paid for it. And so I think what happened in the fourth quarter, for instance, is when -- especially when you have 51 different locations and you have managers, regional managers and things calling every day and sort of stressing collection rates, one way to improve collection rates is to build less. And that's what we saw. We're working to improve that. I think the first quarter should be better. The revenue per job should be back to closer to normal. And then the centralization helps that because now you only have a small group of people doing it.

Right. So with all these factors on Roto-Rooter, can you discuss how the seasonality on the business -- how should we be thinking about the seasonality on the Roto-Rooter business throughout 2026? And then specific to Q1, can you review your expectations for seasonality specific to that quarter because, obviously, all the moving parts and also the strength of last year?

Yes. So last year, the first quarter was by far, I think, at least $10 million, if not $15 million higher than any other quarter from a revenue standpoint. So it's a pretty tough comparison. We expect the fourth quarter and the first quarter to be our best quarters because of the weather and the seasonality. And so it was a tough comparison. I think our guidance has us flat to just slightly down in the first quarter from a top line perspective and then down a little more because of -- on an EBITDA perspective from marketing costs mainly. But ultimately, the one thing I would say is the first quarter, I think we are on track for where we thought we were going to be through the first 2 months. The one slight caveat to that is we love cold and wet weather. But when it gets to the point where it's shutting down cities, we can't get on the road just like anyone else. And so we've had 2 weather events that have shut down, the first one that went from basically from Texas all the way to the Northeast that shut down 24 branches for some period of time across the country over a 3-day period. There's a second wave of snow that came, as you well know, through the Northeast that shut down some of our Northeast branches for a period of time over a couple of days. So we've had some downtime over the course of the first quarter that is unusual. That's had an impact -- negative impact on our results a little bit. And when I say a little bit, we're working on estimates, I would say, somewhere $3 million, $4 million maybe. But we're working to get through that. And we're fairly well on track with that exception on the first quarter on all the other metrics and revenue and those things.

Perfect. That's really good color. Moving over to one of the areas of potential growth historically in Roto-Rooter at one point that you guys were more aggressive about buying -- acquiring franchisees, bringing them back in. What's the thoughts around that strategy again?

We are being very aggressive. We have historically offered in the range of 1 to 2x the franchisees their revenue. The franchisees were happy about that. That seemed like a good price to them. And for us, it provided a return on investment in almost every instance above 50%. And so it was a good deal for us. They thought it was a good deal for them. We've now made some offers and particularly in locations that we really like, that are closer to 2.5 to 3x the revenue. And that takes the return on investment down to "only 30% to 35%." I would expect we should have at least a couple of deals to announce before the end of the quarter or certainly by the time we release our first quarter earnings.

Perfect. One last question here. It's definitely something that investors keep asking. Obviously, Roto-Rooter has been somewhat of a problem child over the last 12 to 18 months. If this performance of this business doesn't recover, could you look at strategic alternatives and possibly breaking the company up?

We absolutely have no hesitation to do that if we think it will provide long-term shareholder value. As we sit today, obviously, we feel very good about the VITAS story and the VITAS trajectory over the next 5 years. We don't believe that there has been an existential impairment of Roto-Rooter's value or the -- its ability to get back to its normal predictable growth path. We recognize that we think it's a temporary dislocation. We recognize that a temporary dislocation can't go on for 4 or 5 years at a time. And so I think '26 is going to be a very important year for us to show that Roto-Rooter is recovering. It's on the right track. And if it doesn't show that, I think we will have some strategic alternative decisions to make.

Well, we're out of time. That's a great discussion. I really appreciate your time today, Mike and Joel. This is really great. And like I said, always appreciate your time sitting down here and taking these questions.

Thanks, Mike.

Thanks, Mike.