Chemed Corporation ($CHE)

[Audio Gap] Bank of America Healthcare Conference. And my name is Joanna Gajuk. I cover health care providers at Bank of America. And now the session we have planned is with Chemed. It's a very interesting company because it's partially health care, but partially non-health care. So we try to hit on these other topics as well. And today with us, we have the entire team. So we have Kevin McNamara, who's the CEO. We have Mike Witzeman, who's the CFO. And sorry, I'm looking at Joel, who's the CEO of VITAS.

So we're going to talk about VITAS first, to put you on the spot. But then I want to touch base on the other business as well because there are a lot of questions still floating around that business. But I guess when it comes to the hospice operations, Florida cap was an issue. It sounds like you guys doing much better on that front. And you did raise your census growth outlook for the year, right? So kind of the question is, what gives you confidence you can grow census and manage the Medicare Cap in Florida given the prior year experience?

Yes. As we talked about in the fourth quarter of last year, first quarter of the Medicare Cap year, we really wanted to see how that first quarter played out. We came out of that quarter in an extremely strong position, exceeding our expectations. We put metrics in place to manage our referral balance so that we can see real time if we are leaning one way or another in a pre-admit environment, i.e., short length of stay, long length of stay patients and respond accordingly. We've established a bandwidth that we want to maintain for hospital referrals as a pre-admit environment, and we manage to that every month. We can redirect our selling resources to specific types of pre-admitted environments. We can't control length of stay of patients, but we can control where we spend our time. And our selling resources have been very effective in delivering our strategy to mitigate cap, especially in the state of Florida, which we put completely behind us and have no concerns whatsoever.

And I guess when it comes to reimbursement, the fiscal '27 proposal that comes out was kind of benign when it comes to not including any major changes, right? There were some little things here and there. So maybe can you flesh out the things you focus on in the reg? I know this is just preliminary proposal, but just kind of walk us through the things you kind of look at and say, hey, this is good or this is bad or this is where we like want to push back or maybe ask CMS to look at things differently.

Yes. So the comment period is still open. To your point, that will close June 2, and then we'll await in August, the final rule. The rate increase for '27 is proposed nationwide at 2.4%. As we look at specifically Florida, we have, on a preliminary basis, identified that Florida is probably going to come in on the low side of that 2.4%, probably in the 1.9%, 2.0% range -- or nationwide, we're going to come in, in the 1.9%, 2.0% range. Florida will come in a little bit lower than that, closer to the 1% range. Unlike what happened when we had the significant Medicare Cap concern was the nationwide average was around 3% and Florida came in at 5%. So we feel good where we're at. Would we like it a little bit higher? Sure. But we feel we'll be able to manage to that and feel good about where it's at. We will deliver our comments back to government. And there's many things in the [ wage rule ], Joanna, as you know, that we'll comment back on, but that's one of those.

And some of the things that were included in this proposal were around some incremental oversight measures, like there was this index. We kind of tried to look at this, and then CMS took down the data that we were using. I know there was some questions about how they were coming up with this index. So any comments on that, how you think about this becoming a reality and what it would mean for the company?

Yes. So it's the Service and Spend Variation Index, SSVI. That's still in a -- as we understand it, a preliminary phase. We anticipate some recommendations coming out before long that will provide additional oversight specific to the hospice industry. Waste fraud and abuse has been at the forefront of national communication. Dr. Oz specifically held hearings in California, of which we participated in. They had congressional hearings 2 weeks ago, of which we provided input to the representatives who testified. Look, in reality, when L.A. County grew from the high 400s of providers to nearly 1,500 providers, totaling 30% to 40% of the national total of hospice providers, there was an issue. And so the government has identified that. They are very serious about improving that oversight. And what we want to guard against is that the patient sitting out there and their loved one medically eligible for the Medicare hospice benefit doesn't have restricted access because of overzealous oversight. We want the fraudulent providers out of the industry, and we support every bit of that. But we also want to make sure access is not restricted for those in need.

So just following up on that comment. So you're worried about access being restricted for the patients. And would this be opportunity for you to take some of these patients, or this actually could end up not being such a bad situation for VITAS in particular?

Yes. We certainly do not see that as a headwind. We see it as an opportunity. In reality, almost half of the individuals who pass away in the United States who could access the Medicare hospice benefit end up receiving that benefit. So there is a lot of opportunity of individuals out there through education, through expanded access. One of the things that was floated out there was a national moratorium on new hospice licenses. But there are many, many areas throughout the country that are very underserved. And so we don't want to see, again, an overzealous oversight be a restriction to patients being able to gain access. In regards to VITAS, we do see it as an opportunity. We are one of the top providers of end-of-life care in the nation. And I can speak specifically to the state of California. Just in recent weeks, we've seen an increase in referral activity from providers who -- from referral sources who are concerned about who they may have been sending patients to in the past. And they went with a trusted brand, a trusted provider, as VITAS is the largest provider of end-of-life care in the state of California.

And the other element when it comes to the guidance for that segment, you raised the margin outlook as well. But kind of walk us through kind of what's driving that improvement? And is that sustainable? And how we should think about even going forward in terms of the margin in that segment?

So our margin expansion, look, we've talked about the mitigation strategies we needed to employ to reverse the Medicare Cap situation in the state of Florida. That was to focus on hospitals as a pre-admit environment, which has a tendency to drive a higher number of short length of stay patients. Short length of stay patients have a tendency to be more expensive, more complex, more critical. And so as we begin now to balance that admission volume throughout all the pre-admit environments, but certainly non-hospital opportunities, we know that's going to deliver a longer length of stay patient will allow us to balance that cost over their span of care. And so our teams have done a great job from labor management to prudent operational management to work through the concerns we have. It's nice to put that behind us. And as we look at then expanding ADC throughout the end of the year, and as we said, we restated guidance for ADC in total days of care, that will allow us to expand that.

And Joanna, we were a little conservative at the beginning of the year with our guidance because we weren't sure how quickly Joel and his team could reverse the trend and start taking in those longer-stay patients. And so we were a little conservative when we issued the original guidance in February. Joel and his team, as he said, have done a spectacular job of really accelerating the growth of that segment of the business. And that's evidenced by we had -- our first quarter, we had guided to essentially 0 ADC growth or flat ADC. We actually grew at 2.2%. And that actually builds on itself as the year goes on with the long-stay patients. And so that's why we felt pretty comfortable not only expanding the top line in our guidance, but also the margins as well.

And I guess it ties to my other question around how we should think about VITAS growth outlook, say, beyond '26, right? Is there some things that change how you're looking at things? Because obviously, there was a period of very fast growth in that segment when it comes to census at some point growing high single digits to double digits, right? So can you get back to that? Or should we think more about kind of like mid-single to high single-digit census growth being the kind of normal target growth?

So I think -- I mean, Joel, I'm sure he has comments as well. I think purely from a demand standpoint or from the market standpoint, we could certainly grow the business double digits in the near future with the demographics of the country and the things that people who are going to need access to hospice over the next 3 to 5 years. The Medicare Cap is what really limits that growth. So we think really a sustainable, responsible way to grow the top line is more in the 8%, 10% range. And of that, of course, call it, 6% to 8% comes from ADC. The rest comes from reimbursement.

You covered that well.

Thank you.

National data is that by 2030, 1 in 5 Americans is going to be over the age of 65. The growth opportunity is there. And specifically in the state of Florida, that number drops to 1 in 4. So there is going to be a lot of opportunity to impact the quality of the patient and their loved ones' final journey. However long that journey might be, whether it's a short length of stay or long length of stay, we're well positioned to be able to handle that increased capacity.

And another, I guess, piece of the growth story could be external growth around just acquisitions. So you guys did something that was -- feels like a while ago, right? And then since then, you've been adding the de novos and CON approvals in Florida. But kind of -- what's the latest thinking around just doing maybe more acquisitions in that segment?

Yes. We're continuing to evaluate opportunities. They come across our desk just about every single week. The valuations and the multiples required to get those deals done had reached a very high, unrealistic number. We're seeing those numbers begin to come back down. We will still be very aggressive in CON markets where there's a barrier to enter the market. We were awarded our latest CON in the state of Florida in Manatee County. We go live with that new start next month. So very excited. Our last 4 in the last 18 months were -- 3 or 4 were in the state of Florida, and they are all exceeding expectations beyond what we could have imagined. And it speaks to the need of the patients and their loved ones in those areas, but they have all done extremely well.

We'll continue to look, as Joel said, on at M&A opportunities. But it will have to be in the right location. It will have to be at the right valuation. We're going to be very, very selective. If you think about in a hospice business, what are you really buying, you're buying a referral network. You're not really buying patients, and you're buying an employee base. And you're not contractually -- they're not contractually obligated to you in -- neither the referral network or the employee base. So what you're buying is -- you have to be careful. You have to be careful on valuation. We like really, the de novo route. It's a much more efficient use of our capital.

There's acquisitions in the state of Florida and outside of the state of Florida for VITAS. And any county that we don't have, we're an active participant in. In any other state, there's a few exceptions for a few CON opportunities. But any other state, we're looking at acquiring businesses -- as Mike said, there's not a lot of bricks and mortar. There's the most valuable item referral network, you can't tie up legally. But they're also probably -- you have to look at the expectation of how large they could be. VITAS is a full-service hospice with 4 level layers of care, has a higher breakeven. I mean, our breakeven in a hospice program might be higher than the largest program in some of the acquisition opportunities that are out there. So it's just -- I'm not demeaning their efforts. It's just the one thing to be in a major metropolitan area and another to be on the periphery or even in a rural area that you can't have the expectation of the cost associated with the full-service hospital. So people ask us about acquisitions over the decades, saying that here's one. And we say we were interested in 3 of their programs, but not the other 17. We'd lose money on the other 17. So that's the nature of the game.

We do have 3 pending CONs in other states, 2 in North Carolina, 1 in the state of Washington, that we'll find out later this year.

And when it comes to the CON, it sounds like you're executing pretty well in Florida in these markets. And like Kevin alluded, the deals are kind of like not guarantee your employees. So I'm just curious, like how are you able to staff in those CON states? Are you essentially able to kind of take over some of these nurses and others from your competitors?

We have not experienced staffing concerns in our ability to open up and begin an operation in other locations. We do have a different model as we approach, and it's been one of the -- especially in the state of Florida, one of the significant benefits is we come in fully staffed and we go all in as compared to some of the competition that kind of pays as they go. They add staff as they grow. We come in with our full staffing model so that there aren't any unmet expectations from day 1.

And I was thinking before we switch to another segment, there was something else I want to ask you, but I guess maybe coming back to me. So maybe switching on because I guess we have 10 minutes. In the other segment, right, a lot of disruption in the last, I guess, couple of years really, right? And the first quarter seems like things may be kind of looking a little bit better. But still, if you exclude, there's some weather disruption and such. So if you do that, like revenues barely grew really, right? Even if you exclude that disruption. And you're talking about 3% to 3.5% growth, right, for the year. So the obvious question is like how are you going to get there from like just barely growing in Q1 or on the reported -- considering all things, it was actually declined, right? So how are you going to ramp it up to get to your full year guidance?

So I think if you think about the weather issue we had in the first quarter, we would have been up slightly in the first quarter otherwise on the top line. So the first quarter behaved the way we expected it to. There's a few things that I know we've talked about is our commercial business. We're implementing commercial business managers. We hired 19 in the first quarter. They take anywhere between 30 and 60 days to get up to speed and start producing sales. And so we expect that business to improve. And as you know well, we've talked about it a number of times, but the water restoration business saw some disruptions mainly due to some things that we needed to improve in our documentation and our billing and collection procedures. And we're sort of in the middle of that. We knew that the first quarter was probably going to show some disruption in that business as we essentially centralized 51 branches. And that, again, it behaved the way we expected. It wasn't good results. We wouldn't say that, but it was as expected. And again, we expect that to improve over the rest of the year.

But as I say, a bridge, not an insignificant part of the bridge is related to just the improved collection percentage.

Sure. So we have -- historically in water restoration, we collected about 9 -- we wrote off 9.5% of the revenue in that business. And late -- for all the reasons we've talked about, in late '25, that spiked to about 16%. We knew that we were going to improve that through the centralization effort. It's now back to about 12.5% or 13%. So not quite back to the 9.5%, but it is on its way back as we expected to where it's a better sustainable level.

And I guess also the acquisitions you did, right? There's 2 franchises that you bought. So there's going to be also incremental growth for the rest of the year?

Yes. That's about $5 million over the last 3 quarters.

So maybe like a percentage point or so of that growth from this. All right. And maybe yes, I will ask the question. I don't know if you're willing to answer, but in terms of what are you seeing right now. Because it sounds like early in Q1, very disruptive, then it sounds like March looked better. So just curious, any update on like where things are, April or May?

I think April performed about as we anticipated. I don't think there's any big surprises as we sit here at this point in the quarter.

Right. And you talked about the collections, the water restoration. But I guess the other part of the equation here is around the Google search engine optimization. And I guess you tried to kind of fight Google, which is hard. But maybe kind of give us an update where you stand on the new, I guess, third party that you hired to help you with that process?

Well, let me just start by saying that we improved. We saw through their efforts and some of our internal efforts, our visibility on the, let's call it, the map section of -- which is the most significant part of the free search, as it were, on Google. We saw our visibility improve. From the end of the third quarter of 2025, it was sitting at about 23% visibility. In other words, nationwide, we show up on the map 23% of the time. That's down from 72% about 12 months before that, but it's a little up, 23%. In December, January and February, we grew that to a level of about 35% visibility, okay, with -- again, our expectation was we continue to make progress. It's our understanding that Google in the first week of March changed their algorithm, and we almost immediately fell to 23% as far as visibility with something we track on a daily basis. And basically went to work on making adjustments to the changes Google made in their algorithm. And by the first week in April, we were back up to a 33%, 34% visibility factor. So the issue is it's a battle. Google does not change their algorithm all that often. I mean, it's not like we anticipate doing this every month. But we look to stay on top of the situation. It's a tough one. As you said, Google is big. They're the 800-pound gorilla on the subject. We don't ignore them. From our perspective, the biggest issue we'd say with regard to Google is that we're kind of winning the war on paid search. In other words, we -- the last 3 quarters, each of the quarters have shown that we've increased the number of paid search leads or calls or telephone calls by double digits, including 18%, 18.5% in the most recent quarter without increasing substantially, the amount we're paying per click. So we're seeing great strides in that. Our results would have been spectacular, I suppose, if our natural search leads hadn't fallen 15.5%. So again, order of magnitude where we drove 3% net gain, but we're still fighting that battle on the natural search. But again, Google is not going to go away. We don't ignore it. I think we have elements of our arsenal, that is, our app, where customers could get us directly without going and clicking on Google. We have AI platforms, which are basically -- when somebody is searching for a plumber, the AI platforms, that's essentially, at this point, a natural search, no fee associated with that. And the fees are not insubstantial per job. So we're continuing to fight that battle. It's not the first time Roto-Rooter went through a major transformation like this when Roto-Rooter went from being the #1 entrant in the Yellow Pages for plumbing for the first 2 pages of virtually every metropolitan directory to just a single line in -- on the Internet. That was a tough transformation. I don't think the one we're going through now is as tough necessarily, but it still has a very significant element.

As Kevin said, I mean, it's a cat and mouse game, right? We do things to improve our positioning. And then Google changes something, and we have to respond to that. I think the big change or the big difference between, say, this time last year and where we're at now is we're much in a better position to respond quickly. Our new SEO is really focused on the underlying Google engineer and the engine versus sort of the traditional marketing. And so they're looking at to see how quickly to change things. They use AI to change our underlying structure on the Internet to respond as quickly as possible. And so I think we're in a better position today to respond than maybe we have been in the past.

Okay. Great. Because that was my follow-up question, like what exactly is done differently, right? So I guess they take a different approach, not for the marketing side of things, but just actually, the back end.

Yes, the new SEO are actually -- they're mainly engineers. So they reverse engineer what Google has done, and then we respond appropriately.

And I guess you mentioned, Kevin, around the paid leads, right, and the cost of that. So I guess what comes with that with that growth was the higher cost, right? And then the margins obviously suffer because of that. So now as we think about going forward outlook for this segment, is it sort of like this is the new base or there's more risk that actually, the margins could decline? Or do you expect kind of reverse? Or how should we think about margins there?

But I mean I think that it's largely the new normal as far as on the marketing side. I mean, we think we're going to fight and scrap. And there's no reason to believe that we're not going to make slight improvements, but still, Google is a substantial expense. It's necessary. It's where we get 80% of our leads, natural or otherwise. And we just play the game until other elements outstrip them.

We'll need to drive top line with the additional marketing spend. And then we can normalize margins a little more with efficiencies in other places, covering fixed costs. As long as we're driving the top line, the margin will be fine. The one thing that I would suggest even at our current margins are at or slightly above our pre-pandemic margins. So it hasn't been a disaster in any fashion, but it is causing, I call it, 100 basis point compression on where we think the margins really should be.

So you're saying from here, this is a good base about the margins. And the very last question -- it's almost -- the company has no leverage really much, pretty much. I mean, there's a little bit of debt now maybe on the balance sheet, but not really that material. So how should we think about that? That's why I was asking about acquisitions because I don't know if there's anything on the Roto-Rooter side in terms of capital deployment. Or you're just going to buy back stock?

I think, as you mentioned, since we have a completely clean balance sheet, we can do both. We have no restriction on buying back shares at an opportunistic price where we think we are now, for instance. And that doesn't prohibit us from doing anything on an M&A front that we think makes sense, either on the VITAS side or on the Roto-Rooter acquisition of franchise side.

All right. Great. Thank you so much, everyone.