Chemed Corporation Stock

Here at Jefferies. So the next company we have is Chemed. They're the largest operator of hospice services in the U.S. and also they own Roto-Rooter. So with us this morning are Kevin McNamara, company's CEO; and Joel Wherley, CEO of VITAS, the hospice business. So Kevin, Joel, thank you so much for joining us.

I'll start, Kevin, maybe if you can start with the state of the union, how the second quarter played out and how you're thinking about the back half of the year.

Sure. Let me start by saying that the second quarter, we increased guidance. It was pretty much as we expect -- everything happened as we expected, only a little bit better. The trends, again, were solid. I mean I would characterize it as -- let's start with the tougher one, Roto-Rooter. Roto-Rooter is the goal this year was a little more stabilization. It's difficult. I won't bore everybody with the market issue. The only problem Roto-Rooter has is the fact that we faced some negative comparisons on marketing expenses because our percent of free leads has gone from basically close to 60% to now just under 40% in the course of about 2 years.

It's just efforts by Google to say, if we have companies that are advertising, we should bury them in the free sections and they should pay for their leads. That's their -- it's their business. That's what they've determined to do, and we're just dealing with that. It's a new normal. And so we have a lot of plumbing companies scrambling, paying a lot more. We've gone from about $50 a lead to $120, $125 a lead on the paid side. And there's more companies vying for those. But Roto-Rooter has done a pretty good job of paying a little bit more money, but we're getting the leads. They're not falling. They're getting -- our top line is growing. That's the first stage.

Stabilization of the business, that is the total dump. The top line and looking for growth on the top line and dealing with margin as we fight the battles with Google. And it's -- again, it's a battle where our visibility on the free side falls a little bit, and we make some effort and then we increase it. And that effect is a stable Roto-Rooter business, and I characterize it as from an investment standpoint, what we want is Roto-Rooter to be stable and to get out of VITAS's way because VITAS is doing great and exceeding our expectations. Bouncing back from an unusual situation in Florida last year where we had Medicare cap exposure of a relatively small amount, $19 million.

But the day we announced that, the stock fell 100 points, well over $1 billion in value. But VITAS has dealt with that issue. And as I said, exceeding expectations this year. And the good news about hospice is such that it's a very predictable business. In other words, Roto-Rooter, we don't know what our sales are going to be tomorrow.

We'll just wait to see how the phone rings. Joel knows within a couple of hundred thousand dollars of what your sales are going to be tomorrow. I mean it's a very predictable business. And it's one that during periods when you're struggling, it's like an aircraft carrier, a little tough to turn around on the other side, when things are going well, but steady as she goes. So I mean our outlook is just stabilization of Roto-Rooter, get out of VITAS's way because it doing great.

That's awesome. Maybe, Joel, since Kevin highlighted VITAS and the strength there, if you can walk us through how you're thinking about the sustainability of the margin gains that you've delivered there. I think you had an EHR rollout and a few other initiatives that are helping drive margin and growth. So yes, walk us through some of that.

Yes. We have realized some improvement because of the EHR. But in reality, when we look at our margin expansion, which we planned for and have exceeded expectations, it's really because of the overall management of the business. Personnel management, although while we have had marginal expansion with labor management, we have no concerns about our current labor force being able to expand it to meet the expectations of growth, both in Florida and throughout the country.

The other component to that is, as we looked at the year, we knew the strategy that we put into place and employed going back to last year to mitigate the cap liability that had been generated was going to cause marginal compression. We planned for that and then laid out the strategy of which we would expand that marginal improvement throughout the course of the year.

Our 2 recognitions of expansion of that margin contributed then to restating guidance twice, unprecedented for the -- in a very positive way. So we planned for it. We're ahead of expectations, but also recognize where we will most likely finish the year and then plan for next year.

Joel, maybe if I can double-click on that, the raised expectations, is that just a matter of just execution? Or is it seeing benefits from the Florida expansions you had in Pinellas?

Yes. The most recent expansions in CON awards within the state of Florida have exceeded expectations. So their growth has had a very strong positive contribution to that marginal expansion. But it is through delivering on a strategy and ensuring that from an operational perspective, we are appropriately managing the business on a day-to-day basis.

And one of the things -- one of the reasons I think to the extent that those new starts do so well, they create cap cushion a lot and Florida is all 1 program for us. And what it really demonstrates is there's plenty of business in Florida on the limitations you have to Medicare cap liability. And if Joel is able to, let's say, run -- we talk about a range where we want our hospital admissions, which are low or 0 profit margin associated with. If those run at 44%, okay, it hits your margin, your profitability a little bit, but you create cap cushion.

To the extent that you have other entities, these new starts that are doing better than expected and creating a lot more cap cushion, he can run at the lower end of that, 42%. And that's, in a sense, monetizing that cap cushion that's being prepared or created by those new starts, which goes to your question, which is there's no question, the ones -- the 3 that we've gotten over the last 3 cycles have gone way above expectation.

So maybe I'll pull it up a little higher level here. When we think of demand for hospice services, right, I mean, it sounds like to your point, like in Florida, you can keep -- you can grow as much as you want, like when you have the CON. So what is the demand outlook like if you think of this business for the next 3 to 5 years?

I'll let Joel jump in and say it other than to say, obviously, it's led by rate increase, which is inscribed in law, okay? And demographics. There's no question. And the fact that we are in Florida and [ dominant ] in Florida, it's the best state for hospice. So all of those factors seem to be even more significantly positively impacting our business. But Joel?

Yes. I think as you look at what they have deemed the silver tsunami, by 2031, 1 in 5 Americans is going to be over the age of 65. In Florida, that number is 1 in 4. So the outlook, the opportunity and improving access and education to the value of the hospice benefit is a significant part of that. So we continue to look market by market at where there's additional opportunity to improve that. Statistics show the longer a patient is on hospice care, the more money is actually saved to the Medicare trust fund. And so it's a win-win for everyone.

Joel, maybe just to that last point you made, there are folks out there that are questioning some of the mix numbers that you have, specifically in Florida for dementia. I think I saw a number that was like, what, 58% of your Florida hospice patients had a dementia code on them. If you could just walk us through how you're thinking through coding, compliance and the mix of patients.

Yes. Happy to. First of all, as one of the largest providers of end-of-life care in the nation, we are surveyed and audited more than anyone else, and there is not any question or concern specific to the eligibility of our patients. Capitol Forum is the article you're referencing. It is a subscription-based service. They have a paywall that you've got to pay for to read an article. There would seem to be a high degree of sensationalism and certainly inaccuracies regarding the statistics that they put out there. You referenced 58% having a primary diagnosis they said of dementia.

Coding within hospice is driven by ICD-10. You have to have a primary diagnosis, which may change over the course of a patient's life cycle on hospice. There's oftentimes many comorbid diagnoses also associated with a patient. So to say that dementia in and of itself, which has many components of it is a specific comparison. We would have to much better understand the claims data they were reviewing.

Now I'll speak specific to the numbers, our own numbers, regardless of what their article says, when you look at days of care, you're going to see an outsized number of a neuromuscular type and/or cerebrovascular type patient because they tend to have a longer length of stay on hospice.

So they end up making up a greater percentage of those total days of care. When you combine those 2 and you compare it to the last national data from our National Alliance Association, our numbers are split in this way. If you combine those 2 diagnosis groupings, VITAS's number is around 59% compared to the national recognized number at about 56%. So not a significant delta whatsoever, which was very misrepresented in the article that was then tweeted out for people to look at.

I'll give you just amplify one of the points that Joel is making. About -- first of all, virtually all our patients that come to VITAS has -- another doctor has determined that they were terminal, and they come to us. We verify that. We don't accept 100% of those designations, but we verify. As patients enter about 7% of our patients are neurological, okay? And I might say, how do we get to a higher percentage of our patient base if it starts at 7%, that is compared to cancer, cancer is 26% of our -- okay? Cancer has -- it's much more reliable diagnosis, okay?

The cancer patient about -- high 80s to 90% of the patients die within 6 months or get out of hospice. So you can see if neurological has a longer -- is less predictable. Over time, you have the legacy patients that accumulate. But again, it starts from a number of 7%.

And as Joel says, and it could be -- we're talking about the super elderly who are with you for the extended period of time. It could be that they were -- that they had an undiagnosed dementia that's an added comorbidity during the period. So again, as Joel said, that's how it happens, but it happens to every hospice in the country.

The number, I think, in the comparison that article was something like 13% nationally. That's just the wrong number under any circumstance. But I say, Joel -- I'm happy to say Joel's level of concern about the whole thing approaches 0, which is not to way, let's put this say, if the federal government just said, "Oh, I hear -- I'm getting a lot of letters on this. Let's look into it." That's not a good thing. But to the extent that Joel lives a life one of our largest departments in VITAS is the part we're dealing with audits and surveys and what have you. I mean it's an everyday occurrence for VITAS.

Yes. Thank you for sharing all that information with us. Maybe, Joel, one of the things that we've always been fascinated with is just your ability to recruit because obviously, the growth in demand has to be supported by clinical labor supply. So how are you driving this? And what does the labor market look like today for hospice nurses and caregivers?

I'll go back to the pandemic. When we were in a circumstance in the country where clinical resources had a significant limitation given what was occurring specific to the pandemic. We, at that point, said this is not sustainable. We're losing every bit as much as we're gaining from a labor perspective. We didn't have an hiring problem. We had a retention problem during that particular environment with the pandemic. We rolled out a retention program that was overwhelmingly successful. We invested in our labor force a significant dollar amount, far above any rate increase we ever received, but it was the right thing to do.

We came out of the pandemic with very strong clinical resources. No concerns whatsoever being able to meet capacity that we had then expanded because of our ability to retain our clinical team. As we fast forward to present day, I think we've done a number of considerable benefits for our field staff through clinical ladders, through being recognized as a top health care workplace in '25 and '26. And we continue to look at what that value add is to our clinical teams and ensuring that there is an appropriate balance of work-life and personal life.

One of the things that hit us boldly in the face during the pandemic is the personal side of the concerns of those team members certainly took precedent over the professional side. We recognize that. And even though we have 4 key core values that were established almost 50 years ago now with the organization, and that #1 key core value being that we put patients and families first.

Our second key core value is we take care of each other. And we recognize that we can't do one without #2. And so our teams are reminded of that on a daily basis that we've got to do everything we can to maintain an appropriate work-life and personal life balance for our team members to ensure that when they're in that patient's home, they walked through that door.

Whatever frustration, whatever difficulty they may have going on personally, it pales in comparison to that patient laying in a bed and having a physician look them squarely in the eye and let them know that the life expectancy continues on its normal course, it's going to be less than 6 months. That's a significant responsibility.

And we celebrate our team members to be able to impact the quality of that patient and their loved one's final journey every single day. So I think it's creating a culture in that overall environment that talks about hospice in a way that it's not whispered in the corner, that it's not about death, that it's about life, and it's infusing as much life as possible into whatever journey that patient and their loved one have left. And that's what we focus on every single day.

And also just to put some numbers on what Joel said is during the pandemic, unapplied -- we didn't apply for it, but we received $82 million from the federal government as pandemic relief. We used 100% of -- we took none of it in adjusted net income. We used every dollar to give additional vacation -- initially vacation pay for the -- during the heart of the pandemic for the workers.

And then what was left, we put into the hiring and retention fund that was about $43 million additional. And as Joel jump-started the business on the back end of the pandemic and they're going great since then.

Awesome. Kevin, maybe we'll shift gears a little bit. Let's go to Roto-Rooter this time.

I prefer just talking about VITAS.

So I think your guidance assumes 21.5% to 22.5% margin for Roto-Rooter for the year. What gives you that confidence that Roto has stabilized and that you can hit these margin targets?

Well, let me be specific and say that, obviously, it depends -- I mean, the only real delta, the only real variant here on the negative side is marketing costs. And again, we -- it's a negative comparison that is it's just a question of we have to fill the bucket, okay? To the extent that we lose more free leads than we're projecting, we just go out and get them and that costs money. But we're pretty confident on the top line, the sales as far as our business activity, it's going to be at a very prescribed level. So a bit of an unknown as far as how much marketing expense will result.

But on the positive side, you might say, what are the kind of things that we look for that will help our margin. Well, as we've said, it's not something we laid out in our earlier discussions when we came up with our guidance. We were looking to improve water restoration collections, okay? We had some problems in early 2025 that were self-induced. I mean, we had some rogue billers. But billing was decentralized.

And we said, okay, that comes -- those kind of problems come from decentralization. And we made an effort. We said let's centralize the billing because it's an inexact science, billing for water restoration.

And we wanted high quality, we wanted consistency. And in our guidance, we put that, and that's a good contributor to our expectations on margin. And I'll tell you, given now that we're 8.5 months through the year, I would say that it's a triple whammy on that. In other words, we -- by centralization, we have 33 fewer employees doing billing, okay? Our billing -- our average job size is up more than $300 per job. Our collection rate has improved a percentage point. So I mean that's the -- so let's say, internal metrics of Roto-Rooter on both the top line and some of those internal operating metrics have been positive with the one wildcard marketing.

And that becomes -- we haven a trade sales force. We don't want business activity to fall below a level that we can't support that sales force. And even if we do, we're talking about a service provision at a margin that exceeds 20% for EBITDA margin, 20%. It's just -- it's a comparative issue. It's a new normal. But again, there are enough positive things to answer your question really is, okay, are you going to get 21 plus? And the answer is there's some things going on that are positive. I mean we have -- we've made acquisitions, okay, which Day 1 are accretive even at the -- but every one by definition is a fixer upper.

In Roto-Rooter, when we make an acquisition, and this is true since our first acquisition in 1980, it's a fixer upper, okay? But we've -- they're accretive Day 1 using the cash that just we buy back a fewer shares. And I think we're also getting benefit from that as well.

Maybe Kevin, just to your point on the Google searches, Roto used to run at a mid-20s on margin. You're saying this is the new normal. So is it right to think that there's just a margin reset/step-down that has occurred, and this is the right run rate to be thinking about from a margin perspective?

As long as Google adopts these attitudes. I mean, in other words, we've fallen from 60% free leads to 39%, okay? And that's been tough to deal with. Now you might say, is this a permanent whatnot? As long as Google is in charge. I mean, with AI, Roto-Rooter does fantastic because it's the largest, puts out a lot of content, easy to scrape the information. That's free.

At the current time, that's free. Is that going back with that -- as AI becomes adopted as the search du jour, I mean, that's what we're expecting. But in the meantime, we're kind of at the -- I mean, I hate to say this is a public company, but we're kind of at the mercy of Google.

We just try and stay on top of them. And I think our efforts in that regard, you might say, well, how far is down? I mean -- but we have seen that it really comes down on the free search to something we call visibility. How often do we appear in, call it, the map section, some place where we can get a call from somebody who hasn't looked at an ad, but they're looking at the, call it, the free section. And our visibility historically, because it used to be done based on a number of positive reviews, and propinquity to the customer and years having provided the service. And so obviously, we did very well on that.

Our visibility was in the 70-plus percentage rates, okay? They changed the rules of the game. We fell to the low 20s. We -- we put other efforts using some outside contractors. We got it up to the mid-30s. They made some other changes. We fell to the low 20s. We've gotten those back to the low 30s. And that's what -- that has yielded results, which I said have been a return to kind of a consistency and a new normal, a stable base to grow from.

So maybe shifting gears here. We've got 3 minutes. You have an activist investor involved in the stock. They've asked for some strategic moves and strategic reviews. You've been very active with the share buyback. How would you want investors to think of your approach to these requests and your perspective on share repurchases for the remainder of the year?

Well, the company is called Barington. I mean it's a small firm, a very small firm. They took a position when we were selling in under $400, a little under 0.5% of our shares. We've met with them several times, very good relationship. At the time, they specifically said, oh, boy, they would not recommend separating the 2 companies, for instance. They just -- I think everything is going great, but they wanted -- they mentioned at the time adding -- there's a person who they associate with who they have proposed for many boards. We said, we'll have him meet our nominating committee.

And what happened? I -- now everything else after that point is speculation.

At that point, for a variety of reasons, I thought the stock was too low to start with. The stock recovered to well over $500. I think that they got -- they weren't getting any credit. I mean nothing -- nobody was added to the Board. It was getting away from them. The entry point to other -- I mean, their obvious goal is to get other activist investors to kind of piggyback with them to give them a little more say. The entry point had changed so dramatically that I think they did not see that happening.

And actually, we haven't heard a word from them since. So -- and I saw recently they announced a situation with Bed Bath & Beyond, but maybe they've gone to greener pastures. But no, we've never had any discussion that involved anything other than would we like to add a certain gentleman to the Board of Directors.

Got it. Kevin, last question for you. So as we think of what you think is underappreciated by investors in terms of the Chemed story, both in VITAS and Roto-Rooter, what would be the message?

Well, let me say this. Let me -- I don't know -- it's your guys' job to come up with what's something's worth. I would just say that if you go back to the beginning of last year, let's say, our stock was selling over $600. I think we're in a lot better position than we were then. I mean, VITAS has shown a lot of growth and the expectation for the future has never been higher. The risk associated with cap in Florida, as we come to the end of the government plan year, Joel is looking in excess of $35 million of cap cushion. So that's what's being generated under our current mix of business.

So I mean that's it hasn't been that high in a long time, to put it that way. So that's better than recent events. So first thing I'd say is there's a lot to be said that Roto-Rooter has stabilized. And a year ago at $600, it was still in a downward slide. So I would just say the first thing is, I don't know about valuation, but it seems like we are better. I don't know why it's as low as it is other than still a hangover from the fact that we did have a big miss, get punished for that.

But I think that the -- to the extent that we're going to -- the market will reward getting back to our growth of kind of a very consistent low-risk, high single-digit operating number, coupled with taking shares out of the market with stock repurchase. I think to the extent that, that gets back to being rewarded, I think then that's the outlook for the Chemed stock price.

Amazing. Thank you, guys. Appreciate your time today. Thank you so much.

Thank you for standing by, and welcome to Chemed Corporation's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Holley Schmidt, Assistant Controller. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the second quarter of 2026 ended June 30, 2026. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements.

Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of July '28 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.

A reconciliation of these non-GAAP results is provided in the company's release dated July '28, which is available on the company's website at chemed.com.

I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Holly. Good morning. Welcome, Chemed Corporation's Second Quarter 2026 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call up for questions. VITAS performance during the quarter exceeded even the high end of our expectations. VITAS continues to add ADC through accelerated admissions from nonhospital preadmission locations while also maintaining a high level of hospital-based admissions. This was achieved while also keeping hospice labor costs lower than budgeted.

These factors combine to allow VITAS to achieve higher-than-expected revenue growth and EBITDA margins, while continuing to add cushion to the Medicare cap position in our Florida combined program. Admissions at VITAS during the quarter totaled 19,125 which equates to a 9% improvement from the same period of 2025. Hospital additions as a percent of total admissions for our Florida combined program were 42.9% during the second quarter of 2026. As we've previously discussed, an appropriate balance for a sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions come from hospitals.

Equally as important, as Joel will discuss in greater detail, admissions from all other preadmission locations increased 8.1% compared to the second quarter of 2025 in our Florida combined program. Improved admissions led VITAS to outperform our expectations while also adding $8.9 million to cap cushion in the Florida combined program in the second quarter of 2026. This strong performance makes us more confident than ever that VITAS has put the Florida cap issue of 2025 behind us and has returned to a normalized rate of growth.

Now let's turn to Roto-Rooter. In the second quarter, Roto-Rooter performed as we anticipated. Commercial sales and water restoration collections exceeded our expectations for the quarter, while marketing costs and the independent contractor business continue to be a challenge. Our commercial business manager program continues to perform at a high level. Total commercial revenue in the second quarter of 2026 increased 6.8% compared to the second quarter of 2025. There were 30 productive commercial business managers in place for the entire quarter, resulting in a commercial revenue increase of approximately 13% in their respective branches. This compares to a commercial revenue in branches without commercial business manager, which saw a decline of 1%.

We continue to evaluate the ability of the remaining branches to add a commercial business manager, which will drive additional growth. Centralization of water restoration billing and collections function continues and has resulted in improved collections. Total write-offs improved by $1.3 million during the second quarter of 2026 compared to the second quarter of 2025. Additionally, the centralization effort has resulted in a reduction of approximately 20 employees compared to the second quarter of 2025. Lead generation and the resulting cost of customer acquisition remained a challenge in the second quarter.

Total leads during the second quarter of 2026 were down 1.6% compared to the second quarter of 2025. Continuing the same trend as the past quarters, 3 leads generated from Internet searches declined 13.1%, while paid leads increased 7.3%. Of all leads generated during the quarter, approximately 59% were paid compared to the 54% in the second quarter of 2025. This change resulted in increased marketing spend of about $3.1 million in the quarter compared to the second quarter of 2025. In June, Roto-Rooter purchased the territory and assets of franchises operating in South Texas, including Corpus Christi. The purchase price was approximately $12 billion. This territory will be an independent contractor and represents a significant new population base to incorporate into the contractor portfolio.

It is not expected to add a material amount of revenue or income in the last half of the year, but represents a nice growth opportunity for 2027 and beyond. Through the first 6 months of 2026, we have spent an aggregate total of $33.5 billion repurchasing 4 franchises in strategically advantageous locations. Additional opportunities exist to purchase desirable Roto-Rooter franchises, and we intend to continue to take advantage of those opportunities. We are very happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond.

Roto-Rooter is building positive operating momentum while being in a great position to take advantage of franchise acquisition opportunities as they arise. The combination of the two business units drove an increase in total Chemed revenue of 8.8% and an increase in adjusted diluted earnings per share of 41.9% in the second quarter of 2026 as compared with the same period of 2025. Additionally, the consolidated business generated cash flow from operations in excess of $173 million in the second quarter which along with minimal leverage, allows us to pursue accretive acquisitions, aggressive share repurchases as those opportunities present themselves.

With that, I would like to turn this teleconference over to Mike.

Thanks, Kevin. VITAS' net revenue was $443.3 million in the second quarter of 2026, which is an increase of 11.9% when compared to the prior year period. This revenue increase is the result of a 6.1% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.4%. Acuity mix shift negatively impacted revenue growth 115 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes positively impacted revenue growth by approximately 455 basis points.

In the second quarter of 2026, VITAS accrued $500,000 in Medicare Cap billing limitation. This is below our original expectations due mainly to improved admission performance in California. No Medicare Cap billing limitation was recorded in the second quarter of 2026 for the Florida combined program and none is anticipated for the 2026 fiscal period. This compares to a Florida Medicare Cap billing limitation recorded in the second quarter of 2025 of $16.4 million.

Average revenue per patient day in the second quarter of 2026 was $209.98, which is 143 basis points above the prior year period. During the quarter, high acuity days of care were 2.2% of total days of care, a decline of 24 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $80.6 million in the quarter, an increase of 20.6% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 18.2%.

Now let's turn to Roto-Rooter. Roto-Rooter branch commercial revenue in the quarter totaled $56.8 million, an increase of 6.8% from the prior year period. All lines of business and commercial sector had increasing revenue during the quarter. Roto-Rooter branch residential revenue in the quarter totaled $159.1 million, an increase of 1.7% over the prior year period. Similar to the first quarter of 2026 all lines of service increased with the exception of water restoration, water restoration revenue declined 6.7%. Demand for water restoration services continues to be strong, and our conversion rates remain high.

During the transition to a centralized billing and collection model, we anticipated some disruption to the day-to-day bill processing function. In the second quarter of 2026, the average revenue for water restoration job declined by roughly 3.5%. This is a sequential improvement compared to the approximate 13% decline in average revenue per water restoration job in the first quarter of 2026.We anticipate that this challenge will continue to improve as the year progresses with centralized staff gaining experience and proficiency. Revenue from our independent contractors declined 1.9% in the second quarter of 2026.

Our independent contractors are generally smaller operations in middle-market cities because they are independent, they tend to operate more like a small mom-and-pop business than our owned and operated branch locations. We are actively working with the contractor group to help mitigate the challenges in this segment of our business to get it back to a growth trajectory. Adjusted EBITDA for Roto-Rooter in the second quarter totaled $48.5 million, essentially flat when compared to the second quarter of 2025. The adjusted EBITDA margin in the quarter was 21.1%, which represents a 77 basis point decline from the second quarter of 2025. Roto-Rooters gross margin of 50.4% was in line with our expectations and 135 basis points better than the second quarter of 2025. As discussed by Kevin, the decline in adjusted EBITDA margin was mainly caused by increased Internet marketing costs.

With that, I will turn the call over to Joel.

Thanks, Mike. In the second quarter of 2026, our average daily census was 23,687 patients. This represented an increase of 6.1%. By the end of the second quarter, our total patient census exceeded 24,000 for the first time in VITAS' history. In the quarter, hospital directed admissions increased 9%. Home-based patient admissions increased 9%. Assisted-living facility admissions increased 13.5%, with nursing hub admissions declining 8.6% when compared to the prior year period. The continued high level of hospital admissions allows us to also take a high number of admissions from other preadmission locations. This allows us to continue to build Medicare Cap cushion while growing ADC more quickly than our original projections.

We were able to achieve this level of ADC growth while maintaining full-time equivalents below our budgeted targets for the quarter. With respect to the workforce, we continue to run full-time equivalents below our estimated totals. We monitor each location very carefully and ensure that staffing is adequate to provide high-quality care for our patients and their families as well as maintaining a healthy work-life balance for our caregivers.

The current level of staffing does not reflect any issues with our ability to hire or retain qualified caregivers and it does not impede our current growth expectations. Our average length of stay in the quarter was 101.2 days. This compares to 137.1 days in the second quarter of 2025. Our median length of stay was 16 days in the second quarter of 2026, a decline of 4 days from the second quarter of 2025. The new starts in Florida continue to grow at a very rapid pace. Marion, Pasco and Pinellas counties combined had 594 admissions in the second quarter of 2026. ADC for each new start continues to exceed our expectations.

Manatee County admitted their first patient in the second quarter, and we are happy with the progress of that program to date. VITAS has never been in a better position to take advantage of growth opportunities. We have put the difficulties of 2025 behind us and we are looking forward to executing strategies for the remainder of 2026 and beyond that will translate into high sustainable growth while providing the best possible care to our patients and their families.

With that, I'll turn the call back over to Mike.

Thanks, Joel. In a slight break from tradition, we decided to cover the revised guidance at the end of our prepared remarks. Although historically, we do not give quarterly updates, our guidance was revised in conjunction with the first quarter of 2026 due to the materially improved performance of VITAS coupled with the levels of the high level of share repurchases. We have updated the guidance again in the second quarter, mainly to continue our normal historical cadence of updated expectations at the midyear earnings release.

Barring any unusual developments, updating guidance once per year in conjunction with our second quarter press release is our ongoing expectation. VITAS' initiatives returned to a normal growth pattern after managing the 2025 Medicare Cap issue, progressed more quickly than anticipated and continued to provide higher-than-expected growth in the business. These results led us to raise full year guidance for VITAS as follows: Full year ADC growth for 2026 is updated to a range of 5.75% to 6.25% compared to the previous guidance range of 4.5% to 5.5%.

Anticipated revenue growth, excluding the impact of the Medicare Cap, improves from the previous guidance range of 6.5% to 7.5% to a revised range of 8.25% to 9.25%. Finally, revised EBITDA margin, excluding the impact of the Medicare Cap, is anticipated to be 19% to 19.5% compared to the previous guidance of 18% to 18.5%. Our anticipated full year Medicare Cap billing limitation is reduced to $7 million from our previous guidance of $9.5 million. As previously discussed, Roto-Rooter performed in line with our expectations and reflects stable earnings, very positive cash flow and a continued emphasis on investment and growth opportunities. Therefore, full year guidance for the segment remains unchanged.

Full year anticipated revenue growth is 3% to 3.5% for Roto-Rooter with an estimated adjusted EBITDA margin of 21.5% to 22.5%. Based on the above full year 2026 earnings per diluted share excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, are estimated to be in the range of $25 to $25.75. The midpoint of the revised guidance represents a 17.8% increase from 2025 adjusted earnings per diluted share of $21.55. The revised 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.5 million shares.

I will now turn the call back to Kevin for his closing remarks.

Thank you, Mike. I will now open this teleconference to questions. .

[Operator Instructions] Our first question comes from the line of Ben Hendrix of RBC Capital Markets.

Maybe start with a question for Joel. Just wanted to touch on your long-term growth outlook for VITAS. We get a lot of questions on the growth capacity. When we think about the overall demand in the market versus your ability to sustain that 42% to 45% mix of short-stay patients. How sustainable is this level of growth? And what should we assume for a long-term growth outlook for ADC and revenue?

Yes. Thanks, Ben. We absolutely believe it is very sustainable. We feel like the strategies we put in place and the KPI management associated with those strategies helps us much better understand how to react to market changes and adjust resources accordingly. So we have no concerns whatsoever about that ability. As we mentioned in the transcript, we believe VITAS has returned to normal growth rates, and we fully expect to continue to generate those growth rates as we look at the short and middle future as we look at going into '27.

And let me just remind the listeners, I guess, that what that means to me is if you look at the 21-year period up to 2025 at Chemed owned VITAS, I mean, VITAS grew their net income at about 11% per annum. I mean -- so I guess my point is, we're talking about double digit, what we consider traditional growth rates is in the double digits, in the low double digits, but it's a good block and tackle, very reliable, very reliable kind of grinded out service industry. So we look forward to achieving the results that Joel as articulated.

Great. If we can move to Roto-Rooter for a quick one there. It looks like your EBITDA came in just may is marginally shy of our estimate. Just wanted to see what you guys are seeing on the SG&A side in terms of mix of paid versus non-paid leads, kind of how that's evolving and kind of where -- what we can expect -- where we can expect that to stabilize?

Yes, Ben, this is Mike. I think we believe it's not going to deteriorate from here, even though we have really not a lot of insight as to what exactly might happen in the future with Internet marketing and the main provider of our Internet Marketing Services. Having said that, I don't believe that free leads will go to 0. We're working on strategies to get around Google honestly, for -- to get leads through commercial business managers is one strategy.

We've talked a lot about the app in the past. So we're trying to minimize our reliance on Google. But I would say that we think that the the situation is stable. It's not deteriorating from here, but I would also really hesitate to say that we think it's going to significantly improve from here either.

No, it's hard to see improvement. I mean it's 1 thing that it's probably clear to surmise that at this point, Google hate the idea of free leads. I mean, initially, it grew its audience and its users by saying, here's a treasure trove of free information. And that allowed that -- once they built that, they allowed them to start charging for what they've built and they've systematically tried to drive their users away from the three aspects of service providers. I mean that just goes without saying if we're at the very least, we're at a new normal, and it is -- it has largely stabilized.

But I mean the kind of thing that we're constantly looking at. I mean I don't want to go in too much detail, but we don't -- Google is not done. I mean, AI is rapidly gaining on them and they know if they have their own AI product as well, obviously. And our view is we just -- it's like when the Internet was coming in and Yellow Pages was losing its dominance. It's just that's the way it is. I think Roto-Rooter has done a pretty good job of dealing with it. I mean we're living with the biggest issue that we're still -- that we'll continue to deal with, to some extent, is leakage on the marketing expenses.

So we -- you have to -- we want to do jobs every job we do with Roto-Rooter is profitable. And to the extent that we have to pay for those leads, that's increasingly, that's what we do. But as Mike said, the real win here is getting leads, outside of the paid Google search. There's no question about it. And that's really our -- what we're trying to do, but we can't kid anybody. We're going to a transition where free leads are -- they've gone from 40% -- I mean, really paid leads have gone from 44% a 1.5 years ago to 59%. It's kind of an inexorable change and I don't -- it's going to be a continued battle for Roto-Rooter room.

And again, the reason that they've been I think, more successful than certainly our franchisees or the other companies we're familiar with is that they're fortunate to have -- in this case, there are what we call our ancillary services excavation of water restoration. The sales we get from those actually now are expected to slightly exceed sales from all the sources in runover. So we have additional services that we charge for, for these jobs that we do get through the Internet. So it's -- it still all make sense to us. And as we said, the momentum that we're starting to see in the last several months is something that we're taking to the bank.

And I think it might make sense also to point out, I think inherent in your question is where do we see margins going from here and what are our thoughts on that? I would tell you that the 21.5% to 22.5% margin that we've estimated for the full year at Roto-Rooter this year is right in line with where our margins were pre-pandemic. Obviously, they spiked some during the pandemic, but it hasn't caused a huge deterioration in our margins overall from a long-term standpoint.

And I think we would -- we would love that Roto-Rooter to see margins in the 23% or 24% range. But ultimately, even at the, call it, 22% range, that's pretty healthy for a home services business. So, we're doing everything we can in marketing, but I think we've done a lot of other things in other areas to try and overcome some of those higher expenses.

Our next question comes from the line of Brian Tanquilut of Jeffries.

Congrats on the quarter. Maybe for Joel and Mike, as I think about the margins at VITAS, obviously pretty good in the quarter and then the guidance adjustments solid. How do we think about, number one, the drivers of that? And then the sustainability of those margins as we look beyond 2026?

Yes. So -- the biggest driver associated with that is our ability to expand our length of stay and appropriately balance from a preadmission perspective, the types of patients that are coming on service, i.e., balancing our hospital preadmit environment, which typically drives a shorter length of stay patient with our community-based or home-based patients would typically drive a longer length of stay. That allows us and has allowed us, and as we had previously talked about would allow us to expand our margin through the end of the year.

And that certainly has come to fruition. As we look at sustainable longer-term margins, we absolutely believe that the strategic management of the resources that we have in the field, our labor force as well as our controllable costs associated with the care of those patients. All is in line with expectations and allows us to continue to drive at that margin level.

The only thing I would add to that, Brian, is one thing that we certainly are comfortable with the sustainability of if we've always had an internal benchmark at VITAS that back office, essentially SG&A costs grow at half the rate of our revenue growth. And there are years we hit that, and there are years we don't if we're doing something specific.

But, if we're going to grow top line in the high single-digit range, we can certainly gain leverage on our back office costs year-over-year methodically. And so I think that I think that the EBITDA ranges we're talking about now are very sustainable going forward.

I appreciate that. And maybe, Kevin, as I think about Roto here, obviously, there are some investors who believe that more investments need to be made there and service line expansions are probably strategically appropriate. Just curious how you're thinking about where Roto-Rooter stands today? I know you mentioned in your prepared remarks a buying franchisees out. But how are you thinking about expanding the service offerings?

Okay. I mean what we say what we've thought about, first of all, is colored by our past history. And -- the first issue -- I mean what has worked very well for Roto-Rooter certainly is to the extent that if we can provide additional services to customers to call for our main line of service that is plumbing or drain cleaning. The cost of acquisition for that additional business is near 0. So that's always -- that surprisingly, that's always been where when Roto-Rooter added plumbing to drain cleaning, that's what made that a success when they added excavation to drain cleaning and plumbing, of course, that was that issue than a few years ago, we added water restoration. And again, it was to that same customer base.

Roto-Rooter historically has tried basically every service but you can imagine that involves putting a person in a truck and going to your house. And again, generally speaking, that's a different type of customer. It comes with an acquisition cost we would like to try and we've tried repeatedly to use the fantastic service mark that is Roto-Rooter to drive the growth of those businesses and we've been unsuccessful historically. Now does that mean that we then foreclosed all thought of those additional service lines? No.

I'll tell you that answer. So that just gives you the background. I mean, we're dealing with the fact that we have tried it. We tried rotorair conditioning. We tried to under the Roto-Rooter Service mark. We tried it under our own mark. We try to businesses we bought that kept their old service name. It doesn't mean we give it up on air conditioning. It just means we've made a pretty big investment in that in the 1990s and for a 6- or 7-year period just wasn't happy with the results. So that color is our thinking with regard to additions to the service line.

But I won't -- I mean, I'll give you -- but I'll give you a specific example. You might say, what are we thinking we're doing that might be a hybrid that we can sell to our existing customer base and people who don't have a plumbing problem as well. And through the middle of last year, we had a fairly aggressive -- from our perspective, fairly aggressive inroad into water quality. That is both drinking water and the hardness and softness of water, the overall quality of water, which is a huge industry. We, as I said, made an investment had a the water quality business up and running in the majority of our branches, but it was losing money.

We just weren't getting quite the foothold we wanted. And given the other problems in Roto-Rooter last year, we suspended the program. But that just gives you an example of, yes, we're constantly looking at additions to the service line. But say, for this forum, I guess I'd say there's nothing really at this point other than to say, yes, we're investigating. We have investigated in the past, but there's nothing really that has risen to the level that probably requires a discussion in this type of form.

[Operator Instructions] Our next question comes from the line of Joanna Gajuk of Bank of America.

A couple of questions. So maybe first on the growth of business. So here, right, again, we're talking about the higher marketing costs, again, but the guidance is the same. You're talking about this margin is sustainable. So how exactly you're thinking about this in terms of like are there some offsets that you're expecting, is it coming maybe from buying these franchisees? Or is there something else there, I guess, that's helping you sustain that margin?

Well, I'll turn it over to Mike, but let me just say Jojanna that from my perspective, to the extent that we do a bet -- I mean when we talk about our excavation business and water restoration business, okay, we're -- we talk internally. We don't -- it has a relatively low hit rate. I mean, is there -- do we -- have we been getting and do we expect more improvement in the conversion of those opportunities? The answer is always yes.

And to the extent that improvement in that area continues, you can see if we have -- for each if the average price of a job continues to go up because there's more services, I'm kind of adjusting for inflation here. If the price is going up, not by inflation, price increase, but by the fact that you're doing a higher conversion rate on water restoration or excavation, you can see how that makes the marketing costs less of an issue.

It gives you not -- again, you have a service that has no acquisition cost to getting the job. Success and that's -- and basically, we said over the last 9 months to the extent that the successes that Roto-Rooter has had largely has been in the fact that the ancillary services have seen that type of improvement. So it's an advantage that Roto-Rooter has. I mean, I don't know -- I have a hard time believing -- we have a lot of competitors. And I think a lot of them are running plumbing and drain cleaning at a loss leader if they're not also offering excavation and water restoration. It's too tough.

I mean we see that ourselves with small independent contractors or small franchisees that aren't in those ancillary services, and they're saying things are tough. They don't have a 21% margin, they have a 5% margin. That's a tough way to go. But, I guess, I'll turn it over to Mike, like that's my off the top of my head response.

Yes. Joanna, at a high level, in the second quarter, Roto-Rooter missed their EBITDA by roughly $1 million from our point estimate. That was all marketing costs. I would tell you that we didn't think that, that was material enough to change our forward thoughts on where they could be. And as Kevin said, there's plenty of things that can happen at Roto-Rooter to offset $1 million elevated expense.

One is the add-on services Kevin talked about. Water restoration collections continues to improve. We didn't need to exceed our expectations in that but not very much in order to make up that $1 million. So in the grand scheme of Roto-Rooter an extra $1 million of marketing costs, is not enough to change our current or long-term outlook for where we think their margin and where the business is going.

Okay. That's great. And I guess, in terms of these acquisitions, you talking about buying franchisees, are there still some larger ones that are potentially available? And to that end with the level of interest in adding, I guess, hospice assets and how does the moratorium on new centers and the related provisions that impact your ability to have this asset?

I start with the Roto-Rooter side. There's a few. Yes, I would be very surprised before the end of the year. We don't -- let's say -- the opportunity is there. I'd be surprised if we don't make a nice Roto-Rooter acquisition before the end of the year of some size from -- internal from our franchise network. With regard to VITAS, I'll turn it over to Joel, but say [indiscernible]. There's a couple -- there's a few counties left a couple of counties in Florida that we're not in. We'd probably love to do an acquisition or something in Florida. But we're almost everywhere in Florida. I mean the real nice counties left to go. But -- so the acquisitions really go to kind of sea states other than Florida. But Joel, what do you see in that regard?

Yes. Joanna, our targeted acquisition interest remains in areas where there's a barrier to entry in the market. The moratorium does influence our ability to apply for new CONs in states that have that, of which the timing the moratorium is due to end in November, it could be extended. We don't know that we will be in the next 60 days.

But as far as acquisitions, the moratorium does not prevent us from moving forward with a potential acquisition as long as that existing provider had been in service for 3 years and billing to the federal government for 3 years. So we're still actively reviewing any of those opportunities, again, with markets that have a barrier to entry. That has our first interest, but we're continuing to look at what other opportunities could potentially exist out there.

And if I may, on the Medical comp, so here in Florida, it sounds like you're building a cushion there and you're growing census. So I'm thinking how much of that kind of building the cushion is coming from these de novos? And I guess, is there a risk that you could get into trouble, so to speak over the cap when somehow these de novos slow down or you don't have incremental I don't know what markets to add to kind of manage that Medicare crop.

Yes. Thanks, Joanna. The metrics that we put in place to strategically manage where we deploy our resources, balancing out the admissions in the preadmit environment are separate from the growth strategies we have in de novo markets. There's no question, those markets have contributed significantly to our ADC growth, but they're also contributing significantly to admissions. And so the opportunities we have in those markets as well as all across Florida to continue to balance that admission mix gives us no concern going forward, specific to cap management and having that emerge as a significant concern for us at any time in the near future.

And let me say, add on that, that we -- the cap cushion that we that VITAS has has been helped by the new starts, but it's not all of it. I mean, the -- frankly, at an average length of stay, as we mentioned, of 101 days which is driven by having the mix of between 42% and 45% of hospital-based admissions, that's very sustainable. You're not going to run into a problem with that, assuming reimbursement is within an acceptable range, which we see is like 1% above the national average or 1% below the national average.

I mean -- and we're there Joanna I guess is what I was saying I mean that's our run rate where we are. So what you're talking about is certainly theoretical, but that would be absent a big change like a 10% increase in reimbursement in Florida for another 5% increase in quarter with the national average going up 2 or 3. I mean, absent something like that, VITAS is sailing right in the perfect channel for not worrying about cap in the short or midterm, long run, of course, we've all been, but as they say. But again, that's not a major concern under these circumstances.

One of the things, I think, that gives us the most comfort, Joanna, we love Florida for many reasons, the CON is probably the main one. But another significant reason is the availability of hospital-based admissions to hospice is very high continues to grow with the demographics over the next 8 to 10 years.

And so the demand for hospital-based admissions into hospice is very much there. And as long as Joel said, like Joel said, as long as we continue to focus on that, we will garner our share of that demand, and we should not run into any problems with Medicare Cap going forward in Florida.

And let me give you one other comment -- one other comment about the new starts. How early are we in our development of those programs? I mean if it goes to kind of historical averages, we still have a very small percent of the admits in each of those new starts. I mean -- and again, if you look at -- if the past is prologue to the future, I mean, to the extent that we get something like 40% to 60% grow to a market share of that. We're just in the very germinal stages of that -- of the development of these two starts.

Yes. I'll add one more thing, Kevin. Joanna, as part of our overall strategic management of Cap mitigation, especially in the Florida CCN that is also part of expanding additional new relationships for high acuity short length of stay patients. We've just recently broke ground on two new inpatient units that will come online in 2027 with two additional relationships that will be lifted up in '27 that will be inside of other facilities. So that is an extremely strategic part of our cat mitigation, and we'll continue to manage that as needed going forward.

All right. That is great. And actually, on that note, because we didn't get the final half read, but we do have the proposal, right? In that proposal, the rate update for Florida didn't seem like it was an issue versus where the cap is increasing. So any updated thoughts on like what -- based on the proposal, what the rate update would be Florida versus the cup for '27?

Yes. So national average 2.4% in the proposed rule. That will be final in the next couple of weeks. VITAS specifically, 1.9%. Florida is a little over 1% of an increase against the national average.

That's based on our current mix in Florida. Yes.

All right. So that's manageable there. And to that end, so you had a $0.5 million accrual for Medicare Cap in second quarter because I guess you're running in better, I guess, in California, and then what do you assume for fourth quarter of '26 in your guidance?

Yes. Joanna, so we've talked about in the first quarter, Joel talked some about a little bit of activity increase in California as a result of VITAS being a big trusted provider and some of the referral sources are sort of clean to safety and referring to the big trusted providers during the time when people are talking about fraud and abuse with smaller providers that's given us a lift this year in California with the Medicare Cap situation.

But over the last 4 or 5 years, on average, we've run roughly $9.5 million in Medicare Cap and so we kept our forecast for 2027 at that $9.5 million. So baked into the guidance in the fourth quarter is 1/4 of that $9.5 million. I think it's $2.3 million or $2.4 million. We were a little early in the sort of that fraud and abuse and how that's going to all shake out in California to really want to change our run rate expectations, but it certainly has helped us in this calendar year or in this cap year.

Great. If I may, is you mentioned the monetary I'm kind of focused on fraud and I'm using in hospitals. And obviously, we've heard you talk about you're supportive of best and getting rid of in the industry would help as one, but there were a couple of other things that came up that was the OIG report, and then there was the GAO report, right different issues being discussed and such.

But is there something building in the background -- like do you expect CMS respond to these reports in some ways? But do you essentially expect any changes to reimbursement say, for '28 because obviously, we know it's not possible for '27. But any thoughts on these reports and kind of where CMS might land in the end after getting those?

Yes. Joanna, we have no reason to believe at this point that there would be an unbundling of the hospice benefit. There is legislation out there testing the waters specific to an MA carbon plan. That has been shelved for '27. Whether that is resurrected at some point in the future, I think is yet to be seen, but we have no reason to believe there would be significant or material reimbursement changes to the current structure. What we do know is that the final rule is going to come out for '27 in a couple of weeks.

We do expect there to be some elevated degree of program integrity oversight i.e., the SSVI or a service spend variation index. We don't know the components of final integrity plan, but we do believe that there's going to be an increased focus on quality what that quality is measured by is yet to be determined. But we do not see necessarily an indication of reimbursement change at this point.

Thank you. I would now like to turn the conference back to Kevin McNamara for closing remarks. Sir?

Well, I'd just like to say that, yes, it was -- we were gratified with the results of the quarter and thank everyone for their questions and their attention. And we'll reconvene in about 3 months. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Pleased to be joined today by Mike Witzeman, Chief Financial Officer of Chemed Corporation; and Joel Wherley, Chief Executive Officer of VITAS Healthcare.

Thank you, guys, both for being here today.

Thanks, Ben.

Thanks, Ben.

Just wanted to kind of kick off with some -- a little bit of discussion about admission mix rebalancing cadence. For the quarter in 1Q '26, VITAS had over 19,000 admissions. It was up about 7%. Hospital direct admissions were up almost 14%. All other pre-admissions up about 8.5% in the Florida program.

You described the hospital admission range as appropriate, balanced for sustained long-term stability. With Florida kind of at about 44%, how quickly are you experiencing a push to nonhospital admissions to become the dominant growth driver for the remainder of this year?

Yes. We spoke about in the fourth quarter of the calendar year of '25, first quarter of the Medicare Cap year, that we really needed to see how that quarter went before we could think about responsible, thoughtful growth back into that Medicare CCN. We established key metrics that we measure on a daily basis specific to the percentage and split out of where our business comes from.

We can't control average length of stay. What we can control is where we focus our resources and our efforts, into referral environments that we know typically generate either a short length of stay, medium length of stay, long length of stay type patient. So as we purposely refocused where our resources went in response to our Cap mitigation strategy, we came out of that fourth quarter extremely strong. Very pleased with our execution and feel like we're in a really good position.

I know we put out there we'll keep our hospital pre-admission environment in kind of that 42% to 45% of our total admissions. That's on an annualized basis. There's going to be fluctuations up and down. There is a little seasonality in Florida as well. So that's going to fluctuate monthly, but we feel really good about where we're at with that number. And in all honesty, we look to the back half of '26 really as an opportunity to now thoughtfully begin to grow back that census. And actually, we're already doing that and we're ahead of our expected growth trajectory.

Yes. As far as cadence goes, Ben, we -- as you well know, I'm sure, we had projected in the first quarter having ADC flat during the period, where Joel and his team were sort of rebalancing that portfolio. And it actually grew 2.2% in the first quarter.

And so we're ahead of the curve. Joel's team did a great job in accelerating the return to a more balanced patient mix. And that adds to itself, right? It's cumulative as you go along. So we really, as Joel said, expect the second -- particularly the second half of the year to really show some significant growth for us.

Yes. And then from a Cap perspective, $32.5 million of Cap cushion in the Florida combined program in the first quarter alone. No Cap liability accrued for in the quarter. And then how are you thinking about that developing, just the dynamics of Manatee County opening and kind of knowing that all of those are going to be kind of short stay to begin with?

Yes. So we're making sure the pendulum doesn't swing too far one way or the other. We really like the balance where we're at. Yes, to your point, Manatee -- so that if you look at Manatee as a statistical opportunity, about -- in fiscal year '24, about 61% of the Medicare deaths that occurred benefited from hospice benefit, okay? Their average length of stay was less than 50 days.

So they were exercising their right to the benefit very late in their disease trajectory. We feel strongly through our educational efforts that we'll be able to work with the health care community, improving education and expand that, allowing that patient and their family to access that benefit earlier.

To your point, for the rest of '26, all of those new patients are essentially going to be a short length of stay patient given the time frame of the Medicare calendar year, which ends September 30. So they're going to come online mid-June and they'll continue to help contribute to our Cap mitigation. But as Manatee starts, Pasco, Marion, Pinellas specifically, we're already seeing that we've received their short length of stay benefit from becoming a new start, but now they're building census. So now they're starting to contribute and, essentially, we're able to then monetize the value of that Cap mitigation strategy in those new-start markets.

And the new starts are really what has allowed us to really start taking in those longer-stay patients in a quicker time frame. They've given us that runway to be able to do that.

Yes, and maybe we can stay on the whole Marion, Pasco and Pinellas discussion here. Obviously, as you mentioned, exceeding expectations on the pace of ramp-up. Anything in particular driving that outperformance relative to kind of the, I guess, the 500 admissions you had expected from those markets in your internal model? Any referral source relationships, community awareness dynamics in those markets that are developing that faster new start benchmark?

Yes. While I won't talk about specific referral sources, the opportunity that we've been presented in those communities, where there clearly was a need to be met. So increased educational opportunities and our approach to a new start market. We go all in. We don't come in with a skeleton staff, pay as you go, advance your team as you grow census. We come in all in, fully loaded and are able to hit the ground running. And it's been extremely well received.

Florida does such an incredible job managing the CON environment. They identify the need through a very long, tested algorithmic approach. And so when we see that high growth in deaths that are not being met, they open up the CON opportunity. And in those markets specifically, we've seen it be received extremely well.

And it's exceeded our expectations, but that's a contributor to our team, being able to come into the community, present who we are, the value proposition that we present, and the referral sources have responded.

In Pinellas, for instance, I think we had market development people on the ground a month before we started operations. And as a result, on the first day, we took 5 patients in, the first day. I mean that's an impressive development for Joel and his team.

Yes. And to that point, Mike, specifically, if you think about Pinellas geographically where it's at, if you think about Manatee geographically where it's at, and there are other CON, Pasco, also around in Tampa, Hillsborough County. So our ability to market in the Metro Tampa area is benefiting those other markets, and it's going to benefit Manatee, because our brand awareness is already out there.

Great. It sounds like from these ramp-up, the trends that we're seeing, I think that I just want to kind of come back to the Cap issue because we still have some clients who are asking us -- or treating the Cap issue as kind of a show-me story just given the 2025 headwinds. But it sounds like just given the ramp-up of the new markets, that there's not too much to worry about, at least as trends are trending now in 2026. And then as I look ahead to 2027, in the rate update, I believe you guys have previously communicated to the market that Florida, you're going to see about a 1% rate update in that state versus a 2.4% Cap setup. So do we have anything to worry about next year?

Yes. No. We believe we've put in place guardrails that will protect us and help us manage against the Cap liability long into the future. You have to understand how we got there. This has not been a historical issue for VITAS.

And it does speak to the archaic reimbursement environment on how Cap is established. Essentially, a patient by the federal government is set at the same level in Florida as they are in Sacramento, California where there is significant reimbursement differences. So all of that plays out, so you have to manage to what the government says, you have to present in first-time Medicare admissions versus your total billed Medicare revenue.

So we feel, with the guardrails, maintaining that range of hospitals which typically are going to generate a shorter length of stay patient, we're able to then effectively balance that. But one of our key strategies is taking that hospital relationship, which is a health care system, and expanding from just a hospital-based referral to perhaps their insurance product, their physician community and all the other relationships that they have, whether it's home health, palliative or PACE, the opportunity to then become the preferred provider across all of that genre.

And to further Joe's point on sort of the KPIs, I mean as he said, we had a 20-year track record of not having an issue. So we use that data that -- from those 20 years to see what guardrails need to be in place to make sure this didn't happen again, so we don't need to go through the whole -- you know the story very well, but we don't need to go through the whole story of how it occurred from the pandemic and all that. But we just got out of position a little bit. We have better tools, better measurables to make sure we don't get out -- early indicator warnings to make sure we don't get out of position again.

Got you. And as we kind of look through the back half of 2026, I mean, how are we thinking about the ALOS trajectory through the back half and kind of as a lever to get to that 18% to 18.5% margin that you've targeted?

We've already expanded through our strategic initiatives the focus on growing nonhospital pre-admit environments, not reducing down the volume of hospital admissions, but growing and expanding nonhospitals. We've already seen that shift in a responsible way that will help us then continue to add census, which longer length of stay, driving a less complex patient, greater margin associated with it.

Yes. I mean the new starts obviously helped early in the year. But the other thing I think that Joel has done that's very smart is continue to keep the hospital admissions high, right? So when we got out of position last year, it was because, I wouldn't say we ignored hospital admissions or anything like that, but we devoted more resources to the longer length of stay. Devoting equal resources now to both, and so the faster you grow hospital admissions, you can also grow the longer length of stay admissions at the same time.

Got you. And then like your new Tampa Bay Area market where there's obviously a lot of discharges from the short length of stay, and that's a great balancing lever to have for the state, but as we get into 2027 where it appears there might be less of an even worry about Cap, is -- are your ability to attract those longer-stay patients in that specific market, for example, as robust as the rest of the state?

Yes. Throughout the state, I mean, we are, by far, the largest provider in the state, the most trusted and well-respected brand across the state. And so we've done a really good job historically of balancing the benefit and the opportunity that a community may have. And again, hospice -- the hospice benefit was lifted up in 1983. It was primarily intended to be a cancer service environment. That has shifted significantly. And so there is so much more opportunity from other disease states that typically will come on sooner and have a longer trajectory.

And that's one of the reasons -- maybe the big reason why we, probably 15 years ago, consolidated Florida into one provider number, because then it's not so dependent on a location-by-location basis. if Joel sees an opportunity in Dade County to improve a relationship with a long -- a SNF or an ALF or whatever, he can do that and use the cushion created in Manatee to offset that. So that's one of the benefits of having Florida as one provider number.

Yes. And I'll add, strategically, if you look forward to '27, '28, as we responsibly balance where we're spending our time and grow that nonhospital environment, we're also bringing on new opportunities from a higher-acuity short length of stay patient.

We just did a groundbreaking on a new freestanding inpatient unit in the Treasure Coast, Port St. Lucie area that will come online in '27. We just signed a new relationship in the Fort Myers area for an inpatient facility there. So we're adding to the portfolio to ensure that down the road we have a great mix and balance to be able to effectively grow and, in turn, drop that to the bottom line.

Inpatient units are important for Cap because they take in the sickest patients.

Sickest of the sick.

And directly from hospitals, generally. Taking the sickest patients. And so they have a pretty short length of stay generally, which provides Cap cushion for other things.

And I want to shift over to labor capacity. I know that this has been a core competency of you guys since the pandemic. But we came through first quarter about 100 FTEs understaffed. I just wanted to -- I know you accelerated hiring. Maybe you can kind of talk about your plans there, your targets versus your steady-state hiring, and how that's progressing in the second quarter?

Yes. It really was responding to our growth in census. We purposely had that employee base brought down based on what we were doing from a Cap mitigation strategy. We manage that census responsibly down. And then as we have started growing that back up, program by program, we identify the specific needs. And we're having no concerns whatsoever in moving the labor demands and adding care in all of those programs. We're also managing it appropriately to the census growth, so it's not additional marginal compression.

We had budgeted originally about 30 to 35 FTEs a month that we would add during '26. We started 100 below where we thought we were going to start. So we increased for the last 9 months of the year to about 50 to 60. But as Joel said, that's just responding to the increase -- more accelerated increase in the ADC to respond to the volume.

Got you. I want to shift over to some of the regulatory and policy environment a little bit. A lot of scrutiny in California that we've heard recently about the concentration of operators in that state. And can you maybe talk a little bit about your exposure in California, ADC concentration, and then active CMS state-level reviews that were impacting your platform?

Yes. California is 15-ish percent of our business. Joel can talk about the regulatory environment, certainly.

So we're the largest provider in the state. We've been very actively involved with Washington, with Dr. Oz. We attended his very public meeting in California. We've provided guidance. Look, in reality, we believe that scale, transparency and clinical expertise is going to be a tremendous advantage. We have no concern whatsoever of the increased oversight and the steps that they've taken. And I'm going to separate out the California circumstance from the national moratorium that was just announced and I'll address that specifically.

But in California, in L.A. County alone -- and we're very vocal about our concerns about this. L.A. County grew from the high-400 providers to nearly 1,800 providers in a 2-year period. And so they got their license somehow. That starts at the state. That's not the federal government. However, that oversight also comes from the state, and it didn't happen.

So we welcome the fact, and Dr. Oz publicly communicated last week in the press conference, that they have suspended the billing privileges of 800 providers in L.A. County, of which more than a handful of people reached out to the government to say, "What is going on?" The others are just moving on.

We have no issue whatsoever in the additional scrutiny. Weed out the fraudsters, because it only takes away from the incredible benefit that the hospice -- in 1983, the Hospice Benefit was created and the need it was there to meet. This is the most vulnerable time of life and yet there's individuals taking advantage of that. And there's fraud in every aspect of health care. But we only have one shot at this in hospice and you've got to do it right. So our stance and position in working with Dr. Oz and their group is we are extremely supportive.

What we're disappointed with is the broad-brush approach they decided to take nationally in announcing the hospice moratorium last Wednesday. We would much more prefer a targeted, specific approach where they've identified areas of fraud and work specifically then with local state government to weed out that fraud.

Our concern is this. The broad-brush approach on a national basis impacts everyone nationwide. Now from a business case, doesn't impact us, as a clinically competent, regulatory-following organization in every state we serve. So we have no concern about the oversight. What we're concerned about is what it does to states that have no fraud.

If you think about North Carolina, if you think about Florida, that have long-standing, fantastic oversight through their CON process, this moratorium applies to them. So if we identify, say, increased deaths in that community, how does someone expand into that community to help meet that need? There's [ no way to do that ].

[ We think ], eventually, it's going to be modified and be more target-specific. But for right now, the broad-brush is concerning, recognizing that only about 51% of the individuals who pass away in our country today, who could have benefited from the Hospice Benefit, access that benefit. There's so much more opportunity and more studies that support the fact that the longer the patient is on hospice, the more money they save the Medicare Trust Fund. Not the opposite.

So get rid of fraud, weed them out, focus specifically on where those areas of concern are. Let's look at improving education and expanding that benefit to those in need.

The misconception is the fact that hospice is about death. And in 1983, when it was lifted up and focused on cancer, it was. Today, hospice is about life. It's about infusing as much life as possible into whatever journey that patient and their loved ones have left.

That is a tremendous responsibility. It's not a blood test, it's not a chest x-ray. It's everything associated with the terminal prognosis for that patient. It's a powerful charge and one we take very, very seriously.

We will work with the government, [ and we met ], in fact, yesterday, to ensure that there are appropriate guardrails put in place, that we have targeted, specific focus to identify fraud and weed it out, and then the opportunity to expand the benefit to those patients and families in need.

Great. I think that brings us right to time. I really appreciate it. Joel, it's great to have you for the first time at the event. And we always like hearing from you guys. Thank you very much.

Thanks, Ben.

Thanks, Ben.

[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.

Good day, and thank you for standing by. Welcome to the Chemed Corp First Quarter 2026 Earnings Conference Call. At [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Holley Schmidt, [indiscernible]. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the first quarter of 2026 ended March 31, 2026. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 applies to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements.

Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of April and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated April 23, which is available on the company's website at chemed.com.

I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's First Quarter 2026 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions.

VITAS's performance during the quarter exceeded even the high end of our expectations. We believe that the first quarter of 2026 would be a tough comparison as we continue to transition to balance our patient mix between short-stay and long-stay patients. VITAS management was able to add ADC through accelerated admissions from nonhospital preadmission locations while also maintaining a high level of hospital-based emissions. This was achieved while also keeping hospice labor costs lower than budgeted. These factors combined to allow VITAS to achieve higher-than-expected revenue growth and EBITDA margins while continuing to add Cushion to the Medicare Cap position in our Florida combined position program.

Admissions at VITAS during the quarter totaled 19,394 which equates to a 6.9% improvement from the same period of 2025. We Hospital admissions as a percent of total admissions for our Florida combined program was 43.8% during the first quarter of 2026. As we have discussed previously, an appropriate balance for the sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions that come from hospitals.

Equally as important, as Joe will discuss in greater detail, admissions from all other preadmission locations increased 8.4% compared to the first quarter of 2025 in our Florida combined program. Improved admissions led VITAS to outperform our expectations while also adding over $32.5 million to cap cushion in the Florida combined program in the first quarter of 2026. March 31, represents the halfway point in the government fiscal year. We are more confident than ever that VITAS has put the Florida cap issue of 2025 behind us and has returned to a normalized rate of growth.

Now let's turn to Roto-Rooter. Over the past 2 years, we have talked about the many headwinds that have persisted at Rotair, which is made for a difficult operating environment. While we believe [indiscernible] will continue to face some of those headwinds, the first quarter of 2026 also showed some signs of improvement across multiple fronts. For the first time since the fourth quarter of 2022, residential plumbing and residential sewer and drain revenue both increased during the quarter.

We consider these Roto-Rooter's core services which drive the add-on revenue from excavation and water restoration. We see this as a very positive development for the company. Driving the increase in core residential service revenue was an increase in total leads of 3.3%. Paid leads during the first quarter of 2026, increased 18.7% compared to the same quarter of 2025. Continuing the same trend as past quarters, 53.4% of those leads were the result of paid advertisements.

In the first quarter of 2025, we paid for 46.5% of the leads. The change of approximately 7% required Roto-Rooter to increase marketing spend by almost $3 million in the quarter compared to the first quarter of 2025. The centralization of water restoration billing and collections continues and has resulted in improved collections. These improvements resulted in a $1.5 million improvement in overall write-offs compared with the first quarter of 2025. Weather patterns in the first quarter of any given year are positive for Roto-Rooter. However, in the first quarter of 2026, unusual ice and snow storms across large parts of the country led to significant service disruptions due to road conditions. 24 [indiscernible] branches experienced some level of service disruption for a period of time across 5 days of the quarter.

We estimate that these service disruptions resulted in a net loss revenue of between $3 million and $4 million during the quarter. On March 31, 2026, we repurchased the territory and assets of the franchises operating in San Francisco, California, and Fort Worth, Texas in 2 separate transactions. The aggregated combined purchase price of these transactions was approximately $20.6 million. Collectively, these retro locations serve a population of approximately 3.3 million people. This purchase is part of Rodger's ongoing strategy of acquiring franchises to boost productivity, market share and profitability.

These 2 acquisitions are anticipated to add between $5 million and $5.5 million of revenue for the remainder of 2026. These acquisitions are immediately accretive to earnings. However, initially, growth -- gross margins, EBITDA margins, pricing and mix of service offerings tend to be below the average of our existing rotor portfolio. We are happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond. In our February conference call, we described this as a year of transition for Roto-Rooter. The first quarter clearly demonstrated this transition. We feel very positive that the initiatives we have discussed over the last few quarters are beginning to take hold.

With that, I would now like to turn the teleconference over to Mike.

Thanks, Kevin. VITAS' net revenue was $420 million in the first quarter of 2026, and which is an increase of 3.1% when compared to the prior year period. This revenue increase is the result of a 2.2% increase in days of care, and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. The acuity mix shift negatively impacted revenue growth, 120 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 47 basis points.

In the first quarter of 2026, Vitas accrued $2.4 million in Medicare Cap billing limitation. This is in line with our expectations. No Medicare Cap billing limitation was recorded in the first quarter of 26% for the Florida combined program and none is anticipated for the 2026 fiscal period. Average revenue per day in the first quarter of 2026, was $210.62, which is a 146 basis points improvement from the prior year period.

During the quarter, high acuity days of care were 2.3% of total days of care, a decline of 28 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $70.8 million in the quarter, an increase of 0.6% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 16.8%.

Now let's turn to Roto-Rooter. Roto-Rooter branch commercial revenue in the quarter totaled $56.5 million, a decrease of 1.9% from the prior year period. Commercial revenue was negatively impacted by the weather events discussed earlier to Kevin. However, for the 13 branches that had commercial business managers coming into 2026 and Commercial revenue was up approximately 10%. We added 18 new commercial business managers during the first quarter of 2026. We expect commercial business revenue to accelerate as these 18 new commercial business managers complete their training and begin to become productive sales leaders in their locations.

Roto-Rooter branch residential revenue in the quarter totaled $16.3 million, a decrease of 1.5% over the prior year period. All lines of service increased from the first quarter of 2025 with the exception of water restoration. Demand for water restoration services continues to be strong, and our conversion rates remain high. During the transition to a centralized billing and collection model, we anticipated some disruption to the day-to-day billing processing function.

In the first quarter of the average revenue per water restoration job declined by roughly 13%. We anticipate that this issue will improve as the year progresses with the tallies staff gaining experience and proficiency. Revenue from our independent contractors declined 3.3% in the first quarter of '26 compared to the same period of 2025. Our independent contractors are generally smaller operations in middle-market cities. Because they are independent contractors, they tend to operate more like a small mom-and-pop business than our owned and operated branch locations.

We are actively working with the contractor group to help mitigate the issues in this segment of our business to get it back to a growth trajectory. Adjusted EBITDA in the first quarter of 2026 totaled $53.5 million a decrease of 9.6% when compared to the first quarter of '25. The adjusted EBITDA margin in the quarter was 22.5%, which represents a 218 basis point decline from the first quarter of '25. Roto-Rooter gross margin of 51% was in line with our expectations.

As discussed by Kevin, the decline in adjusted EBITDA margin was mainly caused by increased Internet marketing costs. Finally, let's discuss the revised guidance for fiscal 2026. Historically, we do not give quarterly updates to guidance. Due to the materially improved performance of VITAS, coupled with the level of share repurchases in the first quarter of 2026, we believe updating guidance is appropriate in this instance. As a result of the better-than-anticipated first quarter for VITAS we have increased projections for the remainder of '26.

Full year ADC growth for 2026 is updated to a range of 4.5% to 5.5% and compared to the original guidance of 3.5% to 4%. Anticipated revenue growth, excluding the impact of the Medicare Cap, improves from the original guidance of 5.5% to 6.5% and to a revised range of 6.5% to 7.5%. Finally, revised EBITDA margin, excluding the impact of the Medicare Cap, is anticipated to be 18% to 18.5% and compared to original guidance of 17.5% to 18.5%. We're factoring all the gives and takes within expected Roto-Rooter performance for the remainder of fiscal 2026, anticipated revenue growth remains unchanged at 3% to 3.5%.

Estimated adjusted EBITDA margin is lowered slightly to 21.5% to 22.5% compared to the original guidance of 22.5% to 23%. This is primarily due to elevated marketing costs now expected to persist above our original guidance for the remainder of the year. Based on the above full year 2026 earnings per diluted share, excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $20 to $24.75. The midpoint of the revised guidance represents a 13% increase from 2025 adjusted earnings per diluted share of $21.55. The revised 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.6 million shares. The original 2026 guidance was for adjusted earnings per share to be between $23.25 and $24.25.

I will now turn the call over to Joel.

Thanks, Mike. In the first quarter of 2026, our average daily census was 22,723 and an increase of 2.2%. In the quarter, hospital directed admissions increased 13.6%, home-based patient admissions increased 2% and assisted living facility admissions increased 2.9% and nursing home admissions declined 5.4% when compared to the prior year period. The continued high level of hospital admissions allowed us to quickly transition in the quarter and start emphasizing admissions from other preadmission locations that generate a longer length of stay patient. This resulted in ADC growth that was ahead of the original projections. We were able to achieve this level of ADC growth while maintaining full-time equivalents below our budgeted targets for the quarter.

Our average length of stay in the quarter was 102.7 days. This compares to 118.7 days in the first quarter of 2025. Our median length of stay was 15 days in the first quarter of 2026, a decline of 1 day from the first quarter of 2025. The new starts in Florida continued to grow at a very rapid pace. Marian, Pasco and Pinellas Counties, combined had 526 admissions in the first quarter of 2026, exceeding our expectations. AC for each new start continues to exceed our expectations, and we anticipate opening ManatoCounty in late second quarter or early third quarter.

We intend to aggressively go Manati as we have in our other 3 new starts. I believe the opportunity for growth at VITAS has never been better. We have the difficulties of the 2025 cap circumstance behind us. We are looking forward to continue executing our strategies for the remainder of 2026 and beyond. That will translate into high sustainable growth while providing the best possible care to our patients and families. And with that, I'll turn the call back to Kevin.

Thank you, Joel. I will now open this teleconference to questions.

[Operator Instructions] Our first question will come from the line of Brian Tanquilut from Jefferies.

This is Megan Holt on for Brian Tanquilut. Congrats on the quarter guys, and the guidance rates for the year. First, on the VITAS side, margins looked good in the quarter. How much of that was head count reduction that contributed to it? And then since you're raising the ADC guidance, do you expand labor capacity to support their growth for the remainder of the year? And then just lastly on the VITAS side, speak to any fraud enforcement you're seeing in Southern California, given the CMS cure?

I can start with the margin discussion, Megan, and then I'll let Joel talk about the fraud stuff. But we averaged roughly 100 FTEs below our budget in the quarter. we were able to efficiently serve the increased ADC with -- at that level. But I think to your point, that's not something that we view as something sustainable for the rest of the year. We intend to I think our original budget was adding 30 to 40 FTEs a month. We've increased that to closer to 60 per month for the remainder of the year. So we feel very good that if we add those 60, we can achieve the level of ADC growth we have currently budgeted and maybe a little better than that.

Joel, fraud, stuff.

Yes. So we certainly are very sensitive to the national campaign to root out fraud waste and abuse within the health care system. Certainly, the hospice concerns in California have been very public -- there were just Senate congressional hearings on Tuesday, speaking specific to it. We are very supportive of the efforts. However, we also want to avoid direct implications associated with the fraudsters and ensure that, that does not limit access for patients in need in those counties not only in California, but across the United States for legitimate providers to impact the quality of that patient and their loved ones final journey. .

Got it. And then on the Roto-Rooter side, it looked like you guys had some additional marketing expense in the quarter. Is that now the right run rate going forward? And you started seeing some pressure on the customers this time last year given the macro backdrop? And facing a similar headwind in terms of the economy right now and whatnot. So are you seeing that similar trends as we're a month into Q2 now?

Well, let me just start with the marketing costs. Marketing costs proxy for Google costs. And as we indicated, I mean our leads were up 3%. However, I mean, to get that 3%, we had the battle with the fact that due to changes in the Google algorithm are leads from the natural or free side of the search spectrum were down almost 16%, okay? So those were down 16%. Nothing Rodeo could do. We expect that to basically continue. We have several efforts afoot to increase our visibility on the natural side. But I mean, in the short term, it's going to be something approaching that.

We hope to improve our position, but through the models, I would say that's kind of what we expect to see some tough sledding on the natural side of the search with Google. On the positive side, without increasing the amount we bid in the various domains. We've been getting a lot more clicks. I mean our clicks on the paid side went up over 18%. So I guess what I'm saying is, in order to keep our business where it is and basically, our sales where we budgeted, we've got to pay for more of the leads, and that means more marketing costs and kind of inexorable in the short and midterm. And so to answer your question, yes, we expect that to continue.

Yes. Megan, from a specific number, [indiscernible], I can walk you through it a little bit. But we were from a year-over-year comparison, $3 million above last year in marketing costs. We had budgeted or guided -- included in the guidance was an increase of $1 million -- so we basically spent about $2 million in the quarter higher than what we had budgeted. Of that, we think that roughly $1 million of it was related to some of the weather things we talked about. We were -- when we couldn't get on the road, we were still getting calls probably a much higher volume than we would as we've talked about, weather is good -- that kind of weather is good for us, but we couldn't serve it. And so we were paying for calls that ultimately, we couldn't serve.

We expect -- we thought that was probably about $1 million additional expense that shouldn't be really considered in the run rate. So all in all, we spent about -- on a run rate basis, we spent about $1 million more in the quarter than we anticipated. And the entire change in the EBITDA margin in the guidance is us adding $1 million per quarter of marketing costs for the next 3 quarters.

And then just any trends you can speak to so far in Q2?

It's real early in Q2. I think things continue to progress the way we expect them to. .

Next question will come the line of Joanna Gajuk from Bank of America.

So maybe first on the border business. So can you just talk about the marketing for and the weather disruption -- and I guess I want to tie the quarter to the full year outlook. So now the full year outlook includes, call it, $5 million from these 2 franchises that you acquired. So there's some contribution in there too. And I guess you still expect the same revenue growth. So was there some sort of bad guy that after the good guys, so to speak, in the guidance, if you can walk us through .

Yes. So what -- I mean, what we talked about, Joanna, was that there are -- within the guidance and what's even in the first quarter, there are some positives, but there's also continued headwinds the contract operations still performed slightly below our expectations. The water restoration revenue, particularly on a price or cost per job is still below -- a little bit below our expectations. So those gives and takes sort of offset the acquisition revenue we anticipated. But revenue stays in line with where we thought it would be at the beginning of the year, just maybe the underlying components might be slightly different than what we had anticipated. But ultimately, the revenue continues to grow as we expected.

And if I may, so on the collection rate, did I hear right? I guess maybe there was some improvement, but I guess you did not expect in Q2 -- so I guess I just want to make sure, are you still expecting to improve collection by $4 million to $6 million for the year. .

Yes, we were slightly better than that than our expectations in the first quarter. Having said that, part of that obviously comes from the idea that we're billing lesser job. So we anticipate both of those things improving as we finalize the centralization and those centralized employees get more experienced and we can bring up the revenue per job while still maintaining a higher collection rate.

Right. That makes sense. And with these acquisitions that you mentioned, they usually just come with somewhat lower margins. Obviously, accretive printing money, right? -- the goal is to improve over time. Do you anticipate doing more of these this year? And are there some maybe other assets you would consider acquiring for that business?

Well, I would just say, Joanna, that it's hard to say. But yes, I would given the operating environment out there, we've noted that there are a number of franchise holders that held the franchise for a couple of generations and they're saying, "Boy, this is tough. Maybe I will consider selling to you and we're considering a number of possibilities. I would say that -- the 2 that we mentioned this quarter, San Francisco and Fort Worth are kind of unusual. They're real plugs.

I mean the ones that are generally available to be groups of smaller franchisees that are very likely going to be participants in our independent contractor portfolio. But Yes. There's no question. We anticipate continuing to add additional locations for Roto-Rooter. It's a good acquisition environment for us in that time.

And I guess any progress you mentioned you're making some traction with Google, Agusta I guess you had this new SEO partner. So can you give us an update there?

Well, I hate to get too part of the week, but let me just say this, we immediately saw an improvement in what we call visibility. And by visibility, the best way to do that is you look at how often you appear in the map section. That's where -- that's part of the -- that's where you get the natural. It's biggest driver of the natural leads or free leads. And as we indicated previously, at the end of 2024, we were appearing nationwide, 72% of the time. And halfway through the first quarter of last year, we dropped like a rock to the mid- to low 20% of the time showing up on those maps. What we saw in the first quarter of this year was working with our outside contractor, an improvement, basically, a 10 percentage point improvement in our visibility. And then in March, we saw a change in the algorithm again, which knocked us back a bit as far as is and again, working doing their match, we've been able to improve that almost back to the previous run rate of earlier this year.

So it's a constant battle, Joanna. But yes, we're looking for certainly to stabilize the percentage of leads we get that are free. I mean as I indicated, I mean, we are winning the battle in a major way on the paid search. I mean we are getting substantially more leads without increasing the amount we're offering per lead. So the new -- the private equity firms that have come and kind of upended the Google market for leads. I don't know if they're pulling back. I don't know if they're not quite as scientific as we have become as far as our bidding process. But that's a real success story.

The only problem is, if you're comparing it to a prior period where you were paying nothing for the lead, it's a tough comparison. But in any event, Joanna, it's a constant battle, do we anticipate improving on our position, no question about it. Now if you said how Google change our algorithm again, they tend to do it in a significant way once a year. So I mean I don't -- maybe we're past that at this point, but we'll see.

Okay. And switching to [indiscernible] I just want to make sure because we hear other companies calling out the weather disruption in healthcare services. So it sounds like it wasn't material because you guys didn't call it out in the hospice business. .

We get paid on a per day basis, Joanna. So we don't do fee-for-service. So there could be a disruption in a location where we can't get to patients for a day, but that doesn't really impact our revenue.

It might affect admissions, but not of a disruption is just a day or 2. On a specific day. That is correct. So no, Joanna, to answer your question, we did not have any weather disruption in our business model.

Okay. Perfect. I just to confirm. But yes, that segment outperformed. So things are going pretty good there. And thanks for the update on the slowed, I guess, cushion, so that increased -- so now we've got the proposal for '27 year, right? And the rate up is going to increase and the cost is going to increase, call it, 2.4%. And I know you don't have all the details yet, but any indication on your kind of initial estimate in terms of the proposed increase in Florida versus the [indiscernible] for 2027.

At a very high level, very high level, we think that the revenue -- the rate increase might be slightly lower in Florida than the national average, but we're still we're still crunching the numbers and we don't have the details. They don't come out until some in the summer.

Yes. Keeping in mind that is the proposed wage rule. We're still in the comment period, and a final wage rule typically is not put into place until the late part of the third quarter.

Right. So that's 1 we will find out. But as of now, there are no indications, there's some outside dynamic that you experienced, I guess, last year. with that increase being high in Florida than overall. But maybe that's the opposite. So that should be manageable there. And there was a couple of other items in that proposal, including this new scoring system, the index SVI. So when we look at some of the data, there was 2 service CMS, VITAS was actually screening above average, but it seems like there was 1 of these measures that were like penalizing the providers because it was essentially capturing just the total number, not per patient. So any thoughts about any of these efforts or anything that was discussed in the CMS proposal, how could that impact your operations?

Yes. Thanks, Joanna. And as I said previously, we are very supportive of the efforts to eliminate in a waste fraud and abuse from the hospice environment. But you have to keep in mind over 50% of patients needing hospice don't have access or receive that end of life care today. So we want to ensure any efforts to weed out fraudsters, which, again, we are very supportive of, don't in any way impact legitimate providers to be able to provide care to those in need.

Now specific to your question about the proposed potential additional scrutiny that is listed in the wage drill. We're continuing to evaluate what the potential impact that might be on VITAS, but again, I'll go back to -- this is in the comment period, and we will be providing comments to ensure that we have communicated our guidance to ensure that, that scoring and that oversight is aligned with what legitimate providers were to be evaluated on a day-to-day basis across the country. And so weed out the fraud focus on improved quality and access for those in need.

And Joanna, just give you just very generally speaking, when we hear about fraud in the hospice and whatnot, especially we'll focus on California. You have to remember, they're in 2 buildings in Los Angeles County. There are more hospices located in those 2 buildings that they are in the whole state of Florida. I mean the fraud that we're talking about is it's real fraud. That is almost a business mailbox offices for hospices, no real patients, no real care totally different situation from what historically has been fraud in the hospice field, which tends to be highly specialized arguments between doctors, whether a 6-month terminal prognosis is indicated or not.

I mean it's a bit different magnitude. But again, we continue to watch it. We don't want to be swept. We don't want to be a dolphin swept into a tune in net in the accidentally. But so as Joel said, we're watching it very carefully.

So should I read this as even things like this new core system that they proposed is going to be finalized. There were some other things that the CMS proposed, but they never really force because they couldn't really figure out how they're going to measure things. So is it a similar situation with this particular one?

Yes. We want to make sure that the criteria and the algorithms used to evaluate the scoring with makes sense and is accurate and does not include data that is been infiltrated by fraudulent claims processing from these providers. They've got to be able to filter all of that out and focus on legitimate providers and the measurement of the care and services provided from those.

And to that end, when you mentioned making sure that these are legitimate providers. The other effort right out there. So also 1 of these meetings talk about these efforts they want to put in place where states would have to revalidate all providers within 30 days. Have you seen any of the starting? And I don't know if that -- I assume that things like hospice in California. But have you seen anything in your operations where the states are starting to do that? .

We have not seen it to that level. There is in place a higher degree of evaluation on new locations and the review of their claims on a regular basis to ensure that these new providers are legitimate in providing actual care. I mean, again, if you think about where the focus has been in L.A. County, the expansion from 400-plus providers to nearly 1,500 providers in L.A. County alone. Those individuals -- those companies receive licenses. And we are very supportive of an improved surveying environment to ensure that they're legitimate and that their patients are legitimate.

Joanna, let me sure -- one reason Joanna is a little tried on this is we attempted to get a license in San Francisco. It took us about 6 years dealing with a number of surveys kind of kind of where people didn't understand what hospice was but we got it through it. We got it after 6 years. Joel's sitting here saying, how could 1,100 fake hospices get a license in 18 months where it took us 6 years with legitimate. I mean, that's the kind of stuff that's hard to explain.

Now it's different state issues as not the federal government. So you're talking about different silos, but still, they got to coordinate their activities. But I guess what I'm saying is if you put any type of scrutiny and the type of scrutiny we're used to on licensing if they put anywhere a percentage of that, a small percentage of that, it would knock out about 95% of these fake hospices.

[Operator Instructions] Next question will come from Michael Murray from RBC Capital Markets.

For VITAS, I think you're probably seeing a higher mix of admissions from hospitals in your new Florida markets. Just given your current cap situation in the state, how are you thinking about community-based admissions in these markets?

So thanks for the question. And as we have talked previously, we're managing the balance in those preadmit environments, and we look at that on a daily basis. specific to where we're focusing or where our resources are deployed. And we feel that our community-based initiatives are responsibly growing back from where we needed to be in the last half of 2025. So we feel really good about the balance between hospitals as a preadmit and all of our other or community-based type admissions.

And Michael, keep in mind that with the -- you specifically mentioned the new starts, when we have a new start there, there is not, by definition, an existing base of long-stay patients. So regardless of where in the new starts only, regardless of where the preadmission location is for some period of time, they're all short-stay patients because we don't have a base of existing long-stay patients.

You have legacy pace from past couple years. .

So when you're talking specifically about the new starts, think of them all as short-stay patients for at least a period of time.

Okay. And then these new markets are pretty sizable. How should we think about the volume opportunity longer term? What's your typical market share in Florida? And -- and how should we think about the range markets?

Well, I mean, again, if you look at our historical market in some of these markets where we're the original hospice, I mean, -- the numbers are staggering, Joel jump in here. But I mean we're a diamond provider in almost any county that we have the license to operate in. .

Yes. And we don't see a significant change in our outlook specific to our ability to grow into a market. And our last 3 new starts that we talked specifically about have demonstrated that. So we feel really good about the long-term outlook on our ability to continue to effectively grow those markets as we have in the past.

All right. And then just 1 more on Roto-Rooter. So I just wanted to get a sense for your current mix of paid leads versus organic leads is -- and what are your expectations embedded in your guidance?

Paid leads are roughly 53% to 54% of our total leads at the moment. We anticipate that mix to continue. We don't -- we have not anticipated a deterioration or a significant improvement. And that's why, again, we took our guidance and added of additional marketing costs -- marketing costs for the rest of the year. But we don't -- we haven't projected a significant deterioration in that from the first quarter.

I mean it's hard. As I indicated, it's a constant battle. In the first quarter, we had 2 months of improving visibility on maps and then a change in change in March where we had a deterioration. And then we go to April to fight the battle and improve our visibility. So Mike is just saying as far as prognosticator, let's -- there could be some in, there's going to be some outs. Our hope, of course, is that we have improvement there, but it remains to be seen.

I mean we've been to a period where you go back just less than 3 years, our percentage of leads from resources were 55% and that's 47%. I mean that's an expensive significant shift. Now having said that, Roto-Rooter has been through something similar, and that is when we went through the change from the importance of Yellow Pages, where Yellow Pages was all and Roto-Rooter has a dominant position in virtually every directory to the Internet. That was a tough marketing situation where we went from a dominant the first 2 pages in almost every major metropolitan directory to just 1 of 50 listings on the natural side. It was tough, but Roto-Rooter developed into in the dominant position nationwide on the Internet side. Now the Internet is changing. I have confidence that will be able to transition to the new normal, better than our competitors. And if you look at the growth we've had on the paid search side that is far as our 18% plus increase in leads on the paid search. I think that's a demonstration of that.

But again, as we go -- there's a cost of the transition, and we're prepared to we're prepared -- I think, prepared to deal with it and rather we have done it in the past.

I'm not showing any further questions in the queue. I'd like to turn it back over to Kevin for any closing remarks.

Thank you, everyone. We're happy. We had what we thought was a good quarter, excellent quarter in VITAS. And so good trends at both companies. And we look forward to reporting on our results for the current quarter in due course. Thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Have a great rest of your day.

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.

Good day, and thank you for standing by. Welcome to the Chemed Corporation Fourth Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Holley Schmidt, Assistant Controller. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2025 ended December 31, 2025. Before we begin, let me remind you of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from these -- from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of February 25 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated February 25, which is available on the company's website at chemed.com.

I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's Fourth Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions. The fourth quarter of 2025 fell short of our expectations for both subsidiaries. We will touch on the circumstances that led to these results, but more importantly, we will discuss what's being done to improve these results for 2026 and beyond. VITAS continues to execute the strategies required to fully mitigate potential Florida Medicare Cap billing limitations for the government's fiscal 2026. Admissions at VITAS during the quarter totaled 17,419, which equates to a 6% improvement from the same period of 2024. An important metric that we've been tracking related to Florida admissions is the percentage of total admissions that come from hospitals. Our analysis indicates that an appropriate balance for sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions come from hospitals.

During our Community Access program, this ratio dipped below the preferred range for a sustained period. In the fourth quarter of 2025, this ratio was 44.8%, which represents a high watermark during the post-pandemic period. The continued emphasis on short-term hospital-based admissions had 2 main impacts on the results for the fourth quarter of 2025. The first impact is that the Florida Medicare Cap position in the fourth quarter improved by almost $25 million in 2025 -- compared to 2025. It is important to remember that our fourth quarter is the first quarter of the government fiscal year. The year-over-year improvement gives management even more confidence that the Florida Medicare Cap problem of 2025 is behind us.

The second impact is that due to the overwhelming success of garnering elevated short-stay patient admissions, our revenue growth and EBITDA margin were lower than anticipated. Ultimately, the percentage of total admissions that come from hospitals was higher than we originally budgeted in both the third and fourth quarters of 2025, resulting in this muted revenue growth and EBITDA margin.

In mid-January 2026, VITAS management responded to the improved Florida Medicare Cap position by instructing operating personnel to begin the process of refocusing admissions to a more balanced approach between hospital admissions and preadmission -- other preadmission locations. That process is underway. In the guidance that Mike will discuss further, we have anticipated that the more balanced approach will start being reflected in the financial results mainly in the second half of the year. All patients are short-term patients for the first 30 days after admission regardless of their pre-admission location.

As a result, refocusing the admission patterns will result in revenue growth and EBITDA margin building over the course of 2026. Finally, in December, we were granted a certificate of need to begin operating in Manatee County, Florida. Manatee County is in Western Florida between Hillsborough and Sarasota. Approximately 3,000 Medicare patients received hospice care in Manatee County during the government's fiscal 2024, which is the most recently published government information. Manatee represents another significant opportunity for VITAS in 2026 and beyond.

Now let's turn to Roto-Rooter. Roto-Rooter revenue declined 3.7% in the fourth quarter of 2025 compared to the same period of 2024. Branch commercial revenue increased 1.6% compared to the fourth quarter of 2024. We continue to add commercial business managers to select branches during the quarter. Branches with commercial business managers had percentage revenue increases, 10% more than those without them. Roto-Rooter management intends to continue and expand this program in 2026. branch residential revenue declined 3.1%. Total leads were flat in the fourth quarter of 2025 compared to the same period of 2024. As discussed in the past few quarters, the trend of increasing paid leads offset by declining natural leads continues. During the fourth quarter, paid leads increased 9.4% compared to the same quarter of 2024. The decline in natural leads essentially offset the increase in paid leads. Roto-Rooter management has contracted with a new third-party search engine optimization provider in late December.

The new provider does not provide services to any of our private equity competitors. Additionally, they focus on understanding and responding to the underlying code used by internet search engines to develop their search algorithms. We believe that these 2 factors will give us the ability to more positively impact our natural search results in 2026. Write-offs related mainly to our water restoration business increasingly became an issue over the course of 2025. In the fourth quarter of 2025, implicit price concessions and credit memos increased at Roto-Rooter by $4 million or 57% compared to the fourth quarter of 2024. A similar increase in write-offs was seen in the third quarter of 2025. The company has put into place modifications to the billing and collection support functions.

Collection experience began to improve in early 2026, and we anticipate improvement to accelerate through the course of the year. Our guidance reflects management's belief that 2026 is expected to be a transition year for both VITAS and Roto-Rooter. VITAS's financial results are expected to build over the course of the year as we rebalance our patient mix. We are very confident that Florida Medicare Cap limitations in 2025 is fully behind us. The demographic makeup of the U.S. population, along with the addition of new territories in Florida, provides VITAS with significant growth opportunities over the next several years. Roto-Rooter continues to deal with a difficult operating environment.

However, we have initiatives in place that I believe can lead to modest growth, mainly coming in the back half of 2026. We anticipate continued improvement in overall leads based on the past few quarters of paid lead generation improvement plus the impact of the new search engine optimization company. Improved overall leads should lead to modest organic growth in 2026. The addition of more commercial sales resources is anticipated to further improve organic growth.

As Mike will discuss further, improvements we are working out with respect to water restoration billing and collections should provide $4 million to $6 million tailwind in 2026. We believe these improvements, along with an aggressive program to find and reacquire franchises in desirable territories, gives us confidence that we can meet or exceed our 2026 guidance. We believe that the difficult operating environment is temporary, and there has not been any impairment in their underlying long-term growth outlook for Roto-Rooter.

With that, I would like to turn this teleconference over to Mike.

Thanks, Kevin. VITAS' net revenue was $418.8 million in the fourth quarter of 2025, which is an increase of 1.9% when compared to the prior year period. This revenue increase is comprised primarily of a 1.3% increase in days of care, and a geographically weighted average Medicare reimbursement rate increase of approximately 2.2%. The acuity mix shift negatively impacted revenue growth, 143 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 20 basis points.

A $2.4 million Medicare Cap billing limitation was accrued in the fourth quarter of 2025. There was no Medicare Cap billing limitation accrued for our Florida program in the fourth quarter of 2025. Average revenue per patient day in the fourth quarter of 2025 was $208.01, which is 86 basis points above the prior year period.

During the quarter, high acuity days of care were 2.2% of total days of care, a decline of 32 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $91.6 million in the quarter, which is a decline of 1.7% when compared to the prior year period. Adjusted EBITDA on -- the adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 21.7%, which is 79 basis points below the prior year period. The lower EBITDA margin in the quarter reflects the impact of admitting more hospital-based short-stay patients.

Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $155.6 million, a decrease of 3.1% from the prior year period. This aggregate residential revenue change consisted of plumbing increasing 6.3%, excavation essentially flat offset by water restoration declining 10.3% and drain cleaning declining 3.2%. As Kevin mentioned, water restoration write-offs also referred to as implicit price concessions and credit memos have been increasing over the course of 2025. Historically, total write-offs have been slightly below 3% of gross revenue. There was an uptick to the mid-3% range in the first half of '25. We then experienced a significant jump in the second half of 2025 to over 4.5%. As a result of those increases, total write-offs increased $11 million in fiscal 2025 compared to 2024. Primarily through the use of artificial intelligence, many insurance companies have increased their scrutiny of every line item on every job we bill. This has led to the higher write-off percentage. Roto-Rooter management also believes that it has led to a reluctance to bill for certain water restoration services at the branch level. As the scrutiny on collections has increased over the year, billing employees in some branches have reduced their billings per job to help ensure a higher collection rate. This was the biggest factor that led to the 10.3% decline in residential water restoration revenue in the fourth quarter of '25.

In response to this issue, Roto-Rooter is taking steps to improve its documentation through better use of technology. They have also undertaken a project to centralize water restoration billing and collections. Billing and collections were historically performed at each branch. This led to some inconsistent practices across the company. Centralizing these processes is expected to create more concentrated expertise and result in better billing and collection results.

The financial impact is expected to be seen mostly in the second half of the year as these improvements take hold. Additionally, during the transition period, we expect some duplication of costs and investment in technology which will cause some marginal headwinds in the first half of the year. Roto-Rooter branch commercial revenue in the quarter totaled $55.2 million, an increase of 1.6% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.9%, drain cleaning increasing 2%, plumbing essentially flat between years, offset by a 20% decline in water restoration. The water restoration decline is a symptom mainly of the increased insurance scrutiny previously discussed.

Roto-Rooter management believes that our commercial business continues to represent a significant opportunity for growth in 2026 and beyond. Commercial customers generally use our services more often than residential customers, they also have direct access to our local managers and thus generally do not search for us over the internet.

In response to the commercial business opportunity, Roto-Rooter management hired commercial business managers at select branches during 2025. The preliminary results in the branches with commercial business managers are encouraging. As a result, Roto-Rooter continues to add commercial business managers in early 2026. It is a roughly 45-day process to get these positions trained and productive, which also may cause some marginal drag in the first half of '26. Adjusted EBITDA at Roto-Rooter in the fourth quarter of 2025 totaled $47.5 million, a decrease of 21.1% compared to the prior year quarter.

The adjusted EBITDA margin in the quarter was 21.5%. The fourth quarter adjusted EBITDA margin represents a 477 basis point decline in the fourth quarter from the fourth quarter of 2024. The decline in EBITDA margin was caused by higher marketing costs and higher water restoration write-offs.

During the quarter, we repurchased 400,000 shares of Chemed stock at an average price of $436.39. These purchases were funded by the free cash flow generated by both VITAS and Roto-Rooter since the beginning of the program, we returned over $2.9 billion to shareholders through repurchases at an average cost of approximately $167 per share.

Now let's turn to the 2026 guidance. VITAS revenue prior to Medicare Cap is estimated to increase 5.5% to 6.5% when compared to 2025. Average daily census is estimated to increase 3.5% to 4%. Full year EBITDA margin prior to Medicare Cap is estimated to be 17.5% to 18%. Medicare Cap billing limitations are estimated to be $9.5 million in calendar 2026 compared to $27.2 million in calendar 2025. The estimate for 2026 is in line with our historical run rate prior to 2025 and includes no limitations related to our Florida combined program. Roto-Rooter is forecasted to achieve full year 2026 revenue growth of 3% to 3.5%. Roto-Rooter's adjusted EBITDA margin for 2026 is expected to be 22.5% to 23%. We believe this forecast is achievable based on anticipated improved lead volume in 2026, improved billing and collections in our water restoration service line and a lift in our commercial business through a commercial focused sales force. Based on the above full year 2026 earnings per diluted share, excluding noncash expense for stock options, tax benefit from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $23.25 to $24.25. This compares to full year 2025 adjusted earnings per diluted share of $21.55. The 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.9 million shares.

It's important to note that the 2026 earnings trajectory is weighted towards the second half of the year. We estimate 55% of the consolidated adjusted net income and consolidated adjusted EBITDA prior to Medicare Cap is projected to be generated in the second half of the year. I will now turn the call over to Joel.

Thanks, Mike. In the fourth quarter of 2025, our average daily census was 22,462 patients. an increase of 1.3%. In the quarter, hospital directed admissions increased 9.9% and home-based patient admissions increased 4.1%. Assisted living facility admissions increased 5.6% and nursing home admissions declined 8.7% when compared to the prior year period. Our average length of stay in the quarter was 115.1 days. This compares to 105.5 days in the fourth quarter of 2024. Our median length of stay was 17 days in the fourth quarter of 2025, 1 day less than the median in the fourth quarter of 2024.

As Kevin discussed above, we have very successfully transitioned our admission pattern towards more hospital directed admissions in our Florida combined program. To add some context to that success. At the end of the fourth quarter of 2025, that Medicare cap billing limitation was less than $2 million. As of the end of January '26, we have no billing limitation in our Florida combined program. This success has allowed us to begin the process of balancing the admission patterns to a better mix of hospital-based admissions and other preadmission locations. It's important to remember that hospital-based admissions generally provide for shorter-stay patients than other preadmission locations, admitting more short-stay patients results in ADC pressure in lower margins, as previously mentioned. However, in the first roughly 30 days of any patients stay with us, the economics are the same for us regardless of their pre-admission location. Only when a patient exceeds that 30 days, do we see the more positive financial impacts Balancing the mix of admissions will lead to accelerated revenue growth and improved EBITDA margins as the year progresses.

In December 2025, we were notified that we received the new CON to operate in [indiscernible] Manati County, Florida. As Kevin mentioned, this represents another opportunity for significant growth over the next few years. This is the fourth CON awarded to VITAS over the past 2 years. The previous awards in [indiscernible] Marion and Pasco Counties have met or exceeded our expectations. Currently, Marion and Pascal are admitting between 40 and 50 first-time Medicare patients per month. in just its second full month of operation, Pinellas admitted 28 first-time Medicare patients. We will continue to aggressively pursue CON opportunities in Florida in the territories in which we do not currently operate.

Now that we believe the Florida Medicare cap issue is behind us, we are focused on returning VITAS to a more normal, sustainable organic growth pattern. We will look to achieve higher overall growth through the pursuit of new starts, not only in Florida but other CON states as well. We also continue to evaluate strategic acquisitions to add to VITAS' overall growth. With that, I'll turn it back to Kevin.

Thank you, Joel. I will now open this teleconference to questions.

[Operator Instructions]

Our first question comes from the line of Joanna Gajuk of Bank of America.

So I guess, first, a couple of questions on the rate business. So thanks for the details around, I guess, different issues, I guess, happening at the Roto-Rooter. But I guess just to summarize because I think you tried to address a couple of these things. What gives you confidence you can actually grow revenues 3% or so in '26 after revenues were pretty much flat in '25.

Well, let me start, Joanna. And this is -- I'll start with from 20,000 feet. The -- we revised guidance in -- at the end of the second quarter of last year. And we talked at that time there were struggles at Roto-Rooter. The problem at VITAS was we were on to running a Medicare cap liability of Florida, we announced that we were going to have to make changes to push our mix of hospital-based admissions and community access to a different level, okay?

So we make those adjustments to that point. And actually, from our perspective, from our calculations at the end of the third quarter, we were basically right at our guidance. I mean it might have been a little below what analysts were predicting. But that's -- the difference was only seasonality. We were at our level. The fourth quarter was $0.70 per share miss, okay? Massive, big problem. And raises questions like, okay, you've given guidance. How are you going to -- how are you going to reach those numbers, okay?

Now to answer your question, let's start with Roto-Rooter, okay? Roto-Rooter, as we've said, has been going through a transition, okay? The transition -- the most significant transition is going from a majority of free leads that is from natural search to paid leads, okay? And Google is a smart company. They say, why should we give paying customers free leads? And they've been very successful in engineering their algorithms to yield that, that has a negative effect on us as far as number -- or answer your question on sales, it has an effect of reducing our natural search leads, okay? As we mentioned at the end of the fourth quarter, we look back in the quarter, and we said, okay, we have an improvement there.

Our paid leads have increased almost 10%. Unfortunately, natural leads are down almost the equivalent number. So our -- so our total leads were flat. If you look at our sales, we would expect sales to be relatively flat in that case and then making improvements growing to the following year. Well, we had a problem, as we said, with water restoration. And it was an overhang from the first half of the year. Again, we were -- we had various decentralized billing practices, insurance companies kind of sharpen their pencil, and basically, during the course of the year, increasingly, we weren't collecting at the same rate, we were expecting that dramatically goes right to profitability and sales, okay? We believe that has normalized, as Mike said, not to the 2024 level or 2023 level, but certainly better than the 2025 level. So when we talk about growth, to the extent that we -- the way I look at the Roto-Rooter numbers, I look at, okay, what's going on with paid search and natural the paid search is growing nicely. Last 3 quarters, almost 10% per quarter, okay? It comes at a cost. We're paying $94 lead compared to previously 0 in a lot of those leads, but that's still a good business as long as it's stable and growing, that's fine.

We look at our natural leads okay? Why are the natural leads -- why were they so negatively affected last year? As we've said in the past, the most -- the place that most people get their natural leads from is what's known as the map section of Google, okay. In October of 2024, Roto-Rooter was showing up on the maps nationwide 72% of the time, okay? Within a few months, that fell to a low of 24% of the time, okay? Massive change in visibility as known in the industry. And accordingly, leads were falling -- leads were falling, sales are falling. Tough time for Roto-Rooter.

Looking ahead to 2026, what do we see? Well, we see a business that on the paid lead side, continues to improve. We see on the -- let's focus on the visibility, okay? Our visibility, both through some of the internal changes we made and the use of our -- basically AI-centric natural search for our visibility up to about 35%, up from 24%. So that -- to answer your question, that gives me some confidence in saying, yes, as long as those -- we don't have to -- just have to continue those improved rates for growth in Roto-Rooter on the revenue side. I mean there's nothing that has changed in the nature of and quality of the service mark of Roto-Rooter. And then you add one thing Mike mentioned again, it's not that surprising given the difficulty of home services, it seems like the availability of repurchases of other franchises is speeding up, which has given Mike enough confidence that included that in his remarks. Again, those issues give me a lot of confidence that Roto-Rooter sales are going to be higher this year than the previous year.

Now I was just going to say the other point is, you got to remember that I think it's an important one. When you talk about overall strength of the business. As we've talked about the VITAS with the, call it, preloading of Medicare Cap cushion in Florida, that's so significant. Just order of magnitude, we're at about a $28 million better position in cap cushion sitting right now. But right now, I'd say it's probably higher, that's probably more like $35 million. Okay. So the question is, can we -- will VITAS be able to grow census to take advantage of that cushion. And as we said during the prepared remarks, they're doing that, probably beyond our expectations. So in sort of a sense that lower margin and lower sales we saw in the fourth quarter was basically just lending, it was -- we were borrowing from last quarter to see profits and revenue that we're going to see in this year. So all of those are some of the basic points of what I see happening to what looks like on paper, a very bad miss in the fourth quarter.

And just let me -- just in terms of dollars and cents, the $0.70 miss, probably about 33% was that -- was associated with VITAS's getting more more a higher percentage of their admits being short stay rather than long stay. So -- and that's something actually is a good thing. That was something ultimately they were trying to do and just we're a little more successful at it than initially anticipated. With regard to -- on the Roto-Rooter side, the lion's share of the miss was associated with the water restoration situation, which we've talked about and there's every indication that's being ameliorated somewhat. And the rest of Roto-Rooter, it's actually the marketing costs, the increased marketing costs that comes from getting that 10% increase in paid leads. So it's not a good situation. Again, it shows -- it's one where we went a long period of time with always exceeding analyst estimates. And we can't kid ourselves, a $0.70 per share miss is not to be tripled with. It's big and it's causing a lot of change, a lot of renewed emphasis on important matters here at the company and both subsidiaries. Mike, anything to add?

Just to summarize, particularly for Rotter, Joanna, I would characterize our confidence in the 3% to 3.5% revenue growth in '26 based on 3 specific things. As Kevin mentioned, some things we've done to change the lead trajectory, hopefully, to provide some organic growth, but modest organic growth is built in. The increase in commercial sales force will also lead to some more modest organic growth. And then as we've talked about, the water restoration write-offs, we've estimated that of the $11 million that the increase of write-offs of $11 million, we're going to recover maybe half of that this year. So that's a $5.5 million tailwind. So I would say those are the 3 very key components of how we get to the 3% to 3.5%.

Great. And if I may, on the margin, so for the segment, obviously, things impacted the margins and you gave us the guidance for '26. But on the last call, when you kind of were talking about targeting longer term. I guess you were talking about '26, maybe the margins should be closer to 24%, but clearly, they will not be there, but then you also said like longer term, this business should get 25%, 26% margin. So are those still -- those targets are those targets still on the table? Or sort of like we have to think about the business differently.

I think that -- the answer to that question depends on how quickly Roto-Rooter gets back to a more normalized top line growth path? If they get to somewhere 5% or north revenue growth, I think the 24% to 25% is still achievable. We -- I don't anticipate the marketing costs to improve dramatically. And so we need to really to drive top line and get some leverage based on that revenue growth to offset the marketing costs. So yes, I believe it's achievable. But the path isn't as clear maybe as it had been in the past because of the marketing, the additional marketing spend.

The other thing I would just mention, and I think it's obvious joining to you, but you followed us long enough. We are not too far away from where our margins were pre-pandemic. So the '24 to '25 that we've talked about is higher than in the historical Roto-Rooter margins. So we're right now pretty close to what the pre-pandemic margin is. It's just we need to drive some top line and get some leverage from that.

Our next question comes from the line of Brian Tanquilut of Jefferies.

As I think about VITAS first, right? So I know on the -- in previous calls, you've given some insight into what you thought growth would be in the top line. And obviously, in the guidance that you formally gave last night, it's below that range that you previously provided. So just curious -- what is the delta there? And then how do we think about the progression of VITAS's revenues and EBITDA over the course of the year?

Yes, sure. So the -- from a top line perspective, and this also will, I guess, dovetail into your second question about the time line. We're sitting right now with a patient mix that for the second half of the year, we -- of '25. We really emphasized the short-stay preadmission locations, mainly hospitals. As you well know, long-stay patients are the ones that generally provide for more revenue growth and EBITDA margin growth. And so we're sitting today with a patient mix that has let us moderate, not moderate, eliminate the Florida Medicare cap issue. So now we need to refocus the admission pattern. By doing that, we will get back to the normalized growth rate that we think is somewhere in the 7% to 9% top line area. We'll get there. It's just going to take -- it's going to build during the year because every patient, essentially, when you first admit them in the first 30 to 45 days or short-stay patients, they are negative margin for us for a period of time. They'll become long-stay patients over time. But in the first quarter, we're going to continue to have a very elevated number of short-stay patients regardless of the preadmission location. So it builds over the course of the year. That's why in '26, the revenue is a little bit below our targeted range. And the cadence of how it goes quarter-to-quarter, the first quarter is going to be muted from a revenue and perspective and then start to grow and normalize in the second through fourth quarter.

And let me just add 1 thing. When you're talking about revenue at BPAS, you're talking about ADC. If VITAS is able to grow ADC they will grow their revenue. And to the extent that they have the ability -- a much larger ability in Florida to go out and seek longer-stay patients. That's -- longer stay patients is how you grow ADC essentially. It takes short-stay patients to have the same contribution as 1 medium stay patient as far as going to your ADC number. But I think what you'll find is that VITAS is already well on its way. This isn't speculation with VITAS. They're well on their way to growing that average at such a in Florida and beyond.

That makes sense. And then maybe, Kevin, since I have you, shifting gears to Roto-Rooter. This is a business that used to be very stable and predictable One question we're getting asked a lot by investors is, is there a structural change or structural impairment that has happened, whether it's VITAS Roto as an asset or the plumbing industry as a whole. So I'm just curious how you're thinking about the cleanliness or the smoothness of the trajectory for [indiscernible] Roto-Rooter going forward because it feels like every quarter, we're bumping up against some speed bumps that are of different nature. So just curious how you're thinking about how ...

Seven quarters, that's the case. What you're describing. We can't get away with it. Yes, certainly, that's the case. Now what has been going on during this period? I mean I would say that the 2 major issues, let's start with private equity, introduction of private equity money and practices into the -- into our sector, okay? Had an immediate effect on us. We hired our branch managers with a promise of great riches, that has stopped. And they -- several of them have seen trees don't grow to heaven and they've come back to our employee. The biggest impact aside from just existing and offering services at below cost on the plumbing side. They have disrupted the paid search model. We are paying more per lead than we did 2 years ago. But it is -- keep in mind, we paid the same amount in the last 3 quarters. So it is not -- it hasn't continued to go up. And we're winning that battle. Last 3 quarters, we've gotten a 10% increase in each of the last 3 quarters. So I consider the threat of private equity largely diminished at this point, okay? And I'm speaking to the overall saying, has there been something changed in the plumbing industry? I think private equity came in and they said, look, they have a different investment horizon. We're in the marathon they're in a sprint. They want to build the top line and flip. That's a tough competitor, okay? And Also, as I said, I'm going back, I'm repeating myself, but they're basically HVAC companies that said, we're very happy with paying $124 per lead, okay? And lead on a job that they'll say they'll clean any drain for $90, okay? And the reason they're happy doing that is they view as that becomes a long-term customer for their HVAC services. I mean that's a tough competitor, if you're in the plumbing side. Roto-Rooter has dealt with that. I mean I just -- I'm kind of spinning off here into a different discussion, but I think that of the 2 major things that Roto-Rooter has been dealing with the last 7 quarters, private equity, definitely one of them. I don't see that as a long-term problem for Roto-Rooter at this point, okay? One that is a problem. We're still going on in the transition. We are going through a transition where Google -- we used to get in excess of 55% of our leads on the natural search. Somebody just finds Roto-Rooter in the Google, ignoring the sponsored ads. That is totally flip. We're out of way to almost just over 40% of our leads come on the natural side. And I think there's a firming up in that market -- in that percentage, just [indiscernible] by some of the things that Roto-Rooter is doing, having to do with fighting back on visibility.

But to answer your question, is that a significant -- is Google going away? No. That is a change in the business. But as Mike says, it's a change that kind of leads us more back to pre-pandemic numbers as far as sales growth and margin, which was at the worst of all worlds, okay? So what I would say to your clients that say what has happened to the plumbing industry? I would say private equity has come in, disrupted everything, but they're seeing that it's tough to give away the service -- to provide the service at a loss. They're not growing. Companies have stopped buying our competitors. It's it's just -- the problem is diminishing rather than increasing. Google, we can't kid ourselves. Google is -- we're dependent on Google. We deal with them. we hope we can keep just having slight improvements in it. But the thing that has changed is we've gone from a business where the leads were predominantly free, and now they're predominantly we're paying them out. Now let me go back and say, there's nothing wrong with the leads they're very profitable. The business is a good business, paying -- getting leads to paid ads. It just has a negative comparison to getting them for free. So no, I would say that we got to Roto-Rooter, good cash flow, strong growth on the excavation and water restoration side. The water restoration has been a real black eye for us for the last 3 quarters, but it's something we've looked to put behind us. Not by wishful thinking, by the way, by centralizing billing and using our technology to make sure that the support for every bill is almost redundant.

I mean just -- that's how you get past the AI sensors as it were and ultimately get paid. So no, I don't have any long-term concerns on Roto-Rooter at this point, to be honest with you.

Brian, the only thing I would add is from an industry perspective, there's been a lot of talk and a lot of things published that the trade, including the plumbing industry are pretty resistant to the changes that are coming from artificial intelligence and those sorts of things. So we definitely believe that plumbing the industry itself has not -- it has not and is not going to have major changes in the viability of the industry as a whole. I think, I mean, honestly, just to the point of your question, 2026 is the year that Chemed management and Roto-Rooter management show or don't show, but we believe will show the ability to manage that and get back to a more profitable, more sustainable level of growth for Roto-Rooter itself.

Well, let's put this way. It comes down to leads. This quarter, as bad as this past quarter was, our total leads were flat okay. Totally for flat. Unfortunately, I say just -- there was a shift between paid and unpaid. But leads were flat, okay? And from those leads, we're increasingly improving our ancillary services, that is excavation of water restoration. So if you say, how does Rotor continue to grow? It's by having the leads be a little better than flat, continue to grow the ancillary services. And our goal for Rotor historically has not been double digit growth, okay? It's not been 30% margins. It's been growth on the top line of 7% to 8% with 24%, 25% margins depending on the seasonality in the quarter. And from that, with that cash flow, that has achieved over let's say, prior to this year, over the previous 21 years, that is with the years in which we owned both VITAS and Roto-Rooter. They grew their net income at 11% per annum compounded. I mean that -- and they did that with just the basic blocking and tackling and benefit of good cash flow. So -- we get a lot of questions. I mean I can talk about this all day because we're going to talk about it all day. People are going to say, "Is there something significantly wrong with Roto-Rooter?" No, they're going through a difficult period. They're paying for leads that they used to get for free if you want a one-sentence capsule commentary.

Our next question comes from the line of Ben Hendrix of RBC Capital Markets.

Just starting with VITAS. I appreciate all the commentary about Florida Cap and the dynamics in the fourth quarter. I appreciate that you have a little bit more visibility on the -- not having a capital liability in that state, but we're getting a lot of questions on how we square that with some of the -- with the broader higher level cap stat that we're seeing, specifically the greater than 10% cushion coming down over the last couple of years and also an increase in the 0 to 10% cushion bucket and the liability buckets can you kind of help us think about the cat more broadly, how we think those stats might evolve kind of given the dynamics that we're seeing in Florida? And then also just a little detail on are we at cap risk in other markets.

I'm going to turn it over to Joel. And let me start by saying, keep in mind, in Florida, where we have a down position, I want to end the year with small percentage. I want to monetize as much of that cap room that we created as possible. We don't want to cut it -- we don't want to cut it too close. We want to be -- but I just feel in Florida, we have more control over our density than any other state. So I would -- whenever we talk about cap buckets and what that, I personally look at it, Florida and everywhere else. But Joel, why don't you give?

Let me start with just sort of the specific metrics you were talking about then, and then we'll let Joel talk about the color commentary around it. But in '26, we see again, $9.5 million, which is pretty consistent with where we've been for the 5 or so years before 2025. That's comprised of California, mainly, California is by far the largest. But because of some of the things we learned in Florida, the cap liability in California, actually, Joel and his team did some of the same things to help improve California. So California has actually gotten a little bit better. I don't think we're in a position or we don't think it's going to ever go to 0, but in a very manageable position right now. But there's always. There always has been and there probably always will be some of our smaller programs that bounce in and out of cap based on they're so small in the cap calculation is so sensitive that if in a smaller program, if we lose IPU relationship in 1 hospital, it can have a temporary impact that, that particular program jumps into cap for a short period of time.

And that's what you're seeing is the capital liability in total has not changed. But it's a couple of short -- small programs that we think are currently projected to be in cap, but it's 50-50 and they're very small liabilities. But that's why you see -- the number of programs look like it's going up, but the dollar amount isn't because it's just small programs that from time to time do this, and they always have for the entire time that we've owned VITAS.

Joel to give your opinion. I don't want to color it. Are you that concerned with non-California or Florida?

I have not. And primarily for this reason. We are utilizing all of the very effective strategies that we have lifted up within the Florida CCN in every single potential cap market we have out there. Now if you look at fourth quarter specifically, that's the first quarter of the Medicare Cap year. So you have full revenue, but you -- the fleet is wiped clean on admissions, so you are starting over on a new year. We always see some of the small programs dip into cap in that first quarter of the Medicare Cap year.

We have no additional concerns about major programs out there that will we expect a Medicare Cap billing limitation for '26 that we have not seen previously. And to Mike's point, we've made very good progress in the state of California with our historical programs that have been in Medicare Cap. And we've talked previously about why that happens in California. But the short answer to that, Ben, is that no, we have no additional concerns specific to cap and in fact, we're very happy with the progress we're making and our ability to minimize that billing limitation in CCNs outside of Florida. And as we indicated, with no billing limitation within the Florida CCN.

I appreciate the color. Just a quick one on Roto-Rooter. We also have a lot of questions on kind of how we model this, the margin -- the margin impact on the paid search mix versus the natural search mix specifically that $90-some-odd per lead number that you've thrown out there, kind of how does that look on like on a conversion adjusted basis? Assuming some of those leads don't quite convert or there's no follow-through. Is there a set that we can think of in terms of the conversion adjusted dollars per lead on a paid search?

Sure. So as you mentioned, we paid roughly $90 per lead, and that hasn't changed over the last few quarters. historically and then continuing today, it takes between 1.5 to 2 leads to convert to a paying job -- so you're looking at $150 to $180 customer acquisition cost for a paying job -- on the jobs we do from a pay the lead standpoint. And that's, I think, roughly 60% to 65% of our leads are paid at the moment.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Kevin McNamara for closing remarks.

Well, my remarks are limited to the fact that we had a tough quarter, but there is, at least on this side of the line, abundant confidence that the guidance we make is guidance we can -- we want to hit. We know that it's bad enough to have bad results, but it's even worse to this guidance. And so to the extent that the guidance that's out there, we are very confident. But based on our results in the most recent quarters, I can see why reasonable investors might say, Okay. Forget last year, but how are they even going to make this year? I was going to say that when you combine some of the trends we've talked about and insight, again, we're more confident now than we are on the normal guidance goes for you. But with that, I would just like to thank everyone for your attention, and we'll be back 3 months from today. Thank you.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

All right. Thanks, everyone. This is going to be Chemed Corp. We're very happy to have them participating in our conference again this year. We've got Kevin McNamara, Chief Executive Officer of the company; Mike Witzeman, Vice President and Chief Financial Officer; and Joel Wherley, CEO of VITAS.

Well, we're 10 months into the year, and it's a year that have a lot of ups and downs in it. What would -- maybe just give us a little bit of a thought about how the year has progressed for Chemed? What have been some of the positives? What have been some of the challenges?

Sure. I think at the moment, I think we're very positive and optimistic about the future. The second quarter, particularly this year was a rough quarter for both VITAS and for Roto-Rooter, from a VITAS perspective, and we can get into it, but we're extremely confident that we're not going to repeat the Florida Medicare Cap issues that we had in 2025. Roto-Rooter is a little more difficult story. They've had some intense competition over the last few years, but we think we're getting to a point where we can see the light at the end of the tunnel. And the competitive environment seems to be getting a little better, and we're going to take advantage of that over the next 12 to 18 months.

Okay. Just -- I mean, we always get a lot of people trying to just get up to speed on Chemed unique and diverse business model. You've already referenced it VITAS on the hospice provider, Roto-Rooter. Give us just your high-level overview of the company and the overall growth strategy and maybe the earnings algorithm as we think about that.

Yes. I would say that I'd characterize Chemed is from the point we purchased VITAS, which was 2001, just going forward to the pandemic. We had 2 businesses, 2 service businesses that are very disparate, obviously, in the service they provided, but they were similar in that they both were grinded up businesses, grew by largely organic growth rather than acquisition. The -- both were excellent cash flow businesses. They would -- they grew their net income within a percentage point of each other for a 20-year period, which was a very consistent between 11% and 12% per annum. The growth algorithm was to take that consistent growth. The free cash flow is about equal to the reported net income, and Chemed used that to purchase well over $2 billion of Chemed stock, reducing the share count of Chemed from about 27 million to just under 15 million shares outstanding. And through the magic of that leverage over the 20-year period, Chemed's stock price grew about 18% per annum.

And again, that was -- when you risk adjust that, seeing better because it wasn't dependent on flashy acquisitions or a lot of putting a lot of goodwill on the books. It was just, as I say, 2 grinded out predictable businesses. The pandemic hit, which was kind of interesting and in that it really decimated VITAS in the 20% of its workforce quit, good percentage of potential patients were not available either in nursing homes where there was no access allowed or failure to go to doctors and hospitals so you get a terminal diagnosis. So no question, VITAS was wildly disrupted.

On the opposite standpoint, with everyone confined to their home, Roto-Rooter like most home services companies boomed and had EBITDA margin of in excess of 29%, growing the top line in excess of 10%, balanced out the 2 companies maybe a little bit. But one thing it lost was our consistent growth at both. Following the pandemic, we saw the reverse. VITAS was able in time to replace its workforce to grow back from a -- trying to think of the number from Joel, your low end in census was...

17,000.

Just over 17,000 -- just over 17,000, back to its pre-pandemic levels. Roto-Rooter on the other hand, faced some issues. The boom times in the home services attracted a lot of private equity investment. And that disrupted the Roto-Rooter business, no question about it. It initial stage was they hired a lot of our Roto-Rooter managers. We were able to stem that outflow. But one thing that was a consistent issue following that was the -- on Google. Google advertising, Roto-Rooter went from pretty much the only game in town to bidding with multiple private equity-backed companies across the Google platform in every city in which we operate.

So we've been dealing with that for a couple -- for about 2 years. And again, I think we're getting on top of it. But I guess one way to say is we -- our algorithm for growth is 2 consistent grinded up businesses, good cash flow, reduced shares outstanding. And we're getting back to that now. We're hitting an equipoise with both companies now. I'd be remiss if I didn't say that VITAS' biggest problem this past year was a Medicare cap limitation in Florida, which is complicated. All I can say is if I reduced it to 2 sentences, I'd say, -- we saw it coming. We gave a warning. It was about $19 million of -- ended up being $18.9 million of money we had to give back to the government just not because of billings that were not correct, but just due to this above our limitation. And it probably took 100 points out of the Chemed stock price and well over $1 billion.

So again, we're returning to normalcy. We've already given the adequate information to suggest that we're not looking at a limitation this year that it was a onetime event. So again, that's -- when we talk about our strategy, it's just to get back to the pre-pandemic level and get back to that earnings profile that we had previously.

So maybe, again, for people that are trying to get up to speed, maybe just spend a little -- a minute on the cap issue, why it was sort of a unique thing that you don't think is going to repeat itself.

Joel?

So there's several fronts that came together in the first quarter of the '25 Medicare cap year, which actually is the fourth quarter of the '24 calendar year. So starting October 1, we had an outsized revenue increase, which is the annual increase that each of the providers received. In the state of Florida, it was significantly higher than the average across the United States. So that was one component to it. The other component was during the pandemic, and as Kevin mentioned, given the staffing headwinds that we had faced, we had to prioritize where we were able to deploy our resources, where to focus and more importantly, from a clinical standpoint, how are we going to care for those patients. We did that shifting to what we call the community access initiative, which moved us away from hospitals as a pre-admit location, which typically generate a shorter length of stay patient that also is at a higher acuity and requires more touches.

So prioritizing the staff we had available, we focused on the community access or non-hospitals as a pre-admit environment. As we moved through '24, we continue to see a census improvement at record levels. While at the same time, going into October of '24, we were faced with a couple of components, one of which big rate increase. So we had census increase, days of care increase, rate increase. We also were coming off 2 hurricanes in the state of Florida. We had a lot of disruption in our business, and we saw our admissions not track at the same level as our census. And not to get too deep in the weeds on how Medicare billing for hospice is calculated, that put us in a position in that first month of the cap year that we had to then try to dig out from -- essentially in a very simplistic way, we grew too much, and we exceeded the billing limitations.

So we had to try to get out from underneath that all year in '25, which we were in a positive trajectory. We just couldn't do it enough to overcome the hole we put ourselves in that fourth quarter. We have been focused strategically on our mitigation efforts to ensure that we were not going to be in that situation with a headwind going into Medicare Cap year '26. And we have moved in a positive direction and feel we're in a very good position to ensure that for the Florida provider number in '26, we do not anticipate any liability whatsoever.

What is -- as you're describing it, what is the mitigation factors that you can employ to -- I mean a lot of that doesn't sound like it's necessarily in your control, but...

There's multiple strategies actually. and refocusing and shifting our selling priorities back towards hospitals as a admit environment, shifting away or not focusing as much on nursing homes and ALFs that typically yield a longer length of stay patient. So those variable is you got to balance the length of stay, you length of -- your referral sources led to length of stay being.

Another important issue is that anyone that follows us closely, but our length of stay metrics came down significantly in the third quarter. So those bubble of long-stay patients that we created during the community access program, they're all still hospice-eligible completely appropriate patients. And so we knew that would moderate over time, and it did moderate in the third quarter. So we enter the first quarter of this year in a much better position...

And what I'm going to add is you, I guess, intimated the one issue. It's pretty predictable. If we look at hospital versus nonhospital, we can -- it's very predictable to say what their length of stay is going with longer length of stay, are will be longer, there's more reimbursement during a plan year. Well, we saw, as Joel mentioned, just basically out of necessity, our percentage of our admits from hospitals falling from our traditional rate of, let's say, 42% to 45%, 46% to as low as just under 39%, okay, of our admits were coming from hospitals. So one of the accommodations you make is you make sure you do some of the things that Joel just said, but you make sure that on a run rate, your hospital admissions are in that 42% to 45% rate. And we've already seen that.

I guess I say what gives us so much confidence going into this year? Two things. Number one, we are at that rate and have been for the whole calendar year of 2025, okay? So that's -- we have 20 years' experience saying makes it pretty easy to predict what type of patient we're going to get from that referral metric. And again, going back that to say that's fairly significant, the reimbursement that we got -- the Medicare Cap total goes up by the national average. In the previous year, we got reimbursement in Florida that was 200 basis points higher than that. So our reimbursement went up 200 basis points more than the Medicare Cap limitation. That did not repeat. In other words, we ran all of 2025 to date with running a positive surplus for Medicare cap. We awaited the reimbursement increase, and it was in kind of what we thought, a sweet spot.

In other words, the national average went up only 40 basis points less than what we're getting in Florida. So we're getting more than national average in Florida, but 40 basis points, not 200, coupled with our current run rate and the current run rate of billing and run rate in referral network that is 42% plus rather than 39%. It's allowed us to say and maybe hopefully reassure the investing public that Medicare cap limitation was Florida was $18.9 million on its way to 0, not $18.9 million on the way to $100 million.

Yes. Okay. And I'm going to come back to hospice. But in the meantime, you also highlighted on Roto-Rooter, the issues around increased competition, some challenges there. That's in the Google dynamic. That's something that's been a couple of years, I think, no question about it.

See, the money -- first on the competitive level. First, private equity came into the sector, disrupted the -- our then current operating models. And by that, I mean, we were spending, depending on market, between $40 and $60 per click for getting referrals on Google or sponsored ads from paid search. And paid search at that time probably was about 40% to 45% of our leads were coming from paid search. The rest were coming from the natural or free search on Google, okay? So 2 things happened. I'll really summarize what ends up being a longer discussion when we're in the private meetings.

But 2 things happened. Number one, private equity came in and started bidding a lot more for placement in the paid search. We had to pay more. They were paying -- they were paying much more, let's say, $120, $130 per click, okay? Initially, we matched them paying a lot more. That's a margin issue. But we saw that even with matching them, there were just so many of them that we went from a preeminent position to a less than preeminent position and actually had significant decreases over each of the last 2 years in telephone calls, like the rates for the last 2 years have declined double digit. We're talking about double-digit declines in actual phone calls we received.

On the positive side, what we said is the disruption caused by private equity, that is the real disruption was in the number of paid search leads we were getting. In other words, last year, we tried -- we paid more for click and got less -- fewer clicks or fewer calls. What we've seen in the last 2 quarters is we've held constant at a reduced level of pay per click. We've paid -- we've gotten more clicks. So our actual spending has been up, but we've gotten more from it. Last year, we paid more and got less. This year, we're paying more and getting more, which I think is a pretty good indication that the competitive levels caused by the largely private equity advertising competitors has -- the competition has abated somewhat. And I think we're on top of that. It's always something.

The other thing, if you followed our results, we've said that the other thing we're dealing with is Google is not that excited about giving free advertising to people who otherwise would pay for it. So they've been changing their algorithm gradually, but most recently about halfway through the second quarter of last year to pretty significantly exclude larger competitors from what's known as the map portion of the natural search, okay? I think the most important part of the natural search.

And so the net effect is we're getting more jobs from the paid search, paying a little bit more for them, but getting more and getting fewer jobs from the free search. I mean order of magnitude, there's been a switch. We've gone from 55-45 to 45-55, okay? And that's our meeting so far today, people have said what's our body language for Roto-Rooter. And I guess what we tried to say is we're not out of the woods. We've got a lot of good things going for us. We have a lot of negatives that are no longer negatives, but we're still dealing on the marketing side. We're still dealing with some issues with Google. On the executional side, we've been pretty happy with our close rates and what we're doing when we actually do get the phone call, let's put it that way.

So you're getting the more hits, is that -- can you really see that competition has dropped out and...

Well, let's say, Mike, was the last 2 quarters, our paid search were up 9%.

They're up a little lower -- a little below 9% each of the last 2 quarters. We also know -- we do studies, our SEO has done a study. the private equity competitors who are bidding, they're not showing up on the unpaid section either, right, because they're willing to pay. And so we're getting more -- we're still bidding the exact same dollar amount per click, but we're getting a lot more clicks. It can only -- I think the only conclusion can really be that the competitors are bidding less, bidding less often because they're not showing up on the unpaid search just like us.

And what -- when you think about the economics of the business, are they at a point where they're not making money? I just...

I don't think -- the segments of their money, keep mind that a lot of them are treating plumbing as a loss leader, okay? So to answer your question, as they're competing with us, they're not making much money. I just -- I'll give you an example, not an outlier, not a big outlier. They pay for a click. And let's assume that 45% of their clicks are paid, okay? For that paid click, they're paying on average $120, okay, for a job. They are doing that job for $80, okay? Then they're also paying a plumber to go out and do it. I mean that -- and their thinking behind it is -- I mean, I think every business school would say this is a good idea. I don't necessarily agree with it, but they'd say, all they're looking at is the acquisition cost of somebody who could be a lifetime customer of their HVAC business as well.

So they're saying it's a small price to pay. That's a pretty theoretical approach to a dollars and cents grinded out industry. We'll see how it works out for them. The only thing we can say is that we noticed that transactions in the sector are much fewer and far between. In other words, fewer mom-and-pop plumbing companies are being purchased by these private equity-backed HVAC companies. And also, we don't see the exits from those put together. And I don't know what their investment horizons are, but some of them started a good 4, 4.5 years ago.

Yes, it started in '21, generally speaking, from some of the folks we've talked to in the industry and things, '26 is going to be the year that they need to probably figure out what to do with these businesses. And so we knew or we kind of theorized all along, at some point, they were going to have to go from customer acquisition, top line growth and translating that into actual income to be able to address them up for sale. And I think we're starting to see that. It's not unexpected. As Kevin always says, we're running a marathon, they're running a sprint. We're in this for the long term. I think that '26 is going to prove to be a much better year for us.

Is there enough loss leader? I mean, you have your own history of experience there, is doing what they're doing makes sense because...

I mean we go back to the '90s, Roto-Rooter was fairly active in purchasing and starting HVAC businesses thinking that they were compatible. We did not see the symbiotic relationship developed between the 2 businesses, and we tried it in different fashions. We tried it under the Roto-Rooter service mark. We tried it under a new service mark. We tried it under keeping the original names of the acquisitions. We tried it in different sectors of the company, country and a conclusion at that time, based on how we were doing it, and we think we were -- we had skilled operators handling it. We just didn't see it. We didn't see the long-term benefit from it, and we got out of all. We sold them all. And so our experience suggests the jury is still out at best.

Okay. And the idea of you trying to go in and consolidate this is...

I think that's a good suggestion -- we've had that a couple of times today. There are areas, okay? Just because we failed that it once, doesn't mean that it's an idea that will never come or put this way. There are areas throughout the Southwest, particularly where air conditioning is a big business and it's still -- maybe there's still enough because of the -- not necessarily a desert, but there's still good plumbing businesses. I'm using Phoenix in my mind as an example, where we would have an open mind to at the right price, buying one of these aggregators that maybe is tired of it, but they would still have -- it's one of the most important elements you have. That is plumbers.

To the extent that they hired a good group of plumbers, we can usually find work to keep them busy usually. And would air conditioning be antithetical to us? No. but we don't kid ourselves. We probably have to buy expertise. We don't have the internal expertise to think we can do everything, let's put it that way.

And what type of return profile would you look for if you're going to do a deal like that?

One that had a substantial amount of plumbing, okay? It couldn't just be an add-on. And the one thing we've seen with our plumbing business is, we would want them to have a -- on the plumbing side, the possibility of doing ancillary services. But every point of can do under the right circumstances with water restoration. Hard to imagine in this day and age to have a big success without excavation, at least the way we do it. On the HVAC side, we would like -- we like businesses that were a business at least 10 months a year, okay? We're not in the -- we haven't been in the industry of managing part-time employees or seasonal employees.

Right. So that keeps you in the sunbelt basically. Yes. On the -- going back to the hospice since we are a health care conference. The total admissions were up, I think, 5.6% year-to-year in 3Q ADC was up 2.5%. It seems like we're basically back to nice trajectory for hospice. Is that put aside the cap issue. Do you think we're sort of all the pandemic volatility is pretty much done? And we're -- I mean, it seems like most of the people that have exposure to hospice are showing pretty good trends here.

Yes. I think the fourth quarter, as we've indicated multiple times today, fourth quarter is really going to be a strong indicator for us, but we do believe that we had purposely manage the census growth so that it was not at the previous year's growth rate and that we could then work on mitigating strategically the cap liability. We feel we've met that point, plateaued and are beginning to be able to responsibly begin to grow that Medicare census again.

The admissions exceeding ADC in the third quarter, like you mentioned, that was specifically, as Joel said, as a response to making sure we balance the Medicare Cap. Going forward, I think we'll see admissions and ADC growth going more hand-in-hand...

And what is the market growth now roughly, you think?

Overall growth, I think we have no concern returning back to previous growth rates in the 4% to 5% range. But again, the fourth quarter is going to be a key indicator for us to determine really where we can focus on in '26 from a growth rate expectation.

Here's what -- I'd like to build on how we build that up. We look at what has been the model for the previous 20 years for being Chemed before the pre-pandemic, okay? We've gotten price increase of 3% to 4%, let's say, 3%. We have average length of stay trending up a little bit. Let's use -- we don't like significant increases in that, but good ratable increases of a couple of percent, okay? -- which helps ADC. And you grow admits at 4% to 6%. You put those all together, you're at high single-digit top line growth. And not only is that sustainable given Medicare cap limitations in the various programs, it's a healthy growth rate.

And I say, given its cash flow characteristics and Chemed being a public company, that's kind of all you need for what is -- I mean in Chemed's case, as I already made reference to it, a 20-year period, the stock price was up 18%, pretty consistently, 18% per annum and without taking a risk, right?

Over the longer term, CMS has indicated that hospice probably from a demand standpoint is going to grow 8% to 10% a year because of the baby boomers right now. So there's a chance we could even outpace our historical averages. It's just, again, we need to make sure we balance the short stay and the long-stay patients because we can't get out of balance there. But we could grow top line, like Kevin said, high single digits, maybe even low double digits for the foreseeable future.

And what about the availability of the labor for that? What's happening with that? And what's your wage increases looking like and so forth?

So during the pandemic, we faced significant headwinds from a labor perspective. We, as Kevin indicated, had turnover in the high 20s, instituted multiple strategies to improve that. And going back to March of '23, we're able, unlike a lot of our competitors to add clinical capacity every single month. We have now begin to manage that down a little bit because of the circumstances associated with Medicare Cap, but we are facing no headwinds from a labor perspective. We've absorbed the increases associated with what the pandemic brought forth, but we're seeing those high levels come back to a more reasonable amount. So we do not anticipate a labor headwinds for '26.

Your turnover rate, new hires, those are all sort of consistent with what they would have been pre-pandemic.

Correct.

Turnover rate, I think, is a little better than pre-pandemic. Some of the things that Joel mentioned that we did to address the labor shortage, we continue to do. And I think turnover is they were good practices.

Good employer employee practices, we've just maintained them.

And the average wage increases, something like 3-ish percent or something or...

Yes, this previous year, we were in the 3% to mid-3s as an increase. And we've -- we're selected as a best workplace in '25 in the health care setting. So I feel like we're in a good position looking at retention and where we go then in '26.

And going back quickly on Roto-Rooter on the residential versus the industrial, anything to call out there or...

So commercial, I think, is a real opportunity for us. We're hiring commercial business managers whose only job is to focus on that. But one of the things we like it, as Kevin had talked about some of the pressures with Google and with competitors, our competitors really don't focus on that space. And as a commercial business customer of ours, you're going to get either our general manager's direct dial phone number that you're going to get our salesperson's phone number. And so they don't go to the Internet to try and find us.

So we're doing all kinds of things on both the commercial and residential side to avoid people going to the Internet. But ultimately, we feel like commercial is something we can control with our management activity. Residential, again, we're more optimistic now than we have been, I think, from a competitive standpoint on the residential side. But commercial, I think, has some definite upside in the near and medium term.

And would you look at potentially broadening out the offering there as well or like you're talking about in the residential or stay focused on what you're already doing?

The thing we're broadening out is we only -- at the moment, we have commercial business managers in about 15 of our 51 owned branches. We're going to spend the next year expanding that program to pretty much, I think, almost every branch. And so the difference between the 15 branches that have commercial business managers, the revenue over the last couple of quarters has been up 20% in those 15 branches. It's been basically flattish in the other 36. And so we're going to expand that program quickly, taking advantage of that. And I think there's some upside -- obviously, some upside in '26 as we put more of those business managers on our.

Is that a significant investment? Or is that just hiring people?

It's hiring people, but it's hiring the right people.

It's hiring the right people. I mean you like to say, it sounds like the results are good enough, you should do it next week. The reason it's been successful is because we've hired identified the markets that we think they're more likely to succeed. We spent some time getting the right people, and it's been a big success.

We spend a month or 2 training them so that we don't just send 40 people out to do something that 20 are successful and 20 are not. I mean it's not a huge investment. It just maybe $100,000 a person and then obviously, some commissions on top of that and things.

You get asked this periodically, but it was always described like you did at the beginning that the 2 businesses are grinded out, blocking and tackling businesses. There has been some divergence here in the last couple of years. Does that make you take another look at what to have these 2 businesses together?

Well, the answer is we always have an open mind, okay? If it creates value, that's fine. I think that number one, from one perspective, during the pandemic when Roto-Rooter -- when VITAS was struggling, Roto-Rooter was booming. We get some hedge. Now we get the reverse. Now this year, we had a tough one because even though VITAS was booming, it boomed a little too much and had a Medicare cap limitation, okay? But overall, that's a balance. Now the question is, does the fact that -- does that create any -- is there a loss of value because of the connection. It's something we look at very carefully.

One of the things we mentioned early day when that question was asked, I said, well, look, it's hard to look at comparable valuations for 2 years. Number one, the -- both of these businesses for their sectors are huge, okay? It's a huge stand-alone company. Roto-Rooter is huge and the only national plumbing drink care company. So somebody getting involved, it's drinking from -- getting a drink from a fire hose in some respects. So they're very big. It's hard to look at the multiples paid for a contamination of smaller programs and carry out the same multiple.

The other thing, as I said, I made reference to the fact that we had a major issue with the warning on the Medicare Cap limitation. Stock price fell 100 points, over $1 billion was taken out for something that looks like a onetime event. So I guess my point is now is probably the wrong time to assay the respective valuations and what have you. But having said that, if somebody came in and offered enough money for either company, this is capitalism, at least in this state. So we're -- it would be all for it.

All right. Well, with that note, I guess we'll wrap it up. I appreciate Chemed being part of our conference again. And I hope everybody has a great afternoon.

Thanks, A.J.

Good morning, and thank you for standing by. Welcome to the Chemed Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Holley Schmidt, Assistant Controller. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2025 ended September 30, 2025.

Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 28 and in various other filings with the SEC.

You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated October 28, which is available on the company's website at chemed.com.

I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Jolley. Good morning. Welcome to Chemed Corporation's Third Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions.

Both operating units fell primarily in line with our expectations in the third quarter of 2025. VITAS continued to execute the strategies required to fully mitigate any potential Florida Medicare Cap billing limitation for the government's fiscal 2026 year. Additions in VITAS during the quarter totaled 17,714, which equates to a 5.6% improvement from the same period of 2024. An important metric that we have been tracking related to Florida admissions is the percentage of total admissions that come from hospitals. Our analysis indicates that an appropriate balance for sustained long-term stability in the Florida patient base given the current mix of referral sources is between 42% and 45% of the total admissions should come from hospitals.

During our community access program, this ratio dipped below the preferred range for a sustained period of time. In the third quarter of 2025, this ratio was 44.5%, which represents a high watermark during the post-pandemic period. The ratio has been above 42% for all of 2025. We previously estimated that the consolidated Florida program with 2025 Medicare Cap year with a $19 million billing limitation. We came in slightly better than that with a billing limitation of $18.9 million.

Management continues to believe there will be no Medicare Cap billing limitation related to our Florida program in 2026. As discussed above, the initiative to admit a higher percentage of hospital-based admissions has gained traction, and we anticipate that to continue. We have cleared all hurdles to opening our new Pinellas County location, which is now on track to open in early November. Our new program in Marion County, Florida, which opened in May of 2025 has grown to an ADC of 75 as of September 30, 2020. We project that it could double in size to an ADC of 150 by the end of 2026.

Now let's turn to Roto-Rooter. Roto-Rooter revenue increased 1.1% in the third quarter of 2025 compared to the same period of 2024. Branch residential and commercial revenue were both encouraging with increases of 3.4% and 2.8%, respectively. Revenue from independent contractors continues to be disappointing, declining 4.7% in the third quarter of 2025.

For the first time in several quarters, we saw strength in our residential plumbing revenue service line. Residential plumbing revenue increased 8.2% in the third quarter of 2025 compared to the same period of 2024. A multipronged campaign to target selected high revenue dollar plumbing services yielded positive results in the quarter. The campaign included more targeted focus on specific services, enhanced sales materials for the technicians in the field and more frequent close rate reporting to branch management related to the specific services. We are encouraged by the results of this campaign in the quarter.

Total leads were down 1.3% in the third quarter of 2025 compared to the same period of 2024. This is a nice improvement compared to the trajectory we saw in 2024 and earlier in 2025. As discussed in the past few quarters, the trend of increasing paid leads offset by declining natural leads continues. During the third quarter, paid leads increased 8.6% compared to the same quarter of 2024. The entire decline in leads is in the natural lead category. In my opinion, this trend is both a positive and a negative. While we are paying for more leads causing some margin pressure, we also believe this trend indicates a potential moderation of competition for leads from our most significant private equity competitors. We are monitoring these trends closely.

As Mike will discuss further, Roto-Rooter margins continue to be below our long-term expectations. However, gross margin during the quarter was exactly in line with our guidance. The many operational initiatives discussed in past calls are having positive impacts. The shift from unpaid leads to paid leads was the main driver of the $3.6 million increase in SG&A costs in the quarter. This led to EBITDA and EBITDA margins to be slightly lower than our expectations for the quarter.

We are very encouraged with the performance of both businesses in the third quarter. VITAS is on track to ensure that the Florida Medicare Cap issue is behind us. While still below our long-term expectations, there are signs that the Roto-Rooter business has stabilized and is on the way to returning to a predictable, sustainable growth trajectory.

With that, I would like to turn this conference over to Mike.

Thanks, Kevin. VITAS net revenue was $407.7 million in the third quarter of 2025, which is an increase of 4.2% when compared to the prior year period. This revenue increase is comprised primarily of a 2.5% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 4.1%. The acuity mix shift negatively impacted revenue growth 121 basis points in the quarter when compared to the prior year revenue and level of care mix.

The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 124 basis points. The $6.1 million Medicare Cap billing limitation accrued in the third quarter of 2025 is comprised of $4.6 million for our Florida combined program and $1.5 million related to all other VITAS programs, mainly in California. We came in slightly better than our estimates for the quarter in both Florida and California.

Average revenue per patient day in the third quarter of 2025 was $205.08, which is 298 basis points above the prior year period. During the quarter, high acuity days-of-care were 2.3% of total days-of-care, a decline of 259 basis points when compared to the prior year quarter.

Adjusted EBITDA excluding Medicare Cap totaled $70.4 million in the quarter, which is a decline of 3.8% when compared to the prior year period. Adjusted EBITDA margin in the quarter excluding Medicare Cap was 17.0%, which is 157 basis points below the prior year period. The lower EBITDA margin in the quarter reflects the impact of admitting more hospital-based short-stay patients. The EBITDA margin is within our expectations and guidance.

Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $150.9 million, an increase of 3.4% from the prior year period. This aggregate residential revenue change consisted of plumbing increasing 8.2%, excavation increasing 4.5% and water restoration increasing 6.8%, offset by a decline in drain cleaning of 2.6%. Roto-Rooter branch commercial revenue in the quarter totaled $55 million, an increase of 2.8% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.2%, water restoration increasing 3.5% and drain cleaning revenue increasing 1.2%, offset by a decline in plumbing of 0.8%.

Revenue from our independent contractor declined 4.7% in the third quarter of 2025 as compared to the same period of 2024. Our independent contractors are generally smaller operations in middle-market cities. In many instances, based mainly on resourcing constraints, they have less effectively capitalized on the add-on service segment growth opportunities than our owned branch locations. We are actively working with the contractor group to help mitigate the issues in this segment of our business and get it back to a growth trajectory.

Adjusted EBITDA at Roto-Rooter in the third quarter of 2025 totaled $49.4 million, a decrease of 12.4% compared to the prior year quarter. Adjusted EBITDA margin in the quarter was 22.7%. The third quarter adjusted EBITDA margin represents a 351 basis point decline from the third quarter of 2024. The third quarter EBITDA margin is a 90 basis point improvement over the second quarter of 2025. While below our long-term expectations, Roto-Rooter's third quarter gross margins within our guidance range.

The many field-level initiatives discussed in prior quarters have begun to take hold. The paid versus natural lead generation shift discussed by Kevin drove the $3.6 million increase in SG&A costs and the resulting EBITDA margin pressure. This is the main reason for the slightly lower-than-expected EBITDA margin in the third quarter.

Management reiterates its previously issued guidance of $22 to $22.30 per share, excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items. This guidance assumes that there will be no Medicare Cap related to our Florida combined program for the government fiscal year 2026, beginning on October 1, 2025.

I will now turn this call over to Joel.

Thanks, Mike. In the third quarter of 2025, our average daily census was 22,327 patients, an increase of 2.5%. In the quarter, hospital-directed admissions increased 10.4%. Home-based patient admissions increased 2.3%. Assisted living facility admissions increased 8.9%. And nursing home admissions declined 8.9% when compared to the prior year period.

Our average length of stay in the quarter was 109.7 days. This compares to 112 days in the third quarter of 2024. The average length of stay in the second quarter of '25 was 137.1 days. Our median length of stay was 18 days in the third quarter of 2025, equal to the median in the third quarter of 2024. The median length of stay in the second quarter of 2025 was 20 days.

It's important to remember that length of stay statistics are calculated based on discharged patients, not active patients. The return to a more normal length of stay metric in the third quarter is indicative of the success with our renewed focus on higher admissions from hospital as a preadmission location as previously discussed.

I'm excited about the opportunity to lead VITAS into its next chapter. The new CON in Pinellas County is a significant opportunity for VITAS. We will continue to put our best foot forward when applying for new CONs in the state of Florida. We will continue to focus on providing the best possible care to our patients and their families. That focus will be coupled with getting back to the basics of ensuring that we grow the business responsibly while effectively managing the Medicare Cap.

With that, I'll turn the call back over to Kevin.

Thank you, Joel. I will now open this teleconference to questions.

[Operator Instructions] Our first question comes from Ben Hendrix of RBC Capital Markets.

Appreciate the reaffirmation and guidance with results in line with your expectations. But with the results in both segments falling a little bit below what the Street was modeling, we're getting a lot of questions about the elements that bridge us back to guidance in the fourth quarter. Can you run through in each segment what you're seeing from a demand and cost trend perspective and even from a perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in fourth quarter?

Sure, Ben. I think the biggest sort of distinction is that there's a little more seasonality that we anticipate in the fourth quarter. And so when I looked how you progress the third and fourth quarter, and it was across all the analysts, it's not just you. But the third quarter was a little lower than our internal -- or a little higher than our internal expectations and the fourth quarter was a little lower. So all in all, where you ended up the year was exactly in line with where we end up the year. It's more of a seasonal thing.

When you break it down between VITAS and Roto-Rooter, fourth quarter is always their best quarter. It's when the new rate increase goes in on October 1. Our margin spikes in the fourth quarter from that because our cost structure really hasn't changed from September, for instance, from September 30 to October 1. So we get a pretty nice bump in margin from that. From a Roto-Rooter perspective, they always do better in the fourth quarter and the first quarter. The fourth quarter, it's a weather impact. When it's colder, wetter, Roto-Rooter tends to get more jobs. So it's just a little bit of a change. And I would tell you that the difference is only a couple of million dollars, right, between each quarter. And so it's not -- I don't think there was a huge difference between what you had and what we had.

Right. But now giving you some specifics, Mike, some of the elements that we do expect to improve during the quarter compared to the third quarter.

Sure, sure. So Roto-Rooter is probably the easier one where we talked about some of the things that we've been doing. We expect -- we've talked in the past about some of the issues that we've had from a cost perspective at Roto-Rooter with discounting in the field, with higher commission rates. That improved, as I mentioned in the prepared remarks.

I think our sequential margin improved about 90 basis points, and we expect that to continue. So we're expecting some of the green shoots on the revenue side to continue but also to still improve margins as we go forward into the fourth quarter. And VITAS, I think, as steady as she goes in the fourth quarter from a margin and revenue perspective.

Joel, anything with regard to areas where you see some comparative improvements from the third quarter to the fourth quarter by the results?

Yes. And thanks for the question, Ben. As we have talked about in the previous 2 quarters, we knew that we would have additional marginal compression specific to our shift in strategy away from community access and focusing more on hospitals as a preadmit driving a higher volume of shorter length of stay patients.

However, what we have done to offset that is institute additional efficiency gains internally with labor management, which we are really excited and have effectively put into place as well as going into the fourth quarter, as Mike indicated, is usually a good quarter for us. And as we manage that preadmit environment, and as I indicated earlier, back to a more reasonable length of stay, we're effectively managing the fixed costs associated with that.

And just to give you one specific, how this relates to the results for VITAS. As we mentioned in the third quarter, we shoot for between 42% and 45% is the ratio of hospital admissions. For the quarter, it was 44.5%. To the extent that, that were to moderate closer to 42%, you would expect to see longer stay patients, nonhospital admissions. We'd still be in a healthy range but it would yield more profitable patients. So I mean, that expectation is that 44.5% is a high watermark during a period of extensive scrutiny on Medicare Cap. And just the moderation of that alone would cause the type of improvement we're talking quarter compared to quarter.

And if I could just do one follow-up here. Could you talk a little bit about your receivables? DSO was a little elevated. Just wanted to get your thoughts on how cash collections are progressing and if there's a timing issue there or kind of what we can expect from a cash collection perspective.

That's just a timing issue, Ben. I think it's mainly at VITAS and it's mainly relating to Medicaid, as you might imagine, with all the other sand in the air from a government perspective, Medicaid has -- payments have slowed down, but it's not an indication of any deterioration in our collection efforts or ability to collect. It's just a timing issue.

Our next question comes from the line of Brian Tanquilut from Jefferies.

So maybe just as I think about 2026 with where the Medicare rate shook out. I know you had previously provided some insights into how you were thinking about margins and growth rates for next year. So curious where that stands now and just broadly speaking, without giving guidance obviously, how you're thinking about the growth algorithm for 2026.

Sure. I'll start and then Joel or Kevin can follow up. But we -- well, first, we're only at the beginning stages of our budget process, as I know you know. But I think the fourth quarter, particularly as it relates to Florida and the Medicare Cap, will really inform our decisions on how the operations are going to -- what's the strategy for 2026 and then how that relates to the financial statements.

And the reason I say that is, generally speaking, Florida in the fourth quarter is when we generate essentially all of our cap liability in a year. And then we spend the next 9 months overcoming that. And that's how it's operated -- VITAS has operated since we started -- since we've owned them. We saw that, that number in the fourth quarter last year was a lot -- that liability in the fourth quarter was a lot higher than it has historically been. And so we had to moderate, as we've talked about a lot, to more hospital admissions.

To the extent, and we believe this to be the trajectory we're on, but if that number is much more moderate in the fourth quarter this year, that informs our ability, as Kevin mentioned before, to be able to start creeping back up the long-stay patients and improving both the revenue growth rate and the EBITDA margin. Of course, that takes a little time as well as all patients on the first day are short-stay patients. So over time, we'll build a little more momentum in those long-stay categories to the extent we do it responsibly to make sure we don't have a cap problem.

But the fourth quarter is really going to inform 2026. If I had to say from a high-level perspective, again, a little bit of speculation, but I would say revenue in the 8-ish percent range, margins at the 27.5% to 28% range is what we would think -- 17.5% to 18%, sorry, I was mixing that up. sorry, is what we would think off the top of our head. But again, we're putting the pen to paper now.

Joel, anything with regard from an operating margin profitability that gives you renewed confidence for next year? And I know it's -- you're early in your budgeting process.

So thanks, Kevin. First, I would reiterate what Mike said. The fourth quarter is going to be a significant indicator as to the speed for which we can look at responsibly getting back to active census growth, especially within the Florida market. We are very encouraged by the strategies we put in place, the steps that we have taken, the moderation of the average length of stay from a discharge perspective and all of the initiatives that we have put into place to mitigate any concerns going forward with cap, which then puts us in a position where we can be agile and responsibly get back focusing on census growth in those markets.

I appreciate that. And maybe my follow-up, just to try to keep this to two questions. Kevin, you talked about the improvement that you're seeing in the competitive dynamics in Roto. So if you can speak to that. And then maybe as I go back to your comment about gross margin coming in, in mind. Clearly, G&A is the area, the other lever there. So just wanted to hear your thoughts on improvement performance and opportunity on the G&A line as we think about both Roto and VITAS.

Okay. Well, let's have Mike start with the numbers on it, but I'll give you my overall perspective following that.

Yes, sure. The first question, Brian, is our total leads for the second quarter in a row were up almost -- were high single digits on a paid search basis. The entire deterioration in leads that we've seen is in unpaid search categories. Again, as we talked about that, that creates margin pressure because we're paying for more leads. But ultimately, we are not seeing the competitive pressures for those paid leads that we have in the past. And we find that to be encouraging.

The thing, I think, that gives us a little more confidence even in that is we've seen all other big players in a lot of consumer service areas are also having trouble with unpaid. So it's not as if they're sort of targeting Roto-Rooter. All of the people who are willing to pay for leads are being forced to pay for more leads. And so that would include our private equity competitors and, as a result, we're very encouraged that we're getting the leads that maybe we hadn't been getting a year ago at this time.

I'll give you an example. In the second quarter of last year, roto-Rooter paid more, spent more for Google advertising and all of the Internet. And we didn't -- and it was met competitive response. And the net result was everyone paid more, but there was no change in the balance of leads. That's not what we're seeing now. We're seeing now as we spend more, we're getting more. And it's just up to us and basic economics to make sure that we maximize the utility of that spending.

Yes. And then as far as sort of margin, when we talk about gross margin being in line, they're in line with our expectations for the quarter. But they're not necessarily, as Kevin mentioned in his prepared remarks, they're not in line with our long-term expectations. There's work to do there still. But we recognized -- when we talk about it in the second quarter, we recognized it was a multi-quarter fix on some of those things, particularly some of the discounting in the field and commissions. So while the gross margins are in line with what we expected in the third quarter, there's still work to do there.

Yes. And let me just say it. I'll make a subjective comment here. One of our biggest problems in [ giving ] margin on the calls we are getting is it's pricing discipline. And it's easier to have that pricing discipline when there's enough work to go around. And we're starting to see that. As opposed to being down 10%, it's up 1%. So I mean, it's easier to have the discipline to not discount, to not -- to make sure we get a price that gives us our traditional margin. And again, it's the rising creek that lower leads give you to provide that. And that's really -- it's subjective, but that's what we're really shooting for, for the improvement for 2026 in Roto-Rooter.

And then the last thing I would say, and this mirrors Kevin's remarks on the SG&A line. We're doing what we can to minimize the cost, but it's -- we want to make sure that we maximize the opportunities that are provided to us. And if it means spending a little more on paid search to provide the revenue growth that we think is appropriate, then we think that's a good investment. And we track revenue per lead cost and those sorts of things. So we track that pretty closely. And so we think it's the right use of money to drive top line to spend a little more on the paid marketing side.

And something we've -- it's not enough, but we have been talking about the operational aspects of Roto-Rooter and the internal metrics that is close rate at the call center, close rate in the field. A lot of those operational metrics remain very strong. So we feel that we're poised, if we get the calls, we should make more money from them.

Our next question comes from Joanna Gajuk from Bank of America.

Maybe just to continue on the Roto-Rooter segment. So if I read this right, margin is under pressure because of the marketing costs, right? So how should we think about sustainable margins? I mean, it sounds like maybe that's a new kind of business model. You've got to pay more. So how should we think about -- I know you don't have specifics for next year, but say, over the medium term or longer term, how you think about margins in that business?

Sure. From a longer-term perspective, we think that the right margin -- and I'll get it right this time, Kevin. The margin at Roto-Rooter is 25% to 26% is the right EBITDA margin over the longer term. We're not quite there yet. We think that we should be able to absorb higher marketing costs because of the higher leads and the revenue that they generate. And so there's no doubt that there's going to be continued pressure for the near term -- for certainly the foreseeable few quarters on marketing costs specifically. But we think that they are -- we're able to overcome them with other operational things that we've talked about over the last few quarters.

Yes. Just let me tell you how it works in the real world. When calls are down, the service man goes out, makes a written estimate and it's all or nothing. Essentially, the customer says okay or no. And at that point, there's not another job on the board for that service man to go run to. You can see how he's inclined to say, "Well, what will it take for me to do it?" And that's the discounting. That's where you lose margin.

And to the extent that we're able to get enough leads and get enough jobs on the board for those services, and you can see how that could have a dramatic effect on margin just by having that additional potential work. And it's like a multiplier effect. And again, we're not that far from getting back on an even keel with regard to leads. And when I say even keel, I mean something that's not down double digits. So that's the magic as far as paying a little bit more but still having strong margins.

All or nothing. To the service man, if he cuts $70 off the job, that's at least something for his time. But again it's -- bad business drives out good business, and that's what we're always at war with.

And we've put in some a little bit tighter controls around what the technicians able to do at the door, a little bit higher level approval requirements and things like that. But a learned behavior like that doesn't change overnight. And that's why we knew this was going to be at least a couple of quarters to really fix this learned behavior in the field. And we're pleased with where it has progressed through the end of the third quarter.

Okay. Because like I say, if I look at year-to-date, adjusted EBITDA margin for the segment, about 23% or so. But I guess to get to your full year guidance, that just implies higher margin in fourth quarter. But you also alluded to the idea of like seasonality impact, right? So is that...

Yes, fourth quarter is always the highest.

It's higher margin. Okay. Because it kind of comes out to be like 25% or so to get to, call it, 24% for the year. So is that 24% like a good number to think about as we head into next year in terms of margins?

I think we can do better than that next year. But again, we're working on the budgets now. But I think we should see some margin improvement certainly next year compared to '25.

And then when it comes to top line, right, so it's tracking, call it, 1% growth this year. So how should we think about it? Can this business kind of grow closer to mid-single digits? Is that still kind of on the table? And when would you think we should be able to see that kind of growth?

I think we, again, are in the early stages of our budgeting process. I think we'll see better growth next year than we've seen this year, whether that's 3 to 5, it's speculating at this point.

I would say that's probably going to be our budget. Let's put it that way. Our budget will definitely start in that range as submitted to us, let's put it that way, and then we'll go to more...

Yes. And then with the green shoots we've seen in certain revenue categories, in the third quarter here, there could be upside to that. But we're monitoring day-to-day what's happening in the field. And we're going to put together a budget that we think is achievable but also realistic.

Okay. And switching to VITAS, right? So just to clarify first, so when you said you do not have too many liabilities in Florida under the cap. Is it because you just kind of based on the rate increase, you can tell that, hey, like the delta between the rates in Florida versus the cap increase is much smaller, so that's the reason for staying like liability? Or are you in that statement, you also already assumed like some offsets from these new markets or other things?

Yes. So Joanna, it's not just based on the year-over-year reduction in the rate increase. It actually is because of our focus and strategy within the marketplace and what Kevin referenced at the beginning of the call, which is the overall percentage of our admissions coming from hospital preadmit environment which, as we know, has a tendency to drive a shorter length of stay patients.

So what we saw was, last year in the Medicare Cap year for '25, we had multiple months where our overall percentage of hospital admissions dropped to a record low of our overall mix of admissions. That's what Kevin was referencing, that sweet spot being between 42%, 42.5% and 45%. We are monitoring that on a regular basis. And as we indicated for the last quarter, we were at a high watermark of 44.5%. That's what gives us the confidence in knowing that we are in the right direction to mitigate any cap liability. Then with addition, on top of that, we have the Pinellas opening that we're excited about.

Also don't forget, Joanna, the length of stay has really come back into line, which really indicates that the bubble of patients that we create -- the level of long-stay patients that we created in community access has been moderating as we expected as well.

But Joel -- Joanna, you also pointed, there's no question that last year, the thing that pushed VITAS over the edge ultimately in one fell swoop,was the increase, the fact that the increase was 200 basis points higher than the rate that the Medicare Cap was going to be calculated on. That means that alone was, in retrospect, too much to overcome, particularly in line with the issues Joel just spoke about. And then again, just to reiterate, the fact that we now have the rate increase for the nation and Florida, and it's what we have characterized from our perspective is kind of in a sweet spot. It's up but it's very doable.

So what is that number, if you can share with us, versus the 200 delta in fiscal '25. What is it in '26? .

30 to 40 basis points. The national average is around 2.6% or 2.7%. We've calculated our Florida average to be 3%. That equates to a $3 million or $4 million headwind, which is well within our ability to manage. That headwind last year was $22 million or $25 million.

All right. Exactly. Okay. Exactly, that's what I was looking for. And then so I guess, when it comes to these short stay patients, and it sounds like you're getting better -- you've got better traction and now I guess you're kind of maybe stopping that. Because at some point, you're going to talk about sort of like some pause. as in like there was more competition for these patients. So it sounds like in third quarter, like things have changed to the point where you're now also taking more of these longer stay patients. Is that the way to think about how you describe the situation?

We definitely saw last year that -- as we said, VITAS knew at the beginning of the year that it's an uphill battle. And they've pulled various traditional levers that you would think would have the effect of getting more short-stay patients. That is more salespeople, more effort at the hospital level. And one of the things we observed, it didn't have quite the effect that traditionally VITAS would have come to expect. And one aspect of that was pretty much everybody in Florida got this big increase -- not everybody, I mean, impacted -- that is hospices to do continuous care got that type of 200 basis point increase.

But there were increases in Florida that the hospices that traditionally weren't that concerned with short stay patients became more concerned with them. And the real effect last year was just we pulled some levers that we expected to have some reaction. And given that environment, they didn't have quite the impact that we would have hoped. Those, for all the reasons we talked about, are kind of 2025 issues.

2026 issues for VITAS is to get the hospital admissions, get the first-time Medicare admits, have a reasonable average length of stay. And given the reimbursement environment, we should be back to the position where we don't have the Medicare Cap limitation in Florida. It's just -- it's pretty simple. And maybe it's a lot of work to do those various components. But the conclusion from reasonable assumptions is pretty direct. Joel, anything to add just on that very general observation?

No, I think you're spot on, Kevin. It was the combination of the census growth, with the rate increase that just put us in a circumstance that was at a number where we couldn't get out from underneath it throughout the calendar -- throughout the Medicare Cap year.

And keep in mind, it's just one of those things. Even having said all that, no one likes a surprise $18.9 million hit. But that's still less than 2% of the -- I mean, it's still flying pretty darn close to what would have been arriving on fumes. We didn't quite make it. We're within 2%. So it wasn't a big miss. It was a small miss. But it was -- the problem with it, it was the first time ever and it was a scary specter, a term that we hadn't really talked about in the past, that was Medicare Cap in Florida.

And if I may follow up on the discussion on seasonality, right? So if I did the same exercise that feed us in terms of just like how margins are tracking so far this year and what this impact was fourth quarter, so it sounds like margins, I guess, would need to go up year-over-year, like 50 bps or so to get to your prior, I guess, segment margin pre cap. But they've been down year-over-year. So I guess, what's going to be different? I guess, is this really the kind of the mix of patients you assume you're going to be having more of the tailwind from the long patients?

No, I think it's the things we've talked about already. We get a bump from the rate increase, I think Joel has talked about some of the things they're doing at the SG&A level. If you notice, in the third quarter for VITAS, SG&A actually is down year-over-year. That's going to continue in the fourth quarter. So they're combining rate increases, a little better efficiencies as well as some specific targeted cost-cutting measures.

Joanna, let me make one comment. And we don't give quarterly guidance. But I'd say, we reiterated guidance just yesterday. And Ben mentioned something earlier that as far as was basically wasn't aspirational to be shooting for midpoint of guidance. And I'll just say at this point, no, I mean, we're shooting at the upper end of guidance. We don't think it's aspirational in any respect. And you're certainly right. Most of the questions have been along the lines of, okay, so it is doable. It is -- you are on course. And the answer is not only on course, we think that we're on the upper end of the course.

And if I may, sorry, last question. But since you mentioned sequentially G&A down, but also the gross margin was actually up sequentially more than historically at third quarter versus Q2. Gross margin in VITAS will be higher. But this quarter it was like 220 basis points versus maybe like 100 or something in that range in the past. So is there something that you did this quarter?

I don't think there's anything specific, Joanna. I think it's all the things that we've talked about with Joel talking about efficiencies that they've looked at. They looked program by program and are they properly staffed in Florida, and they made the adjustments when they needed to. So I don't think there's -- I wouldn't call there any specific initiatives or anything I would call out directly other than they're looking program-by-program and managing costs appropriately.

At this time, that does conclude the question-and-answer session. I would now like to turn it back to Kevin McNamara, CEO, for closing remarks.

I just want to thank everyone for their attention to our quarterly report, I guess the next time you'll hear from us is mid-February where we'll both have the fourth quarter and our guidance for next year. Thank you.

Thank you. And thank you for your participation in today's conference. This does conclude the program. You may now disconnect.