Chemed Corp (CHE) Q3 2026 Earnings Call Transcript

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the KMIT Corporation third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at this time, you will need to press star 11 on your telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to your host, Ms. Holly Schmidt. Ma'am, please begin.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2026, and it's September 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 October 27th 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 date at October 27th, which is available on the company's website at PEMED.com. I would now like to introduce our speakers for today. Kevin McNamara, President and Chief Executive Officer of PEMED Corporation. Mike Whitman, Chief Financial Officer of ChemEd, and Joel Worley, President and Chief Executive Officer of ChemEd's VTAS Healthcare Subsidiaries. I will now turn the call over to Kevin McNamara.

Thank you, Holly. Good morning. Welcome to ChemEd Corporation's third 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. VTAS continues to perform at a very high level. The combination of ADC growth and cost containment, particularly with respect to central support costs, drove significant revenue and income growth at VTAS during the third quarter of 2026. VTAS revenue increased 12.2% during the quarter compared with the third quarter of 2025, and adjusted net income increased 44.7% over the same period. Admissions at VTAS during the quarter totaled 18,995, which equates to a 7.2% improvement from the same period of 2025. Hospital admissions at 42.3% during the third quarter of 2026. As we've discussed previously, 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 that come from hospitals, discuss in greater detail. Admissions from all other pre-admission locations increased 11.1% of our 2025 in our Florida Combined Program. We ended the 2026 Medicare cap year with a cushion of more than $34 million in the Florida Combined Program. We do not anticipate any Medicare cap billing limitation for the Florida combined program in the 2027 Medicare cap year. Additionally, as a result of strong admissions, our Medicare cap billing limitation relating to all non-Florida programs ended the 2026 year approximately $3 million below our original projection. Now let's turn to Rotary. Roto-Rooter. In the third quarter, we're very pleased with the revenue growth generated by Roto-Rooter. Total revenue grew 7.5% during the quarter compared to the third quarter of 2025. Revenue grew across all major service lines in both our residential and commercial businesses. ...to provide information on the impact of our recent acquisitions. However, it is important to note that our same-store revenue increased 5.5% during the third quarter of 2026, which exceeded our internal expectations. Similar to the total revenue growth metrics, we saw strength in all service lines from same-source sales. Commercial business manager reform at a high level. Commercial business manager is in place for the entire quarter, contributing This compares to a commercial revenue increase of approximately 10.9% in their respective branches. This compares to a commercial revenue increase of 4.8% in branches without a commercial business. Centralization of the water restoration, billing, and collection function continues, and has resulted in improved collections. ...improved by $2.9 million during the third quarter of 2026 compared to the third quarter of 2025. Equally as important, average price per job in the water restoration business increased 2.8% over the third quarter of 2025. This is a reversal of the multi-quarter downward trend in average water restoration price per job, and the resulting cost of customer acquisition remained a challenge in the third quarter. Total leads during the third quarter of 2026 were essentially flat compared to the third quarter of 2025. Consistent with trends observed in prior quarters, free leads generated from Internet searches declined 11.8 percent, while paid leads increased 5 percent. During the quarter, approximately 60 percent were paid compared to 56 percent in the third quarter of 2025. This change resulted in increased marketing spending of $4.3 million in the quarter compared to the third quarter of 2025. 5. Roto-Rooter is building revenue growth momentum through improved operations, supplemented by strategic acquisition activity. Roto-Rooter continues to explore every opportunity to contain and potentially moderate marketing costs. Roto-Rooter has demonstrated a long history of growing margins through cost containment, so long as revenue growth is stable. We fully anticipate Roto-Rooter to return to that historic pattern through 2027 and beyond. The performance of VTAS in the quarter and its prospects for the remainder of 2026 and beyond. The combination of the two business units drove an increase of 10.6% and an increase in adjusted deliverable earnings per share of 28.1% in the third quarter of 2026, as compared to the same period of 2025. Additionally, over the first nine months of 2026, the consolidated business generated cash flow from operations of more than $229 million, which, along with minimal leverage, allows us the flexibility to pursue strategic acquisitions and meaningful share repurchases as the opportunities arise. With that, I would like to turn this teleconference over to Mike.

Thank you, Kevin. VTAS net revenue was $457.4 million in the third quarter of 2026, which This revenue increase was driven primarily by a 9.4% 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 25 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 85 basis points. In the third quarter of 26, VITAS accrued $828,000 in Medicare cap billing limitation. This compares to a Medicare cap billing limitation recorded in the third quarter of 2025 of $6.1 million. Average revenue per patient day in the third quarter of 2026 was $209.11. which is 196 basis points above the prior year period. High acuity days of care were 2.2% of total days of care, a decline of five basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare cap, totaled $92.5 million in the quarter, an increase of 31.4% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 20.2%. Scrooge branch commercial revenue in the quarter totaled $59.9 million, an increase of 9% from the prior year period. All lines of business in the commercial sector had increasing revenues during the quarter. Scrooge branch residential revenue in the quarter totaled $158.8 million, an increase of 5.2% over the prior year period. Again, all lines of business in the residential sector had an increasing revenue during the quarter. Adjusted EBITDA in the third quarter of 2026 totaled $48.2 million, a decline of 2.5 percent when compared to the third quarter of 2025. Adjusted EBITDA margin in the quarter was 20.6 percent, which represents a 213 basis point decline from the third quarter of 2025. As Kevin mentioned, cost of customer acquisition continues to put pressure on Roto-Rooter's margin during the third quarter of 2026. Fuel costs increased approximately $1.4 million compared to the third quarter of 2025. We anticipate both cost headwinds to persist in the fourth quarter. During the third quarter of 2026, Roto-Rooter reacquired multiple franchise territories in California for approximately $62.5 million. Collectively, these territories encompass a population of over 12 million people. Prior to the acquisition, this business had annual revenue of between $50 and $55 million. Slightly over half of the revenue associated with acquired territories will become part of our owned and operated branch locations. Two new branches will be established in Sacramento and San Diego, while other territories will be absorbed by existing branches. The remaining locations will become part of our independent contractor operating model. In 2026, the company has spent $96 million to reacquire Road Rooter franchises, primarily in Texas and California. It is important to note that these acquisitions do not have the same high margin profile as our owned and operated Road Rooter branches. The franchisees acquired operate at a much lower EBITDA margin, often in the single digits. While we see a rapid increase in revenue from acquisitions over the next several quarters, it is a 12- to 18-month process to implement the full Roto-Rooter operating model. Rapidly increasing revenue from the acquisitions coupled with lower EBITDA margins at these locations immediately post-acquisition will result in lower overall margins at Roto-Rooter in the short term. Acquiring territories with significant and growing population characteristics is the right thing to do for the long term at Roto-Rooter. Turning now to ChemEd, during the quarter, the company repurchased 125,000 shares of stock for $66 million, which equates to a cost per share of $528.24. Over the trailing 12 months, the company has repurchased 1,235,000 shares of ChemEd stock at an average price of $427.62 per share. As of September 30th, there was approximately $73.7 million of remaining share repurchase authorization under the company's plan. Based on the company's financial results through September 30, 2026, we expect to finish the year at or slightly above the high end of our full year 2026 adjusted EPS guidance discussed in our second quarter 2026 earnings press release dated July 28, 2026. The contribution of each operating unit to that overall EPS level will likely differ slightly from the guidance given at the end of the second quarter. However, we are very comfortable with the overall adjusted EPS guidance given at that time. I'll turn the call over to Joel.

Thank you, Mike. In the third quarter of 2026, our average daily census was 24,428 patients, an increase of 9.4%. In the quarter, hospital-directed admissions increased 5.7%, home-based patient admissions increased 6.3%, assisted living facility patients increased 8.1%, and nursing home admissions increased 9.8% 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 pre-admission locations. We expect this pattern to continue for the remainder of 2026 and all of 2027. High admissions in both hospital and non-hospital settings allows us to responsibly grow revenue while also balancing the patient mix needed to manage Medicare capital. With respect to the workforce, full-time equivalents ran below our estimated totals for most of the quarter. However, to address continued ADC growth, we ramped up hiring in September of 2026. As a result, at the end of the quarter, we are in line with our overall budgeted full-time equivalent metric. 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. We have not experienced issues with our ability to hire and retain qualified caregivers over the past few years. Our average length of stay in the quarter was 103.5 days. This compares to 109.7 days in the third quarter of 2025. Our median length of stay was 17 days in the third quarter of 2026, a decline of one day from the third quarter of 2025. Our adjusted EBITDA margin, excluding Medicare cap in the third quarter of 2026, was 20.2%. We are able to achieve that high margin level through a continued focus on cost control at every level of the organization. As mentioned above, we have been able to operate for most of 2026 at staffing levels below our budgeted levels. This was achieved mainly through enhanced electronic staffing tools, which allowed our managers to more closely manage and flex daily staffing levels. Equally important, selling general and administrative costs declined $2.1 million in the third quarter of 2026, compared to the same period of 2025. We have worked hard to establish a culture particularly related to back-office processes, which ensures every dollar spent is necessary to support our overall goal to provide high-quality care to patients and their families. We believe VITAS is exceptionally well-positioned to capitalize on future growth opportunities. We look forward to executing our strategy 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 to Kevin.

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

Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1-1 again. Again, if you have a question or comment, please press star 1-1 on your telephone keypad. Please stand by while we compile the Q&A roster. First question or comment comes from the line of Brian Tranquillet from Jeffries. Your line is open.

Hey, good morning, guys, and congrats on the quarter. Maybe, Joel, I appreciate your comments on staffing, so maybe I'll start there. As we think about the nursing environment today, what can you share with us in terms of the ability to recruit nurses and increase capacity as demand has been strong on the VTAC side? And also, what are you seeing in terms of wage inflation in light of, you know, we're seeing increases in orders for temp nurses? Yeah, absolutely.

Two things. One, we're not experiencing difficulty in hiring. There may be specific pockets or a specific program that has a greater need than another, but none of which have reached a level of concern associated with our ability to recruit and retain those key clinical positions. In regards to inflationary pressure or wage pressure, certainly I think everyone is experiencing an impact of the inflationary situation that we're facing nationally within the United States. That's no different in health care. However, it has not in any way impeded our ability to hire and certainly not restricted our ability to grow across the organization. So the answer is no issues in hiring and no significant wage pressures that we're concerned about at this time.

And I'd just like to add that, you know, when you observe this over time, you notice that the market for hiring nurses is highly segmented, and that is, you know, we do not compete generally, you know, with the higher nurses away from hospitals on the basis of salary. I mean, if you want to make more money as a nurse, you can make it outside of hospice. Hospice nurses have tended to be a special calling. We compete largely with other hospices for nurses that are familiar with this segment, and every hospice has to have strict discipline. You know, the price increase is, you know, always, you know, a couple percent, and regardless of what inflation is doing, you know, in the short term, and, you know, the market for, you know, hospice nurses, you know, have lived with that reality for some time, and Joel's done a great job in bringing, you know, that. It basically is an iron law of hospice. If you look at VITAS over time, the field level expenses are in the mid-60s as a percent of total reimbursement, and you live within that, or you die. And so we've done a great job doing that.

I just think that we've lived with, I think, for five-plus years the fact that wage increases overall for nurses are higher than the reimbursement we get back, which is, I think, why Joel and his team have really stressed cost containment, particularly in the back office. It helps maintain, if not expand, the EBITDA margin a little bit, even though, you know, the reimbursement isn't necessarily keeping up with our wage inflation.

That makes sense. And then maybe, Kevin, as I think through Roto-Rooter, obviously seeing some inflection here, nice growth, nice same store, and also you've had some acquisitions there. When I think of the pipeline for franchise acquisitions, what does that look like? And then maybe for Mike, just related to this, you touched on how we should be thinking about margins and the ability to grow revenues for these acquired franchisees. If you can just walk us through that dynamic. Thank you.

Let me just start with the pipeline. We always try and de-emphasize that because most of the major meth pollen areas, Rotorua has already repurchased. And, you know, there's a few out there, a little bit, but that, you know, given what's going on in the market, I mean, that's what it's made it possible to make these acquisitions on Rotor. But generally speaking, where the action is in the smaller markets, participants in our independent contractor program, smaller locales that are added to an existing branch for Roto-Rooter. We don't like to emphasize the pipeline other than say, I just signed an RCA for another good-sized one today. Again, when I say a good-sized one, an independent contractor operation. So not that significant. Don't take that as a significant acquisition. But they're still out there, but, you know, it's the type of thing that, as you saw, we were pretty active and made a big one, and it was, what, like 90 million in, you know. For the full year, yeah. But that was big. That was beyond our expectations, and not, you know, you shouldn't extrapolate that and expand that to the future at that level.

A few years ago, Brian, we had done a study, and we estimated at the time we could have spent, you know, if all of the acquisition, franchise acquisition candidates we would be interested in all became available, we could have spent $200 to $250 million at the time. So by virtue of the fact that we spent 96 this year, we've eaten into that some, but there's still a handful of, as Kevin said, bigger acquisitions we'd be interested in, and then the rest of them are smaller, either tuck-ins or contractor operations. Your question about revenue and margin, I'll just give you from the California acquisition we just did. Our first year estimated revenue is somewhere in the $30 to $35 million range, but their EBITDA margin was sub-10% when we purchased them. So we'll add, you know, $30 to $35 million to the top line, say, in 27, but it will add, you know, less than $4 million in EBITDA. It'll start growing, and we'll start integrating it into the Roto-Rooter operation and getting it into that model, but that takes a little time. And that's how most of these acquisitions work. Top-line growth is immediate, and then the EBITDA margin comes, but we're very excited to have a franchisee that had $12 million of population and population density as well, which is important, in locations like San Diego and Sacramento. I know. So I think it's definitely a good long-term acquisition for the company. Just in the near term, it will mute overall margins a little bit. Thanks, Brian.

Thank you. Our next question comes from the line of Joanna Gajic from Bank of America. Your line is now open.

Hi. Good morning. Thank you so much for taking the question. So maybe just to first clarify, thanks, Alain, to your guidance change. So, you expect not to be at the higher end or slightly above your EPS, but you did not specifically comment on the segment. So, maybe you can kind of give us color. You know, it's correct to assume that this guidance raises largely the VEDA's outperformance. I mean, there's also the Rota franchisee acquisitions, so how much is adding to the guidance. Can I help us bridge that EPS guidance based on the segment outlook now?

Okay, I'm going to turn it over to Mike. He handles this, but I'm going to start by saying, obviously, we, you know, the last two quarters, we increased guidance. You know, I mean, we're trying to get out of the business of increasing and changing the guidance every quarter, but obviously, we're trying to send the signal. Yes, we outperformed in the third quarter compared to when we came up with that, the number for the last two quarters. First, we're obviously running ahead, but we've tried to give the indication that, yeah, things are going well. We don't expect a slowdown, for instance, but we don't want to be too specific and get in the business of guiding every quarter. But, Mike, why don't you go ahead and answer, Joanne, we do have some questions, some specifics, but with that proviso, we're trying to get out of that business.

Join us as, you know, certainly from just purely a mass standpoint, right, we gave guidance at the end of the second quarter. We beat the third quarter by about 30 cents. Even if we hit the fourth quarter, just meet the guidance that we've issued for the fourth quarter, we'll be at the top end or near the top end of the range already. Saying that we're going to be at the top end doesn't necessarily need to signal any huge outperformance in the fourth quarter. What we're signaling is, as Kevin said, that given that we beat the third quarter by 30 cents, we didn't want to signal that, you know, we might miss the fourth quarter by 30 cents to get to the middle of the range. We wanted to make sure to signal that we're on track in the fourth quarter for meeting the guidance that we've given. And so that was the whole point. And I think, as you can see from the third quarter results, Rotator, from an income, purely from an income standpoint, came in a little lower than what our guidance was, and VTOS came up higher. And so when we say that the components of how we might get to the top end or above the top end of the range are going to change a little bit, I think that's fairly obvious from the third quarter results. And so that's all we were trying to signal is, and as Kevin said, we didn't feel the need to necessarily regurgitate all of the components and all of the metrics around each one of the operating units.

Okay, and I understand this, but I guess this latest franchise acquisition in mid-September, that's going to add, I guess, a little bit in fourth quarter when it comes to EBITDA. But you said maybe less than four for the, like, annuals. Maybe that's less than one million in Q4 is a good number to think about. So now, I guess, on the photo segment, actually, so just a follow-up of the comment in favor of Mark, I think you said something along the lines of you expect to return to historic growth in 27. So are you talking about, I guess, what kind of growth are you talking about? And is it excluding that impact on the recent acquisitions of this all-inclusive? Help us understand, like, how are you guys thinking about 2027 growth in the world?

We don't have a budget yet for 2027. They're still working on that. So that is more of a high-level comment. I can't give you specifics on 2027. The comment relates to the fact that over a long period of time that we've owned Roto-Rooter, if they can consistently grow top line, they're very good at cost containment and making sure our EBITDA margin is consistent, if not growing slightly quarter to quarter, year to year. So that's what we were talking about there. We weren't giving any specifics. I think it's important to note that, given the marketing headwinds that we're seeing, the fact that we can find other places to get leverage and margin with consistently growing revenue at Roto-Rooter, some of those marketing costs in 27 and beyond.

Go ahead. Let me also add a comment that really springs from some of the questions we've had since yesterday afternoon when we released earnings. I mean, when you look at the rotator numbers and the margin, we're saying, oh, yeah, margin. I mean, the margin has been affected, yes, by every company that has people on the road has fuel costs. I mean, that was a million dollars or a million dollars in the quarter. But generally speaking, it's marketing expenses. And what we're seeing is that it's kind of double-barreled. Compared to previous periods, we're paying Google more per lead. The bidding is going up for the lead. So it's just the price per lead is going up. But also there's a shift that when Google first came into existence, everything was free. Every lead was free. So we've gone from zero to under 40% of the leads we get are free. I mean, that's a big transformation. That begs the question of where do you go from here? You know, what do you expect, you know, as far as erosion in that percentage of free release? I mean, that's a big question, and I think it came through with a number of questions by, you know, people who commented on our earnings release. And all I can say is, you know, we have good thoughts on that. Over 50% of our Roto-Rooter customers are repeat customers. They come to the Internet looking for Roto-Rooter, largely. They're coming looking for the telephone number. Half of them, maybe. It really comes down to the strength of the Roto-Rooter service market. So that's a natural floor to, let's say, the percentage of natural leads that we get, we think. I will say that we've had, recently this quarter, we've seen a, when I say a flattening, we've actually had an improvement in natural leads compared to the prior year's period. So, we have a pretty good thought on that, you know, question, but it's a question, Joanna. If that is over the next a flat or improving situation, yeah, I don't see marketing having, you know, a continued negative effect on our comparative margins. Mike, do you agree with that?

Okay, and to the end, I guess, you know, we hear from some national brands in the residential services sectors, you know, they're simply calling out some negative impact as the consumer is using, you know, their AI tools like CharGPD and such to find just a solution to an issue at the house or apartment. So is that part of what you're seeing already? And I guess is there risk to, you know, vote a brand because of that? Because I guess there's a couple of things, you know, that happens when people use those newer tools because, first of all, you know, they can get a first like a do-it-yourself type of the solution, right? And I guess, you know, price transparency might be also needed when those, you know, models look for information. So can you comment on that? Is this something that you've already been seeing, you know, in your search, in the lead process, I guess, generation?

That's, you know, I would say, Joanna, that's a little bit speculative, but I would say that from a Roto-Rooter-specific standpoint, given that we focus on emergency-level work, when we get calls, it's the much more complicated issues where there's sewage backing up in the basement, somebody needs something to be out there immediately. You know, our bread and butter business is not changing out a toilet or fixing a leaky faucet. Those are the things I think people try and do, DIY, you know, chat GPT kind of searches. That's not our bread and butter. So if that's a trend that, you know, really continues or really expands, could it hurt us on the margins? It could certainly hurt us on the margins, but that's not the bread-and-butter jobs that we do. And so it's a little bit speculative, but we don't see that as a huge headwind going forward.

No, and, Joanne, your question also touches on a subject that, first of all, it touches on a subject because of the fact that, you know, it's something very different than what you're describing. Our average job is $1,500. I mean, we're talking about, you know, some job that involves, you know, plumbing. You know, half our revenue comes from excavation and water restoration. I mean, it's a different type of job than what you're getting involved in to do it yourself. But let me also say, but when I say it touches on an important point, because I think our way out of the conundrum and problems associated with marketing is not so much Google going out of business. We think that Google's stranglehold on the market will abate with AI emerging It's emerging and is emerging strongly, but when you look at the effect of $1,500 on marketing, and if you look at our average price per job, as that price goes up significantly, marketing becomes less of a factor. You know, I mean, to the extent that it wasn't too many years ago, our average price per job was $600, and I think we can have litigation, you know, across all facets of the service industry to some of their predatory activities, but, you know, I think the real answer is, in growing our average price per job, that will be how we handle the marketing issue.

That makes sense. And if I may, last question on that segment. Like you said, you find these franchisees and you see, you know, margins are well below average. So can you help us understand what specifically, you know, these other owners fail to do or kind of how do you plan to bring these margins to the average in terms of, like, some examples?

Yeah, I would, I mean, it's across the entire organization that we acquired. They were not as sophisticated as we are as it relates to internet marketing, for instance. So they've spent a significant amount higher percentage of their revenue on internet marketing to get the business that they got. They did not do any water restoration, and so that obviously comes at a good margin for us. And so there's just a number of things they had, you know, pretty significant back office staffs that we really don't need to replicate. And so there's just a...

Many of us don't have one or a three.

Top to bottom, I think there's ways that we will improve the EBITDA margin. And there's no reason to believe that these locations are any different than any other Roto-Rooter branch location that all, you know, combined average 20.8% margin in the third quarter.

Thank you so much for that. And if I may, on the VITAS, one question, I have security outperformance, very strong results there. So this is great. One question about that contractual allowance. It's a small number, but I guess it is going up, and it's this quarter in particular, and went up again, like $3 million sequentially. So can you help us understand what's right with that, and also do you assume this line item stays at around COVID-8 million per quarter going forward? Thank you.

Because of all of the press and things around fraud and abuse, we saw a very significant increase in activity around reviewing files on a state and federal level across all of our locations across the country. So order of magnitude, we saw roughly 12 to 14 million additional revenue being reviewed by the state and federal regulators. We have a great track record in sustaining any challenges to the revenue. We have great record keeping. We have entire departments devoted to compliance, but historically, there is a slightly higher write-off percentage when files get pulled than our normal write-off percentage on a day-to-day basis, and that's all you're seeing is a bit of an increase in activity around regulators. Whether that continues going forward or not, I think, is anyone's guess. I would say, if I were guessing, that it probably will be sustained for some period of time, but as you said, it's not particularly material to the total.

We probably have a competitive advantage, you know, given that, you know, our products and whatnot are far beyond what, you know, our average competitor, that is a single site.

Yeah, and to Mike's point, though, we have a really, really strong track record of reversal on these claims, but we have to go through the due process, which takes some time. And so from an accounting perspective, we record it. And then we go through the necessary steps in reviewing of the claims. And again, we have an outstanding track record and have no concerns associated with that recent increase. Because of, to Mike's point, the focus from the government and program integrity has certainly increased the number of audits, both pre- and post-payment audits, that we're faced with.

Thanks. I appreciate it for the call.

Thank you. Our next question or comment comes from the line of Ben Hendricks from RBC Capital Markets. Mr. Hendricks, your line is now open.

Thank you very much. Just a couple of quick follow-ups. Kevin, I think you mentioned on the Roto-Rooter side that you had increased actually your number of organically generated leads. I wonder if you'd kind of give us a recap of some of the platforms or programs you have in place to kind of generate those leads internally. Are we working with applications or apps for iPhone apps or AI tools to help generate that and diversify away from Google? Just any comments you can offer on that and where that could go?

Yeah, I could start, Mike, also. But we have an app. And, Mike, what is our total downloads at this point?

It's over 300,000. We receive roughly 1,000 to 1,500 leads a week generated directly from the app.

We have apps. You know, we have, when I say our natural, we'll get them from, you know, for instance, commercial customers that have the commercial business managers, you know, direct line. We get them from largely the Maps section of Google. And generally speaking, it could be from a sticker on a water heater that we replaced with our telephone number that does not go through a Google click. So they're multifaceted, but basically they're everything other than somebody going to Google and clicking on one of the paid ads. I mean, the type of thing that Google makes is tough is they make it so it's hard for a defined listing on Google. There's three sections of paid advertising before you get to that type of information. I mean, if you search Roto-Rooter Plum, you'd be viewing seven or eight competitors before you had the telephone number for Roto-Rooter, And there would probably be a map section with a paid Roto-Rooter. We wouldn't have a paid ad to the extent that Google now has rotating paid ads in the map section. We don't have any control over that, where those appear. So, you know, that would very likely, again, our customers have to do, you know, a dance and go through a maze in order to find it on a basis, but we find that they still do, and they're still looking for just Roto-Rooter. Sure.

Yeah, and even if they're – so, you know, they would click down a page, and the first two or three places they would see Roto-Rooter are still paid, some level of paid search. And so even if they're looking for Roto-Rooter, they don't distinguish, certainly, between paid and unpaid. They just click the first one available. So I think that's part of what Google is forcing with the way they've organized their search page. But the other thing that I definitely think we see, it's a little harder for us to track. We certainly believe that the number of leads we get from AI searches is increasing. It's hard for us to track because all the AI search engines do at the moment is scrape information from anywhere in the Internet. So we're not exactly sure where the phone number was obtained from, but we know that those are free leads as well. So it's a slow slog, but, you know, I do think that we'll continue to expand free leads. Unfortunately, Google is still the elephant in the room, at least for the near term.

And I want to emphasize that certainly our goal is to have the lion's share, never 100%, but the lion's share of commercial business come other than from Google. And that's, of course, part of the road to business. And that gives us, you know, a lot of hope for stability with regard to this.

One more on VITAS side, and just to follow up on the line of questioning around the recruiting costs. Just, I know you guys are still working on your plan for 2027, but we're getting the question. So any way to think directionally about kind of recruiting costs this year versus next? And should we expect some kind of acceleration in recruiting expenses next year? Thanks. Hey, Ben.

No, we do not anticipate any material increase in recruiting costs as we look forward to 2027. Our teams do a great job of proactively managing where we have staffing needs and responding accordingly.

Thanks, guys. Thank you.

Again, ladies and gentlemen, if you have a question or comment, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of A.J. Rice from UBS. Mr. Rice, your line is open.

Thanks. Hi, everybody. Maybe just first on the VITAS side, obviously strong growth there. I wonder, when you drill down, is that your sense of you're consistent with overall market? Are you picking up share? I know you've got a couple new markets in Florida that you've opened that may be contributing. I know the discussion around fraud and abuse, is there any movement of referral sources toward you because people feel more comfortable with your compliance programs versus a mom-and-pop? I wonder if you could just comment on what you're seeing in your growth numbers relative to what you think the underlying trends are.

Yeah. Thanks for the questions. First, we had a very balanced quarter as you look at growth, both Florida and non-Florida, across the company. Although I will speak to your latter question, which is, have we seen an increase specific to any concerns associated with waste fraud and abuse, potentially with other providers? We continue to see strong growth in California, specifically Southern California. And so, yes, we do believe there has been a migration towards a more stable, trusted partner as it comes to end-of-life care in those markets, and we have benefited from that. We continue to support the government's oversight with program integrity and their desire to weed out fraudsters within the industry. One thing I want to comment on, and that we're working very closely with CMS on this, is that we want to change that narrative from discussing waste, fraud, and abuse to access for those in need. Recognizing only a little over half of the Medicare deaths in the United States actually get the benefit from the Medicare hospice benefit. There is a lot of education still to be done and a lot of access that needs to be created. So we feel good about our balance growth. It's not just been in our new starts in Florida. It's been across the company, and as regards to California, we feel really good as the largest provider across the state of where we're positioned and the growth that has occurred out there.

Okay. Maybe also on the Roto-Rooter side, I know a lot of the discussion has been about the headwind on the margin side that the paid leads and all the dynamic of how the referral sources have changed over the last few years. I wonder, when you step back, do you think, because you maybe are in a better position to fund that, is it helping you grab share? I don't know whether the 5.5% same-store growth revenues that you're reporting in Roto-Rooter, is that, do you think, market, or do you think you're picking up share because of some of the changing dynamics in the business?

I think there's a little bit of that, but the countervailing force is I think we're seeing a little bit of panic by some of our competitors. And when I say panic, I see them increasing their bids for placement on the paid search to the extent that things get tougher. They have a company that has very little name recognition in their markets. Relatively, well, compared to Rotor, and we see them as they are, because they're largely big competitors, we're seeing, and, you know, because they're advertisers, it's kind of counterintuitive, but Google is discriminating against any company that advertises, because they say, well, as long as you're big enough to advertise, and you're going to be forced to have that be your only outlet for getting leads. I see them possibly panicking a bit. We saw during the quarter that are part of what we call the margin pressure associated with marketing. I think stage one is that market erosion, and I think a little bit of that is coming to us. We expect to be even more successful with regard to market share. I mean, it's also another comment that there are very few markets that we aren't, you know, significantly larger than our competitors. You know, there's some. Again, so it's a little bit like VITAS in Florida. Right. It's hard to talk about them get improving market share when they, when some of the counties, VITAS might have, you know, 75% of the Medicare deaths associated with entered hospice, you know. But I think you're making the right point. I mean, Roto-Rooter has, I think, some advantages in adversity. I mean, to the extent that, again, our average price per job is much higher. It makes our marketing cost per job lower, obviously, just arithmetic. It, you know, our resiliency of our service mark is strong. The time that we've been in each one of these markets has been since the 1940s. I mean, we have a lot of advantages. Google's doing everything we can to make it tougher, but we have good thoughts for Roto-Rooter, but we don't want to ever send the message during this period that there aren't headwinds. We've talked about the headwinds of, you know, gas prices aren't going to improve any time in the next couple of weeks. We're trying to get, you know, better in dealing with them, saying, look, if we can grow the top line, you know, it's like a rising creek covers a lot of stumps, and the creek is rising, and now it's our job just to navigate the stumps.

I would just add, AJ, that much to our disappointment internally as well is there are not great statistics in the overall plumbing industry, market share, and overall size of the industry and our part in that. What I would say is 5.5% growth is higher than what we would historically see in the overall industry on a year-to-year basis. So I think we would conclude that, at least to some degree, as Kevin would say, we are taking market share in our branches. We know with certainty, as evidenced particularly by some of the things we've talked about, our own contractors, as well as the very motivated seller we just bought their business from California, we know that smaller, less sophisticated plumbing companies are really struggling in this environment. It's a difficult environment, and as Kevin has talked about, it's a pretty sophisticated marketing problem to navigate our way through. So I do think we're taking market share from some of the smaller players, and we'll see. I wish we had better statistics on how that all worked.

No, no problem. I might ask one last question. On the prepared remarks, you made the comment about, obviously, the capital structure is strong. You're positioned if strategic deals come along to take a look at it. It sounds like in some of the earlier discussion, the main focus is on potentially buying out some franchisees, but I didn't want to leave it without making sure. Is that what you're talking about when you're saying you have the capital strength to consider strategic deals, or is there something broader than that that you're referencing?

I think at this moment, we're more focused on the type of deals we have made this year so far, reacquiring franchises. Maybe Joel will find a single location or smaller multi-location hospice in a place we like. But I think we're focused on building the two brands that we own. Kevin and I and some of the other executives talk all the time about the potential for third legs of the stool at the company, but ultimately, that's a pretty high bar for us from an investment standpoint to make. But it's not that we ever rule it out. It's just we have pretty high standards when it comes to thinking about potentially expanding to a new product or service line altogether.

Yeah, I would say if you talk about in terms of – I agree 100% with what Mike said, that nothing – certainly nothing's imminent. I would say much – if you talk about probability, you know, the type of thing we look at just regularly is another service line of Roto-Rooter. I mean, you know, we've certainly been in many other service lines. A lot of questions like, would we ever consider getting back into the HVAC? And we think in certain geographies we would. We think there are struggling HVAC companies in some of the geography that we would like to be in. The first time we were in it, and this was in most of the 1990s, we just didn't see it helping our plumbing business very much, or vice versa. But maybe, you know, things change. But, I mean, I'd say that's a lot more likely to an additional service line at Rotorator than it is a completely new business.

All right. That's great. Thanks so much. Thanks, AJ.

Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.

No, closing remarks are just thanks, everyone, for their attention, and appreciate all the operating units for excellent results.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.