Earnings Call Transcript - CHE Q4 2025

Operator, Operator

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

Holley Schmidt, Assistant Controller

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, which 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 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 (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.

Kevin McNamara, President and CEO

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 two 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 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 of 10% over 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 two 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 throughout 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 are 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 on with respect to water restoration billing and collections should provide a $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 the underlying long-term growth outlook for Roto-Rooter. With that, I would like to turn this teleconference over to Mike.

Michael Witzeman, CFO

Thanks, Kevin. VITAS' net revenue was $418.8 million in the fourth quarter of 2025, which is an increase of 1.9% 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 by 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 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% compared to the prior year period. 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 2025. 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 by $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 2025. 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 may also cause some marginal drag in the first half of 2026. 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 focus. 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 $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.

Joel Wherley, CEO VITAS Healthcare Corporation

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%, 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, one 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 2026, 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 average daily census pressure and lower margins, as previously mentioned. However, in the first roughly 30 days of any patient’s 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 certificate of need to operate in Manatee County, Florida. As Kevin mentioned, this represents another opportunity for significant growth over the next few years. This is the fourth certificate of need awarded to VITAS over the past two years. The previous awards in Pinellas, Marion, and Pasco Counties have met or exceeded our expectations. Currently, Marion and Pasco 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 certificate of need 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 certificate of need 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.

Kevin McNamara, President and CEO

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

Operator, Operator

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

Joanna Gajuk, Analyst

So I guess, first, a couple of questions on the Roto business. Thanks for the details around, I guess, different issues happening at 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 by 3% or so in '26 after revenues were pretty much flat in '25?

Kevin McNamara, President and CEO

Let me begin, Joanna. To provide some context, we revised guidance at the end of the second quarter last year, noting challenges at Roto-Rooter. At VITAS, we were dealing with potential Medicare cap liability in Florida; we indicated that we needed to adjust our mix of hospital admissions and community access. We made those changes and, by the end of the third quarter, our calculations showed us pretty much in line with our guidance. It might have been slightly lower than analyst expectations, but that was mainly due to seasonal factors. In the fourth quarter, we had a significant miss of $0.70 per share, which raised questions about how we would meet our guidance. Now, addressing your question, let's focus on Roto-Rooter. Roto-Rooter is undergoing a transition, primarily shifting from relying on free leads from natural search to paid leads. Google has optimized its algorithms, which negatively impacts our natural search leads. We observed some improvement in paid leads, which have grown nearly 10%. Unfortunately, natural leads decreased by a similar amount, leaving our total leads flat. Consequently, we expected sales to remain relatively stable but to improve as we moved into the next year. However, we encountered challenges with water restoration due to various decentralized billing practices and insurance companies tightening their payment processes, which affected our revenue collection rates and overall profitability. We believe this situation has stabilized, and while we don't anticipate returning to 2023-2024 levels, it should be better than 2025. Looking at Roto-Rooter's numbers, the paid search continues to grow. Our cost per lead has risen to $94, compared to essentially zero before, but as long as the business remains stable and shows growth, that is acceptable. We also need to consider why our natural leads were significantly affected last year. Most natural leads come from Google's map section. In October 2024, Roto-Rooter was visible on the maps 72% of the time, which dropped to 24% shortly thereafter. This drastic reduction in visibility was reflected in our leads and sales, creating a tough period for Roto-Rooter. Looking ahead to 2026, we see continued improvement in the paid lead side and some recovery in our visibility due to internal changes and our AI-driven natural search efforts, which has increased our visibility to about 35%. This improvement gives me confidence that Roto-Rooter's revenue growth will follow suit. The integrity and quality of Roto-Rooter's service remain intact. Additionally, Mike noted that the pace of repurchases of other franchises is accelerating, which adds confidence. This leads me to believe that Roto-Rooter sales this year will surpass last year's figures. It's also important to highlight the overall strength of the business, particularly regarding VITAS and its Medicare Cap cushion in Florida, which has improved our position by about $28 million, possibly even higher now at around $35 million. The question is whether VITAS can grow its census to leverage that cushion, and as we've mentioned, they are performing beyond our expectations. The lower margins and sales we experienced in the fourth quarter were essentially temporary, as we were utilizing resources from last quarter to support anticipated profits and revenues for this year. Those are some key points regarding what appears to be a significant miss in the fourth quarter.

Michael Witzeman, CFO

Just to summarize, particularly for Roto-Rooter, Joanna, I would characterize our confidence in the 3% to 3.5% revenue growth in 2026 based on three specific things. As Kevin mentioned, some changes we've made to change the lead trajectory, hopefully, providing some organic growth. 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, we’re going to recover maybe half of that this year. So that's a $5.5 million tailwind. Those are the three very key components of how we get to the 3% to 3.5% growth.

Joanna Gajuk, Analyst

Great. Regarding the margin for the segment, there are factors affecting it, and you provided guidance for 2026. In the last call, you mentioned aiming for 24% margins for that year, but clearly, that won’t be achieved. You also indicated that, in the long run, this business should aim for margins of 25% to 26%. Are those targets still valid, or should we be considering the business in a different light?

Michael Witzeman, CFO

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 in revenue growth, I think the 24% to 25% is still achievable. I don't anticipate the marketing costs to improve dramatically. And so we need to really 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 as it had been in the past because of the marketing, the additional marketing spend. The other thing I would mention, and I think it's obvious to you, Joanna, you followed us long enough. We are not too far away from where our margins were pre-pandemic. The 24% to 25% we've talked about is higher than the historical Roto-Rooter margins. So we're right now pretty close to what the pre-pandemic margin is. We need to drive some top line and get some leverage from that.

Operator, Operator

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

Brian Tanquilut, Analyst

As I consider VITAS, I recall that in past calls you provided some insight into your expectations for top-line growth. In the guidance you released last night, however, it is below the previously indicated range. I'm curious about the difference there and how we should view the progression of VITAS's revenues and EBITDA throughout the year.

Michael Witzeman, CFO

Yes, certainly. From a top line perspective, which relates to your second question about the timeline, we currently have a patient mix for the second half of 2025. We are focusing on short-stay preadmission locations, primarily hospitals. Long-stay patients typically contribute more to revenue growth and EBITDA margin growth. We need to rework the admission pattern. By doing this, we expect to return to a normalized growth rate, which we believe will be in the range of 7% to 9% for top line revenue. We'll achieve this, but it will take time as it will build throughout the year. Initially, every newly admitted patient within the first 30 to 45 days are short-stay patients and result in negative margins for a while. However, they will transition into long-stay patients eventually. In the first quarter, we will continue to see a high number of short-stay patients, regardless of the preadmission location. So this growth will accumulate over the year. That’s why in 2026, the revenue forecast is slightly below our target range, and the quarterly progression will see muted revenue in the first quarter, followed by growth and normalization in the second through fourth quarters.

Kevin McNamara, President and CEO

Let me add one more point. When discussing revenue at VITAS, it's important to focus on ADC. If VITAS can increase ADC, their revenue will also increase. They have a significant opportunity in Florida to target longer-stay patients, which is crucial for growing ADC. It takes ten short-stay patients to match the contribution of one medium-stay patient in terms of ADC. However, VITAS is already progressing well in increasing their average daily census in Florida and beyond.

Brian Tanquilut, Analyst

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 or 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 Roto 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 ...

Kevin McNamara, President and CEO

Certainly, over the last seven quarters, what you’re pointing out has been evident. We have had to adapt. A couple of major factors have played a role during this time, particularly the influx of private equity into our sector, which has had a noticeable effect on us. We had previously attracted branch managers with the promise of significant earnings, but that has changed. Some of them have realized that expectations were unrealistic, and they have returned to our company. Additionally, the pressure from competitors offering services at below cost has disrupted our paid search model, leading us to pay more per lead than we did two years ago. However, we’ve maintained the same expenditure over the last three quarters, indicating that the situation isn’t deteriorating further. In fact, we've seen a 10% increase in each of the last three quarters, which I believe means the threat from private equity has largely decreased at this point. Regarding changes in the plumbing industry, private equity firms typically have a different timing strategy; they aim for rapid growth and quick returns, which makes them fierce competitors. They often treat HVAC services as a long-term relationship with the customer, which poses challenges for plumbing companies like Roto-Rooter. While dealing with these factors, I wouldn’t characterize Roto-Rooter as facing a long-term issue due to private equity. However, we are navigating a transition with Google. Previously, we sourced over 55% of our leads from organic search, but that has now decreased to just over 40%. It's important to recognize our dependence on Google, and we hope to see gradual improvements in this area. To summarize, despite the challenges, there’s nothing fundamentally wrong with Roto-Rooter; they are simply facing a difficult phase, particularly with the cost of leads that were previously free.

Michael Witzeman, CFO

Brian, I would like to add that there has been considerable discussion in the industry, including the plumbing sector, about its resistance to changes driven by artificial intelligence. We firmly believe that plumbing and the industry at large have not experienced and are unlikely to undergo significant changes in their overall viability. Regarding your question, 2026 is the year when Chemed management and Roto-Rooter management will demonstrate their ability to adapt and return to a more profitable and sustainable growth level for Roto-Rooter.

Kevin McNamara, President and CEO

Let’s put it this way: it comes down to leads. This past quarter, despite the difficulties, our total leads remained flat. Unfortunately, there was a shift between paid and unpaid leads, but total leads stayed the same. From these leads, we are increasingly enhancing our ancillary services, specifically excavation and water restoration. If you ask how Roto-Rooter continues to grow, it's by improving leads slightly beyond flat and expanding the ancillary services. Historically, our goal for Roto-Rooter has not been double-digit growth; instead, we aim for top-line growth of 7% to 8% with profit margins of 24% to 25%, depending on the seasonality of the quarter. With this cash flow, we have achieved, prior to this year, over the past 21 years, during the time we owned both VITAS and Roto-Rooter, an annual net income growth of 11% compounded.

Operator, Operator

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

Ben Hendrix, Analyst

Starting with VITAS, I appreciate the insights about Florida Cap and the dynamics in the fourth quarter. It's helpful to know that there is no capital liability in that state, but we are receiving numerous inquiries on how to reconcile this with the overall higher cap statistics, particularly the significant decrease in the greater than 10% cushion over the past couple of years, along with an increase in the 0 to 10% cushion and liability buckets. Can you help clarify the broader cap perspective and how those statistics might change considering the current conditions in Florida? Also, could you provide some details on whether we are at cap risk in other markets?

Kevin McNamara, President and CEO

I'm going to hand it over to Joel. To start, I want to emphasize that in Florida, where we have a lower position, my goal is to finish the year with a small percentage. I aim to utilize as much of the available cap space we have created as possible. We prefer not to get too close to the limit. However, I believe that in Florida, we have more control over our outcomes than in any other state.

Michael Witzeman, CFO

Let me begin by discussing the specific metrics you mentioned, and then we'll allow Joel to provide additional insights. For 2026, we project $9.5 million, which aligns with our performance over the past five years before 2025. This figure is primarily driven by California, which remains our largest market. However, based on lessons learned in Florida, Joel and his team implemented strategies to enhance our position in California, leading to some improvements there. While we don't anticipate reaching a zero liability, we believe we're currently in a manageable state. There will always be smaller programs that fluctuate in and out of cap due to their size, and the sensitivity of cap calculations means that losing a relationship with a key hospital in one of those smaller programs can temporarily push it into cap status.

Joel Wherley, CEO VITAS Healthcare Corporation

We are implementing all our effective strategies from the Florida CCN across every potential cap market. In the fourth quarter, the first quarter of the Medicare Cap year, we have full revenue, but admissions reset, so we are starting fresh for the new year. Typically, small programs experience a dip into cap during this initial quarter. However, we do not have concerns about major programs facing Medicare Cap billing limitations for 2026 that we haven't encountered before. We have made significant progress in California with our historical Medicare Cap programs. In short, we have no additional concerns related to cap, and we are pleased with our progress in minimizing billing limitations in CCNs outside of Florida, with no limitations in the Florida CCN.

Ben Hendrix, Analyst

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 marginal 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. 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 paid search?

Kevin McNamara, President and CEO

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

Operator, Operator

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

Kevin McNamara, President and CEO

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 want to hit. We know that it's bad enough to have bad results, but it's even worse to miss guidance. 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 to be honest with you. But with that, I would just like to thank everyone for your attention, and we'll be back three months from today. Thank you.

Operator, Operator

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