Chemed Corp (CHE) September 2026 Conference Transcript

here at Jeffries.

So the next company we have is Kemet. 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 CEO, and Joel Worley, 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, you know, how the second quarter played out and how you're thinking about the back half of the year sure uh let me start by saying that the you know second quarter we increased you know increased guidance it was pretty much as we expect things happened as we expected only a little bit better uh the trends again were solid i mean i would characterize it as um let's start with the tougher one roto-rooter roto-rooter is you know the goal this year was a little more stabilization. You know, it's difficult. I won't bore everybody with the marketing issue. The only problem Rotor has is, you know, the fact that we face 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 two 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 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 um and so we have a lot of plumbing companies scrambling paying a lot more we've gone from about you know fifty dollars a lead to 120 125 dollars a lead on the paid side and there's more companies buying for those but rotaver's done a pretty good job of paying a little bit more money but we're getting the leads you know they're not falling they're getting our top line is growing that's that's the first stage stabilization of the business that is the total number the top line and looking for growth with the top line uh and dealing with margin as we as we fight the battles with uh google and it's again it's it's it's a battle where 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 Rotor business and I characterize it as from an investment standpoint what we want is Rotor to be stable and to get out of VTAS's way because VTAS 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 a billion dollars in value. But, you know, 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. You know, 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 hundred thousand dollars 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. It's steady as she goes. So, I mean, our outlook is just stabilization of Roto-Rooter, get out of VITAS and wait because they're 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, yeah, walk us through some of that.

Yeah. 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 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, you know, 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 two recognitions of expansion of that margin contributed then to restating guidance twice, unprecedented for the organization. In a very positive way. So we plan 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 this seeing benefits from the Florida expansions you had in Pinellas?

Yeah, 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 say, to the extent that those new starts do so well, they create cap cushion. And Florida's all one program for us. And what it really demonstrates is there's plenty of business in Florida on the, you know, there's limitations on, you have to, is 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 zero 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 three that we've gotten over the last three 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 grow as much as you want. like when you have the CON. So what does the demand outlook like if you think of this business for the next three to five years?

I'll let Joel jump in and say it. Other than to say, obviously it's fed by rate increase, which is inscribed in law, okay? And demographics, if you have a good question. And the fact that we are in Florida and down in Florida, it's the best state for us. So all those factors seem to be even more significantly positively impacting our business.

I think as you look at what they have deemed the silver tsunami, by 2030, one in five Americans is going to be over the age of 65. In Florida, that number's one in four. 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 mixed 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 can just walk us through how you're thinking through coding, compliance, and the mix of patients.

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. Capital 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 two 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 two 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 give you just to amplify one of the points that Joel's making about, you know, 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 we verify um as patients enter about seven percentage seven percent of our patients are neurological okay now you might say how do we get to a higher percentage of our patient days you know if it starts at seven percent that is compared to cancer cancer is 26 percent of our okay cancer has it's much more reliable uh diagnosis okay the cancer patient uh about 90 80 high 80s to 90 percent of the patients die within six months of or get out of hospice um so you can see if if uh if neurological has a longer it is less predictable over time you have the legacy patients that accumulate but again it starts from a number of seven percent and as joel says and it could be um we're talking about the super elderly who are with you for an extended period of time it could be that they were that they had an undiagnosed dementia that is an added you know comorbidity you know during the period so again as joel says that's how it happens but it happens to every hospice in the country the number I think in comparison that article was something like 13% nationally that's just the wrong number under any circumstance but I'm happy to say Joel's level of concern about the whole thing approaches zero which is not to 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 department dealing with audits and surveys and what have you. It's an everyday occurrence for VITAS.

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 healthcare 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. You know, 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 four key core values that were established almost 50 years ago now with the organization, and that number one 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 number two 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've 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 him squarely in the eye and let him know that if the life expectancy continues on its normal course it's going to be less than six 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 the culture and 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, we didn't apply for it, but we received $82 million for the federal government as pandemic relief. We used 100%, we took none of it and adjusted net income. We used every dollar to give additional vacation, initially vacation, pay for the, during the heart heart of the pandemic for the the workers and then what was left we put into the uh uh hiring and retention fund it was about about 43 million dollars additional and uh you know as joseph we we jump-started the business on the back end of the pandemic and uh have going been going great since then awesome kevin maybe we'll shift gears a little bit let's go to rooter this time um i think for just talking about vtas so i think your guidance assumes 21 and a half to 22 and a half percent margin for roto rooter for the for the year what 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 real delta the only real variant here on the negative side is marketing costs and again we were 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 we lose more free leads than we're projecting we just go out and get them and that cost 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 um so a bit of a unknown as far as how much market expense will will uh will result um but on the positive side you might say what are the kind of things that we look that we look for that will help our margin well as we said it's not something we laid out in our uh earlier discussions for 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 is, it's a inexact science billing for water restoration and we wanted we wanted high quality we wanted consistency and in our guidance we we put that and that's you know a good contributor to our expectations on margin and I'll tell you given now that we're you know eight and a half months through the year I I would say that you know it's a triple whammy on that in other words we've we by centralization, we have 33 fewer employees doing bidding, billing. Okay? Our billing, our average job size is up more than $300 per job. Our collection rate has improved a percentage point. that's the kind, you know, so I'm going to say, internal metrics of Roto-Rooter on both the top line and and some of those internal operating metrics have been positive with the one wild card marketing. And that becomes, you know, we have a trained 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 percentage, you know, for even dot march 20 uh it's just you know it's a a comparative issue it's a new normal but again there are enough positive things to go to answer your question really is okay are you going to get 21 plus you know and the answer is there's some things going on that are they're positive i mean we have at we've made acquisitions okay which day one are um accretive, even at the, you know, but everyone by definition is a fixer-upper. In Rotorua, when we make an acquisition, and this is true since our first acquisition in 1980, it's a fixer-upper. Okay, but we've, you know, they're accretive day one using the cash that we just buy back a few fewer shares, and, you know, I think we're also getting benefit from that as well.

Maybe, Kevin, just to your point on the Google searches. Your road 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 slash 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 And that's been tough to deal with. Now you might say, is this a permanent one? As long as Google is in charge. I mean, with AI, 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, you know, 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, you know, I mean, I hate to say this to 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 you know we have seen that our it really comes down on the free search to something we call visibility how often do we appear in the call it the map section someplace where 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 you know our visibility historically because it used to be done based on on number of you know positive reviews and propinquity to the customer and you know years years having provided the service and so obviously we did very well in that our visibility was in the 70 plus percentage rates okay they changed the rules of game we felt at low 20s we fought you know we put other efforts you know using some outside contractors we got it up to the mid-30s they made some other changes we felt to the low 20s we've got those back to the to the low And that's what that has yielded results, which I've said has been a return to a kind of a consistency and a new normal, a stable base to grow from.

Thank you for that. So maybe shifting gears here, we've got three 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 a 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, you know, the company is called Barrington. I mean, it's a small firm, a very small firm. They took a position when we were selling in, you know, under $400, a little under half of 1% of our shares. We met with them several times. Very good relationship. uh at the time they specifically said oh boy that they would not recommend separating the two companies for instance they just you know they they just they think everything's 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 uh we said you know we'll have them beat our our nominated committee and uh what happened i i won't now everything else after that point is the 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 you know i mean nothing nobody was added to the board it was getting away from them uh 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 at the you know the entry point had changed so dramatically i think they did not see that happening um and actually we haven't heard a word from them you know since so and i saw recently they're uh announced a situation with bed bath and beyond but uh maybe they've gone to you know greener pastures but no we've never had any discussion that involved anything other than you know would we like to would we like to add a certain gentleman to the board of directors got it um kevin last question for you so as we think of what you think is underappreciated by investors in terms of the chem ed story both in vitas and roto-rooter what would you be uh what would be the message well let me say this let me say i don't know it's your guy's job to come up with what something's worth i i would just say that you go back to uh 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 vtas is is that showed a lot of growth and their the expectation for the future is has never been higher uh the risk associated with cap in florida as we come to the end of the government plan year Joel's looking at excessive 35 million dollars of cap cushion you know so that that's what's being generated under a current mix of business so I mean that's it hasn't been that high in a long time put it that way so that's better than that better than recent events so first thing I'd say is there's a lot to be said that you know Roto-Rooter has stabilized and you know a year ago over 600 it was still you know in a downward slide uh so i would just say you know the first thing is i don't know about valuation but it seems like we were better i don't know why it's as low as it is other than still a hangover for the fact that we did have a big miss get punished for that um but uh i think that the uh you know to the extent that we're The market will reward getting back to our growth of, you know, kind of a very consistent, low-risk, high single-digit operating number coupled with taking shares, you know, out of the market with stock repurchases. I think to the extent that that gets back to being rewarded, I think that's the outlook for the Kevin Stock Press.

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

Thank you so much.