Chemed Corp (CHE) May 12, 2026 Conference Transcript

Hello everyone. Thanks so much for joining the Bank of America Healthcare Conference. And my name is Joanna Gajuk. I cover healthcare providers at Bank of America. And now the session we have planned is with Kemet. It's a very interesting company because it's partially healthcare, but partially non-healthcare. So we try to hit on these other topics as well. And today with us, we have the entire team. So we have Kevin McNamara, who's the CEO. We have Mike Witzman, who's the CFO. and so are looking at joel rarely who's the ceo of vita so we're going to talk about vita's first to put you on the spot but then i want to touch base on the other business as well because there are a lot of questions still floating around around that business um but i guess in when it comes to the hospice operations florida cop was an issue sounds like you guys you know doing much better on that front um and you know you did raise your uh census growth outlook for the year Right. So kind of, you know, the question is, what gives you confidence you can go census and manage the Medicare cap in Florida, given the, you know, the prior experience?

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

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

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

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

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

but we also want to make sure access is not restricted for those in need so just following on that comment um so you worried about access being restricted for the patients and um would this be opportunity for you to take some of these patients so this actually could end up not being such a bad situation for VDAS in particular?

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

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

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

And, Joanna, we were a little conservative at the beginning of the year with our guidance because we weren't sure how quickly Joel and his team could, you know, reverse the trend and start taking in those longer stay patients. And so we were a little conservative when we issued the original guidance in February. Joel and his team, as he said, have done a spectacular job of really accelerating the growth of that segment of the business. and that's evidenced by we had our first quarter we had guided to essentially zero ADC growth or flat ADC we actually grew at 2.2 percent and that that actually builds on itself as the year goes on with the long state patients and so that's why we felt pretty comfortable not only expanding the top line in our guidance but also the margins as well and I guess it ties to my other question around how we should think about VDAS growth outlook say you know beyond 26 right is there some things that changed how you're looking at things because obviously there was a period of very fast growth in that segment when it comes to census at some point growing you know high single digits to you know double digits right so can you get back to that or should we think more about kind of like mid single to high single digits census growth being the kind of normal target growth so i think i mean joel i'm sure he has comments as well i think purely from a demand standpoint or from the market standpoint we could certainly grow the business double digits um in the near future with the with the demographics of the country and the things the people who are going to need access to hospice over the next three to five years the medicare cap is what really limits that growth so we think really a sustainable responsible way to grow the top line is more in the 8, 10% range. And of that, of course, 6 to 8% comes from ADC. The rest comes from reimbursement.

You covered that well. Thank you. You know, national data is that by 2030, one in five Americans is going to be over the age of 65. The growth opportunity is there. And specifically in the state of Florida, that number drops to one in four. so there is going to be a lot of opportunity to impact the quality of a patient and their loved one's final journey however long that journey might be whether it's a short length to stay or long length to stay and we're well positioned to be able to handle that increased capacity and another I guess piece of the road story could be external growth around just acquisitions so you You guys did something, you know, that was, feels like a while ago, right?

And then since then you've been adding these de novos and CON approvals in Florida, but kind of, you know, what's the latest thinking around just doing maybe more acquisitions in that segment?

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

We'll continue to look, as Joel said, at M&A opportunities. But it'll have to be in the right location. It'll have to be at the right valuation. We're going to be very, very selective. If you think about in a hospice business, what are you really buying? You're buying a referral network. You're not really buying patients and you're buying an employee base and you're not contractually, they're not contractually obligated to you in, you know, neither the referral network or the employee base. So what you're buying is you have to be careful.

You have to be careful on valuation. we like really the de novo route to the it's a much more efficient use of our capital we the uh there's acquisitions in the state of florida and outside of the state of florida and you know any county um that we don't have we're an active participant in um in any other state as there's a few exceptions for a few con opportunities but in the other state we're looking at acquiring um businesses as mike says this there's you know not a lot of bricks and mortar there's you know the most valuable item referral network you can't tie up legally um but they're also probably you have to look at you know the expectation of how large they could be And VITAS is a full-service hospice with four level layers of care has a higher break-even. I mean, our break-even in a hospice program might be higher than their largest, you know, the largest program in some of the acquisition opportunities that are out there. So it's just, you know, I'm not demeaning their efforts. It's just the one thing to be in a major metropolitan area and another to be on the periphery or even in a rural area that you can't have the expectation of the cost associated with a full-service hospice. So people ask us about acquisitions over the decades, saying that here's one. And we say, yes, we were interested in three of their programs, but not the other 17. We'd lose money on the other 17. So that's the nature of the game.

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

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

We have not experienced staffing concerns in our ability to open up and begin an operation in other locations. You know, we do have a different model as we approach, and it's been one of the, especially in the state of Florida, one of the significant benefits is we come in fully staffed and we go all in. as compared to some of the competition that kind of pays as they go they add staff as they grow we come in with our full staffing model so that there aren't any unmet expectations from day one and i was thinking before i switch to um to one of the segment um there's something else i want to ask you but i guess maybe coming back to me so maybe switching on because i guess we um we have 10 minutes um in the other segment right um a lot of disruption the last i guess couple of

years really right and the first quarter seems like you know things may be you know kind of looking a little bit better but still you know if you exclude you know there's some weather disruption and such so if you do that like revenues barely grew really right even if you exclude that disruption and you're you know talking about three to two three and a half percent growth right for the year so the obvious question is like how are you going to get there from like just you know barely growing in q1 or on the report of who you know considering all things it was actually declined right so how are you going to ramp it up to get to your full year guidance so i think if you think about the weather issue we had in the first quarter we would have been up slightly in the first quarter otherwise in a top line so the first quarter uh behaved the

way we expected it to the there's a few things that i know we've talked about is our commercial business we're implementing commercial business managers we hired 19 in the first quarter they take anywhere between 30 and 60 days to get up to speed and start producing sales and so we expect that business to improve and as as you know well we've talked about it a number of times but water restoration business saw some disruptions mainly due to some some things that we needed to to improve in our documentation and our billing and collection procedures and we're sort of in the middle of that we knew that the first quarter was probably going to show some disruption in that business as we essentially centralized 51 branches and that again it behaved the way we expected it wasn't it wasn't good results we wouldn't say that but it was as expected and again we expect that to improve over the rest of the year but let's say a bridge is not an insignificant part of the bridge is related to just the improved collection percentage sure sure so we have historic historically in water restoration we collected about nine we wrote off nine and a half percent of the revenue in that business and late for all the reasons we've talked about in late 25 that spiked to about 16 percent we knew that we were going to improve that through the

centralization effort it's now back to about 12 and a half or 13 percent so not quite back to the nine and a half but it is on its way back as we expected to where where it's a better sustainable level and i guess there's also the acquisitions you did right there's two franchises that you bought so there's going to be also incremental growth yes for the rest of the year that's about five million dollars over the last three quarters so maybe like a percentage point or so of that growth from this all right and um maybe yeah i will ask a question if you're willing to answer but in terms of what are you seeing right now because sounds like you know early in q1 very disruptive then sounds like march look better so just curious any update on like where things are you know april or may i think april performed about as we anticipated um i don't think there's any big surprises as we sit here at this point in the quarter right and um you know you talk about the collections of the water restoration but i guess the other uh part of the uh equation here is around the go-go search engine optimization, and I guess you try to kind of fight the go-go, which is hard, but maybe kind of give us an update where you stand on the new, I guess, third party that you hire to help you with that process.

Well, let me just start by saying that we improved. We saw through their efforts and some of our internal efforts our visibility on what's called the map section, which is the most significant part of the free search, as it were. google uh we saw our visibility uh improve from the end of the third quarter of 2025 it was it was sitting at about 23 percent visibility in other words nationwide we'd show up on the map 23 percent of the time that's down from 72 percent about 12 months before that but so it's a little of 23 in december january and february we grew that um to a level about 35 percent visibility okay with, again, where our expectation was we're going to make progress. It's our understanding that Google, the first week of March, changed their algorithm, and we almost immediately fell to 23% as far as visibility was something we tracked on a daily basis. And basically went to work on making adjustments to, you know, to what changes Google made in their algorithm. and by the first week of April we were back up to a 33 34 visibility factor so um you know the issue is it's a battle um Google does not change our algorithm all that often I mean it's not like we anticipate doing this every month um but we look to stay on top of the situation it's a tough one as you said Google's big they're the 800 pound gorilla you know on the subject we don't ignore them um you know from our perspective the biggest issue we'd say with regard to google is that we're kind of winning the war on paid search in other words we the last three quarters each each of the quarters have shown that we've increased the number of paid search leads or calls or telephone calls by double digits including 18 percent 18 and a half percent in the most recent quarter um without increasing substantially the amount we're paying per click so we're seeing we make great strides in that our our results would have been spectacular i suppose i suppose if our natural search leads hadn't fallen um 15 and a half percent so again we're order of magnitude where we showed three percent net gain um but we're still we're still uh fighting that battle on the uh on the natural search but again google's not going to go away we don't ignore it um i think there you know we have uh elements of our arsenal that is our app you know where we where customers can get us directly without going clicking on uh google we have uh AI platforms, which are basically somebody searching for a plumber. The AI platforms, that's essentially, at this point, a natural search. No fee associated with that. And the fees are not insubstantial per job. So we're continuing to fight that battle. It's not the first time Rotorator went through a major transformation like this. when Rotorier went from being the number one entrant in the yellow pages for plumbing for the first two pages of virtually every metropolitan directory to just a single line on the internet, that was a tough transformation. I don't think the one we're going through now is as tough necessarily, but it still has a very significant element.

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

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

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

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

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

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

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

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

All right. Thank you so much, everyone. Thanks, Dr. Tomo.

Thanks, Joanna. Thanks, Joanna.