Prepared remarks
Thank you for standing by, and welcome to Chemed Corporation's Second Quarter 2026 Earnings Conference Call. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. To remove yourself from the queue, you may press star 1 again. I would now like to hand the call over to Holley R. Schmidt, Assistant Controller. Please go ahead.
Good morning. Our conference call this morning will review the financial results for the second quarter of 2026 ended June 30, 2026. Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements. As a result of a variety of factors, including those identified in the company's news release of July 28, 2026 and in various other filings with the SEC, you are cautioned that any forward-looking statements reflect management's current view only, and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization, or EBITDA, and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's release dated July 28, 2026, which is available on the company's website at Chemed.com. I would now like to introduce our speakers for today, Kevin J. McNamara, President and Chief Executive Officer of Chemed Corporation, Michael D. Witzeman, Chief Financial Officer of Chemed, and Joel L. Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin J. McNamara.
Thank you, Holley. Good morning. Welcome to Chemed Corporation's second quarter 2026 conference call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call up for questions. VITAS's performance during the quarter exceeded even the high end of our expectations. VITAS continues to add ADC through accelerated admissions from non-preadmission locations while also maintaining a high level of hospital-based admissions. This was achieved while also keeping hospice labor costs lower than budgeted. These factors combined to allow VITAS to achieve higher-than-expected revenue growth and EBITDA margins, while continuing to add cushion to the Medicare cap position in our Florida combined program. Admissions at VITAS during the quarter totaled 19,125, which equates to a 9% improvement from the same period in 2025. Hospital admissions as a percent of total admissions for our Florida combined program were 42.9% during the second quarter of 2026. As we have previously discussed, an appropriate balance for sustained long-term stability in the Florida patient base given the current mix of referral sources is between 42% and 45% of total admissions coming from hospitals. Equally as important, as Joel will discuss in greater detail, admissions from all other preadmission locations increased 8.1% compared to the second quarter of 2025 in our Florida combined program. Improved admissions led VITAS to outperform our expectations, while also adding $8.9 million to cap cushion in the Florida combined program in the second quarter of 2026. This strong performance makes us more confident than ever that VITAS has put the Florida cap issue of 2025 behind us and has returned to a normalized rate of growth. Now let's turn to Roto-Rooter. In the second quarter, Roto-Rooter performed as we anticipated. Commercial sales and water restoration collections exceeded our expectations for the quarter, while marketing costs and the independent contractor business continue to be a challenge. Our commercial business manager program continues to perform at a high level. Total commercial revenue in the second quarter of 2026 increased 6.8% compared to the second quarter of 2025. There were 30 productive commercial business managers in place for the entire quarter resulting in a commercial revenue increase of approximately 13% in their respective branches. This compares to commercial revenue in branches without a commercial business manager, which saw a decline of 1%. We continue to evaluate the ability of the remaining branches to add a commercial business manager which will drive additional growth. Centralization of the water restoration billing and collections function continues and has resulted in improved collections. Total write-offs improved $1.3 million during the second quarter of 2026 compared to the second quarter of 2025. Additionally, the centralization effort has resulted in a reduction of approximately 20 employees compared to the second quarter of 2025. Lead generation and the resulting cost of customer acquisition remained a challenge in the second quarter. Total leads during the second quarter of 2026 were down 1.6% compared to the second quarter of 2025, continuing the same trend as past quarters. Free leads generated from internet searches declined 13.1% while paid leads increased 7.3%. Of all leads generated during the quarter, approximately 59% were paid compared to 54% in the second quarter of 2025. This change resulted in increased marketing spend of about $3.1 million in the quarter compared to the second quarter of 2025. In June, Roto-Rooter purchased the territory and assets of franchises operating in south Texas, including Corpus Christi. The purchase price was approximately $12 million. This territory will be an independent contractor and represents a significant new population base to incorporate into the contractor portfolio. It is not expected to add a material amount of revenue or income in the last half of the year, but represents a nice growth opportunity for 2027 and beyond. Through the first six months of 2026, we have spent an aggregate total of $33.5 million repurchasing four franchises in strategically advantageous locations. Additional opportunities exist to purchase desirable Roto-Rooter franchises and we intend to continue to take advantage of those opportunities. We are very happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond. Roto-Rooter is building positive operating momentum while being in a great position to take advantage of franchise acquisition opportunities as they arise. The combination of the two business units drove an increase in total Chemed revenue of 8.8% and an increase in adjusted diluted earnings per share of 41.9% in the second quarter of 2026 as compared with the same period in 2025. Additionally, the consolidated business generated cash flow from operations in excess of $173 million in the second quarter, which along with minimal leverage allows us to pursue accretive acquisitions and aggressive share repurchases, as those opportunities present themselves. With that, I would like to turn this teleconference over to Mike Witzeman.
Thanks, Kevin. VITAS net revenue was $443.3 million in the second quarter of 2026, which is an increase of 11.9% when compared to the prior year period. This revenue increase is the result of a 6.1% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.4%. Acuity mix shift negatively impacted revenue growth by 115 basis points in the quarter compared to the prior year revenue and level-of-care mix. The combination of Medicare cap and other contra-revenue changes positively impacted revenue growth by approximately 455 basis points. In the second quarter of 2026, VITAS accrued $500,000 in Medicare cap billing limitation. This is below our original expectations due mainly to improved admission performance in California. No Medicare cap billing limitation was recorded in the second quarter of 2026 for the Florida combined program and none was anticipated for the 2026 fiscal period. This compares to a Florida Medicare cap billing limitation recorded in the second quarter of 2025 of $16.4 million. Average revenue per patient day in the second quarter of 2026 was $209.98, which is 1.43% above the prior year period. During the quarter, high acuity days of care were 2.2% of total days of care, a decline of 24 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare cap, totaled $80.6 million in the quarter, an increase of 20.6% compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 18.2%. Now let's turn to Roto-Rooter. Roto-Rooter branch commercial revenue in the quarter totaled $56.8 million, an increase of 6.8% from the prior year period. All lines of business in the commercial sector had increasing revenue during the quarter. Roto-Rooter branch residential revenue in the quarter totaled $159 million, an increase of 1.7% over the prior year period. Similar to the first quarter of 2026, all lines of service increased with the exception of water restoration. Water restoration revenue declined 6.7%. Demand for water restoration services continues to be strong and our conversion rates remain high. During the transition to a centralized billing and collection model, we anticipated some disruption to the day-to-day bill processing function. In the second quarter of 2026, the average revenue per water restoration job declined by roughly 3.5%. This is a sequential improvement compared to the approximate 13% decline in average revenue per water restoration job in the first quarter of 2026. We anticipate that this challenge will continue to improve as the year progresses with centralized staff gaining experience and proficiency. Revenue from our independent contractors declined 1.9% in the second quarter of 2026. Our independent contractors are generally smaller operations in middle-market cities. Because they are independent, they tend to operate more like a small mom-and-pop business than our owned and operated branch locations. We are actively working with the contractor group to help mitigate the challenges in this segment of our business to get it back to a growth trajectory. Adjusted EBITDA for Roto-Rooter in the second quarter totaled $48.5 million, essentially flat when compared to the second quarter of 2025. The adjusted EBITDA margin in the quarter was 21.1%, which represents a 77 basis point decline from the second quarter of 2025. Roto-Rooter's gross margin of 50.4% was in line with our expectations and 135 basis points better than the second quarter of 2025. As discussed by Kevin, the decline in adjusted EBITDA margin was mainly caused by increased internet marketing costs. With that, I will turn the call over to Joel.
Thanks, Mike. The second quarter of 2026, our average daily census was 23,687 patients. This represented an increase of 6.1%. By the end of the second quarter, our total patient census exceeded 24,000 for the first time in VITAS history. In the quarter, hospital-directed admissions increased 9%. Home-based patient admissions increased 9%. Assisted living facility admissions increased 13.5%, with nursing home admissions declining 8.6% when compared to the prior year period. The continued high level of hospital admissions allows us to also take a high number of admissions from other preadmission locations. This allows us to continue to build Medicare cap cushion while growing ADC more quickly than our original projections. We were able to achieve this level of ADC growth while maintaining full-time equivalents below our budgeted targets for the quarter. With respect to the workforce, we continue to run full-time equivalents below our estimated totals. We monitor each location very carefully and ensure that staffing is adequate to provide high-quality care for our patients and their families, as well as maintaining a healthy work-life balance for our caregivers. The current level of staffing does not reflect any issues with our ability to hire or retain qualified caregivers, and it does not impede our current growth expectations. Our average length-of-stay in the quarter was 101.2 days. This compares to 137.1 days in the second quarter of 2025. Our median length-of-stay was 16 days in the second quarter of 2026, a decline of 4 days from the second quarter of 2025. The new starts in Florida continue to grow at a very rapid pace. Marion, Pasco, and Pinellas Counties combined had 594 admissions in the second quarter of 2026. ADC for each new start continues to exceed our expectations. Manatee County admitted their first patient in the second quarter and we are happy with the progress of that program to date. VITAS has never been in a better position to take advantage of growth opportunities. We have put the difficulties of 2025 behind us, and we are looking forward to executing strategies for the remainder of 2026 and beyond that will translate into high, sustainable growth while providing the best possible care to our patients and their families. With that, I will turn the call back over to Mike Witzeman.
Thanks, Joel. In a slight break from tradition, we decided to cover the revised guidance at the end of our prepared remarks. Although historically we do not give quarterly updates, our guidance was revised in conjunction with the first quarter of 2026 due to the materially improved performance of VITAS coupled with the high level of share repurchases. We have updated the guidance again in the second quarter mainly to continue our normal historical cadence of updating expectations at the midyear earnings release. Barring any unusual developments, updating guidance once per year in conjunction with our second quarter press release is our ongoing expectation. VITAS's initiative to return to a normal growth pattern after managing the 2025 Medicare cap issue progressed more quickly than anticipated and continued to provide higher-than-expected growth in the business. These results led us to raise full-year guidance for VITAS as follows. Full-year ADC growth for 2026 is updated to a range of 5.75% to 6.25% compared to the previous guidance range of 4.5% to 5.5%. Anticipated revenue growth, excluding the impact of the Medicare cap, improves from the previous guidance range of 6.5% to 7.5% to a revised range of 8.25% to 9.25%. Finally, revised EBITDA margin, excluding the impact of the Medicare cap, is anticipated to be 19.0% to 19.5% compared to the previous guidance of 18% to 18.5%. Our anticipated full-year Medicare cap billing limitation is reduced to $7 million from our previous guidance of $9.5 million. As previously discussed, Roto-Rooter performed in line with our expectations and reflects stable earnings, very positive cash flow and a continued emphasis on investment and growth opportunities. Therefore, full-year guidance for the segment remains unchanged. Full-year anticipated revenue growth is 3% to 3.5% for Roto-Rooter, with an estimated adjusted EBITDA margin of 21.5% to 22.5%. Based on the above, full-year 2026 earnings per diluted share excluding non-cash expenses for stock options, tax benefits from stock option exercises, costs related to litigation, and other discrete items are estimated to be in the range of $25.00 to $25.75. The midpoint of the revised guidance represents a 7.8% increase from 2025 adjusted earnings per diluted share of $20.21. The revised 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.5 million shares. I will now turn the call back to Kevin for his closing remarks.
Questions and answers
Our first question comes from the line of Ben Hendrix of RBC Capital Markets. Your line is open.
Maybe start with a question for Joel. Just wanted to touch on your long-term growth outlook for VITAS. We get a lot of questions on the growth capacity. When we think about the overall demand in the markets versus durability, this staying at 42% to 45% mix of short-stay patients. How sustainable is this level of growth? And what should we assume for a long-term growth outlook for ADC and revenue?
Yes. Thanks, Benjamin. We absolutely believe it is very sustainable. We feel like the strategies we put in place and the KPI management associated with those strategies helps us much better understand how to react to market changes and adjust resources accordingly. So we have no concerns whatsoever about that ability. As we mentioned earlier in the prepared remarks, we believe VITAS has returned to normal growth rates, and we fully expect to continue to generate those growth rates in the near and midterm, as we look into 2027.
And let me just remind the listeners that, if you look at the 21-year period up to 2025 that Chemed owned VITAS, VITAS grew net income at about 11% per annum. So when we talk about traditional growth rates, we are talking about low double-digit growth. It is a reliable, service-oriented business, and we look forward to achieving the results that Joel has articulated.
Great. Thank you. If we can move to Roto-Rooter for a quick one there. Looks like your EBITDA came in just maybe marginally shy of our estimate. Just wanted to see what you guys are seeing on the SG&A side in terms of mix of paid versus non-paid leads, how that is evolving, and where we can expect that to stabilize? Thanks.
Yeah. This is Mike. I think we believe it is not going to deteriorate from here even though we do not have a lot of insight as to what exactly might happen in the future with internet marketing and the main provider of our internet marketing services. Having said that, I do not believe that free leads will go to zero. We are working on strategies to get around Google; for example, getting leads through commercial business managers is one strategy. We have talked a lot about the app in the past. We are trying to minimize our reliance on Google, but I would say that the situation is stable. It is not deteriorating from here, but I would also hesitate to say that we think it is going to significantly improve from here either.
No. It is hard to see improvement. One thing that is probably clear to surmise at this point is that Google has shifted away from free leads. Initially, it grew its audience by providing free information, which then allowed it to start charging for what it built. They have systematically tried to drive users away from the free aspects of service providers. At this point, we think we are at the new normal and it has largely stabilized. AI and other developments may continue to evolve the landscape, but our view is that Roto-Rooter has done a pretty good job dealing with this transition. Paid leads have gone from roughly 44% a year and a half ago to 59% now. That is an inexorable change. The thing that has helped Roto-Rooter is ancillary services—excavation and water restoration—which provide additional services on jobs that make the economics work. We are seeing positive momentum in recent months and are taking that seriously.
And I think it might make sense also to point out that inherent in your question is where do we see margins going from here, and what are our thoughts on that?
I would tell you that the 21.5% to 22.5% margin that we have estimated for the full-year at Roto-Rooter this year is right in line with where our margins were pre-pandemic. Obviously, they spiked some during the pandemic, but it has not caused a huge deterioration in our margins overall from a long-term standpoint. We would love to see margins in the 23% or 24% range, but even at the 22% range that we are projecting, that is healthy for a home services business. We are doing everything we can in marketing, but we have done a lot of other things in other areas to try and overcome some of those higher expenses.
That is helpful. Thank you very much.
Thank you. Our next question comes from the line of Brian Tanquilut of Jefferies. Your line is open, Brian.
Hey. Good morning, guys, and congrats on the quarter. Maybe for Joel and Mike, as I think about the margins of VITAS, obviously, pretty good in the quarter and then the guidance adjustments, solid. How do we think about, number one, the drivers of that? And then the sustainability of those margins as we look beyond 2026?
Yeah. So the biggest driver is our ability to manage and balance length-of-stay by balancing hospital preadmit patients, which typically have a shorter length of stay, with community- or home-based patients, which typically have a longer length of stay. That has allowed us to expand our margin through the end of the year, which has come to fruition. Looking longer term, our strategic management of field resources, our labor force, and controllable costs associated with the care of patients are all in line with expectations and allow us to continue to operate at this margin level.
The only thing I would add is that we have an internal benchmark at VITAS that back-office SG&A costs grow at half the rate of revenue growth. There are years we hit that and years we do not if we're doing something specific, but if we grow top-line in the high-single-digit range, we can gain leverage on back-office costs year over year. The EBITDA ranges we are discussing are very sustainable going forward.
I appreciate it. And maybe, Kevin, as I think about Roto-Rooter here, obviously, there are some investors who believe that more investments need to be made there and service-line expansions are probably strategically appropriate. Just curious how you are thinking about where Roto-Rooter stands today. I know you mentioned in your prepared remarks buying franchisees out, but how are you thinking about expanding the service offerings? Thanks.
Okay. What we have learned from past experience is that adding services that can be sold to the same customer who calls for plumbing or drain cleaning is the most efficient way to grow. When Roto-Rooter added plumbing to drain cleaning, and later excavation and water restoration, those made economic sense because the customer acquisition cost was essentially zero for the additional services. Historically, Roto-Rooter has tried many services that involve sending a technician to a customer's home. Some of those efforts worked and some didn't. For example, we invested in air conditioning services in the 1990s and had mixed results. More recently, we developed a water quality business—drinking water treatment and related services—which we rolled out in many branches but it was losing money and we suspended the program. That does not mean we have given up on additional service lines; we continually evaluate opportunities. Right now, there is nothing that has risen to the point where we need to discuss it in detail on this call.
Got it. Thank you.
Thank you. Our next question comes from the line of Joanna Gajuk of Bank of America. Your question, please, Joanna.
Hi. Good morning. A couple of questions. First, on the Roto-Rooter business: with the higher marketing cost but unchanged guidance and the view that margin is sustainable, how exactly are you thinking about offsets? Is it coming from buying these franchisees, or are there other offsets helping you sustain that margin?
Joanna, I will turn to Mike for specifics, but from my perspective, offsets come from improving conversion and increasing the average price per job by selling ancillary services. If conversion of ancillary services like excavation and water restoration improves, the incremental revenue per job increases, which reduces the relative burden of marketing costs. That ancillary mix improvement has been a part of the recent success at Roto-Rooter.
Joanna, at a high level, in the second quarter Roto-Rooter missed their EBITDA by roughly $1 million from our internal estimate, and that was all marketing costs. We did not view that as material enough to change our forward outlook for the business. There are many levers to offset an extra million of marketing costs, including continued improvement in collections, higher conversion of add-on services, and operational improvements. So in the grand scheme, an extra million of marketing costs does not change our long-term view of where margins will be.
Okay. That is great. And regarding acquisitions: are there still some larger Roto-Rooter franchisees potentially available? And on the hospice side, with interest in adding assets, how does the moratorium on new centers and related provisions impact your access to hospice assets?
There are still a few sizable Roto-Rooter franchise opportunities. I would be surprised if we do not make a meaningful Roto-Rooter acquisition before the end of the year from within our franchise network. On the hospice side, we are almost everywhere in Florida, but there are a few attractive counties left. Acquisitions more broadly tend to be outside Florida in Certificate of Need states.
Joanna, our targeted acquisition interest remains in areas with a barrier to entry. The moratorium influences our ability to apply for new CONs in certain states; the moratorium is due to end in November and could be extended. The moratorium does not prevent us from pursuing acquisitions as long as the existing provider has been in service and billing to the federal government for three years. We are actively reviewing opportunities in markets with barriers to entry, and we continue to look for other potential acquisitions.
On the Medicare cap in Florida, you are building cushion while growing census. How much of that cushion is coming from de novos, and is there a risk you could get into trouble if de novos slow or you do not have incremental markets to manage the Medicare cap?
Joanna, the metrics we put in place to strategically manage resource deployment and balance admissions are separate from our de novo growth strategies. De novo markets have contributed significantly to ADC growth and admissions, but we also balance the admission mix. Those measures give us no concern about cap management reemerging as a significant issue in the near future.
To add, the cap cushion VITAS has been helped by new starts but not entirely driven by them. With an average length of stay around 101 days and a hospital admission mix between 42% and 45%, our run rate is sustainable assuming reimbursement remains in an acceptable range near the national average. So under normal conditions we are not worried about cap in the short or midterm.
One thing that gives us comfort is the high availability of hospital-based admissions in Florida. The demand for hospital-directed hospice admissions is strong and should continue to support our ability to manage cap risk going forward.
I would also note that we are early in developing those new-start programs. If historical patterns hold, each new start can grow materially and we are still at a small percentage of the long-term potential admits in those markets.
I will add one more point. As part of our cap mitigation strategy, we are expanding relationships for high-acuity, short-length-of-stay patients. We have recently broken ground on two new inpatient units that will come online in 2027 as part of additional relationships that will be available in 2027. That is an important strategic part of our cap mitigation going forward.
On the hospice proposed rule, the national average rate update is shown in the proposal. Based on the proposal, any updated thoughts on what the rate update will be for Florida versus the national average for 2027?
The proposed rule shows a national average update of 2.4% for 2027. For VITAS specifically, the increase is 1.9%, and for Florida it is a little over 1% relative to the national average based on our current Florida mix. That is manageable.
You had a $500,000 accrual for Medicare cap in the second quarter because performance in California has run better. What do you assume for the fourth quarter of 2026 in your guidance?
Joanna, as discussed previously, we have seen some increased activity in California where referral sources have leaned toward trusted, larger providers amid discussions about fraud and abuse affecting smaller providers. That has given us a lift this year. Historically we have run roughly $9.5 million in Medicare cap on average, and we kept our forecast for 2026 at that $9.5 million in the first-quarter revision. Baked into guidance for the fourth quarter would be approximately one-fourth of that $9.5 million, so roughly $2.3 million to $2.4 million. We were a little early to change our run-rate expectations given uncertainty about how the situation will fully shake out in California, but it has certainly helped us in this calendar or cap year.
One more on the regulatory environment: given the OIG and GAO reports and general focus on fraud and abuse in hospice, do you expect CMS to respond with changes that could affect reimbursement in 2028 or beyond?
Joanna, we have no reason to believe at this point that there will be an unbundling of the hospice benefit. There has been legislation testing the waters around MA carve-in plans, but that has been shelved for 2027. We do expect an elevated degree of program integrity oversight, such as the service spend variation index, and an increased focus on quality measures, though the specific components remain to be determined. We do not see an indication of a material reimbursement change at this point.
Thank you.
Thank you. I would now like to turn the conference back to Kevin J. McNamara for closing remarks. Sir?
Well, I would just like to say that we were gratified with the results of the quarter. Thank you to everyone for your questions and your attention. We will reconvene in about three months. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.