Chemed - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 consolidated revenue was $624.9M (+3.1% YoY) and adjusted diluted EPS was $5.27; GAAP diluted EPS was $4.46. Management reiterated FY25 adjusted EPS guidance of $22.00–$22.30 and expects no Florida Medicare cap billing limitation in FY26, assuming the rate differential does not recur. Versus S&P Global consensus, CHE was modestly below on revenue ($624.9M vs $626.0M*) and EPS ($5.27 vs $5.37*).
• VITAS net patient revenue rose 4.2% YoY to $407.7M, with ADC up 2.5% to 22,327 and admissions up 5.6%; adjusted EBITDA (ex Medicare cap) was $70.4M with a 17.0% margin (−157 bps YoY) as higher hospital-based short-stay mix compressed margins.
• Roto-Rooter revenue increased 1.1% to $217.2M; gross margin fell to 50.7% (from 52.9% YoY) and adjusted EBITDA margin to 22.7% (−351 bps YoY) amid a shift to paid leads (+$3.6M SG&A) and contractor weakness (−4.7%). Management sees sequential margin improvement into Q4 on seasonality and operational fixes.
• Balance sheet remains strong: cash and equivalents $129.8M, no debt; share repurchases of 407,500 shares for $180.8M in Q3 ($443.62/share) leave ~$301.8M remaining authorization. Undrawn revolver capacity is ~$404.5M net of letters of credit.
• Near-term catalysts: Florida cap risk engineered down (Q3 accrued $6.1M vs $16.4M in Q2), Pinellas County program opening in early November, and typical Q4 rate uplift and weather-driven demand at Roto-Rooter. Management’s tone targets the upper end of guidance for FY25.

What Went Well and What Went Wrong

What Went Well

• VITAS growth held: net patient revenue $407.7M (+4.2%), ADC 22,327 (+2.5%), admissions 17,714 (+5.6%). “Adjusted EBITDA, excluding Medicare Cap, totaled $70.4 million… Adjusted EBITDA margin… was 17.0%”.
• Florida cap mitigation progressing: Medicare cap accrued $6.1M in Q3 (vs $16.4M in Q2); management “continues to believe there will be no Medicare cap billing limitation related to our Florida program in 2026”.
• Roto-Rooter showed “strength in our residential plumbing revenue service line… increased 8.2%” aided by targeted campaigns and improving paid lead dynamics; sequential EBITDA margin improved ~90 bps vs Q2.

What Went Wrong

• Margin pressure at both segments: VITAS adjusted EBITDA margin down 157 bps YoY due to higher hospital-driven short-stay mix; Roto-Rooter adjusted EBITDA margin down 351 bps YoY on paid leads, SG&A increase, and contractor softness.
• Roto-Rooter gross margin fell to 50.7% (from 52.9% YoY); total leads down and shift from unpaid to paid leads increased marketing costs and hurt margins.
• Street modeled higher Q3; management acknowledged results “fell a little bit below what the street was modeling” but highlighted Q4 seasonality (VITAS rate increase Oct 1; Roto-Rooter weather demand) to bridge back to guidance.

Transcript

Speaker 3

Good morning.

Speaker 1

Good morning. Thank you for standing by. Welcome to the Chemed Corporation Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during your session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Good morning. Our conference call this morning will review the financial results for the third quarter of 2025, ended September 30, 2025. Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 28 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation, and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated October 28, 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 Worley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Speaker 6

Thank you, Holley. Good morning. Welcome to Chemed Corporation's Third 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. Both operating units fell primarily in line with our expectations in the third quarter of 2025. VITAS continued to execute the strategies required to fully mitigate any potential Florida Medicare cap billing limitation for the government's fiscal 2026 year. Admissions at VITAS during the quarter totaled 17,714, which equates to a 5.6% improvement from the same period of 2024. An important metric that we have 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 between 42% and 45% of the total admissions should come from hospitals. During our community access program, this ratio dipped below the preferred range for a sustained period of time. In the third quarter of 2025, this ratio was 44.5%, which represents a high watermark during the post-pandemic period. The ratio has been above 42% for all of 2025. We previously estimated that the consolidated Florida program would end the 2025 Medicare cap year with a $19 million billing limitation. We came in slightly better than that with a billing limitation of $18.9 million. Management continues to believe there will be no Medicare cap billing limitation related to our Florida program in 2026.

As discussed above, the initiative to admit a higher percentage of hospital-based admissions has gained traction, and we anticipate that to continue. We have cleared all hurdles to opening our new Pinellas County location, which is now on track to open in early November. Our new program in Marion County, Florida, which opened in May of 2025, has grown to an average daily census of 75 as of September 30, 2025. We projected it could double in size to an average daily census of 150 by the end of 2026. Now let's turn to Roto-Rooter. Roto-Rooter revenue increased 1.1% in the third quarter of 2025 compared to the same period of 2024. Branch residential and commercial revenue were both encouraging, with increases of 3.4% and 2.8% respectively. Revenue from independent contractors continues to be disappointing, declining 4.7% in the third quarter of 2025.

For the first time in several quarters, we saw strength in our residential plumbing revenue service line. Residential plumbing revenue increased 8.2% in the third quarter of 2025 compared to the same period of 2024. A multi-pronged campaign to target selected high-revenue dollar plumbing services yielded positive results in the quarter. The campaign included more targeted internet focus on specific services, enhanced sales materials for the technicians in the field, and more frequent close-rate reporting to branch management related to the specific services. We are encouraged by the results of this campaign in the quarter. Total leads were down 1.3% in the third quarter of 2025 compared to the same period of 2024. This is a nice improvement compared to the trajectory we saw in 2024 and earlier in 2025. As discussed in the past two quarters, the trend of increasing paid leads offset by declining natural leads continues.

During the third quarter, paid leads increased 8.6% compared to the same quarter of 2024. The entire decline in leads is in the natural lead category. In my opinion, this trend is both a positive and a negative. While we are paying for more leads, causing some margin pressure, we also believe this trend indicates a potential moderation of competition for leads from our most significant private equity competitors. We are monitoring these trends closely. As Mike will discuss further, Roto-Rooter margins continue to be below our long-term expectations. However, gross margin during the quarter was exactly in line with our guidance. The many operational initiatives discussed in past calls are having positive impacts. The shift from unpaid leads to paid leads was the main driver of the $3.6 million increase in SG&A costs in the quarter.

This led to EBITDA and EBITDA margins to be slightly lower than our expectations for the quarter. We are very encouraged with the performance of both businesses in the third quarter. VITAS Healthcare is on track to ensure that the Florida Medicare cap issue is behind us. While still below our long-term expectations, there are signs that the Roto-Rooter business has stabilized and is on the way to returning to a predictable, sustainable growth trajectory. With that, I would like to turn this conference over to Mike.

Speaker 2

Thanks, Kevin. VITAS net revenue was $407.7 million in the third quarter of 2025, which is an increase of 4.2% when compared to the prior year period. This revenue increase is comprised primarily of a 2.5% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 4.1%. The acuity mix shift negatively impacted revenue growth 121 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 124 basis points. The $6.1 million Medicare cap billing limitation accrued in the third quarter of 2025 is comprised of $4.6 million for our Florida combined program and $1.5 million related to all other VITAS programs, mainly in California. We came in slightly better than our estimates for the quarter in both Florida and California.

Average revenue per patient day in the third quarter of 2025 was $205.08, which is 298 basis points above the prior year period. During the quarter, high acuity days of care were 2.3% of total days of care, a decline of 259 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare cap, totaled $70.4 million in the quarter, which is a decline of 3.8% when compared to the prior year period. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 17.0%, which is 157 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. The EBITDA margin is within our expectations and guidance. Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $150.9 million, an increase of 3.4% from the prior year period.

This aggregate residential revenue change consisted of plumbing increasing 8.2%, excavation increasing 4.5%, and water restoration increasing 6.8%, offset by a decline in drain cleaning of 2.6%. Roto-Rooter branch commercial revenue in the quarter totaled $55 million, an increase of 2.8% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.2%, water restoration increasing 3.5%, and drain cleaning revenue increasing 1.2%, offset by a decline in plumbing of 0.8%. Revenue from our independent contractors declined 4.7% in the third quarter of 2025 as compared to the same period of 2024. Our independent contractors are generally smaller operations in middle-market cities. In many instances, based mainly on resourcing constraints, they have less effectively capitalized on the add-on service segment growth opportunities than our owned branch locations.

We are actively working with the contractor group to help mitigate the issues in this segment of our business and get it back to a growth trajectory. Adjusted EBITDA at Roto-Rooter in the third quarter of 2025 totaled $49.4 million, a decrease of 12.4% compared to the prior year quarter. Adjusted EBITDA margin in the quarter was 22.7%. The third quarter adjusted EBITDA margin represents a 351 basis point decline from the third quarter of 2024. The third quarter EBITDA margin is a 90 basis point improvement over the second quarter of 2025. While below our long-term expectations, Roto-Rooter's third quarter gross margins are within our guidance range. The many field-level initiatives discussed in prior quarters have begun to take hold. The paid versus natural lead generation shift discussed by Kevin drove the $3.6 million increase in SG&A costs and the resulting EBITDA margin pressure.

This is the main reason for the slightly lower than expected EBITDA margin in the third quarter. Management reiterates its previously issued guidance of $22 to $22.30 per share, excluding non-cash expenses for stock options, tax benefits from stock option exercises, costs related to litigation, and other discrete items. This guidance assumes that there will be no Medicare cap related to our Florida combined program for the government fiscal year 2026 beginning on October 1, 2025. I will now turn this call over to Joel.

Speaker 4

Thanks, Mike. In the third quarter of 2025, our average daily census was 22,327 patients, an increase of 2.5%. In the quarter, hospital-directed admissions increased 10.4%, home-based patient admissions increased 2.3%, assisted living facility admissions increased 8.9%, and nursing home admissions declined 8.9% when compared to the prior year period. Our average length of stay in the quarter was 109.7 days. This compares to 102 days in the third quarter of 2024. The average length of stay in the second quarter of 2025 was 137.1 days. Our median length of stay was 18 days in the third quarter of 2025, equal to the median in the third quarter of 2024. The median length of stay in the second quarter of 2025 was 20 days. It's important to remember that length of stay statistics are calculated based on discharged patients, not active patients.

The return to a more normal length of stay metric in the third quarter is indicative of the success with our renewed focus on higher admissions from hospital as a pre-admission location, as previously discussed. I'm excited about the opportunity to lead VITAS Healthcare into its next chapter. The new CON in Pinellas County is a significant opportunity for VITAS Healthcare. We will continue to put our best foot forward when applying for new CONs in the state of Florida. We will continue to focus on providing the best possible care to our patients and their families. That focus will be coupled with getting back to the basics of ensuring that we grow the business responsibly while effectively managing the Medicare cap. With that, I'll turn the call back over to Kevin.

Speaker 6

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

Speaker 3

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Ben Hendricks of RBC Capital Markets. The floor is yours.

Great. Thank you very much, and thanks for all of the comments. Appreciate the reaffirmation of guidance, with results in line with your expectations. With the results in both segments falling a little bit below what the street was modeling, we're getting a lot of questions about the elements that bridge us back to guidance in the fourth quarter. Can you kind of run through in each segment what you're seeing from a demand and cost trend perspective and even from a CFO perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in the fourth quarter? Thanks.

Speaker 2

Sure, Ben. I think the biggest distinction is that there's a little more seasonality that we anticipate in the fourth quarter. When I looked at how you progressed the third and fourth quarter, and it was across all the analysts, it's not just you, the third quarter was a little higher than our internal expectations, and the fourth quarter was a little lower. All in all, where you ended up the year was exactly in line with where we end up the year. It's more of a seasonal thing. When you break it down between VITAS Healthcare and Roto-Rooter, VITAS Healthcare's fourth quarter is always their best quarter. It's when the new rate increase goes in on October 1st. Our margin spikes in the fourth quarter from that because our cost structure really hasn't changed from September, for instance, from September 30th to October 1st.

We get a pretty nice bump in margin from that. From a Roto-Rooter perspective, they always do better in the fourth quarter and the first quarter. The fourth quarter, it's a weather impact. When it's colder, wetter, Roto-Rooter tends to get more jobs. It's just a little bit of a change. I would tell you that the difference is only a couple million dollars between each quarter. It's not, I don't think there was a huge difference between what you had and what we had.

Speaker 6

Right. Now, we'll give you some specifics, Mike. You know, some of the elements that you do expect to improve during the quarter compared to the third quarter.

Speaker 2

Sure. Roto-Rooter is probably the easier one where we talked about some of the things that we've been doing. We expect, we've talked in the past about some of the issues that we've had from a cost perspective at Roto-Rooter with discounting in the field, with higher commission rates. That improved, as I mentioned in the prepared remarks. I think our sequential margin improved about 90 basis points. We expect that to continue. We're expecting some of the green shoots on the revenue side to continue, but also to still improve margins as we go forward into the fourth quarter. VITAS, I think, is steady as she goes in the fourth quarter from a margin and revenue perspective.

Speaker 6

Joel, anything with regard to areas where you see some comparative improvements from the third quarter to the fourth quarter by the results?

Speaker 4

Yeah, so thanks for the questions, Ben. As we have talked about in the previous two quarters, we knew that we would have additional marginal compression specific to our shift in strategy away from community access and focusing more on hospitals as a pre-admit, driving a higher volume of shorter length of stay patients. However, what we have done to offset that is institute additional efficiency gains internally with labor management, which we are really excited and have effectively put into place. As we go into the fourth quarter, as Mike indicated, it is usually a good quarter for us. As we manage that pre-admit environment, and as I indicated earlier, back to a more reasonable length of stay, we're effectively managing the fixed costs associated with that.

Speaker 6

To give you one specific, how this relates to the results for VITAS Healthcare, as we mentioned in the third quarter, we shoot for between 42% and 45% as the ratio of hospital admissions. For the quarter, it was 44.5%. To the extent that that were to moderate closer to 42%, you would expect to see longer stay patients, non-hospital admissions, which would still be in a healthy range, but it would yield more profitable patients. That expectation is that 44.5% is a high watermark during a period of extensive scrutiny on Medicare cap. Just the moderation of that alone would cause the type of improvement we're talking quarter compared to quarter.

Thank you. If I could just do one follow-up here, could you talk a little bit about your receivables? It looks like DSO is a little elevated. I just wanted to get your thoughts on how cash collections are progressing and if there's a timing issue there or what we can expect from a cash collection perspective. Thanks.

Speaker 2

That's just a timing issue, Ben. I think it's mainly at VITAS and it's mainly relating to Medicaid. As you might imagine, with all the other sand in the air from a government perspective, Medicaid has slowed, payments have slowed down, but it's not an indication of any deterioration in our collection efforts or ability to collect. It's just a timing issue.

Great. Thank you, guys.

Speaker 3

Thank you for your question. One moment, please. Our next question comes to the line of Brian Tanquillet from Jefferies. The line is yours.

Good morning, guys. Mike, thanks for all the comments. Good morning. Thanks for all the comments on VITAS. Maybe just as I think about 2026 and where the Medicare rates took out, I know you had previously provided some insights into how you were thinking about margins and growth rates for next year. Curious where that stands now and just broadly speaking, without giving guidance, obviously, how you were thinking about the growth algorithm for 2026.

Speaker 2

Sure. I'll start and then Joel or Kevin can follow up. First, we're only at the beginning stages of our budget process, as I know you know. I think the fourth quarter, particularly as it relates to Florida and the Medicare cap, will really inform our decisions on how the operations are going to, you know, what the strategy for 2026 is and then how that relates to the financial statements. The reason I say that is, generally speaking, Florida in the fourth quarter is when we generate essentially all of our cap liability in a year, and then we spend the next nine months overcoming that. That's how it's operated, you know, VITAS Healthcare has operated since we started, since we've owned them.

We saw that number in the fourth quarter last year was a lot, that liability in the fourth quarter was a lot higher than it has historically been. We had to moderate, as we've talked about a lot, to more hospital-based admissions. To the extent, and we believe this to be the trajectory we're on, that number is much more moderate in the fourth quarter this year, that informs our ability, as Kevin mentioned before, to be able to start creeping back up the long-stay patients and improving both the revenue growth rate and the EBITDA margin. Of course, that takes a little time as well, as all patients on the first day are short-stay patients. Over time, we'll build a little more momentum in those long-stay categories to the extent we do it responsibly to make sure we don't have a cap problem.

The fourth quarter is really going to inform 2026. If I had to say from a high-level perspective, again, a little bit of speculation, I would say revenue in the 8% range, margins at the 27.5% to 28% range is what we would think. Or 17.5% to 18%, sorry. I was mixing that up. Sorry.

Speaker 6

I get it.

Speaker 2

Yeah, is what we would think off the top of our head, but again, we're putting the pen to paper now.

Speaker 6

Joel, anything with regard to, from an operating margin profitability that gives you renewed confidence for next year? I know it's, it's you're early in your budgeting process.

Speaker 4

Thanks, Kevin. First, I would reiterate what Mike said. The fourth quarter is going to be a significant indicator as to the speed for which we can look at responsibly getting back to active census growth, especially within the Florida market. We are very encouraged by the strategies we put in place, the steps that we have taken, the moderation of the average length of stay from a discharge perspective, and all of the initiatives that we have put into place to mitigate any concerns going forward with the Medicare cap, which then puts us in a position where we can be agile and responsibly get back focusing on census growth in those markets.

I appreciate that. Maybe my follow-up just to try to keep this to two questions. Kevin, you talked about the improvement that you're seeing in the competitive dynamics in Roto-Rooter, so if you can speak to that. As I go back to your comment about gross margin coming in in line, clearly SG&A is the area, the other lever there. Just wanted to hear your thoughts on improvement, performance, and opportunity on the SG&A line as we think about both Roto-Rooter and VITAS. Thank you.

Speaker 6

Okay. Let me have Mike start with the numbers on it. I'll give you my overall perspective following that.

Speaker 2

Yeah, sure. The first question, Brian, is our total leads for the second quarter in a row were up almost, were high single digits on a paid search basis. The entire deterioration in leads that we've seen is in unpaid search categories. As we've talked about, that creates margin pressure because we're paying for more leads, but ultimately, we are not seeing the competitive pressures for those paid leads that we have in the past. We find that to be encouraging. The thing I think that gives us a little more confidence even in that is we've seen all other big players that, in a lot of consumer service areas, are also having trouble with unpaid. It's not as if, you know, they started targeting Roto-Rooter. All of the people who are willing to pay for leads are being forced to pay for more leads.

That would include our private equity competitors. As a result, we're very encouraged that we're getting the leads that maybe we hadn't been getting a year ago at this time.

Speaker 6

To give you an example, in the second quarter of last year, Roto-Rooter paid more, you know, spent more for Google advertising and all the internet. We didn't, and it was met by a competitive response. The net result was everyone paid more, but there wasn't a change in the balance of leads. That's not what we're seeing now. We're seeing now as we spend more, we're getting more. It's just up to us and basic economics to make sure that we maximize the utility of that spending.

Speaker 2

The, and then as far as, sort of margin, when we talk about gross margin being in line, they're in line with our expectations for the quarter, but they're not necessarily, as Kevin mentioned in his prepared remarks, they're not in line with our long-term expectations. There's work to do there still. We recognized, when we talked about it in the second quarter, we recognized it was a multi-quarter fix on some of those things, particularly some of the discounting in the field and commissions. While the gross margins are in line with what we expected in the third quarter, there's still work to do there.

Speaker 6

Let me just say, I'll make a subjective comment here. One of our biggest problems in getting margin on the calls we are getting is pricing discipline. It's easier to have that pricing discipline when there's enough work to go around. We're starting to see that as opposed to being down 10%, it's up 1%. It's easier to have the discipline to not discount, to make sure we get a price that gives us our traditional margin. Again, it's the rising creek that more lower leads give you to provide that. That's really, it's subjective, but that's what we're really shooting for, for the improvement for 2026 in Roto-Rooter.

Speaker 2

The last thing I would say, and this mirrors Kevin's remarks on the SG&A line, we're doing what we can to minimize the cost, but we want to make sure that we maximize the opportunities that are provided to us. If it means spending a little more on paid search to provide the revenue growth that we think is appropriate, then we think that's a good investment. We track revenue per lead cost and those sorts of things pretty closely. We think it's the right use of money to drive top line, to spend a little more on the paid marketing side.

Speaker 6

We've been talking about the operational aspects of Roto-Rooter and the internal metrics, that is, close rate at the call center, close rate in the field. A lot of those operational metrics remain very strong. We feel that we're poised. If we get the calls, we should make up, we should make more money from them.

Awesome. Thanks. I'll stick to my two questions.

Speaker 3

Thank you for your question. Our next question comes from Joanna Jajouq from Bank of America. The floor is yours.

Hi. Good morning. Thanks so much for taking the question. Just to continue on the Roto-Rooter segment, if I read this right, margins are under pressure because of the marketing costs, right? How should we think about sustainable margins? It sounds like maybe that's the new kind of business model. You got to pay more. How should we think about, I know you don't have specifics for next year, but say over the medium term or longer term, how you think about margins in that business?

Speaker 2

Sure. From a longer-term perspective, we think that the right margin, and I'll get it right this time, Kevin, the margin at Roto-Rooter is 25% to 26% is the right EBITDA margin over the longer term. We're not quite there yet. We think that we should be able to absorb higher marketing costs because of the higher leads and the revenue that they generate. There's no doubt that there's going to be continued pressure, for the near term, for certainly the foreseeable few quarters on marketing costs specifically. We think that we're able to overcome them with other operational things that we've talked about over the last few quarters.

Speaker 6

Let me, Joe, just tell you how it works in the real world. When calls are down, the service man goes out, makes a written estimate, and it's all or nothing. The customer says, "Okay or no." At that point, if there's not another job on the board for that service man to go run to, you can see how he's inclined to say, "What will it take for me to do it?" That's the discounting. That's where you lose margin. To the extent that we're able to get enough leads and get enough jobs on the board for those service men, you can see how that could have a dramatic effect on margin just by having that additional potential work. It's like a multiplier effect. Again, we're not that far from getting back on an even keel with regard to leads.

When I say even keel, I mean something that's not down double digits. That's the magic as far as paying a little bit more, but still having strong margins.

Speaker 2

And, and.

Speaker 6

It's that all or nothing. It's that, you know, to the service man, you know, if he cuts $70 off the job, that's at least something for his time. Again, bad business drives out good business. That's what we're always at war with.

Speaker 2

We have put in some tighter controls around what the technicians are able to do at the door, with a higher level of approval requirements and things like that. A learned behavior like that does not change overnight. That is why we knew this was going to be at least a couple of quarters to really fix this learned behavior in the field. We are pleased with where it has progressed through the end of the third quarter.

Okay. Because like I said, if I look at year-to-date, excuse me, adjusted EBITDA margins for the segment, about 23% or so. I guess to get to your full-year guidance, that just implies higher margin in the fourth quarter. I also alluded to the idea of seasonality impact, right? Is that the way you started it?

Fourth quarter is always the highest.

Oh, it's higher margin too. Okay. Because it kind of comes out to be like 25% or so to get to, call it, 24% for the year. Is that 24% like a good number to think about, you know, as we head into next year in terms of margin?

I think we can do better than that next year. Again, we're working on the budgets now. I think we should see some margin improvements certainly next year compared to 2025.

When it comes to top line, right? It's tracking, call it, you know, 1% growth this year. How should you think about it? Can this business kind of grow closer to mid-single digits? Is that still kind of on the table? When would you think, you know, we should be able to see that kind of growth?

I think we are in the early stages of our budgeting process. I think we'll see better growth next year than we've seen this year, whether that's, you know, 3 to 5%. It's speculating at this point.

Speaker 6

I would say that's probably going to be our budget. It's the way it's, you know, put it that way. That our budget will definitely start in that range as submitted to us. Let's put it that way, and then we'll go to work.

Speaker 2

With the green shoots we've seen in certain revenue categories in the third quarter, there could be upside to that. We're monitoring day-to-day what's happening in the field, and we're going to put together a budget that we think is achievable but also realistic.

Okay. Thanks. Switching to VITAS, right? Just to clarify first, when you said you do not assume any liability in Florida under the cap, is it because you just kind of based on the rate increase, you can tell that the delta between the rates in Florida versus the cap increase is much smaller? That's the reason for saying no liability. Or in that statement, you also already assume some offsets from these new markets or other things.

Speaker 4

Yeah. Joanna, it's not just based on the year-over-year reduction in the rate increase. It actually is because of our focus and strategy within the marketplace and what Kevin referenced at the beginning of the call, which is the overall percentage of our admissions coming from a hospital pre-admit environment, which, as we know, has a tendency to drive a shorter length of stay patient. What we saw was last year in the Medicare cap year for 2025, we had multiple months where our overall percentage of hospital admissions dropped to a record low of our overall mix of admissions. That's what Kevin was referencing, that sweet spot being between 42%, 42.5%, and 45%. We are monitoring that on a regular basis. As he indicated, for the last quarter, we were at a high watermark of 44.5%.

That gives us the confidence in knowing that we are in the right direction to mitigate any cap liability. In addition, on top of that, we have the Pinellas opening that we're excited about.

Speaker 2

Also, don't forget, Joanna, the length of stay has really come back into line, which really indicates that the bubble of patients that we create, the bubble of long-stay patients that we created in community access, has been moderating as we expected as well.

Speaker 6

Joanna, you're also pointed, there's no question that last year, the thing that pushed VITAS Healthcare over the edge, ultimately, in one fell swoop, was the increase. The fact that the increase was 200 basis points higher than the rate that the Medicare cap was going to be calculated on. I mean, that alone was, in retrospect, too much to overcome, particularly in line with the issues that Joel just spoke about. Just to reiterate the fact that we now have the rate increase for the nation and Florida, and it's what we have characterized from our perspective as kind of in a sweet spot. It's up, but it's very doable.

What is that number that you can share with us versus the $200 delta, you know, fiscal 2025? What is it in 2026?

Speaker 2

It's 30 to 40 basis points. The national average is around 2.6% or 2.7%. We've calculated our Florida average to be 3%. That equates to a $3 million or $4 million headwind, which is well within our ability to manage. That headwind last year was $22 million or $25 million.

Right. Exactly. That's what I was looking for. Thank you for this. When it comes to these short-stay patients, it sounds like you're getting better, you got better traction. I guess you're kind of maybe stopping that because at some point you talk about sort of like some pause as in like there was more competition for these patients. It sounds like in third quarter, things just changed to the point where you're now also taking more of these longer-stay patients. Is that the way to think about how you describe the situation currently?

Speaker 6

Definitely. We definitely saw last year, you know, that as we said, VITAS knew at the beginning of the year, they had an uphill battle. They pulled various traditional levers, you know, that you would think would have the effect of getting more short-stay patients. That is more salespeople, more effort on the hospital level. One of the things we observed, it didn't have quite the effect that traditionally VITAS would have come to expect. One aspect of that was pretty much everybody in Florida got this big increase. Not everybody. I mean, impact that is hospices that do continuous care got that type of 200 basis point increase. There were increases in Florida that hospices that traditionally weren't that concerned with short-stay patients became more concerned with them. The real effect last year was just we pulled some levers that we expected to have some reaction.

It didn't, and given that environment, they didn't have quite the impact that we would have hoped. Those, from all the reasons we talked about, are kind of 2025 issues. 2026 issues for VITAS is get the hospital admissions, get the first-time Medicare admits, have a reasonable, ultimately a reasonable average length of stay. Given the reimbursement environment, we should be back to the position where, you know, we don't have a Medicare cap limitation in Florida. It's just, it's pretty simple. Maybe it's a lot of work to do those various components. The conclusion from reasonable assumptions is pretty direct. Joel, anything to add just on that very general observation?

Speaker 4

No, I think you're spot on, Kevin. It was the combination of the census growth with the rate increase that just put us in a circumstance that was at a number where we couldn't get out from underneath it throughout the calendar, or throughout the Medicare cap year.

Speaker 6

Keep in mind, it's just one of those things. Even having said all that, no one likes a surprise $18.9 million hit, but that's still less than 2% of the, I mean, it's still flying pretty darn close to what would have been, you know, arriving on fumes. We just didn't quite make it. Yep, we were within 2%. It wasn't a big miss. It was a small miss. The problem with it was, it was the first time ever. It was a scary specter, you know, of a term that we hadn't really talked about in the past, and that was Medicare cap in Florida.

If I may follow up on the discussion on seasonality, right? If I do the same exercise in VITAS Healthcare in terms of just how much it's attracting so far this year and what this implies for fourth quarter, it sounds like margins, I guess, would need to go up year over year, like 50 bps or so, to get to your prior, I guess, segment margin pre-CUP. They've been down year over year. What's going to be different, I guess, is it's really the kind of the mix of patients you assume you're going to be having more of a tailwind from the long-stay patients?

Speaker 2

No, I think it's the things we've talked about already that we get a bump from the rate increase. I think Joel's talked about some things they're doing at the SG&A level. If you notice in the third quarter for VITAS, SG&A actually is down year over year. That's going to continue in the fourth quarter. They're combining rate increases, a little better efficiencies, as well as some specific targeted cost cutting measures.

Speaker 6

Joan, let me make one comment. You know, we don't give quarterly guidance, but I say we reiterated guidance just yesterday. Ben mentioned something earlier that, as far as was it basically, was it aspirational to be shooting for midpoint of guidance? I'll just say that at this point, no. We're shooting at the upper end of guidance. We don't think it's aspirational in any respect. You're certainly right. Most of the questions have been along the lines of, okay, so it is doable. It is that you are on course. The answer is not only on course, we think that we're on the upper end of the course.

If I may, sorry, last question. Since you mentioned sequential SG&A down, the gross margin was actually up sequentially more than historic. Historically, a third quarter versus Q2, the gross margin in VITAS Healthcare would be higher. This quarter was like 220 basis points versus maybe like 100 or something in that range in the past. Is there something else that you did this quarter?

Speaker 2

I don't think there's anything specific, Joanna. I think it's all the things that we've talked about, with Joel talking about efficiencies that they've looked at. They look program by program, and are they properly staffed in Florida? They made the adjustments when they needed to. I don't think there's, I wouldn't call there any specific initiatives or anything I would call out directly other than they're looking program by program and managing costs appropriately.

Great. Thank you so much for taking all these questions.

Speaker 3

Thank you for your question. At this time, that does conclude the question and answer session. I would now like to turn it back to Kevin McNamara, CEO, for closing remarks.

Speaker 6

I just want to thank everyone for their attention to our quarterly report. I guess the next time you'll hear from us is mid-February, where we'll both have the fourth quarter and our guidance for next year. Thank you.

Speaker 3

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