Chemed Corporation (CHE) Q3 2026 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Chemed Corporation third quarter 26 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question at that time, you need to press *11 on your telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to your host, Ms. Holley R. Schmidt. Ma'am, please begin.

Good morning. Our conference call this morning will review the financial results for the third quarter of 26 ended 09/30/2026. Before we begin, let me remind you that the safe harbor provisions of the private Securities Litigation Reform Act of 2 thousand applied 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 27 in various other filings with the SEC. You are cautioned that any forward looking statements reflect management's current view only, 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 27, 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 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 subsidiary. I will now turn the call over to Kevin J. McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's third quarter 26 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. VITAS continues to perform at a very high level. The combination of ADC growth and cost containment particularly with respect to central support costs, drove significant revenue and income growth at VITAS during the third quarter of 26. VITAS revenue increased 12.2% during the quarter compared with the third quarter of 25. And adjusted net income increased 44.7% over the same period. Admissions at VITAS during the quarter totaled 19 thousand. Which equates to a 7.2% improvement from the same period of 2025. Hospital admissions as a percent of total admissions for our Florida combined program were 42.3% during the third quarter of 26. As we have discussed previously, an appropriate balance for sustained long term stability in the Florida patient base given the current mix of referral sources is that between 42% and 45% of total admissions that come from hospitals. Equally as important, as Joel will discuss in greater detail, admissions from all other preadmission locations increased 11.1% compared to the third quarter of our 2025 in our Florida combined program. We ended the 2026 Medicare cap year. With a cushion of more than $34 million in the Florida combined program. We do not anticipate any Medicare cap billing limitation for the Florida combined program in the 2027 Medicare cap year. Additionally, as a result of strong admissions, our Medicare cap billing limitation related to all non-Florida programs ended the 2026 year approximately $3 million below our original projection. Now let's turn to Roto Rooter. In the third quarter, we are very pleased with the revenue growth generated by Roto Rooter. Total revenue grew 7.5% during the quarter compared to the third quarter of 25. Revenue grew across all major service lines in both our residential and commercial businesses. Mike will further provide information on the impact of our recent acquisitions. However, it is important to note that our same store revenue increased 5.5% during the third quarter of 26. Which exceeded our internal expectations. Similar to the total revenue growth metrics, we saw strength in all service lines from same source sales. Our commercial business manager program. Continues to perform at a high level. There were 36 productive commercial business managers in place for the entire quarter, contributing to a commercial revenue increase of approximately 10.9% in their respective branches. This compares to a commercial revenue increase of 4.8% in branches without a commercial business manager. Centralization of the water restoration billing and collections function continues. And has resulted in improved collections. Total write offs improved by $2.9 million during the third quarter of 26 compared to the third quarter of 25. Equally as important, average price per job in the water restoration business increased 2.8% over the third quarter of 25. This is a reversal of the multi quarter downward trend in average water restoration price per job. Lead generation and the resulting cost of customer acquisition remained a challenge in the third quarter. Total leads during the third quarter of 26 were essentially flat compared to the third quarter of 25. Consistent with trends observed in prior quarters, free leads generated from in internet searches declined 11.8% while paid leads increased 5%. Of all leads generated during the quarter, approximately 60% were paid compared to 56% in the third quarter of 26. 2025. This change resulted in increased marketing spending of $4.3 million in the quarter compared to the third quarter of 25. Roto Rooter is building revenue growth momentum through improved operations, supplemented by strategic acquisition activity. Roto Rooter continues to explore every opportunity to contain and potentially moderate marketing costs. Roto Rooter has demonstrated a long history of growing margins through cost containment, so long as revenue growth is stable. We fully anticipate Roto Rooter to return to that historic pattern through 2027 and beyond. We are very happy with the performance of VITAS in the quarter and its prospects for the remainder of 2026 and beyond. The combination of the 2 business units drove an increase in total Chemed revenue of 10.6% and an increase in adjusted diluted earnings per share of 28.1%. In the third quarter of 26. As compared to the same period of 2025. Additionally, over the first 9 months of 2026, the consolidated business generated cash flow from operations of more than $229 million which along with minimal leverage allows us the flexibility to pursue strategic acquisitions and meaningful share repurchases. As the opportunities arise. With that, I would like to turn this teleconference over to Michael D. Witzeman.

Thank you, Kevin. VITAS net revenue was $457.4 million in the third quarter of 26, which is an increase of 12.2% when compared to the prior year period. This revenue increase was driven primarily by a 9.4% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.2%. The acuity mix shift negatively impacted revenue growth 25 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 positively impacted revenue growth by approximately 85 basis points. In the third quarter of 26, VITAS accrued $828 thousand Medicare cap billing limitation. This compares to a Medicare cap billing limitation recorded in the third quarter 25 of 6.1 million. Average revenue per patient day in the third quarter of 26 was $209.11. Which is 196 basis points above the prior year period. During the quarter, high acuity days of care were 2.2% of total days of care a decline of 5 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $92.5 million in the quarter an increase of 31.4% when compared to the prior year period. Adjusted EBITDA margin in the quarter excluding Medicare cap, was 20.2%. Now let's turn to Roto Rooter. Roto Rooter branch commercial revenue in the quarter totaled $59.9 million an increase of 9% from the prior year period. All lines of business in the commercial sector had increasing revenues during the quarter. Roto Rooter branch residential revenue in the quarter totaled $158.8 million an increase of 5.2% over the prior year period. Again, all lines of business in the residential sector had an increasing revenue during the quarter. Adjusted EBITDA in the third quarter of 26 totaled $48.2 million a decline of 2.5% when compared to the third quarter of 25. Adjusted EBITDA margin in the quarter was 20.6% represents a 213 basis point decline from the third quarter of 25. As Kevin mentioned, cost of customer acquisition continues to put pressure on Roto Rooter's margin. Additionally, during the third quarter of 26, fuel costs increased approximately $1.4 million compared to the third quarter of 25. We anticipate both cost headwinds to persist in the fourth quarter. During the third quarter of 26, Roto Rooter reacquired multiple franchise territories in California for approximately $62.5 million Collectively, these territories encompass a population of over 12 million people. Prior to the acquisition, this business had annual revenue of between $50 and $55 million. Slightly over half of the revenue associated with acquired territories will become part of our owned and operated branch locations. 2 new branches will be established in Sacramento and San Diego, while other territories will be absorbed by existing branches. The remaining locations will become part of our independent contractor operating model. In 2026, the company has spent $96 million to reacquire Roto Rooter franchises primarily in Texas and California. It is important to note that these acquisitions do not have the same high margin profile as our owned and operated Roto Rooter branch. Franchisees acquired operate at a much lower EBITDA margin often in the single digits. While we see a rapid increase in revenue from acquisitions over the next several quarters, It is a 12 to 18 month process to implement the full Roto Rooter operating model. Rapidly increasing revenue from the acquisitions coupled with lower EBITDA margins at these locations, immediately post acquisition will result in lower overall margins at Roto Rooter in the short term. However, acquiring territories with significant and growing population characteristics is the right thing to do for the long term at Roto Rooter. Turning now to Chemed. During the quarter, the company repurchased 125 thousand shares of stock for $66 million which equates to a cost per share of $528.24. Over the trailing 12 months, the company has repurchased 1.24 million shares of Chemed stock at an average price of $427.62 per share. As of September 30, there was approximately $73.7 million of remaining share repurchase authorization under the company's plan. Finally, based on the company's financial results through 09/30/2026, we expect to finish the year at or slightly above the high end of our full year 2026 adjusted EPS guidance discussed in our second quarter 26 earnings press release dated July 28, 2026. The contribution of each operating unit to that overall EPS level will likely differ slightly from the guidance given at the end of the second quarter. However, we are very comfortable with the overall adjusted EPS guidance given at that time. I will now turn the call over to Joel L. Wherley.

Thank you, Mike. In the third quarter of 2026, our average daily census was 24 thousand 4 hundred 28 patients. An increase of 9.4%. In the quarter, hospital directed admissions increased 5.7%. Home based patient admissions increased 6.3%, Assisted living facility patients, increased 8.1%, and nursing home admissions increased 9.8% 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. We expect this pattern to continue for the remainder of 2026 and all of 2027. High admissions in both hospital and nonhospital settings allows us to responsibly grow revenue while also balancing the patient mix needed to manage Medicare cap. With respect to the workforce, full time equivalents ran below our estimated totals for most of the quarter. However, to address continued ADC growth, we ramped up hiring in September 2026. As a result, at the end of the quarter, we are in line with our overall budgeted full time equivalent metric. 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. We have not experienced issues with our ability to hire and retain qualified caregivers over the past few years. Our average length of stay in the quarter was 103.5 days. This compares to 109.7 days the third quarter of 25. Our median length of stay was 17 days in the third quarter of 26. A decline of 1 day from the third quarter of 25. Our adjusted EBITDA margin, excluding Medicare cap in the third quarter of 26, was 20.2%. We were able to achieve that high margin level through a continued focus on cost control at every level of the organization. As mentioned above, we have been able to operate for most of 2026 at staffing levels below our budgeted levels. This was achieved mainly through enhanced electronic staffing tools, which allowed our managers to more closely manage and flex daily staffing levels. Equally important, selling, general, and administrative costs declined $2.1 million in the third quarter of 26. Compared to the same period of 2025. We have worked hard to establish a culture particularly related to back office processes which ensures every dollar spent is necessary to support our overall goal to provide high quality care to patients and their families. We believe VITAS is exceptionally well positioned to capitalize on future growth opportunities We look forward to executing our strategy 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 to Kevin.

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

Ladies and gentlemen, if you have a question or comment at this time, please press *1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment, please press *1 on your telephone keypad. Please stand by while we compile the Q and A roster. Our first question or comment comes from the line of Brian Tanquilut from Jefferies. Your line is open.

Good morning, guys, and congrats on the quarter. Maybe, Joel, I appreciate your comments on staffing. So maybe I will I will start there. As we think about the nursing environment today, what can you share with us in terms of the ability to nurses and increase capacity as demand has been strong in the VITAS side? And, also, what are you seeing in terms of wage inflation in light of. You know, we are seeing increases in orders for temp nurses on the hospital side, it seems like the. Just curious what you are seeing on your side of the business. Thanks.

Yeah, absolutely. So 2 things. 1, we are not experiencing difficulty in hiring. There may be specific pockets or a specific program that has a greater need than another, but none of which have reached a level of concern associated with our ability to recruit and retain those key clinical positions. In regards to inflationary pressure or wage pressure, Certainly, I think everyone is experiencing an impact of the inflationary situation that we are facing nationally within The United States. that is no different in health care. However, it has not in any way impeded our ability to hire. And certainly not restricted our ability to grow across the organization. So the short answer is, no issues in hiring. And no significant wage pressures that we are concerned about at this time.

And I would just like to add that, you know, when you observe this over time, you notice that the market for hiring nurses is highly segmented. And that is, you know, a hospital-- We do not compete generally. You know, with the higher-- to hire nurses away from hospitals on the basis of salary. I mean, if you if you want to make more money as a nurse, can make it outside of hospice. Hospice nurses have tended to be a special calling. We compete largely with other hospices, or nurses that are familiar with the segment. And every hospice has, you know, has to have strict discipline. You know, we are. You know, the price increase is, you know, always know, a couple percent And, regardless of what inflation is doing, you know, in the short term, And you know, the market for. You know, hospice nurses, you know, have lived with that reality for some time, and Joel's done a great job. In bringing you know, that. It basically is the iron law of hospice If you look at VITAS over time, the field level expenses are in the mid-60s as a percent of you know, total reimbursement, and you live within that or you die. And Phil's done a great job doing that.

Yeah. Brian, I would--I just think that we have lived with. I think, for 5 plus years, the fact that wage increases overall for nurses are higher than the reimbursement we get back. Which is I think why Joel and his team have really stressed cost containment, particularly in the back office, It helps maintain, if not expand, the EBITDA margin a little bit. Even though, you know, the reimbursement is not necessarily keeping up with our wage inflation.

That makes sense. And then maybe, Kevin, as I think through Roto Rooter, obviously, seeing some inflection here. Nice growth, nice same store. And, also, you have had some acquisitions there. When I think of the pipe for franchise acquisitions, what does that look like? And then maybe for Mike, just related to this, and you touched on how we should be thinking about margins and the ability to grow revenues for these acquired franchisees. If you can just walk us through that dynamic. Thank you.

Let me just let me just start with the pipeline. We always try and deemphasize that because most of the major metropolitan areas Roto-Rooter has already repurchased. And, you know, there is a few out there. It has surprised us a little bit, but that. You know, given what is going on in the market, I mean, that is what is made it possible to make these acquisitions on Roto-Rooter. But generally speaking, we are you know, where the action is, is in the smaller markets. Participants in our contractor. Independent contractor program, smaller you know, smaller locales that are added to an existing, branch for Roto Rooter We do not like to emphasize the pipeline other than say, it is you know, we. I just signed a RCA for another 1, another good size today. I mean, that. I mean, again, when I say a good-sized 1 like an independent contractor operation. So not that significant, so do not take that as a significant acquisition.

But they are still out there But, you know, it is it is the type of thing that as you saw, we were pretty active and made a big 1. And it was what about $90 million in acquisition costs for the full year. Yeah. Yeah. But that was big. That was beyond our expectations and not. You know, we. You should not you should not extrapolate that and expand that in the future at that level. A few years ago, Brian, we had done a study, and we estimated at the time we could have spent you know, if all of the acquisition franchise acquisition candidates we would be interested in, all became available We could have spent $200 to $250 million at the time. So by virtue of the fact that we spent 96 this year, you know, we have eaten into that some, but there is still you know, a handful of as Kevin said, bigger acquisitions we would be interested in and then, you know, the rest of them are smaller, either tuck ins or contractor, operations.

Your question about revenue and margin, I will just I will just give you, from the California acquisition we just did.

Our first year estimated revenue is somewhere in the $30 to $35 million range. But their EBITDA margin was sub-10% when we purchased them. So we will add, you know, 30 to $35 million to the top line, say, in 27. But it will add, you know, less than $4 million in EBITDA. It will start growing, and we will start integrating it into the Roto Rooter and getting it into that model, but that takes a little time. And that is how most of these acquisitions work. Top line growth is immediate. And then the EBITDA margin comes. But we are very excited to have franchisee that had 12 million of population in population density as well, which is important. And, you know, locations like San Diego and Sacramento. So I think it is definitely a good long term acquisition for the company just in the in the near term, it will mute overall margins a little bit.

Awesome. Thank you, guys. Thanks, Brian.

Thank you. Our next question or comment comes from the line of Joanna Gajuk from Bank of America. Your line is now open.

Hi. Good morning. Thank you so much for taking the question. So maybe just to first clarify things around your guidance change. So you expect now to be at the higher end or slightly above your EPS but you did not specifically commented on the segment. So maybe you can kind of give us color. You know, is it fair to say that this guidance raise is largely VITAS Outperformance. I mean, there is also the broader franchisee acquisitions, so how much it is adding to the guidance. Can you help us bridge to that EPS guidance based on the segment outlook now?

Okay. I am going to turn it over to Michael D. Witzeman. He handles this. But I am going to start by saying, obviously, the last 2 quarters, we increased guidance. I mean, we trying to get out of the business of increasing and changing the guidance every quarter. But obviously, we are trying to send the signal. Yes. We had it. We outperformed in the third quarter compared to when we came up with that, the number for the last 2 quarters. We are obviously running ahead, but we are we are we tried to make. Tried to give the indication that, yeah, things are going well. We do not expect a slowdown, for instance. But we are we are we are not. We do not wanna be too specific and get in the business of guiding every quarter. But, Mike, why do not you go ahead? Answer Joanna's. We do have some questions, some specifics. But with that with that proviso, Joanna, just remember we are we are we are trying to get out of that business.

Joanna, as, you know, certainly from just purely a math standpoint. Right? We gave guidance at the end of the second quarter. We beat the third quarter by about 30 cents Even if we hit the fourth quarter, just meet the guidance that we have issued for the fourth quarter, we will be at the top end or near the top end of the range already, right? So saying that we are gonna be at the top end does not necessarily need to signal any huge outperformance in the fourth quarter. What we are signaling is, as Kevin said, that given that we beat the third quarter by $0.30 we did not want to signal that, you know, we might miss the fourth quarter by 30 cents. To get to the middle of the range. We wanted to make sure to signal that we are on track in the fourth quarter for meeting the guidance that we have given. And so that was that was the whole point. And I think as you can see from the third quarter results, Roto Rooter from a income. Purely from an income standpoint, came in a little lower than what our guidance was. And VITAS came up higher. And so when we say is that the components of how we might get to the top end or above the top end of the range are gonna change a little bit. I think that is fairly obvious from the third quarter results. And so that is all we were trying to signal is. And as Kevin said, we did not feel the need to necessarily regurgitate all of the components and all of the metrics around each of the operating units.

Right. Now I understand this, but I guess this latest purchase acquisition in mid September, that is gonna add I guess, a little bit in fourth quarter when it comes to EBITDA. But you said maybe less than $4 million for the, like, annual Maybe that is less than $1 million in Q4. is that a good number to think about? Okay. So now I guess on the on the Roto-Rooter segment, actually. So just to follow-up on the comment and prepared remarks that you said something along the lines of you expect to return to historic growth in 2027. So are you talking about I guess, what kind of growth are you talking about And is it excluding that impact on the recent acquisitions or is that all inclusive? Help us understand, like, how you guys thinking about 2027 growth in Roto-Rooter. We do not have a budget yet for 2027.

They are still working on that. So that is more of a high level comment. So I cannot give you specifics on 2027. The comment relates to the fact that over a long period of time that we have owned Roto Rooter, if they can consistently grow top line they are very good at cost containment and making sure our EBITDA margin is consistent, if not growing, you know, slightly. Quarter to quarter, year to year. So that is what we were talking about there. We were not giving any specifics I think it is important to note that given the marketing headwinds that we are seeing, the fact that we can find other places to get leverage and margin with consistently growing revenue at Roto Rooter will be able to overcome some of those marketing costs. In 2027 and beyond.

Joanna, let me ask. Also add a comment that really springs from some of the questions we have had just. it is. You know, since yesterday afternoon when we released earnings. I mean, you look at the Roto Rooter numbers and the margin, you know, we are saying, oh, yeah, margin. I mean, the margin has been affected Yes. But, you know, every company that has people on the road has fuel cost. Mean, that was a million. Over a million dollars in the quarter. But generally speaking, it is marketing expenses. And you know, what we are seeing is that, it is kind of double-barreled. You know? So compared to previous, you know, previous periods, we are paying Google more per lead. The bidding is going up. For the lead. So, you know, it is just the price per lead is going up. But, also, there is a shift that, you know, when Google first you know, came into existence, everything was free. Every lead was free. So we have gone from zero to under 40% of the leads we get are free. I mean, that. that is a that is a big transformation. That begs the question of, well, where do you go from here? How. You know, what do you expect, you know, as far as erosion in that percentage of free leads? that is a big question, and I think it came through with a number of questions by know, people who commented on our, earnings release. And all I can say is, you know, we have we have good thoughts on that. Over 50% of our Roto Rooter customers are repeat customers. In other words, they come to the Internet looking for Roto Rooter. Largely, they are coming looking for the telephone number. Half of them, maybe. And it is it is. Because. And it really comes down to the strength of the Roto Rooter service mark. So that is a that is a natural floor. To the you know, to, let's say, the numb. The percentage of natural leads we get, we think. I will say that we have had recently this quarter we have seen a you know, when I say a flattening, we have actually had a week where We had an improvement in natural leads compared to the prior year's period. So we have a pretty good thought on that you know, question, but, and some good hopes.

But I guess that really answers your question, Joanna.

If that is if that is over the next 12 months, a flat or improving situation, Yeah. I do not see marketing having, you know, a continued negative effect on our comparative margins. Mike, do you agree with that? Yep. I agree with that completely. Okay. And to that end, I guess, know, we hear from some national brands in the residential services sectors You know, they just simply keep calling out some negative impact as the consumer is using, you the AI tools, like, ChatGPT, and such to find just a solution to an issue at the house or apartment. So is that part of what you are seeing already? And I guess is there a risk to, you know, Roto-Rooter brand because of that? Because, I guess, there is couple of things, you know, that happens when people use those newer tools because of all, you know, they could get a like, a do it yourself type of the solution. Right? And I guess, you know, price transparency might be also needed when those you know, models look for information. So can you comment on that? Is this something that you already been seeing you know, in your search, in the lead process, I guess, generation?

that is. You know, that. I would say, Joanna, that is a little bit speculative, but I would say that from a Roto Rooter specific standpoint, given that we focus on emergency level work, the people-- when we get calls,, it is the much more complicated issues where there is sewage backing up in the basement, somebody needs something to be out there. Immediately, We do not you know, our bread and butter business is not, you know, changing out a toilet or fixing a leaky faucet. Are the things I think people try and do, DIY, you know, ChatGPT kind of searches. that is not our bread and butter. So if that if that is a trend that, you know, really continues or really expands, could it hurt us on the margins? It could certainly hurt us on the margins, but that is not the bread and butter jobs that we do And so it is a little bit speculative, but we do not see that as a huge headwind going forward. No. And, Joanna, your question also touches on the subject that first of all, it touched on the subject with the fact that you are our average job is something very different than what you are describing. Our average job is $1.5 thousand. I mean, we are talking about some job that involves you know, plumbing. Half, you know, half our revenue comes from excavation and water restoration. I mean, it is a it is a different type of job than what you are getting involved in. You know, do it yourself. But let me also say, but when I say it touches on an important point, because I think our way out of the conundrum and problems associated with marketing is not so much Google going out of business. We think that Google stranglehold on the market. it is. It will abate, with AI. Emerging and is emerging strongly. But the. You know, when you when you look at the when you look at the effect of $1.5 thousand on marketing, and if you look at our average price per job, as that price goes up significantly, marketing becomes you know, less of a factor. Know, I mean, to the extent that it was not too many years ago, our average price per job was $600. And you know, so I think we can outgrow a lot of the pernicious effects of you know, Google stranglehold. And, you know, and I will tell you something right now. there is also litigation you know, across all facets of the service industry with Google with regard to some of their predatory activities. But you know, I think I think the real answer is we. In growing our average price per job, that will that will be how we handle the marketing issue.

That makes sense. And if I may, last question on that segment. Like you said, you are buying in franchisees and you see margins are well below average. Can you help us understand, like, specifically, you know, these other owners fail to do, or kind of how do you plan to bring these margins to the average, in terms of, like, some specific examples?

Yeah. I would. I mean, it is across the entire organization that we acquired. They did. They were not as. As sophisticated as we are as it relates to Internet marketing, for instance. So they spent a significant amount higher percentage of their revenue on Internet marketing to get the business that they got. They did not do any water restoration. And so that obviously comes at a at a good margin for us. And so 's just a number of things they had you know, pretty significant back office staffs that we really do not need to replicate. And so there is there is just a Many of them do not have water respiration. Right. So that is. You know, top to bottom, I think there is a. there is ways that we will improve the EBITDA margin. And there is no reason to believe that these locations are any different than any other Roto Rooter branch location that all you know, combined average 20.8% margin in the third quarter. Get that, and that is almost a sure thing. The double treatment being. Alright.

And thank you so much for that. And if I may, on the VITAS side, 1 question I have, so clearly, outperformance, very strong results there. So this is all great. 1 question about that contractual allowance. it is small number, but I guess it is going up and it is this quarter in particular, it went up again, like, $3 million sequentially. Can you help us understand what is driving that? And also do you expect this line item to stay at around, call it, $8 million per quarter going forward?

Because of all the. All of the press and things in around fraud and abuse, we saw a very significant increase in activity around reviewing files. On a state and federal level of. Across all of our locations across the country. So order of magnitude, we saw roughly 12 to 14 million additional revenue being reviewed by the state and federal regulators. We have a great track record in sustaining any challenges to the revenue. We have great recordkeeping. We have entire departments devoted to compliance. But, historically, there is a slightly higher write off percentage when files get pulled than our normal write off percentage on a day to day and that is all you are seeing. Is a bit of a increase in you know, in activity around regulators.

Whether that continues going forward or not, I think, is anyone's guess. I would I would say, if I were guessing, that it probably will be sustained for some period of time. But as you said, it is not particularly material to the total. it is a. it is. We probably have a competitive advantage. You know, given that you know, our department that we have that fights those know, audits and whatnot are far beyond what, you know, our average competitor that is a single site not for profit. Could deal with. So And to Mike's point, though, we have a really, really strong track record of reversal on these claims, but we have to go through the due process which takes some time.

And so from an accounting perspective, we record it. And then we go through the necessary steps in reviewing of the claims, And, again, we have an outstanding track record and have no concerns, associated with that recent increase because of, to Mike's point, the focus from the government on program integrity has certainly increased the number of audits both pre and post payment audits that we are faced with.

Thanks. I appreciate you for the color.

Thank you. Our next question or comment comes from the line of Ben Hendrix from RBC Capital Markets. Mister Hendrix, your line is now open.

Thank you very much. Just a couple of quick follow ups. Kevin, I think you mentioned on the Roto Rooter side that you had increased actually your number of organically generated leads. I wonder if you can kind of give us a recap of some of the platforms or programs you have in place to kind of generate those leads internally? Are you working with applications or apps for iPhone apps or AI tools to help generate that and diversify away from Google. Just any comments you can get you can offer on that and where that could go.

Yeah. I could start, Mike, also.

But, you know, we have, know, we have an app. And, Mike, what is our total downloads at this point? it is over 300 thousand. We receive roughly a thousand to 1.5 thousand leads a week. Generated directly from the app.

And we have apps. You know, we have. When I say our natural, we. We will get them from, you know, for instance, commercial customers that have the commercial business managers, you know, direct line We get them from largely the maps section of Google. And generally speaking, it could be, you know, from a sticker on a water heater that we place-- replace with our telephone number that you know, does not go through a Google click. So it is. They are multifaceted, but, basically, they are they are everything other than a. You know, somebody going to Google and clicking on 1 of the paid ads. I mean, and see what. The type of thing that makes Google tops is they make it so it is hard for our it is hard for our customers to find our free you know, listing on Google. Know what mean? it is. there is there is 3 there is 3 sections of paid advertising before you get to that you know, type of information. I mean, if you search Roto Rooter Plumbing, you probably be viewing 7 or 8 competitors before you had the telephone number for Roto Rooter. And there would probably be a map section with a paid Roto Rooter We would not. We would not have a paid ad generally on that. But to the extent that Google now has, rotating paid ads in the map section. We do not have any control over that where those appear. So, you know, that would. Very likely again, our customers have to do you know, a dance and a and a go to a maze in order to find it on a free basis. But, we find that they still do.

And there is. And they are still looking for just Roto-Rooter. Yeah. And even if they are. So you know, they would click down a page and the first 2 or 3 places they would see Roto Rooter are still paid some level of paid search. Yeah. And so even if they are looking for Roto Rooter, they do not distinguish certainly between paid and unpaid. They just click the first 1 available. So I think that is part of the you know, part of what Google's forcing with the way they have they have organized their search page. But the other thing, that we. I definitely think we see, it is a little harder for us to track but we certainly believe that the number of leads we get from AI searches is increasing. it is hard for us to track because the. All the AI search engines do at the moment is scrape information from anywhere in the Internet So we are not exactly sure where the phone number was obtained from, but we know that those are free leads as well. So yeah. it is a slow slog, but, you know, I do think that we will continue to expand free leads Unfortunately, you know, Google is still the elephant in the room for the at least, for the near term.

Yeah. And I do not want to. You know, it. And I want to emphasize that our certain certainly our goal is to have the lion's share never a 100%, but the lion's share of commercial business, you know, come other than from Google. Okay? And that is, of course, the fastest growing part of the Roto-Rooter business And that gives us, you know, a lot of hope for stability with regard to this. Subject.

Thank you very much. 1 more on VITAS side and a follow-up on the line of questioning around the recruiting costs. Just. I know you guys are still working on your plan for 2027, but we are getting the question. So, any way to think directionally about kind of recruiting cost this year versus next? And should we expect some kind of acceleration in recruiting expenses next year? Thanks.

Hey, Ben. No. We do not anticipate any material increase, in recruiting cost as we look forward to 2027. Our teams do a great job of proactively managing where we have staffing needs and responding accordingly. Thanks, guys.

Thank you. Our next question or comment comes from the line of AJ Rice from UBS. Mister Rice, your line is open.

Thanks, Joel L. Wherley. Hi, everybody. Maybe just first on the VITAS side. Obviously, strong, growth there. I wonder when you drill down, is that your sense of you are consistent with overall market? Are you picking up share? I know you got a couple of new markets in Florida that you have opened that may be contributing. I know the discussion around fraud and abuse may be? Is there any movement of referral sources toward you because people feel more comfortable with your compliance programs versus a mom and pop I wonder if you could just comment on what you are seeing in your growth numbers relative to what you think the underlying trends are?

Yeah. Thanks for the questions. First, we had a very balanced quarter. As you look at growth both Florida and non Florida across the company. Although I will speak to your latter question, which is, have we seen an increase specific to any concerns associated with waste, fraud, and abuse potentially with other providers. We continue to see strong growth in Florida. Or, I mean, in California. Specifically Southern California. And so, yes, we do believe there has been a migration towards a more stable, trusted partner. As it comes to end of life care in those markets, and we have benefited from that. We continue to support the government's oversight with program integrity and their desire to weed out fraudsters within in the industry. 1 thing I want to comment on in that we are working very closely with CMS on this is that we wanna change that narrative. From discussing waste, fraud, and abuse to access for those in need. Recognizing only a little over half of the Medicare deaths in The United States actually get the benefit from the Medicare hospice benefit. There is a lot of education still to be done and a lot of access. That needs to be created. So we feel good about our balanced growth it is not just been in our new starts in Florida. it is been across the company, and as regards to California, we feel really good as the largest provider across the state. Of where we are positioned and the growth that has occurred out there.

Okay. Maybe also on the Roto Rooter side, I know a lot of the discussion has been about the headwind on the margin side that the paid leads and all the dynamic of how the referral sources have changed over the last few years. I wonder when you step back, do you think. Because you maybe are in a better position to fund that, is it helping you grab share? I do not know whether the 5.5% same store growth revenues that you are reporting in Roto Rooter, is that you think, market? Or do you think you are picking up share because of some of the changing dynamics in the business?

Yeah. I think that there is I think there is a little bit of that, but the countervailing force is I think we are seeing a little bit of panic by some of our competitors. And when I say panic, I see them increasing their bids you know, for placement. On the paid search. To the extent that things get tougher, they do not. You know, they have a company that has, you know, very little name recognition, you know, in their markets. Relatively. Well, compared to Roto Rooter. And we see them as they are. it is because they are largely big competitors, They are they are facing the same discrimination by Google, but that we are seeing. And, you know, because there are advertisers, what. it is kind of counterintuitive, but Google is discriminating against any company that advertises. Because they say, well, as long as you are big enough to advertise, you know, we are gonna turn the screws on you, and you are gonna you are gonna be forced to have that be your only outlet for getting leads. And I, you know, I see them possibly panicking a bit. We saw during the quarter, that our. The bids per lead were going in. That was part of the, you know, what we call the margin pressure associated with marketing. And I think stage 1 is their fighting off that market erosion. And I think a little bit of that is coming to us. We expect to be even more successful with regard to market share. I mean, it is also another comment that there are very few markets that we are not you know, significantly larger than our competitors. You know, there is some. But again. So it is it is little bit like VITAS in Florida. Right. it is hard to talk about them get. Improving market share when they. When some of the counties VITAS might have, you know, 75% of the Medicare deaths associated that entered hospice. You know? So but you are you are. I think you are making the right point.

I mean, Roto Rooter has some, I think, some advantages in adversity. I mean, to the extent that is get. Our average price per job is much higher. It makes our marketing you know, your cost per job lower, obviously, just arithmetic. It you know, our resiliency of our service mark is. it is, you know, so strong. The time. The period. The time that we have been in the. In each 1 of these markets has been since the 1.94 thousands. I mean, we have a lot of advantages We are we are still facing some tough competition, and Google's doing everything they can to make it tougher. But, Yeah. Hey. We have we have good thoughts for Roto Rooter. But, you know, we do not wanna ever send the message during this period. That there are not headwinds. We have talked about the headwinds of, you know, gas prices are not gonna improve anytime in the next couple weeks. No. Google is not going away. We are trying to get we are trying to get, you know, better in dealing with them. And job 1, really, for us, is saying, look. If we can grow the top line, you know, that, you know, that. it is like a rising creek covers a lot of stuffs. And, the creek is rising. And now it is our job just to navigate the stumps. I would just I would just add AJ, that it. You know, much to our, you know, you know, disappointment internally as well is there are not great statistics in the overall plumbing industry market share and overall size of the industry and our part in that. What I would say is 5.5% growth is higher than what we would historically see in the overall industry on a year to year basis. So I think we would conclude that at least to some degree, as Kevin would say, we are taking market share in our branches We know with certainty, as evidenced particularly by, you know, some of the things we talked about, our own contractors as well as you know, the very motivated seller. We just bought their business from California. We know that smaller, less sophisticated plumbing companies are really struggling in this environment. it is a difficult environment, and as Kevin has talked about, it is a pretty sophisticated marketing problem to navigate our way through. So I do think we are taking market share from some of the smaller players and we will see. We. I wish we had better statistics on how that all worked. No problem. I might ask 1 last question. On the prepared remarks, you made the comment about, obviously, the capital structure. Strong. You can. You are positioned if strategic deals come along. To take a look at it. It sounded like in some of the earlier discussion, the main focus is on potentially buying out some franchisees, but I wanna. I wanna leave it without making sure, is that what you are talking about when you are saying you have the capital strength to consider strategic deals, or is there something broader than that you are referencing? I think I think at this moment, we are more we are more focused on the deals. The type of deals we have. Made this year so far, reacquiring franchises maybe. You know, Joel will find a single location or, you know, smaller multi location hospice in a place we like. But I think we are focused on building the 2 brands that we own Kevin and I and some of the other executives talk all the time about, you know, the potential for third legs of the stool at the company, but ultimately, that is a pretty high bar for us. From an investment standpoint to make, but it is not that we ever rule it out. it is just we have pretty high standards when it comes to thinking about potentially expanding to a new product or service line altogether.

Yeah. I would say if you talked about in terms of. I agree 100% with what Mike said that nothing. Certainly nothing's imminent. I would say much. If you talk about probability, the type of thing we look at you know, almost, you know, just regularly through another service line of Roto Rooter. I mean, you know, we have, you know, certainly been in many other service lines lot of, you know, lot of questions like, would you ever. Would we ever consider getting back into the HVAC And we think in certain geographies, we would. We think they are struggling HVAC companies in some of the geography that we would like to be in. The first time we were in it, and this was in the. most of the 1.99 thousands, We just did not see it helping our plumbing business very much or vice versa. And but maybe, you know, things change. But, I mean, I would say that is that is a lot more likely to an additional service line at Roto Rooter that is a completely new business.

Okay. Alright. that is great. Thanks so much. Thanks, AJ.

Thank you. I am showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.

No. Closing remarks are just thanks, everyone, for their attention, and appreciate all the operating units for excellent results. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.