Q3 2025 Chemed Corp Earnings Call

Operator: Good morning, everyone.

Speaker #2: Good morning .

Operator: 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.

Speaker #3: Good morning and thank you for standing by . Welcome to the CHEMED CORP Corporation , third quarter 2020 Earnings Conference Call . At this time , all participants are in a listen only mode .

Speaker #3: After the speakers presentation , there will be a question and answer session . To ask a question during your session , you will need to press star one one on your telephone .

Speaker #3: You will then hear an automated message advising your hand is raised . To withdraw your question , please press star one one again .

Speaker #3: 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 .

Speaker #3: Please go ahead .

Holley Schmidt: 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. Your caution is 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.

Speaker #2: Good morning. Our conference call this morning will review the financial results for the third quarter of 2025, ended September 30, 2025.

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: 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 28th and in various other filings with the SEC .

Speaker #2: 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 .

Holley Schmidt: 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 #2: In addition , management may also discuss non-GAAP operating performance results during today's call , including earnings before tax , before interest , taxes , depreciation and amortization , amortization , or EBITDA , and adjusted EBITDA .

Speaker #2: A reconciliation of these non-GAAP results is provided in the company's press release dated October 28th , which is available on the company's website at CHEMED CORP .

Speaker #2: I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of CHEMED Corp, and Michael Witzeman, Chief Financial Officer of CMD.

Speaker #2: And Joel Worley , president and Chief Executive officer of CHEMED CORP . Vitas healthcare Corporation subsidiary . I will now turn the call over to Kevin McNamara .

Kevin McNamara: Thank you, Holly. 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.

Speaker #4: Thank you . Holly . Good morning . Welcome to CHEMED CORP third quarter 2025 conference call . I will begin with highlights for the quarter .

Speaker #4: 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 .

Speaker #4: Vitas continued to execute the strategies required to fully mitigate any potential Florida Medicare cap billing . Billing limitation for the government's fiscal 2026 year .

Speaker #4: 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 .

Kevin McNamara: 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.

Speaker #4: 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 .

Speaker #4: During our community Access program , this ratio dipped below the preferred range for a sustained period of time . In the third quarter of 2025 .

Speaker #4: This ratio was 44.5% , which represents a high water mark during the post period . The ratio has been above 42% for all of 2025 .

Speaker #4: We previously estimated that the consolidated Florida program would end 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 .

Speaker #4: 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 .

Kevin McNamara: 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 ADC of 75 as of September 30, 2025. We projected it could double in size to an ADC 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.

Speaker #4: 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 ADC of 75 as of September 30th , 2025 .

Speaker #4: We project that it could double in size to an ADC of 150 by the end of 2026 . Now , let's turn to Roto-Rooter .

Speaker #4: 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 .

Speaker #4: 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 .

Kevin McNamara: 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 multipronged 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.

Speaker #4: 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 yield yielded positive results in the quarter .

Speaker #4: 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 .

Speaker #4: 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 .

Speaker #4: This is a nice improvement compared to the trajectory we saw in 2024 , and earlier in 2025 , as discussed in the past few 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 .

Kevin McNamara: 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.

Speaker #4: The entire decline in leads is in the natural lead category . In my opinion , this trend is both a positive and a negative .

Speaker #4: While we are paying for 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 , significant private equity competitors .

Speaker #4: 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 .

Speaker #4: The many operational initiatives discussed in past calls are having positive impacts. The shift from unpaid leaves to paid leaves was the main driver of the $3.6 million increase in costs in the quarter.

Kevin McNamara: 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 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 #4: This led to EBITDA and EBITDA margins to be slightly lower than our expectations for the quarter . We were very encouraged with the performance of both businesses in the third quarter .

Speaker #4: Vitas 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 road business has stabilized and is on the way to returning to a predictable , sustainable growth trajectory .

Speaker #4: With that , I would like to turn this conference over to Mike .

Mike Witzeman: 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.

Speaker #5: 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 .

Speaker #5: 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% .

Speaker #5: 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 .

Speaker #5: 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 .

Speaker #5: 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 .

Mike Witzeman: 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.

Speaker #5: $0.08 , 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 .

Speaker #5: 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 .

Speaker #5: Adjusted EBITDA margin in the quarter , excluding Medicare cap , was 17.0% , which is 157 basis points below the prior year period .

Speaker #5: 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 .

Speaker #5: 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 .

Mike Witzeman: 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.

Speaker #5: 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% .

Speaker #5: 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% .

Speaker #5: 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 2020 .

Speaker #5: For 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 branch owned or owned branch locations .

Mike Witzeman: 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.

Speaker #5: 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 .

Speaker #5: 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 .

Speaker #5: 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 .

Speaker #5: The third quarter EBITDA margin is a 90 basis point improvement over the second quarter of 2025 , well below our long term expectations .

Speaker #5: Roto-Rooter . Third quarter gross margins were within our guidance range . The many field level initiatives discussed in prior quarters have begun to take hold .

Speaker #5: The paid versus natural lead generation shift discussed by Kevin drove the 3.9 $3.6 million increase in costs and the resulting EBITDA margin pressure .

Mike Witzeman: 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 #5: 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 23 , $22.30 per share , excluding non-cash expenses for stock options , tax benefits from stock option exercises , cost related to litigation and other discrete items .

Speaker #5: This guidance assumes that there will be no Medicare cap related to our Florida combined program . For the government . Fiscal year 2026 .

Speaker #5: Beginning on October 1st , 2025 , I will now turn the call over to Joel .

Joel Worley: 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%. 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.

Speaker #6: Thanks , Mike . In the third quarter of 2025 , our average daily census was 22,327 patients . An increase of 2.5% in the quarter .

Speaker #6: 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% .

Speaker #6: 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 2020.

Speaker #6: For the average length of stay in the second quarter of 25 was 137.1 days . Our median length of stay was 18 days .

Speaker #6: In the third quarter of 2025, the median length of stay was equal to the median in the third quarter of 2020. For the median length of stay in the second quarter of 2025, it was 20 days.

Speaker #6: Its 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 .

Joel Worley: 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 into its next chapter. The new CON in Pinellas County is a significant opportunity for VITAS. 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: As previously discussed, I'm excited about the opportunity to lead Vitas into its next chapter. The new con in Pinellas County is a significant opportunity for Vitas.

Speaker #6: 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 .

Speaker #6: 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 .

Speaker #6: With that , I'll turn the call back over to Kevin .

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

Speaker #4: Thank you . Joel . I will now open this teleconference to questions .

Operator: 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 Hendrix of RBC Capital Markets. The floor is yours.

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 one one on your telephone and wait for your name to be announced .

Speaker #3: To withdraw your question , press star one one again . Please stand by while we compile the Q&A roster . Our first question comes from Ben Hendrix of RBC Capital Markets .

Speaker #3: The floor is yours .

[Analyst 1]: Great. Thank you very much. Thank you 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 CEO perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in the fourth quarter? Thanks.

Speaker #7: Great . Thank you very much . And thanks for all the comments . Appreciate the reaffirmation and guidance . With results in line with your expectations .

Speaker #7: But 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 .

Speaker #7: In the fourth quarter . Can you kind of run through in each segment what what you're seeing from a demand and cost trend perspective and even from a perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in fourth quarter .

Speaker #7: Thanks .

Mike Witzeman: Sure, Ben. I think the biggest sort of 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, but 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.

Speaker #5: Sure , Ben . I think I think the biggest , you know , sort of distinction is that there's there's a little more seasonality that we anticipate in the fourth quarter .

Speaker #5: And so when I looked at your your how you progressed the third and fourth quarter and it was across all the analysts , it's not just you , but the third quarter was a little lower than our internal or a little higher than our internal expectations .

Speaker #5: And the fourth quarter was a little lower . So all in all , where you ended up , the year was exactly in line with where we end up the year .

Speaker #5: It's more of a seasonal thing . The to the when you break it down between Vitas and Roto-Rooter , Vitas is fourth quarter is always their best quarter .

Speaker #5: It's when the the the new rate increase goes in on October 1st , our margin spikes in the fourth quarter from from that because our cost structure really hasn't changed from September .

Speaker #5: You know , for instance , from September 30th to October 1st . So we get a pretty nice bump in margin from that , from a rotorooter perspective .

Mike Witzeman: 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. I don't think there was a huge difference between what you had and what we had.

Speaker #5: They always do better in the fourth quarter . And the first quarter . The fourth quarter , you know it's a whether impact when it's colder wetter Roto-Rooter tends to get more jobs .

Speaker #5: So it's just a little bit of a change . And and I would tell you that the difference is only a couple million dollars , right ?

Speaker #5: Between each quarter . And so it's not I don't think there was a huge difference between what you had and what we had .

Kevin McNamara: Right. Now, giving 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 #4: Right . But now it would give you some specifics . Mike . Some of the elements that that you do expect to improve during the quarter compared to the third quarter .

Mike Witzeman: 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 Healthcare, I think, is steady as she goes in the fourth quarter from a margin and revenue perspective.

Speaker #5: Sure , sure . So 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 the issues that we've had from a cost perspective at Roto-Rooter with discounting in the field , with higher commission rates , that that improved , as I mentioned in the prepared remarks , I think are sequential margin improved about 90 basis points .

Speaker #5: And we can we we expect that to continue . So we're expecting , you know , 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 .

Speaker #5: And Vitas, I think is steady as she goes in the fourth quarter from a margin and revenue perspective.

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

Joel Worley: Yeah. 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: Yeah . So and 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-admission driving a higher volume of shorter length of stay patients .

Speaker #6: 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 well as going into the fourth quarter .

Speaker #6: As Mike indicated , is usually a good quarter for us . And 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 .

Kevin McNamara: 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-based 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 the 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 the Medicare cap. Just the moderation of that alone would cause the type of improvement we're talking quarter compared to quarter.

Speaker #4: And just to give you one specific how this relates to the results for Vitas , as we mentioned in the third quarter , you know , we shoot for between 42 and 45% is the ratio of hospital admissions for the quarter .

Speaker #4: It was 44.5% . To the extent that that were to moderate , closer to 42% , you would expect to see longer stay patients .

Speaker #4: Non-hospital admissions , which still be in a healthy range . But it would it would yield more profitable patients . So I mean , that's that expectation is that 44.5% is a high water mark .

Speaker #4: And during a period of , you know , extensive scrutiny on Medicare cap and just the moderation of that , that alone would cause the type of improvement we're talking quarter compared to quarter .

[Analyst 1]: 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 #7: Thank you . And if I could just do one follow up here . Could you talk a little bit about your receivables ? Looks like DSO is a little elevated .

Speaker #7: Just wanted to get your thoughts on how cash collections are progressing . And if there's a timing issue there or kind of what we can expect from a from a cash collection perspective .

Speaker #7: Thanks .

Mike Witzeman: 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 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.

Speaker #5: 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 , you know , sand in the air from a government perspective , Medicaid has slowed , payments have slowed down .

Speaker #5: But it's not an indication of any , you know , deterioration in our our collection efforts or ability to collect . It's just a timing issue .

[Analyst 1]: Great. Thank you, guys.

Speaker #7: Great . Thank you guys .

Operator: Thank you for your question. One moment, please. Our next question comes from the line of Brian Gil Tanquilut from Jefferies. The line is yours.

Speaker #3: Thank you for your question . One moment please . Our next question comes from the line of Brian Tanquilut from Jefferies . The line is yours .

[Analyst 2]: Hey, 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 with 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. Broadly speaking, without giving guidance, obviously, how you're thinking about the growth algorithm for 2026.

Speaker #8: Hey , good morning guys . Mike , thanks for all the comments . Good morning . Yeah , thanks for all the comments on Vitas .

Speaker #8: So maybe just as I think about 2026 with where the Medicare rates shook out , I know you had . Previously provided some insights into how you were thinking about margins and growth rates for next year .

Speaker #8: So curious where that stands now . And just broadly speaking , without giving guidance , obviously , how you're thinking about the growth algorithm for 2026 .

Mike Witzeman: 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. VITAS Healthcare has operated that way since we started, since we've owned them.

Speaker #5: Sure . I'll start . And then Joel or Kevin can can follow up . But we well , first we're only , you know , at the beginning stages of our budget process .

Speaker #5: As I know you know . But 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 and then how that relates to the financial statements .

Speaker #5: And 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 .

Speaker #5: And that's how it's operated . You know , Vitas is operated since we started , since we've owned them , we saw that that number in the fourth quarter last year was a lot .

Mike Witzeman: 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.

Speaker #5: That liability in the fourth quarter was a lot higher than it is historically been . And so we had to moderate , as we've talked about a lot more hospital admissions to the extent and we believe this to be the trajectory we're on .

Speaker #5: But that that number is much more moderate in the fourth quarter this year . That informs our ability , as Kevin mentioned before , to to be able to start creeping back up the long stay patients and improving the revenue growth rate and the EBITDA margin , of course , you know , that takes a little time as well as those all all patients on the first day are short stay patients .

Speaker #5: So 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 .

Mike Witzeman: 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 #5: But the , you know , the fourth quarter is really going to inform 2026 if , you know , if I had to say from a high level perspective , again , a little bit of speculation , but I would say revenue in the eight ish percent range margins at the 27.5 to 28% range is what we would think 17.5 to 18% .

Speaker #5: Sorry , I was mixing that up . Sorry .

Kevin McNamara: I get it.

Speaker #4: I get .

Speaker #5: Excited . Yeah , is what we would think off the top of our head . But again , we're putting pen to paper now .

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

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

Speaker #4: Joel , anything with regard to from an operating margin profitability that gives you renewed confidence for next year . And I know it's you're early in your budgeting process .

Joel Worley: Thank you, 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.

Speaker #6: So 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 .

Speaker #6: Getting back to active census growth , especially within the Florida market , we are very encouraged by the strategies we put in place .

Speaker #6: 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 Cap , which then puts us in a position where we can be agile and responsibly get back focusing on census growth in those markets .

[Analyst 2]: 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, G&A is the area, the other lever there. Just wanted to hear your thoughts on improvement, performance, and opportunity on the G&A line as we think about both Roto-Rooter and VITAS. Thank you.

Speaker #8: I appreciate that , and 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 .

Speaker #8: So if you can speak to that and then maybe as I go back to your comment about gross margin coming in in line , clearly G&A is the area .

Speaker #8: The other lever there . So just wanted to hear your thoughts on improvement , performance and opportunity on the line . As we think about both roto and Vitas .

Speaker #8: Thank you .

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

Speaker #4: Okay , well let me let's have Mike start with the the the numbers on it . But I'll give you my overall perspective following that .

Mike Witzeman: 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're sort of targeting Roto-Rooter. All of the people who are willing to pay for leads are being forced to pay for more leads.

Speaker #5: Yeah , sure . The first question , Brian is , is our total leads for the second quarter in a row were up almost were high single digits on a paid search basis .

Speaker #5: The entire deterioration in leads that we've seen is in in unpaid search categories . Again , as we've talked about that that creates margin pressure because we're paying for more leads .

Speaker #5: But ultimately we are not seeing the competitive pressures for those paid leads that we have in the past . And and we find that to be encouraging .

Speaker #5: 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 .

Speaker #5: So it's not it's not as if , you know , their sort of targeting Roto-Rooter , all of all of the people who are willing to pay for leads are being forced to pay for more leads .

Mike Witzeman: 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 #5: And so that would include our private private equity competitors . And 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 #4: In the second , give you an example . In the second quarter of last year , Roto-Rooter paid more , you know , spent more for advertising and all the internet .

Kevin McNamara: 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 #4: And we didn't . And it was met by competitive , competitive response . And the net result was everyone paid more . But there wasn't a change in the balance of leads .

Speaker #4: That's not what we're seeing now . We're seeing now as we spend more . We're getting more . And it's it's just up to us .

Speaker #4: And basic economics to make sure that we maximize the utility of that spending . Yep .

Mike Witzeman: Yep. 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 #5: The and then as far as sort of margin , when when we talk about gross margin being in line there 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 .

Speaker #5: There's work to do there still . But 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 the discounting in the field .

Speaker #5: And commissions . So while the gross margins are in line with what we expected in the third quarter , they're still work to do there .

Kevin McNamara: Yeah. Let me just say, I'll make a subjective comment here. You know, one of our biggest problems in getting margin on the calls we are getting is, you know, it's pricing discipline. It's easier to have that pricing discipline when there's enough work to go around. We're starting, you know, as you know, we're starting to see that as opposed to being down 10%, it's up 1%. I mean, it's easier to have the discipline to not discount, to make sure we get a price that gives us our traditional margin. You know, 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 #4: And let me just say this , I'll make a subjective comment here . You know , one of our biggest problems in getting margin on on the calls we are getting is it's pricing , discipline and it's easier to have that pricing discipline when there's enough work to go around .

Speaker #4: And we're starting , you know , as you know , we're starting to see that as opposed to being down 10% . It's up 1% .

Speaker #4: So, I mean, it's easier to have the discipline to not discount, to make sure we get a price that gives us our traditional margin.

Speaker #4: And again , it's it's the it's the rising creek that more , more , more leads give you to provide that . And that's , that's really it's a it's subjective , but it's , that's what we're really shooting for , for the improvement for 2026 .

Speaker #4: And Roto-Rooter .

Mike Witzeman: The last thing I would say in this mirrors Kevin's remarks on the SG&A line. We're doing what we can to minimize the cost, but it's a, 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. We track that pretty closely, and we think it's the right use of money to drive top line, to spend a little more on the paid marketing side.

Speaker #5: And then the last thing I would say , and in this , you know , mirrors Kevin's remarks on the A line , we're doing what we can to to minimize the cost .

Speaker #5: But , you know , it's a it's a we want to make sure that we maximize the opportunities that that are provided to us .

Speaker #5: And if , 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 and we track revenue .

Speaker #5: Revenue per , you know , per lead cost and those sorts of things . So we track that pretty closely . And so we think it's the right use of money to to drive top line , to spend a little more on the paid marketing side .

Kevin McNamara: 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 more money from them.

Speaker #4: And something we've , you know , you know , it's not it's not enough . But we haven't been talking about the operational aspects of Roto-Rooter and the internal metrics .

Speaker #4: That is close rate at the call center , close rate in the field . A lot of those operational metrics remain very strong .

Speaker #4: So we feel that we're poised if we get the calls we should make , we should make more money from them .

[Analyst 2]: Awesome. Thanks. I'll stick to my two questions.

Speaker #8: Awesome . Thanks . I'll stick to my two questions .

Operator: Thank you for your question. Our next question comes from Joanna Sylvia Gajuk from Bank of America. The floor is yours.

Speaker #3: Thank you for your question . Our next question comes from Joanna Zhuk from Bank of America . The floor is yours .

[Analyst 3]: Hi. Good morning. Thanks so much for taking the question. Maybe just to continue on the Roto-Rooter segment. If I read this right, you know, margins are under pressure because of the marketing costs, right? How should we think about sustainable margins? I mean, it sounds like maybe that's the new kind of business model. You got to pay more. How should we think about, you know, 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 #9: Hi . Good morning . Thanks so much for taking the questions . So maybe just to continue on the on the segment . So if I read this right , margins are under pressure because of the marketing costs , right ?

Speaker #9: So how should we think about sustainable margins . I mean , it sounds like maybe that's the that's the new kind of business model .

Speaker #9: You got to pay more . So how should we think about , you know , I know you don't have specifics for next year , but say over the medium term or longer term , how how you think about margins in that business .

Mike Witzeman: 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 is 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 #5: Sure . From from a longer term perspective , we think that the right margin and I'll get it right this time . Kevin .

Speaker #5: The margin that rotary is 25 to 26% is the right EBITDA margin over the longer term . We're not quite there yet . We think that that we should be able to absorb higher marketing costs because of the higher leads and the revenue that they generate .

Speaker #5: And so there's no doubt that there's going to be continued pressure for the near term , for certainly the foreseeable . You know , few quarters on marketing costs specifically , but we think that they are we're able to overcome them with other operational things .

Speaker #5: We've talked about this over the last few quarters.

Kevin McNamara: Yeah. Let me 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. Essentially, 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.

Speaker #4: Let me just let me tell you how it works in the real world . When calls are down , the service man , you know , goes out , makes a written estimate , and it's all or nothing .

Speaker #4: You know , essentially the the , the customer says , okay or no . And , you know , at that point if , if there's not another job on the board for that service man to go run to , you can see how he's he's inclined to say , well , what will it take for me to do it ?

Speaker #4: You know , and that's the discounting . That's where you that's where you lose margin and to the extent that we're able to .

Speaker #4: 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 those , you know , that additional potential work .

Speaker #4: And it's like a multiplier effect . And , you know , again , we're not that far from , you know , getting back on an even keel or , you know , with regard to leads .

Kevin McNamara: 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 #4: And when I say even keel , I mean something that's , that's that's not down double digits , you know . So that's the magic is as far as paying a little bit more , but still having , you know , strong margins .

Mike Witzeman: It's that all or nothing. You know, to the service man, if he cuts $70 off the job, that's at least something for his time. Again, bad business drives out good business, and that's what we're always at war with. We've put in some a little bit tighter controls around what the technicians are able to do at the door, a little bit higher-level approval requirements and things like that. A learned behavior like that doesn't change overnight. That's why we knew this was going to be at least a couple quarters to really fix this learned behavior in the field. We're pleased with where it has progressed through the end of the third quarter.

Speaker #4: . And it's that all or nothing . It's that , you know that to the service to the service man . You know if he if he cuts $70 off the job , that's at least something for his time .

Speaker #4: But again , you know , it's bad business . Drives off , drives out , good business . And that's what we're always , you at war with .

Speaker #5: And we and we've put in some some a little bit tighter controls around what the , the technicians are able to do at the door .

Speaker #5: You know, a little bit higher-level approval requirements and things like that. But learned behavior like that doesn't change overnight. And that's why we knew this was going to be at least a couple of quarters to really fix this.

Speaker #5: This learned behavior in the field . And we're pleased with where it where it has progressed through the end of the third quarter .

[Analyst 3]: 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 what you started at?

Speaker #9: Okay . Because I guess if I look at year to date , excuse me , adjusted EBITDA margins for the segment , about 23 or so , but I guess to get to your full year guidance , that just implies higher margin in fourth quarter .

Speaker #9: But you also alluded to the idea of like seasonality , seasonality impact , right ? So is that what .

Mike Witzeman: Fourth quarter is always the highest.

Speaker #5: Fourth quarter is always the highest .

[Analyst 3]: Always 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?

Speaker #9: Always higher margin to okay . Because it kind of comes out to be like 25% or so to get to call it 24% for the year .

Speaker #9: So is that 24 like a good number to think about ? You know , as we head into next year in terms of margins .

Mike Witzeman: 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.

Speaker #5: I think I think we can do better than that next year . But again , we're we're working on the budgets now . But I think we should see some margin improvement .

Speaker #5: Certainly next year compared to 25 .

[Analyst 3]: 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?

Speaker #9: And then when it comes to top line , right . So it's tracking it . You know , 1% growth this year . So how should you think about this .

Speaker #9: Can this business kind of grow closer to mid-single digits . Is that still kind of on the table . And when would you think you know , we should be able to see that kind of growth ?

Mike Witzeman: 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 #5: I think we are I think we , again , are in the early stages of our budgeting process . I think we'll see better growth next year than we've seen this year .

Speaker #5: Whether that's , you know , 3 to 5 . It's speculating at this point .

Kevin McNamara: I would say that's probably going to be our budget, the way it's, or 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. Then we'll go to work.

Speaker #4: 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 .

Speaker #4: And then we'll go to work .

Mike Witzeman: Yeah. With the green shoots we've seen in certain revenue categories in the third quarter here, 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.

Speaker #5: Yeah . And then with the , you know , the , the green shoots we've seen in certain revenue categories in the third quarter here , you know , there could be upside to that .

Speaker #5: But we're , you know , monitoring day to day what what's happening in the field . And we're going to put together a budget that we think is achievable , but also , you know , realistic .

[Analyst 3]: Okay. Thanks. Switching to VITAS. Right. Just to clarify first, when you said you do not assume any liability in Florida under the Medicare 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 Medicare 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 #9: Okay . Thanks . And switching to so just to clarify , so when you said , you know , you do not assume any liability in Florida under the comp , is it because you just kind of based on the weight increase , you know , you can tell that , hey , like the the delta between the rates in Florida , the increase is much smaller .

Speaker #9: So that's , that's the reason for saying no liability or you in that , in that statement , you're also assumed like some assets from , you know , these new markets or other things .

Joel Worley: 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%.

Speaker #6: Yeah . So 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 .

Speaker #6: And what Kevin referenced at the beginning of the call , which is the overall percentage of our admissions coming from a hospital . Pre-admission environment , which as we know , has a tendency to drive a shorter length of stay patient .

Speaker #6: So what we saw was last year in the Medicare cap year for 25 , we had multiple months where our overall percentage of hospital admissions dropped to a record low of .

Speaker #6: 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 .

Speaker #6: And as he indicated for the last quarter , we were at a high water mark of 44.5% . That's what gives us the confidence in knowing that we are in the right direction to mitigate any cap liability .

Joel Worley: 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 #6: Then , with addition on top of that , we have the Pinellas opening that we're excited about .

Mike Witzeman: 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 #5: But don't 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 .

Kevin McNamara: Joanna, you also pointed, there's no question that last year the thing that pushed VITAS 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.

Speaker #4: And but , Joel , Joanna , you're also point is , there's no question that last year . The thing that pushed us over the edge , ultimately in one fell swoop was .

Speaker #4: 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.

Speaker #4: I mean , that alone was two was was in retrospect , too much to overcome , particularly in line with the the issues that Joel just spoke about .

Speaker #4: And then again , just to , you know , 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 is kind of in a sweet spot .

Speaker #4: It's up , but it's very doable .

[Analyst 3]: What is that number that you can share with us versus the $200 delta, you know, fiscal 2025? What is it in 2026?

Speaker #9: So what is that number ? If you can share with us versus the 200 Delta in fiscal 25 ? What is it in .

Speaker #5: 2630 to 40 basis points ? The national average is around 2.6 or 2.7 . We've calculated our Florida average to be 3% . That that equates to a 3 or $4 million headwind , which is well within our ability to manage that headwind .

Mike Witzeman: 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.

Speaker #5: Last year was 22 or 25 million .

Speaker #10: Yeah , right .

[Analyst 3]: Yeah. Exactly. Okay. 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, and now I guess you're kind of maybe stopping that because at some point you kind of 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 #9: Exactly . Okay . Exactly . That's what I was looking for . Thank you for this . And then so I guess when it comes to these short patients and it sounds like you're getting , but you got better traction .

Speaker #9: And now, I guess you kind of maybe stopped that because at some point you kind of talked about sort of like some pause, as in like there was more competition for these patients.

Speaker #9: So it sounds like in third quarter , like things have changed to the point where you now also taking more of these longer stay patients that the way to think about how you describe the situation currently .

Kevin McNamara: Absolutely. 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 that you would think would have the effect of getting more short-stay patients. That is, more salespeople, more effort at 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, impacted. 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.

Speaker #4: Put it this way . We definitely saw last year , you know , that as we said , Vitas , new at the beginning of the year , they had an uphill battle and they , you know , and they pulled various traditional , you know , levers , you know , that they that you would think would have the effect of getting more short stay patients .

Speaker #4: That is , more salespeople , more effort on the at the hospital level . And one of the things we observed , it didn't have quite the effect that traditionally would have come to expect .

Speaker #4: And one aspect of that was pretty much everybody in Florida got this big increase . Not not everybody . I mean , impact that is hospices do continuous care .

Speaker #4: Got that type of 200 basis point increase . But there were increases in Florida that that , that hospices that traditionally weren't that concerned were short .

Speaker #4: Stay patients became more concerned with them . And the real effect last year was just we pulled some levers that we expected to have some reaction .

Kevin McNamara: It didn't, and given that environment, they didn't have quite the impact that we would have hoped. Those, for 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 we don't have the Medicare cap limitation in Florida. It's just, it's pretty simple. It's a lot of work to do those various components, but the conclusion from reasonable assumptions is pretty direct. Joel, anything to add just on that very general observation?

Speaker #4: It and given that environment , they didn't have quite the the impact that we would have hoped those , for 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 , Medicare admits have a reasonable ultimate , a reasonable average length of stay .

Speaker #4: And given the reimbursement environment , we should be back to the to the position where , you know , we don't have a Medicare capital invitation in Florida .

Speaker #4: It's just it's it's it's pretty simple . And , you know , it's a lot of work to do . Those various components .

Speaker #4: But the conclusion from reasonable assumptions is pretty direct . Joel , anything to add just on that very general observation ?

Joel Worley: 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, throughout the Medicare cap year.

Speaker #6: 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 , throughout the Medicare cap year .

Kevin McNamara: 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. We were within 2%. It wasn't a big mess. It was a small mess. The problem with 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.

Speaker #4: But and keep in mind , it's just one of those things , even having said all that , no one likes a surprise $18.9 million hit .

Speaker #4: But that's still less than 2% of the I mean , it's still it's still flying pretty darn close to what would have been , you know , arriving on fumes .

Speaker #4: We just didn't quite make it .

Speaker #10: Yeah .

Speaker #4: We were within 2%. So it wasn't a big mess; it was a small mess, but it was the problem with it.

Speaker #4: It was it was it was the first time ever . And it was a scary specter , you know , of a term that we hadn't really talked about in the past .

Speaker #4: And that was the Medicare cap in Florida.

[Analyst 3]: 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 the fourth quarter, it sounds like margins would need to go up year over year, like 50 bps or so, to get to your prior segment margin pre-cap. They've been down year over year. What's going to be different 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 #9: And if I may follow up on the discussion on seasonality , right . So if I do the same exercise in in terms of just like how much it's tracking so far this year and what this implies for fourth quarter .

Speaker #9: So it sounds like margins , I guess would need to go up year over year . Like 50 or so to get to your prior , I guess , segment margin pre pre comp .

Speaker #9: But they've been down year over year . So I guess what's going to be different I guess , is it really the kind of the mix of patients you assume you're going to be , you know , having more of a tailwind from the long stay patients ?

Mike Witzeman: 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 #5: No , I think it's the things we've talked about already that we get a bump from the the rate increase . I think Joel's talked about some things .

Speaker #5: They're doing at the G&A level . If you notice in the third quarter for Vitas , SG&A actually is down year over year .

Speaker #5: That that's going to continue in the fourth quarter . So that there combining , you know , rate increases a little better efficiencies as well as some specific targeted cost cost cutting measures .

Kevin McNamara: Joan, let me make one comment. You know, we don't give quarterly guidance, but you know as we—

Speaker #5: .

Speaker #4: John , let me make one , one comment . And , you know , and , you know , we don't give quarterly guidance .

Speaker #4: But , you know , I say we reiterated guidance . know , just , you yesterday . But and you know , Ben mentioned something earlier that as far as was it basically was it aspirational to be shooting for midpoint of guidance .

Operator: 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, it is doable, you are on course. The answer is not only on course, we think that we're on the upper end of the course.

Speaker #4: And , you know , I'll just say that at this point , no , I mean , we're we're shooting at the upper end of guidance .

Speaker #4: We don't think it's aspirational . You know , any respect . And you're certainly right . Most of the questions have been along the lines of of okay , so you know , it is doable .

Speaker #4: It is , you know , that that you are on course . And the answer is not only on course . We think that we're on the upper end of the course .

Operator: If I may, sorry.

Speaker #9: And if I may, sorry, last question. But since you mentioned sequential G&A down, but also the gross margin was actually up sequentially, more than historically.

Operator: Go ahead.

Operator: 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, gross margin in VITAS 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 #9: Historically at third quarter versus Q2 , it was more than we that would be higher . But this quarter was like 220 basis points versus maybe like a 100 or something in that range in the past .

Speaker #9: So is there something else that you did this quarter ?

Operator: 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 looked 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.

Speaker #5: 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 , you know , efficiencies that they've looked at , you know , they looked , you know , program by program .

Speaker #5: And are they properly staffed in Florida? And they made the adjustments when they needed to. So I don't think there's, you know, I wouldn't call there any specific initiatives or anything.

Speaker #5: I would call out directly other than there looking program by program and managing , you know , costs appropriately .

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

Speaker #9: Great . Thank you so much for taking all these questions .

Operator: 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 #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 .

Holley Schmidt: 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 #4: I just want to thank everyone for their attention to our , our our quarterly report . You know , I guess the next time you'll hear from us is mid-February , where we'll both have the fourth quarter and our our guidance for next year .

Speaker #4: Thank you .

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