CHE - NYSE

Good day, and thank you for standing by. Welcome to the Chemed Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Holley Schmidt, Assistant Controller. Please go ahead.

Good morning. Our conference call this morning will review the financial results for the fourth quarter of 2025 ended December 31, 2025. Before we begin, let me remind you of 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 these -- 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 February 25 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated February 25, 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 Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara.

Thank you, Holley. Good morning. Welcome to Chemed Corporation's Fourth 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. The fourth quarter of 2025 fell short of our expectations for both subsidiaries. We will touch on the circumstances that led to these results, but more importantly, we will discuss what's being done to improve these results for 2026 and beyond. VITAS continues to execute the strategies required to fully mitigate potential Florida Medicare Cap billing limitations for the government's fiscal 2026. Admissions at VITAS during the quarter totaled 17,419, which equates to a 6% improvement from the same period of 2024. An important metric that we've been tracking related to Florida admissions is the percentage of total admissions that come from hospitals. Our analysis indicates that an appropriate balance for sustained long-term stability in the Florida patient base, given the current mix of referral sources is that between 42% and 45% of total admissions come from hospitals. During our Community Access program, this ratio dipped below the preferred range for a sustained period. In the fourth quarter of 2025, this ratio was 44.8%, which represents a high watermark during the post-pandemic period. The continued emphasis on short-term hospital-based admissions had 2 main impacts on the results for the fourth quarter of 2025. The first impact is that the Florida Medicare Cap position in the fourth quarter improved by almost $25 million in 2025 -- compared to 2025. It is important to remember that our fourth quarter is the first quarter of the government fiscal year. The year-over-year improvement gives management even more confidence that the Florida Medicare Cap problem of 2025 is behind us. The second impact is that due to the overwhelming success of garnering elevated short-stay patient admissions, our revenue growth and EBITDA margin were lower than anticipated. Ultimately, the percentage of total admissions that come from hospitals was higher than we originally budgeted in both the third and fourth quarters of 2025, resulting in this muted revenue growth and EBITDA margin. In mid-January 2026, VITAS management responded to the improved Florida Medicare Cap position by instructing operating personnel to begin the process of refocusing admissions to a more balanced approach between hospital admissions and preadmission -- other preadmission locations. That process is underway. In the guidance that Mike will discuss further, we have anticipated that the more balanced approach will start being reflected in the financial results mainly in the second half of the year. All patients are short-term patients for the first 30 days after admission regardless of their pre-admission location. As a result, refocusing the admission patterns will result in revenue growth and EBITDA margin building over the course of 2026. Finally, in December, we were granted a certificate of need to begin operating in Manatee County, Florida. Manatee County is in Western Florida between Hillsborough and Sarasota. Approximately 3,000 Medicare patients received hospice care in Manatee County during the government's fiscal 2024, which is the most recently published government information. Manatee represents another significant opportunity for VITAS in 2026 and beyond. Now let's turn to Roto-Rooter. Roto-Rooter revenue declined 3.7% in the fourth quarter of 2025 compared to the same period of 2024. Branch commercial revenue increased 1.6% compared to the fourth quarter of 2024. We continue to add commercial business managers to select branches during the quarter. Branches with commercial business managers had percentage revenue increases, 10% more than those without them. Roto-Rooter management intends to continue and expand this program in 2026. branch residential revenue declined 3.1%. Total leads were flat in the fourth quarter of 2025 compared to the same period of 2024. As discussed in the past few quarters, the trend of increasing paid leads offset by declining natural leads continues. During the fourth quarter, paid leads increased 9.4% compared to the same quarter of 2024. The decline in natural leads essentially offset the increase in paid leads. Roto-Rooter management has contracted with a new third-party search engine optimization provider in late December. The new provider does not provide services to any of our private equity competitors. Additionally, they focus on understanding and responding to the underlying code used by internet search engines to develop their search algorithms. We believe that these 2 factors will give us the ability to more positively impact our natural search results in 2026. Write-offs related mainly to our water restoration business increasingly became an issue over the course of 2025. In the fourth quarter of 2025, implicit price concessions and credit memos increased at Roto-Rooter by $4 million or 57% compared to the fourth quarter of 2024. A similar increase in write-offs was seen in the third quarter of 2025. The company has put into place modifications to the billing and collection support functions. Collection experience began to improve in early 2026, and we anticipate improvement to accelerate through the course of the year. Our guidance reflects management's belief that 2026 is expected to be a transition year for both VITAS and Roto-Rooter. VITAS's financial results are expected to build over the course of the year as we rebalance our patient mix. We are very confident that Florida Medicare Cap limitations in 2025 is fully behind us. The demographic makeup of the U.S. population, along with the addition of new territories in Florida, provides VITAS with significant growth opportunities over the next several years. Roto-Rooter continues to deal with a difficult operating environment. However, we have initiatives in place that I believe can lead to modest growth, mainly coming in the back half of 2026. We anticipate continued improvement in overall leads based on the past few quarters of paid lead generation improvement plus the impact of the new search engine optimization company. Improved overall leads should lead to modest organic growth in 2026. The addition of more commercial sales resources is anticipated to further improve organic growth. As Mike will discuss further, improvements we are working out with respect to water restoration billing and collections should provide $4 million to $6 million tailwind in 2026. We believe these improvements, along with an aggressive program to find and reacquire franchises in desirable territories, gives us confidence that we can meet or exceed our 2026 guidance. We believe that the difficult operating environment is temporary, and there has not been any impairment in their underlying long-term growth outlook for Roto-Rooter. With that, I would like to turn this teleconference over to Mike.

Thanks, Kevin. VITAS' net revenue was $418.8 million in the fourth quarter of 2025, which is an increase of 1.9% when compared to the prior year period. This revenue increase is comprised primarily of a 1.3% 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, 143 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 20 basis points. A $2.4 million Medicare Cap billing limitation was accrued in the fourth quarter of 2025. There was no Medicare Cap billing limitation accrued for our Florida program in the fourth quarter of 2025. Average revenue per patient day in the fourth quarter of 2025 was $208.01, which is 86 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 32 basis points when compared to the prior year quarter. Adjusted EBITDA, excluding Medicare Cap, totaled $91.6 million in the quarter, which is a decline of 1.7% when compared to the prior year period. Adjusted EBITDA on -- the adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 21.7%, which is 79 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. Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $155.6 million, a decrease of 3.1% from the prior year period. This aggregate residential revenue change consisted of plumbing increasing 6.3%, excavation essentially flat offset by water restoration declining 10.3% and drain cleaning declining 3.2%. As Kevin mentioned, water restoration write-offs also referred to as implicit price concessions and credit memos have been increasing over the course of 2025. Historically, total write-offs have been slightly below 3% of gross revenue. There was an uptick to the mid-3% range in the first half of '25. We then experienced a significant jump in the second half of 2025 to over 4.5%. As a result of those increases, total write-offs increased $11 million in fiscal 2025 compared to 2024. Primarily through the use of artificial intelligence, many insurance companies have increased their scrutiny of every line item on every job we bill. This has led to the higher write-off percentage. Roto-Rooter management also believes that it has led to a reluctance to bill for certain water restoration services at the branch level. As the scrutiny on collections has increased over the year, billing employees in some branches have reduced their billings per job to help ensure a higher collection rate. This was the biggest factor that led to the 10.3% decline in residential water restoration revenue in the fourth quarter of '25. In response to this issue, Roto-Rooter is taking steps to improve its documentation through better use of technology. They have also undertaken a project to centralize water restoration billing and collections. Billing and collections were historically performed at each branch. This led to some inconsistent practices across the company. Centralizing these processes is expected to create more concentrated expertise and result in better billing and collection results. The financial impact is expected to be seen mostly in the second half of the year as these improvements take hold. Additionally, during the transition period, we expect some duplication of costs and investment in technology which will cause some marginal headwinds in the first half of the year. Roto-Rooter branch commercial revenue in the quarter totaled $55.2 million, an increase of 1.6% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.9%, drain cleaning increasing 2%, plumbing essentially flat between years, offset by a 20% decline in water restoration. The water restoration decline is a symptom mainly of the increased insurance scrutiny previously discussed. Roto-Rooter management believes that our commercial business continues to represent a significant opportunity for growth in 2026 and beyond. Commercial customers generally use our services more often than residential customers, they also have direct access to our local managers and thus generally do not search for us over the internet. In response to the commercial business opportunity, Roto-Rooter management hired commercial business managers at select branches during 2025. The preliminary results in the branches with commercial business managers are encouraging. As a result, Roto-Rooter continues to add commercial business managers in early 2026. It is a roughly 45-day process to get these positions trained and productive, which also may cause some marginal drag in the first half of '26. Adjusted EBITDA at Roto-Rooter in the fourth quarter of 2025 totaled $47.5 million, a decrease of 21.1% compared to the prior year quarter. The adjusted EBITDA margin in the quarter was 21.5%. The fourth quarter adjusted EBITDA margin represents a 477 basis point decline in the fourth quarter from the fourth quarter of 2024. The decline in EBITDA margin was caused by higher marketing costs and higher water restoration write-offs. During the quarter, we repurchased 400,000 shares of Chemed stock at an average price of $436.39. These purchases were funded by the free cash flow generated by both VITAS and Roto-Rooter since the beginning of the program, we returned over $2.9 billion to shareholders through repurchases at an average cost of approximately $167 per share. Now let's turn to the 2026 guidance. VITAS revenue prior to Medicare Cap is estimated to increase 5.5% to 6.5% when compared to 2025. Average daily census is estimated to increase 3.5% to 4%. Full year EBITDA margin prior to Medicare Cap is estimated to be 17.5% to 18%. Medicare Cap billing limitations are estimated to be $9.5 million in calendar 2026 compared to $27.2 million in calendar 2025. The estimate for 2026 is in line with our historical run rate prior to 2025 and includes no limitations related to our Florida combined program. Roto-Rooter is forecasted to achieve full year 2026 revenue growth of 3% to 3.5%. Roto-Rooter's adjusted EBITDA margin for 2026 is expected to be 22.5% to 23%. We believe this forecast is achievable based on anticipated improved lead volume in 2026, improved billing and collections in our water restoration service line and a lift in our commercial business through a commercial focused sales force. Based on the above full year 2026 earnings per diluted share, excluding noncash expense for stock options, tax benefit from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $23.25 to $24.25. This compares to full year 2025 adjusted earnings per diluted share of $21.55. The 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.9 million shares. It's important to note that the 2026 earnings trajectory is weighted towards the second half of the year. We estimate 55% of the consolidated adjusted net income and consolidated adjusted EBITDA prior to Medicare Cap is projected to be generated in the second half of the year. I will now turn the call over to Joel.

Thanks, Mike. In the fourth quarter of 2025, our average daily census was 22,462 patients, an increase of 1.3%. In the quarter, hospital directed admissions increased 9.9%, home-based patient admissions increased 4.1%, assisted living facility admissions increased 5.6% and nursing home admissions declined 8.7% when compared to the prior year period. Our average length of stay in the quarter was 115.1 days. This compares to 105.5 days in the fourth quarter of 2024. Our median length of stay was 17 days in the fourth quarter of 2025, 1 day less than the median in the fourth quarter of 2024. As Kevin discussed above, we have very successfully transitioned our admission pattern towards more hospital directed admissions in our Florida combined program. To add some context to that success, at the end of the fourth quarter of 2025, that Medicare cap billing limitation was less than $2 million. As of the end of January '26, we have no billing limitation in our Florida combined program. This success has allowed us to begin the process of balancing the admission patterns to a better mix of hospital-based admissions and other preadmission locations. It's important to remember that hospital-based admissions generally provide for shorter-stay patients than other preadmission locations, admitting more short-stay patients results in ADC pressure in lower margins, as previously mentioned. However, in the first roughly 30 days of any patients stay with us, the economics are the same for us regardless of their pre-admission location. Only when a patient exceeds that 30 days do we see the more positive financial impacts. Balancing the mix of admissions will lead to accelerated revenue growth and improved EBITDA margins as the year progresses. In December 2025, we were notified that we received the new CON to operate in Manatee County, Florida. As Kevin mentioned, this represents another opportunity for significant growth over the next few years. This is the fourth CON awarded to VITAS over the past 2 years. The previous awards in Pinellas, Marion and Pasco Counties have met or exceeded our expectations. Currently, Marion and Pasco are admitting between 40 and 50 first-time Medicare patients per month. In just its second full month of operation, Pinellas admitted 28 first-time Medicare patients. We will continue to aggressively pursue CON opportunities in Florida in the territories in which we do not currently operate. Now that we believe the Florida Medicare cap issue is behind us, we are focused on returning VITAS to a more normal, sustainable organic growth pattern. We will look to achieve higher overall growth through the pursuit of new starts, not only in Florida but other CON states as well. We also continue to evaluate strategic acquisitions to add to VITAS' overall growth. With that, I'll turn it back to Kevin.

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

[Operator Instructions] Our first question comes from the line of Joanna Gajuk of Bank of America.

So I guess, first, a couple of questions on the Roto business. So thanks for the details around, I guess, different issues, I guess, happening at the Roto-Rooter. But I guess just to summarize because I think you tried to address a couple of these things. What gives you confidence you can actually grow revenues 3% or so in '26 after revenues were pretty much flat in '25.

Well, let me start, Joanna. And this is -- I'll start with from 20,000 feet. We revised guidance in -- at the end of the second quarter of last year. And we talked at that time -- there were struggles at Roto-Rooter. The problem at VITAS was we were on our way to running a Medicare cap liability of Florida, we announced that we were going to have to make changes to push our mix of hospital-based admissions and community access to a different level, okay? So we make those adjustments to that point. And actually, from our perspective, from our calculations at the end of the third quarter, we were basically right at our guidance. I mean it might have been a little below what analysts were predicting. But that's -- the difference was only seasonality. We were at our level. The fourth quarter was $0.70 per share miss, okay? Massive, big problem. And raises questions like, okay, you've given guidance. How are you going to -- how are you going to reach those numbers, okay? Now to answer your question, let's start with Roto-Rooter, okay? Roto-Rooter, as we've said, has been going through a transition, okay? The transition -- the most significant transition is going from a majority of free leads that is from natural search to paid leads, okay? And Google is a smart company. They say, why should we give paying customers free leads? And they've been very successful in engineering their algorithms to yield that, that has a negative effect on us as far as number one -- answer your question on sales, has an effect of reducing our natural search leads, okay? As we mentioned at the end of the fourth quarter, we look back in the quarter, and we said, okay, we have an improvement there. Our paid leads have increased almost 10%. Unfortunately, natural leads are down almost the equivalent number. So our -- so our total leads were flat. If you look at our sales, we would expect sales to be relatively flat in that case and then making improvements growing to the following year. Well, we had a problem, as we said, with water restoration. And it was an overhang from the first half of the year. Again, we were -- we had various decentralized billing practices, insurance companies kind of sharpen their pencil, and basically, during the course of the year, increasingly, we weren't collecting at the same rate we were expecting that dramatically goes right to profitability and sales, okay? We believe that has normalized, as Mike said, not to the 2024 level or 2023 level, but certainly better than the 2025 level. So when we talk about growth, to the extent that we -- the way I look at the Roto-Rooter numbers, I look at, okay, what's going on with paid search and natural. The paid search is growing nicely. Last 3 quarters, almost 10% per quarter, okay? It comes at a cost. We're paying $94 lead compared to previously 0 on a lot of those leads, but that's still a good business as long as it's stable and growing, that's fine. We look at our natural leads, okay? Why are the natural leads -- why were they so negatively affected last year? As we've said in the past, the most -- the place that most people get their natural leads from is what's known as the map section of Google, okay. In October of 2024, Roto-Rooter was showing up on the maps nationwide 72% of the time, okay? Within a few months, that fell to a low of 24% of the time, okay? Massive change in visibility as known in the industry. And accordingly, leads were falling -- leads were falling, sales are falling. Tough time for Roto-Rooter. Looking ahead to 2026, what do we see? Well, we see a business that, on the paid lead side, continues to improve. We see on the -- let's focus on the visibility, okay? Our visibility, both through some of the internal changes we made and the use of our -- basically AI-centric natural search for our visibility up to about 35%, up from 24%. So that -- to answer your question, that gives me some confidence in saying, yes, as long as those -- we don't have to -- just have to continue those improved rates for growth in Roto-Rooter on the revenue side. I mean there's nothing that has changed in the nature of and quality of the service mark of Roto-Rooter. And then you add one thing Mike mentioned -- again, it's not that surprising given the difficulty of home services, it seems like the availability of repurchases of other franchises is speeding up, which has given Mike enough confidence that included that in his remarks. Again, those issues give me a lot of confidence that Roto-Rooter sales are going to be higher this year than the previous year. Now I was just going to say the other point is, you got to remember that I think it's an important one. When you talk about overall strength of the business. As we've talked about the VITAS with the, call it, preloading of Medicare Cap cushion in Florida, that's so significant. Just order of magnitude, we're at about a $28 million better position in cap cushion sitting right now. But right now, I'd say it's probably higher, that's probably more like $35 million. Okay. So the question is, can we -- will VITAS be able to grow census to take advantage of that cushion. And as we said during the prepared remarks, they're doing that, probably beyond our expectations. So in sort of a sense that lower margin and lower sales we saw in the fourth quarter was basically just lending, it was -- we were borrowing from last quarter to see profits and revenue that we're going to see in this year. So all of -- those are some of the basic points of what I see happening to what looks like on paper, a very bad miss in the fourth quarter. And just let me -- just in terms of dollars and cents, the $0.70 miss, probably about 33% was that -- was associated with VITAS's getting more a higher percentage of their admits being short stay rather than long stay. So -- and that's not something I see as a good thing. That was something ultimately they were trying to do and just we're a little more successful at it than initially anticipated. With regard to -- on the Roto-Rooter side, the lion's share of the miss was associated with the water restoration situation, which we've talked about and there's every indication that's being ameliorated somewhat. And the rest of Roto-Rooter, it's largely the marketing costs, the increased marketing costs that comes from getting that 10% increase in paid leads. So it's not a good situation. Again, it shows -- it's one where we went a long period of time with always exceeding analyst estimates. And we can't kid ourselves, a $0.70 per share miss is not to be trifled with. It's big and it's causing a lot of change, a lot of renewed emphasis on important matters here at the company and both subsidiaries. Mike, anything to add?

Just to summarize, particularly for Roto-Rooter, Joanna, I would characterize our confidence in the 3% to 3.5% revenue growth in '26 based on 3 specific things. As Kevin mentioned, some things we've done to change the lead trajectory, hopefully, to provide some organic growth, but modest organic growth is built in. The increase in commercial sales force will also lead to some more modest organic growth. And then as we've talked about, the water restoration write-offs, we've estimated that of the $11 million that the increase of write-offs of $11 million, we're going to recover maybe half of that this year. So that's a $5.5 million tailwind. So I would say those are the 3 very key components of how we get to the 3% to 3.5%.

Great. And if I may, on the margin, so for the segment, obviously, things impact the margins and you gave us the guidance for '26. But on the last call, when you kind of were talking about targeting longer term, I guess you were talking about '26, maybe the margins should be closer to 24%, but clearly, they will not be there, but then you also said like longer term, this business should get 25%, 26% margin. So are those still -- those targets -- are those targets still on the table? Or sort of like we have to think about the business differently.

I think that -- the answer to that question depends on how quickly Roto-Rooter gets back to a more normalized top line growth path. If they get to somewhere 5% or north revenue growth, I think the 24% to 25% is still achievable. We -- I don't anticipate the marketing costs to improve dramatically. And so we need to really to drive top line and get some leverage based on that revenue growth to offset the marketing costs. So yes, I believe it's achievable. But the path isn't as clear maybe as it had been in the past because of the marketing, the additional marketing spend. The other thing I would just mention, and I think it's obvious, Joanna, to you, you followed us long enough. We are not too far away from where our margins were pre-pandemic. So the 24% to 25% that we've talked about is higher than in the historical Roto-Rooter margins. So we're right now pretty close to what the pre-pandemic margin is. It's just we need to drive some top line and get some leverage from that.

Our next question comes from the line of Brian Tanquilut of Jefferies.

As I think about VITAS first, right? So I know on the -- in previous calls, you've given some insight into what you thought growth would be in the top line. And obviously, in the guidance that you formally gave last night, it's below that range that you previously provided. So just curious -- what is the delta there? And then how do we think about the progression of VITAS's revenues and EBITDA over the course of the year?

Yes, sure. So the -- from a top line perspective, and this also will, I guess, dovetail into your second question about the time line. We're sitting right now with a patient mix that for the second half of the year, we -- of '25. We really emphasized the short-stay preadmission locations, mainly hospitals. As you well know, long-stay patients are the ones that generally provide for more revenue growth and EBITDA margin growth. And so we're sitting today with a patient mix that has let us moderate, not moderate, eliminate the Florida Medicare Cap issue. So now we need to refocus the admission pattern. By doing that, we will get back to the normalized growth rate that we think is somewhere in the 7% to 9% top line area. We'll get there. It's just going to take -- it's going to build during the year because every patient, essentially, when you first admit them in the first 30 to 45 days or short-stay patients, they are negative margin for us for a period of time. They'll become long-stay patients over time. But in the first quarter, we're going to continue to have a very elevated number of short-stay patients regardless of the preadmission location. So it builds over the course of the year. That's why in '26, the revenue is a little bit below our targeted range. And the cadence of how it goes quarter-to-quarter, the first quarter is going to be muted from a revenue and perspective and then start to grow and normalize in the second through fourth quarter.

And let me just add one thing. When you're talking about revenue at VITAS, you're talking about ADC. If VITAS is able to grow ADC, they will grow their revenue. And to the extent that they have the ability -- a much larger ability in Florida to go out and seek longer-stay patients. That's -- longer stay patients is how you grow ADC essentially. It takes 10 short-stay patients to have the same contribution as 1 medium stay patient as far as going to your ADC number. But I think what you'll find is that VITAS is already well on its way. This isn't speculation with VITAS. They're well on their way to growing that average daily census in Florida and beyond.

That makes sense. And then maybe, Kevin, since I have you, shifting gears to Roto-Rooter. This is a business that used to be very stable and predictable. One question we're getting asked a lot by investors is, is there a structural change or structural impairment that has happened, whether it's VITAS or Roto as an asset or the plumbing industry as a whole. So I'm just curious how you're thinking about the cleanliness or the smoothness of the trajectory for Roto going forward because it feels like every quarter, we're bumping up against some speed bumps that are of different nature. So just curious how you're thinking about how ...

Certainly in the last seven quarters, that's the case what you're describing. We can't get away with it. Yes, certainly, that's the case. Now what has been going on during this period? I mean I would say that the 2 major issues, let's start with private equity, introduction of private equity money and practices into the -- into our sector, okay, had an immediate effect on us. We hired our branch managers with a promise of great riches, that has stopped. And they -- several of them have seen trees don't grow to heaven and they've come back to our employee. The biggest impact aside from just existing and offering services at below cost on the plumbing side. They have disrupted the paid search model. We are paying more per lead than we did 2 years ago. But it is -- keep in mind, we paid the same amount in the last 3 quarters. So it is not -- it hasn't continued to go up. And we're winning that battle. Last 3 quarters, we've gotten a 10% increase in each of the last 3 quarters. So I consider the threat of private equity largely diminished at this point, okay? And I'm speaking to the overall -- saying has there been something changed in the plumbing industry? I think private equity came in and they said, look, they have a different investment horizon. We're in a marathon, they're in a sprint. They want to build the top line and flip it. That's a tough competitor, okay? And also, as I said, I'm going back, I'm repeating myself, but they're basically HVAC companies that said, we're very happy with paying $124 per lead, okay? And a lead on a job that they'll say they'll clean any drain for $90, okay? And the reason they're happy doing that is they view as that becomes a long-term customer for their HVAC services. I mean that's a tough competitor, if you're in the plumbing side. Roto-Rooter has dealt with that. I mean I just -- I'm kind of spinning off here into a different discussion, but I think that of the 2 major things that Roto-Rooter has been dealing with the last 7 quarters, private equity, definitely one of them. I don't see that as a long-term problem for Roto-Rooter at this point, okay? One that is a problem. We're still going on in the transition. We are going through a transition where Google -- we used to get in excess of 55% of our leads on the natural search. Somebody just finds Roto-Rooter in the Google, ignoring the sponsored ads. That has totally flipped. We're out of way to almost -- just over 40% of our leads come on the natural side. And I think there's a firming up in that market -- in that percentage, just again by some of the things that Roto-Rooter is doing, having to do with fighting back on visibility. But to answer your question, is that a significant -- is Google going away? No. That is a change in the business. But as Mike says, it's a change that kind of leads us more back to pre-pandemic numbers as far as sales growth and margin, which wasn't at the worst of all worlds, okay? So what I would say to your clients that say what has happened to the plumbing industry? I would say private equity has come in, disrupted everything, but they're seeing that it's tough to give away the service -- to provide the service at a loss. They're not growing. Companies have stopped buying our competitors. It's just -- the problem is diminishing rather than increasing. Google, we can't kid ourselves. Google is -- we're dependent on Google. We deal with them. we hope we can keep just having slight improvements in it. But the thing that has changed is we've gone from a business where the leads were predominantly free, and now they're predominantly we're paying them out. Now let me go back and say, there's nothing wrong with the leads, they're very profitable. The business is a good business paying -- getting leads to paid ads. It just has a negative comparison to getting them for free. So no, I would say that we got to Roto-Rooter, good cash flow, strong growth on the excavation and water restoration side. The water restoration has been a real black eye for us for the last 3 quarters, but it's something we've looked to put behind us. Not by wishful thinking, by the way, by centralizing billing and using our technology to make sure that the support for every bill is almost redundant. I mean just -- that's how you get past the AI sensors as it were and ultimately get paid. So no, I don't have any long-term concerns on Roto-Rooter at this point, to be honest with you.

Brian, the only thing I would add is from an industry perspective, there's been a lot of talk and a lot of things published that the trade, including the plumbing industry are pretty resistant to the changes that are coming from artificial intelligence and those sorts of things. So we definitely believe that plumbing the industry itself has not -- it has not and is not going to have major changes in the viability of the industry as a whole. I think, I mean, honestly, just to the point of your question, 2026 is the year that Chemed management and Roto-Rooter management show or don't show, but we believe will show the ability to manage that and get back to a more profitable, more sustainable level of growth for Roto-Rooter itself.

Well, let's put this way. It comes down to leads. This past quarter -- as bad as this past quarter was, our total leads were flat, okay, total leads were flat. Unfortunately, I say just -- there was a shift between paid and unpaid. But leads were flat, okay? And from those leads, we're increasingly improving our ancillary services, that is excavation and water restoration. So if you say, how does Roto-Rooter continue to grow? It's by having the leads be a little better than flat, continue to grow the ancillary services. And our goal for Roto-Rooter historically has not been double digit growth, okay? It's not been 30% margins. It's been growth on the top line of 7% to 8% with 24%, 25% margins depending on the seasonality in the quarter. And from that, with that cash flow, that has achieved over, let's say, prior to this year, over the previous 21 years, that is with the years in which we owned both VITAS and Roto-Rooter. They grew their net income at 11% per annum compounded. I mean that -- and they did that with just the basic blocking and tackling and benefit of good cash flow. So we get a lot of questions. I mean I can talk about this all day because we're going to talk about it all day. People are going to say, "Is there something significantly wrong with Roto-Rooter?" No, they're going through a difficult period. They're paying for leads that they used to get for free if you want like a one-sentence capsule commentary.

Our next question comes from the line of Ben Hendrix of RBC Capital Markets.

Just starting with VITAS. I appreciate all the commentary about Florida Cap and the dynamics in the fourth quarter. I appreciate that you have a little bit more visibility on the -- not having a capital liability in that state, but we're getting a lot of questions on how we square that with some of the -- with the broader higher level cap stat that we're seeing, specifically the greater than 10% cushion coming down over the last couple of years and also an increase in the 0 to 10% cushion bucket and the liability buckets. Can you kind of help us think about the cap more broadly, how we think those stats might evolve kind of given the dynamics that we're seeing in Florida? And then also just a little detail on are we at cap risk in other markets.

I'm going to turn it over to Joel. And let me start by saying, keep in mind, in Florida where we have a down position, I want to end the year with a small percentage. I want to monetize as much of that cap room that we created as possible. We don't want to cut it -- we don't want to cut it too close. We want to be -- but I just feel in Florida, we have more control over our destiny than any other state. So I would -- whenever we talk about cap buckets and whatnot, I personally look at it, Florida and everywhere else. But Joel, why don't you give..?

Let me start with just sort of the specific metrics you were talking about then, and then we'll let Joel talk about the color commentary around it. But in '26, we see again, $9.5 million, which is pretty consistent with where we've been for the 5 or so years before 2025. That's comprised of California, mainly, California is by far the largest. But because of some of the things we learned in Florida -- the cap liability in California, actually, Joel and his team did some of the same things to help improve California. So California has actually gotten a little bit better. I don't think we're in a position or we don't think it's going to ever go to 0, but in a very manageable position right now, but there's always -- there always has been and there probably always will be some of our smaller programs that bounce in and out of cap based on they're so small and the cap calculation is so sensitive that if in a smaller program, if we lose IPU relationship in 1 hospital, it can have a temporary impact that, that particular program jumps into cap for a short period of time. And that's what you're seeing is the capital liability in total has not changed. But it's a couple of short -- small programs that we think are currently projected to be in cap, but it's 50-50 and they're very small liabilities. But that's why you see -- the number of programs look like it's going up, but the dollar amount isn't because it's just small programs that from time to time do this, and they always have for the entire time that we've owned VITAS.

Joel, to give your opinion. I don't want to color it. Are you that concerned with non-California or Florida cap?

I am not and primarily for this reason. We are utilizing all of the very effective strategies that we have lifted up within the Florida CCN in every single potential cap market we have out there. Now if you look at fourth quarter specifically, that's the first quarter of the Medicare Cap year. So you have full revenue, but you -- the fleet is wiped clean on admissions, so you are starting over on a new year. We always see some of the small programs dip into cap in that first quarter of the Medicare Cap year. We have no additional concerns about major programs out there that will we expect a Medicare Cap billing limitation for '26 that we have not seen previously. And to Mike's point, we've made very good progress in the state of California with our historical programs that have been in Medicare Cap. And we've talked previously about why that happens in California. But the short answer to that, Ben, is that no, we have no additional concerns specific to cap and in fact, we're very happy with the progress we're making and our ability to minimize that billing limitation in CCNs outside of Florida. And as we indicated, with no billing limitation within the Florida CCN.

I appreciate the color. Just a quick one on Roto-Rooter. We also have a lot of questions on kind of how we model this, the marginal -- the margin impact on the paid search mix versus the natural search mix specifically that $90-some-odd per lead number that you've thrown out there, kind of how does that look on like on a conversion adjusted basis? Assuming some of those leads don't quite convert or there's no follow-through, is there a set that we can think of in terms of the conversion adjusted dollars per lead on a paid search?

Sure. So as you mentioned, we paid roughly $90 per lead, and that hasn't changed over the last few quarters historically and then continuing today, it takes between 1.5 to 2 leads to convert to a paying job. So you're looking at $150 to $180 customer acquisition cost for a paying job on the jobs we do from a pay-the-lead standpoint. And that's, I think, roughly 60% to 65% of our leads are paid at the moment.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Kevin McNamara for closing remarks.

Well, my remarks are limited to the fact that we had a tough quarter, but there is, at least on this side of the line, abundant confidence that the guidance we make is guidance we can -- is we want to hit. We know that it's bad enough to have bad results, but it's even worse to miss guidance. And so to the extent that the guidance that's out there, we are very confident. But based on our results in the most recent quarters, I can see why reasonable investors might say, okay, forget last year, but how are they even going to make this year? I was going to say that when you combine some of the trends we've talked about and insight, again, we're more confident now than we are on the normal guidance to be honest with you. But with that, I would just like to thank everyone for your attention, and we'll be back 3 months from today. Thank you.