Chemed Corporation (CHE) Earnings

Management highlights

**VITAS Healthcare Operational Highlights** - Successfully resolved the 2025 Florida Medicare cap issue, returning to normalized growth: $8.9 million was added to the Florida combined program's cap cushion in Q2 2026, with no Medicare cap billing limitation recorded for the Florida program in Q2 2026 (compared to a $16.4 million limitation in Q2 2025). A full year 2026 Medicare cap billing limitation of only $500,000 was recorded, all from California, which was below original expectations. - Maintains a target 42-45% hospital admission share for the Florida combined program to balance short-stay and long-stay patients for long-term Medicare cap stability; Q2 2026 hospital admissions were 42.9% of total Florida admissions, hitting the target range. Non-hospital admissions from other pre-admission locations increased 8.1% year-over-year in Florida. - Labor costs came in below budget in the quarter; staffing levels are adequate to support growth, with no material hiring or retention issues for qualified caregivers. - Continues de novo market expansion in Florida: Marion, Pasco, and Pinellas Counties recorded 594 admissions in Q2 2026, exceeding ADC growth expectations, and Manatee County admitted its first patient during the quarter. Two new inpatient units are scheduled to launch in 2027 to support cap mitigation strategy. **Roto-Rooter Operational Highlights** - Commercial business manager program continues to deliver strong performance, driving commercial revenue growth. Centralization of the water restoration billing and collections function is ongoing, resulting in $1.3 million of improved write-offs and a 20-person headcount reduction year-over-year. The sequential decline in average revenue per water restoration job slowed to 3.5% in Q2 2026 from 13% in Q1 2026, with further improvement expected as staff gain experience. - Lead generation and customer acquisition costs remain a challenge: total leads declined 1.6% year-over-year, with free organic search leads down 13.1% and paid leads up 7.3%. 59% of all leads were paid in Q2 2026, up from 54% in Q2 2025, increasing total marketing spend by $3.1 million year-over-year. Management is focused on growing lead generation outside of paid Google search to offset this trend. - Acquired the South Texas (Corpus Christi) franchise territory and assets for $12 million in June 2026. Aggregate franchise acquisition spend through the first half of 2026 totaled $33.5 million, with management planning to continue pursuing additional strategically located franchise acquisitions. The South Texas acquisition is not expected to contribute material revenue/income in H2 2026, but will drive long-term growth starting in 2027. **Overall Corporate Highlights** - Consolidated operating cash flow exceeded $173 million in Q2 2026. Minimal balance sheet leverage allows the company to pursue accretive acquisitions and aggressive share repurchases.

Guidance

- ChemEd is moving to a cadence of updating full-year guidance once per year alongside the Q2 earnings release; this Q2 2026 update is the first under this new cadence. - VITAS full-year guidance was revised upward across all metrics, driven by faster-than-expected recovery from the 2025 Medicare cap issue and stronger-than-expected growth: - Full-year average daily census (ADC) growth revised to 5.75% to 6.25%, from the prior 4.5% to 5.5% range. - Full-year revenue growth (excluding Medicare cap impact) revised to 8.25% to 9.25%, from the prior 6.5% to 7.5% range. - Full-year adjusted EBITDA margin (excluding Medicare cap impact) revised to 19% to 19.5%, from the prior 18% to 18.5% range. - Full-year anticipated Medicare cap billing limitation reduced to $7 million, from the prior $9.5 million forecast. - Roto-Rooter full-year guidance was maintained, as Q2 performance was in line with management expectations: full-year revenue growth is projected at 3% to 3.5%, with an adjusted EBITDA margin of 21.5% to 22.5%. - Consolidated full-year 2026 adjusted diluted earnings per share guidance is set at $25 to $25.75, with the midpoint representing a 17.8% increase from 2025's adjusted diluted EPS of $21.55. Guidance assumes an effective adjusted tax rate of 24.5% and a diluted share count of 13.5 million shares.

Segment performance

ChemEd Corporation operates two business segments: VITAS Healthcare and Roto-Rooter. Consolidated total revenue for the second quarter of 2026 increased 8.8% year-over-year, and adjusted diluted earnings per share increased 41.9% year-over-year. 1. **VITAS Healthcare**: Net revenue was $443.3 million, an 11.9% increase from Q2 2025. Revenue growth was driven by a 6.1% increase in days of care, a 2.4% geographically weighted average Medicare reimbursement rate increase, and a 455 basis point positive impact from Medicare cap and contra revenue changes, partially offset by a 115 basis point negative impact from acuity mix shift. VITAS contributed 67.6% of ChemEd's total segment revenue. Adjusted EBITDA (excluding Medicare cap) totaled $80.6 million, a 20.6% year-over-year increase, with an adjusted EBITDA margin of 18.2%. Average daily census was 23,687 patients, a 6.1% year-over-year increase, and total patient census exceeded 24,000 for the first time in company history. Total admissions were 19,125, a 9% year-over-year increase. 2. **Roto-Rooter**: Total net revenue was $215.9 million, a 2.8% year-over-year increase. Branch commercial revenue was $56.8 million, a 6.8% year-over-year increase, while branch residential revenue was $159.1 million, a 1.7% year-over-year increase. Independent contractor revenue declined 1.9% year-over-year. Roto-Rooter contributed 32.4% of ChemEd's total segment revenue. Adjusted EBITDA was essentially flat year-over-year at $48.5 million, with an adjusted EBITDA margin of 21.1%, a 77 basis point decline from Q2 2025. Gross margin was 50.4%, in line with expectations and 135 basis points better than Q2 2025.

Risks & headwinds

- Roto-Rooter faces ongoing structural pressure from declining free organic search leads from Google, leading to steadily rising paid lead costs and marketing spend that pressures margins. Management notes the shift to paid leads is largely inexorable and will remain an ongoing challenge, with no material near-term improvement expected. - For VITAS, the Medicare cap in Florida could become a problem again if there is a large unexpected increase in Medicare reimbursement that outpaces the company's current balanced admission mix strategy. Long-term cap stability is dependent on maintaining the 42-45% hospital admission target range. - The CON (Certificate of Need) moratorium for new hospice centers is scheduled to end in November 2026, and it is unknown if it will be extended, creating uncertainty for new de novo hospice expansion. The moratorium does not block qualifying acquisitions of existing providers, however. - Industry-wide regulatory risk exists: increased CMS program integrity oversight for hospice is expected, and while management does not anticipate material reimbursement changes for 2028 at this point, potential future changes to the hospice benefit structure (such as unbundling) cannot be ruled out. - Roto-Rooter's independent contractor segment, consisting of small mom-and-pop style operations in mid-sized markets, is currently facing growth headwinds, and it remains uncertain how quickly it can return to growth.

Analyst Q&A

• Q: How sustainable is VITAS' current growth rate and 42-45% hospital admission mix, and what is the long-term growth outlook? /

  A: Management confirmed that VITAS' current growth trajectory and admission mix are fully sustainable, supported by improved KPI tracking and resource allocation strategies. VITAS has returned to normalized growth after resolving the 2025 Medicare cap issue, with a historical track record of low double-digit net income growth over 21 years leading up to 2025 that management expects to continue.

• Q: How sustainable are Roto-Rooter's current margins given rising paid marketing costs, and why wasn't guidance changed after the slight Q2 EBITDA miss? /

  A: The Q2 2026 EBITDA miss was only ~$1 million, entirely driven by higher-than-expected marketing costs, which was not material enough to change full-year guidance. Roto-Rooter's 21.5-22.5% projected full-year margin is in line with pre-pandemic levels and healthy for the home services sector. Offsets to higher marketing costs include growing conversion of add-on ancillary services (excavation, water restoration) that have near-zero incremental customer acquisition cost, plus ongoing improvements in water restoration collections that can easily make up the small gap from elevated marketing spend.

• Q: What is Roto-Rooter's strategy for expanding service lines, and what is the outlook for new offerings? /

  A: Historically, the most successful service line expansions for Roto-Rooter have been add-on offerings for existing plumbing/drain cleaning customers, which benefit from near-zero customer acquisition cost. Management has tested many stand-alone new services (such as air conditioning and water quality) with mixed results, and has suspended the unprofitable water quality program launched in recent years. Management continues to evaluate potential new service line additions, but no material expansion plan is ready to announce at this time.

• Q: How much do new de novo VITAS locations contribute to Florida cap cushion building, and is there risk of cap issues returning if de novo growth slows? /

  A: Cap management strategy depends on balancing admission mix (hitting the 42-45% hospital admission target) rather than relying on de novo growth. While new de novo locations have contributed to ADC growth, the current balanced admission mix at the overall Florida program level is already sufficient to sustain cap stability in the near to medium term, absent a large unexpected change to Medicare reimbursement rates. New Florida de novo programs are still in early growth stages and will add additional long-term cushion as they scale.