Roto-Rooter residential revenue edges up — but lead costs bite

Roto-Rooter’s residential, company-owned branch revenue rose 1.7 percent year-over-year in the second quarter, though lead generation and customer acquisition costs “remained a challenge,” Kevin McNamara, CEO of parent company Chemed, said on an earnings call last week. 

• Of note: Roto-Rooter counts 122 company-owned and 345 franchise locations across North America — and, though a wholly owned subsidiary, is the only publicly traded plumbing contractor with a residential business, which accounts for 70 percent of revenue. 

What’s happening: The quarter’s residential revenue change “consisted of excavation increasing 11.1%, plumbing increasing 3.3%, and drain cleaning increasing 1.3%, offset by a decline in water restoration of 6.7%,” a news release states. 

• The company reported a 50.4 percent gross margin in the quarter, which includes its commercial business, up from 49 percent in the same quarter last year. 
• However, its adjusted EBITDA margin declined slightly, driven by “increased internet marketing costs,” Chemed CFO Mike Witzeman said.
• For the six months through June 30, Roto-Rooter’s total revenue is up 1.1 percent year-over-year. 

Zoom in: Total leads fell 1.6 percent year-over-year in the quarter, as a 13.1 percent decline in free leads from internet searches outweighed a 7.3 percent increase in paid leads, continuing a trend from prior quarters. 

• Of all leads generated during the second quarter, according to McNamara, roughly 59 percent were paid, up from 54 percent in the same quarter last year — and 44 percent a year and a half ago.

What they’re saying: “We believe it’s not going to deteriorate from here, even though we [really don’t have] a lot of insight as to what exactly might happen in the future with internet marketing,” Witzeman told analysts. 

• “Having said that, I don’t believe that free leads will go to zero. We’re working on strategies to get around Google… I would say that we think that the situation is stable,” he added.
• Yes, but: “I would also really hesitate to say that we think it’s going to significantly improve from here either.”

Go deeper: “It’s hard to see improvement. It’s probably clear to surmise that at this point, Google hates the idea of free leads. At the very least, we’re at a new normal, and it has largely stabilized,” McNamara said.

• “We want to do jobs. Every job we do at Roto-Rooter is profitable. To the extent that we have to pay for those leads, increasingly that’s what we do. As Mike said, the real win here is getting leads outside of the paid Google search,” he added. 
• “It’s going to be a continued battle for Roto-Rooter. [But we’re] fortunate to have what we call our ancillary services — excavation, water restoration. The sales we get from those actually now are expected to slightly exceed sales from all other sources. We have additional services that we charge for [on] these jobs that we do get through the internet, so it still all makes sense to us.”