The Pennant Group Q1 2023 Earnings Call Transcript

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May 5, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Pennant Group First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Curt Cheney, Corporate Secretary. Please go

Speaker 1

ahead. Thank you, Victor. Welcome, everyone, and thank you for joining us today. Here with me today, I have Brent Giarsoli, our CEO John Goughner, our President and COO and Jen Freeman, our Interim CFO. Before we begin, I have a few housekeeping matters.

Speaker 1

We filed our earnings press release and 10 Q yesterday. This announcement is available on the Investor Relations section of our website at www.tenantgroup.com. A replay of this call will also be available on our website until 5 pm Mountain on May 4, 2024. I want to remind anyone who may be listening to a replay of this call that all statements are made as of today, May 5, 2023, and these statements have not been nor will they be updated after today's call. Also, any forward looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate.

Speaker 1

These statements are subject to risks and uncertainties that could cause our actual results To materially differ from those expressed or implied on today's call, listeners should not place undue reliance on forward looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Pennant and its affiliates do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information, In addition, The Pennant Group Inc. Is a holding company with no direct operating assets, Certain of our independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, Risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. The words Pennant, Company, We, Our and Us refer to the Pennant Group Inc. And its consolidated subsidiaries.

Speaker 1

All of our operating subsidiaries in the service center are operated by separate independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of the terms we, us, are and similar terms used today are not meant to imply nor should it be meaning that The Pennant Group, Inc. Has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Pennant Group. Also, we supplement our GAAP reporting with non GAAP metrics. When reviewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports.

Speaker 1

A GAAP to non GAAP reconciliation is available in yesterday's press release and is available in our 10 Q. And with that, I'll turn the call over to Brent Guarasoli, our CEO. Brent?

Speaker 2

Thanks, Kirk, and welcome, everyone, to our Q1 2023 earnings call. We are pleased to announce that Q1 brought solid revenue and census growth and overall financial performance in line with our expectations. Our local leaders and teams drove improvement in our clinical outcomes, reduced turnover and grew admissions and occupancy. Your disciplined approach produced significant progress in an environment with ongoing inflationary headwinds and labor difficulties. Collectively, our Q1 consolidated results reflect revenue of $126,500,000 an increase of $12,600,000 or 11 percent over the prior year quarter and adjusted EBITDA of $7,900,000 an increase of $1,800,000 or 28.8 percent over the prior year quarter.

Speaker 2

Our unique locally Tailored approach resulted in continued growth in each of our primary lines of business, including reaching an all time high in home health and hospice average daily census and achieving a same store senior living occupancy of 79.1%, representing a 5th Consecutive quarter of occupancy improvement. We are excited about this progress and still see significant opportunities to improve our bottom line financial performance. With the benefit of the positive momentum built over the last several quarters, We remain on track to deliver on our 2023 earnings commitments, and we'll get there by focusing on the 5 key organizational priorities we identified On our most recent call, 1st, leadership development 2nd, margin 3rd, turnover 4th, growth and 5th, clinical excellence. Leadership development continues to be our top priority where I'm personally investing much of my time and attention. We are diligently focused on finding, hiring and developing a robust pipeline of exceptional operational leaders We can optimize the many exciting growth opportunities that lay before us.

Speaker 2

Our expanded leadership development team now includes several Key field and service center partners work closely with markets and clusters to find, train and develop future leaders. Specifically, over the next several years, our commitment is to develop 100 local CEOs. To earn the title of CEO, our leaders must not only achieve extraordinary clinical outcomes, culture and growth, but also drive significant financial improvement in their operations. We have found that CEOs typically generate roughly $1,000,000 more in annual earnings than our executive directors as well as better clinical and cultural outcomes. To support this local CEO development, we have revamped and reinforced many elements of our leadership training programs We have also increased the depth of our leadership pool.

Speaker 2

Year to date, we have appointed 7 local CEOs, Adding to the 22 existing local CEOs and another 10 C level leaders, we also hired 11 CEOs in training with many more in the pipeline. The future of our organization is in good hands and this continued investment will drive our future growth. Value creation and margin improvement remain key operational priorities in 2023. Our local leaders are succeeding at growing revenues incentives, But in a macroeconomic cycle of inflation and rising costs, we must be even more disciplined and innovative To ensure that our earnings outpace our revenue growth, we continue our multi faceted approach to optimize our operations And appropriately increase margins. First, our local teams carefully measure and manage utilization and staff productivity.

Speaker 2

2nd, our teams diligently monitor payer mix to balance reimbursement with our commitment to be a solution to the needs of our communities. Finally, based on our strategy of acquiring and turning around underperforming operations, we continue to strengthen our transition process to ensure that our newer operations become accretive more quickly. Our standard for new operations is that they contribute meaningfully to earnings no later than the 9th As an example, in early 2021, we acquired Home Health Operations in Phoenix and Tucson, Arizona. The first four quarters post acquisition were foundation building quarters reinforcing culture, operational and clinical leadership teams Over those four quarters, revenue increased 48% and earnings increased 13% year over year. In Q1 of 2023, the 9th quarter since the acquisition, these operations are now high performers With a 135% increase in revenue and a 200% increase in earnings since the acquisition.

Speaker 2

Their clinical performance is also impressive with star ratings consistently between 4 and 4.5 stars. We've made progress in our employee turnover and are committed to being the employer of choice Each community we serve, we are leveraging our unique operating model to reduce turnover and improve employee satisfaction. We share turnover scorecards proudly, create accountability and empower our clusters and individual operators to drive improvement. We're achieving encouraging reductions in turnover in both segments, experiencing double digit year over year improvement with the greatest impact realized in our senior living business. Turning to growth, our acquisition and growth strategy follows several core principles.

Speaker 2

First, we don't grow for growth sake, rather we grow to provide meaningful opportunities for local leaders and communities, which leads to greater value creation for shareholders. 2nd, we invest where we have strength, Strong leaders ready to step in and establish operations to serve and support as cluster partners. 3rd, We are disciplined in our valuation approach and seek to make opportunistic investments with significant long term upside value. We will continue to invest consistently in home health and hospice through multiple avenues. These include traditional acquisitions, Operational expansions such as branch expansions, strategic partnerships and start up operations.

Speaker 2

This multipronged approach provides flexibility to expand and create opportunities for our developing leaders through changing economic cycles. We also plan to invest strategically in senior living, where we can quickly turn operations and create value. Senior Living deals may be attractive based on a number of factors, including favorable lease terms and strong relationships with landlord partners such as Ensign, CareTrust and others, we believe value generating real estate acquisitions are on the horizon and we will be disciplined yet opportunistic in pursuing these opportunities. As we look to the future, we see significant potential to invest in both segments and create long term shareholder value through the post acute care continuum. With that, I'll turn the call over to John to provide more detail on our Q1 operational results.

Speaker 3

Thank you, Brent, and good morning, everyone. We are pleased to report that the Q1 reflected significant progress in both our operating segments. Turning first to our home health and hospice performance. Top line revenue for the quarter of $91,100,000 increased $10,600,000 or 13.2% over the prior year quarter, while adjusted EBITDA of $13,200,000 increased $500,000 or 3.7 percent over the prior year quarter. Our home health business continues to thrive.

Speaker 3

Home health revenue grew by 11.7% over the prior year quarter, Despite CMS' base rate cut, which resulted in a net negative 0.8% impact on our home health revenue per episode as compared to the Q4 of 2022. Revenue per episode increased a modest 0.3% and our results were accelerated by a 7.1% increase in home health admissions and a 6.8% increase in Medicare home health admissions each over the prior year quarter. Our growth is a direct result of our efforts to create unique solutions in the communities we serve and largely driven by our strong clinical outcomes. Our CMS star rating of 4.2 is well above the national average of 3.0 and our real time 60 day hospitalization rate is 12.1%, which compares favorably to the national average of 14.2%. These metrics are critical measures for home health value based purchasing and for our partners across the care continuum, and our teams are tracking and trending these measures in their clusters to drive continued improvement.

Speaker 3

We are excited to be measured and rewarded for the clinical outcomes we deliver through our home health programs. On the hospice side, Q1 brought an important and exciting return to our historically robust growth trajectory. Hospice admissions increased 9.1% sequentially Over the Q4 of 2022, coupled with a more normalized length of stay, this led to robust ADC growth of 9.3% and revenue growth of 14.5 percent each over the prior year quarter. As we described in last quarter's call, We expect to see a continued ramp of growth in the home health and hospice segment throughout 2023. Our local teams continue to establish themselves as community resources and as we more rigorously manage costs, bottom line results will follow even in a difficult macroeconomic environment.

Speaker 3

Last quarter, we highlighted 2 markets, Arizona and Texas, where we saw significant opportunity to return to past levels of performance and are more consistent with the strong results in other parts of our portfolio. We continue to work diligently We are happy to report significant progress in our Arizona market. Over the last few quarters, Arizona added and developed several talented leaders and established robust clusters in both urban and rural markets. With a resolute commitment to our locally driven operating model, our Arizona agencies are rapidly improving clinically, financially and culturally. Arizona is beginning to again contribute to our overall health, demonstrated by its 47.3% earnings increase over the Q1 of 2022.

Speaker 3

In Texas, we have seen strong progress in several of our operations, particularly those in West Texas and Dallas, and we remain focused on improving performance in the few who are falling short. Talented leaders have stepped in to help support this effort. Fixing culture and creating strong clusters takes time, We are confidently executing on plans to accelerate performance throughout Texas. Our senior living business continues its impressive progress. Improvement is apparent in almost every facet of the business, in the experience of our residents, the caliber of our leaders, The engagement of our employees and the support of our service center partners, our financial performance has improved accordingly.

Speaker 3

Adjusting for divested buildings, same store senior living segment revenue improved to $34,600,000 an increase of 4,500,000 or 15% over the prior year quarter. Segment adjusted EBITDA improved to $2,300,000 in Q1, an increase of $700,000 or 45.6 percent over the prior year quarter. Same store occupancy continued its steady ramp, growing for a 5th consecutive sequential quarter and reaching 79.1%, a 370 basis point improvement in our same store communities over the prior year quarter and a 50 basis point improvement sequentially over the Q4 of 2022. Even as occupancy improved, we also grew our revenue per occupied room, which rose to $3,846 in the 1st quarter, An increase of 14.1% over the prior year quarter and 4.8% sequentially over the Q4 of 2022. We are pleased and will continue to drive progress in the senior living business.

Speaker 3

Senior living is becoming a source of strength to our organization and one that will contribute significantly to the bottom line. With capable leaders, improved occupancy and increased room rents to better reflect the cost of services and care, We have a solid foundation from which to execute throughout the remainder of 2023. The increasing stability in our senior living business and particularly in our Wisconsin market allowed us to seize a compelling acquisition opportunity in Q1. CareTrust REIT, one of our key landlord partners, invited us to step in and operate 2 underperforming communities in the Milwaukee area. We acquired these two operations, Robins Landing of Brookfield and Robins Landing of New Berlin under a long term lease With 88 combined beds, attractive facilities and reasonable lease terms, we see a significant long term financial upside in these opportunities.

Speaker 3

And importantly, we know that we can deliver better care and a better experience to the residents of these communities. After a relatively quiet Q1, our home health and hospice pipeline is ripe with opportunities we expect to execute on over the next few quarters. We completed one license acquisition in the Q1, which allowed us to add home health services to our hospice and senior living operations In an expanded continuum of care in Prescott, Arizona, we also added 1 small home health agency after quarter end It allowed us to add Home Health to a hospice branch we recently opened in Colorado Springs. Each of these opportunities Is an example of the strategy Brent described earlier, as we look for new markets where we can build strong continuums of care with relatively modest capital outlays, A significant opportunity for value creation as C level leaders step in and begin to build. In addition to executing on our core acquisition We are focused on identifying key strategic partnerships across the care continuum.

Speaker 3

These relationships, such as the Ensign Penic Care Continuum and the successful joint venture we have operated for several years with Scripps Health in San Diego present unique opportunities for growth and clinical development. We look forward to establishing such dynamic partnerships across the care continuum. With that, I'll hand it over to Jen for a review of the financials. Jen?

Speaker 4

Thank you, John, and good morning, everyone. Detailed financial results For the 3 months ended March 31, 2023 are contained in our 10 Q and press release filed yesterday. The quarter ended March 31, 2023, we reported total GAAP revenue of $126,500,000 an increase of $12,600,000 or 11% over the prior year quarter. We also reported GAAP diluted Earnings per share of $0.06 a 50% increase over the prior year quarter And non GAAP diluted earnings per share of $0.13 an 18.2% increase over the prior year quarter. These results are consistent with our full year 2023 guidance.

Speaker 4

Key metrics for the 3 months ended March 31, 2023 includes $58,500,000 outstanding on our $150,000,000 revolving line of credit And $3,000,000 cash on hand at quarter end, 1.62 times net debt to adjusted EBITDA Cash flows provided from operations of $9,000,000 for the quarter, an improvement $8,300,000 over the prior year quarter adjusted for the repayment of Medicare Advanced Payments. We expect cash flow from operations to continue to reflect organic revenue growth, strong cash collections and bottom line improvement throughout 2023. With that, I'll hand it back to Brent to highlight a couple of our local leaders.

Speaker 2

Thanks, Jen. It's my pleasure to spotlight a few leaders and operations in our organization who have achieved exceptional results. At Simbee Home Health and Hospice in Price, Utah, newly appointed CEO, Becky Richards and CCO, Melissa Nelson Are creating something remarkable in rural Central Utah. Originally part of the SYMBEE operations covering Northern and Central Utah, The SynVee price experience demonstrates the tremendous potential we have to subdivide existing service areas and create exciting opportunities For our emerging leaders, Cindy Price became its own independent operation in 2022, better enabling Becky and Melissa to drive performance and own their results. They've delivered exceptional performance and become the overwhelming provider of choice in price.

Speaker 2

Envy Price is clinically excellent with a real time home health star rating of 4.5, a real time home health hospitalization rate of 10.3 compared to the national average of 91%. This clinical quality has led to financial excellence as well As SYMBRY prices revenue grew 18.2 percent and earnings increased 19.6% versus the prior year quarter. These strong consistent results led to their receiving the Flag Award this year, which represents the highest level of achievement for operations in Pennant. At Heritage Assisted Living in Twin Falls, Idaho, future CEO, Bianca Azevedo and clinical leader, Selena Krumrein are writing a remarkable story. Since joining the Pennant family in Q1 of 2020, Heritage's growth trajectory has been extraordinary.

Speaker 2

Janke and Selena have driven impressive financial performance With a revenue increase of 6.9% and an EBITDAR increase of over 1300% over the prior year quarter, Heritage's clinical performance has been exemplary as well as recognized by the recent receipt of the Silver Excellence in Care Award presented by the State of Idaho highlighting their outstanding survey results. The performance Both Finbere Price and Heritage Assisted Living are examples of the dramatic improvement we see when CEO Caliber local leaders step into operations. With that, we'll open it up for questions. Victor, can you please instruct the audience on the Q and A procedure?

Operator

Sure. One moment for our first question. Our first question comes from the line of Raj Kumar from Stephens. Your line is open.

Speaker 5

Hi. This is Raj on for Scott Fidel. Good morning. Just want to get your views On the ensuring access to Medicaid services proposal that we released last week, given the company's exposure to home care services? And then also if you could just remind us how much of your home care revenue is associated with personal care and what the payer mix dynamics are there?

Speaker 5

Thank you. Yes,

Speaker 3

I'll take the first part of that, Raj. We're pretty modestly exposed To home care, it is a growing business within our portfolio, both from a private pay standpoint and from a Medicaid standpoint, but it represents a very modest portion of our home health revenue. And so we appreciate the work The government is doing there to evaluate and determine kind of how to appropriately reimburse those home and community based support services. We don't necessarily agree with the strategy and feel like for the most part, providers are well positioned to Make sure that they're delivering care in a competitive way by increasing employee wages and benefits in a way that Also allows for the significant costs associated with operating those businesses. And so I hope there's an And we plan to participate in the public comment period, but because of our modest exposure to that rule, It's not something that we're significantly worried about.

Speaker 3

And Jen can give some more insight on exactly that exposure.

Speaker 2

Yes,

Speaker 4

Raj. Our home care revenue at this point in time is about $2,000,000 for the quarter.

Speaker 5

Okay. And so thanks for the color there. And then just as a Quick follow-up. Just wanted to reconfirm the outlook for senior living top line growth of 10% that the company highlighted last quarter. And then also, I just wanted to see, what your margin expectations for the year are for the remainder of the year in terms of the progression?

Speaker 4

Yes. We're actually in line with our projected revenue increases on our senior living side on the revenue growth. And so we would expect to continue to grow at that pace. In fact, our senior living for the Q1, The revenue grew about 15%. When you take into account the same store revenue that we're looking at, which excludes any sort of acquisitions or the divested buildings that we had last year.

Speaker 4

So when you look at it that way, we're right in line and actually a little bit ahead of where we projected in our guidance. On our margins, John, do you want to talk a little bit about our margins and where we expect to go this year?

Speaker 3

Yes. I'm happy to address that, Jen. And as you look at our performance over the Q1, Raj, you see some really Strong growth that's taking place in each side of our business. Our local teams have done an extraordinary job of establishing themselves as providers of choice In the community, our focus now, as Brett mentioned in his remarks, is on making sure that that makes its way to the bottom line. And so we're focused on A variety of things we've spoken before about our Home Care Home Base makeover and our efforts to make sure that our clinicians are able to be as effective and efficient as possible.

Speaker 3

And so we're really focused on measuring utilization, continuing to monitor and deliver the highest quality outcomes effectively with the right number of visits per episode, and we continue to see progress there. And so you'll see throughout the course of the year, we experienced As we normally do, kind of that seasonal drop in census through the holidays at the end of Q4, and our Q1 margin was impacted by The fact that we had to sort of regrow that census in the 1st part of the quarter. Fortunately, by the end of the quarter, we're in a stronger position as we've ever been, And we've been able to add headcount on the clinical side that will allow us to continue to grow and take more of the volume and market share that's out there for us. So our focus throughout the year, as Brent outlined, we'll be working on measuring and monitoring and improving including through reducing the time our clinicians spend in documentation. We'll be focused on continuing to improve On the transition side and making sure that those underperforming assets that we take over are quickly able to move into the bucket of accretive and are producing financial results in addition to the clinical results that we seek to through that transformation process.

Speaker 3

And we expect that our margins will come in line quickly over the next couple of quarters.

Speaker 2

Yes. I would just add a couple of other things. And John mentioned it, right? Part of Q1 was an investment period. And so as we kept up with that growth, we made those investments.

Speaker 2

And so That hurt our margin a little bit. The other piece of this and why we're so focused on our local leadership and driving that forward, what we've seen Is outcomes across the board are better when we have C level caliber leaders in those operations. One of those critical outcomes is turnover. And the most one of the biggest drivers of margin difficulty is high turnover levels. And so as we We're excited about the progress that we've made on the turnover front.

Speaker 2

But as we continue to drive that down more and more, we expect that to also I'll reflect on the bottom line margin performance.

Speaker 5

Great. Appreciate all the color. Thank you.

Speaker 1

Thanks,

Operator

I'm not showing any further questions in the queue. Now I'd like to turn the call back over Brent Gaurisoli for any closing remarks.

Speaker 2

Okay. Well, thank you, Victor, and thank you, everyone, for joining us today, and we hope you have a great rest of your day and weekend.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
The Pennant Group Q1 2023
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